Sunday, January 20, 2013
FINANCING LOCAL ECONOMIC DEVELOPMENT (LED) IN THE UNITED STATES AND THE LESSONS THEREOFF
Financing of economic development strategies in the United States from the 1950s has critical implications for urban development today. The understanding and justification for these financing approaches and their effectiveness can help ameliorate urban poverty through the effective and efficient management of local economic development interventions. That notwithstanding, review of these financing approaches by Susan Fainstein, Rachel Weber, Alan Peters and Peter Fischer raises important issues of equity, efficiency, effectiveness and sustainability for urban planners and policy analysts. A review of these funding strategies has been done in this paper. This discussion has been subdivided into the various standpoints that these authors have articulated. The paper is in two main sections. The first section espouses the summary and questions from the perspectives drawn by these authors and the implications for urban poverty and local economic development are presented in the subsequent section.
2. Perspectives of LED Finance Approaches in the United States
2.1 Susan S. Fainstein: The City Builders
The thrust of this discussion related to the concept of global cities and their effects on the decentralization of central management functions of business. According to Sassen (2005) as industries grow, they tend to converge and locate their headquarters in global cities, notably New York and London, because these are the cities with the needed capacity to manage central management functions. However, as a result of agglomeration and increasing management activity they tend to decentralize their management functions into specialized functions away from the headquarters. In Sassen’s (2005) conclusion, globalization trends tend to concentrate central management functions in global cities.
Fainstein (2001) agrees with her that there exist a potential in locating industries in global cities as well as the decentralization of management functions but differs on Sassen’s conclusion. Fainstein (2001) raises the question as to whether the relationship between global cities and central management functions are deterministic as alluded to by Sassen (2005). Fainstein (2001) explains that industries tend to cluster because of proximity to suppliers, markers and personnel determine the locations of industries but may decentralize to optimize advantages elsewhere. Apparently, technology and growing capacities of other cities Fainstein (2001) argues are rather more cogent in the decentralization and networking attitudes of these industries. Through information and computer technologies firms are able to decentralize theirs functions far more easily and not as a result of the natural consequences of agglomeration. In her conclusion, Fainstein (2001) intimates that “while restructuring has increased the power of small businesses, the headquarters of these firms have not moved to global cities”. Reviewing the dominance and eminence of London and New York as global cities, she identifies that several factors have contributed to their status including investments in the housing and real estate sector which financial and advance services industries in the 1980s needed. However, factors such as increasing labor pool, increase investment in technological space and increase accessibility within and across geographical areas are reducing their competitive edge in the globalizing markets.
Typically, the drive to build by real estate investors were influenced by poor projections and market assessments, available funding and a political system that encouraged building in the hope of inducing employment, increasing income levels, tax revenue and the transformation of the urban environment. Local governments in particular supported these investments through infrastructure provision, low priced lands, grants, loans and regulatory and local tax relieves as economic development strategies. In addition, financial institutions and banks provided the ready funding for implementation. Thus Fainstein (2001) intimates that understanding the overall market situation after project completion and the type of project and the site that would produce the greatest return were and should be seen as critical conditions for enterprise choice. Moreover, these investments raised the question as to whether public resources should be invested into private-led strategies of economic development. Subsequently, Fainstein (2001) concluded that “promoting real estate development is not identical with fostering a stable economic growth”.
2.2 Rachel Weber, Negotiating the ideal deal: Which local governments have the most bargaining leverage?
The discussion by Weber (2007) presents an exposition into the public-private partnerships that characterizes local government economic development strategies. For most of these transactions critics have argued that the incentives provided by local governments cost more than the benefits that actually accrued to the city or urban area. In addition, it compromised the investments for other germane sectors of the urban area such as infrastructure and education at the same time straining local government financial capacities (Weber, 2007). Overall, the mega nature of these investments tended also to kill local economic initiatives and small and medium scale enterprises.
The author discussing the nature of these partnerships raises several critical issues and how they occur. Whereas both parties have their degree of influence on the transaction processes, it is observed that private investors normally have an upper hand over the transaction processes. This is basically because of the increasing competition of local governments to attract businesses; raising an issue of demanding chasing supply. There are no jurisdictional limitations and the control of information and the decision-making by firms or private investors are flexible (Weber, 2007). Even though these local governments have powers such as the incentives to attract business, zoning and land-use regulations the issue of competition has reduced this potential to some extent. For both parties the issue of the regulatory context, interest, and power play critical roles in these transactions.
With the aim of improving the business environments and promoting economic development, the author identifies that several local governments in the United States have entered into transactions or partnership deals that have rather promoted the good of the private investor to the detriment of the citizen at large. “Cronyism, wasteful expenditures, uncontrolled borrowing and profligacy in local government financial governance” have been the consequence of these desperate interventions (Weber, 2007).
As a result, two main questions became eminent and critical in the economic development discourse. First what are the “public purposes” of private business and what basis (criteria) do local governments use to explain the “public purpose”? Secondly, is it a matter of poor regulation or the consequences of the federalist system of government to be blamed or both? (Weber, 2007). In both cases, what becomes equally important is the understanding of how regulation and supervision influence the transactions process?
In response to the latter question, the author argues that local governments must enter into a good deal. Such deals must provide detail ex-ante assessment using realistic and reliable and measurable criteria to assess the gains and losses of any partnership decision. There should be the setting and application of performance standards such that rewards and punishments could be evoked on firms enhancing or impoverishing the public good respectively. Local government must also supervise and monitor the utilization of opportunities and the fulfillment of obligations. Yet the achievement of an improved situation is not without challenges and the issues of regional and economic inequalities among municipalities impose a lot of strain on these local governments. Weber (2007) argues that those with higher economic potential tend to demand some obligation and have a high footing in negotiations compared to those with lower economic potentials; autonomy of local government, large markets, high income locations, valuable land inventory, state of the local economy, political influences, community agitations and level of experience. Despite the advocacy on the adoption of an “ideal deal”, there still remains the issue of whether this is actually effective. There is however a moot point as to the outcomes of “ideal deals” and other types of deals.
2.3 Rachel Weber: Tax increment financing in theory and practice
According to Weber (2003), in the face of local government inefficiencies; cronyism, wasteful expenditure, uncontrolled borrowing, profligate financial governance, mentioned under the earlier discussion, federal and state governments have responded dramatically by cutting down on federal and state funding, placing restrictions on tax-exempt bonds, initiating administrative devolution of urban policy to reduce these negativity and the desire to ensure corporate welfare. With restrictions on funding, local governments adopted alternative financing particularly using the mechanism of Tax incremental Financing (TIF) which “is a reallocation of property tax revenue from the municipality general fund to a smaller enclave of contiguous properties; a TIF District” (Weber, 2003).
It thus became a frequently used mechanism and still is operating with two legal parameters of demonstrating the need for TIF as the only alternative to redevelopment. Several methods are adopted by municipalities including fronting expenditures and pay-as-go mechanisms with concentration on redevelopment projects that potentially yield drastic increases in tax revenues. However, whether this mechanism has been effective is debated too but several suggestions have been made to improve its efficacy including the management of externalities on revenue, adjusting of tax rates through the project cycle, migration of fiscal risks to developers, adopting other funding alternatives, and incorporating performance standards in the implementation of TIFs.
2.4 Alan Peters and Peter Fischer: Enterprise zone incentives: How effective are they?
In addition to TIF, Peter and Fisher (2003) identify three other sources of funding that facilitate the economic development in the United States. They identified that a mix of corporate taxes, property taxes, and targeted tax incentives are used. These are applied to firms locating in specific areas called enterprise zones which are special areas or regions in blighted neighborhoods or neighborhoods with some specific economic potential. They indicated the application and the extent to which these are used and through a study of 24 states. These approach according to the study have varied taxes contributions to the revenue base of municipalities. Depending on how local governments want to attract economic development these taxes may be varied to attract these private investors. Completing these observations with cases of Enterprise zones these authors have argued that the successes have been diverse and raise similar questions identified earlier: “Do economic development incentives create new jobs? Are those jobs taken by targeted populations in targeted places? Do these incentives increase the revenue base of municipalities? Do they offer value for money per direct investment in social safety nets for the poor? Do the poor benefit from these companies at all? If yes, to what extent and how? Peter and Fisher (2003). In effect, the issue of funding private businesses with public funds becomes eminent here again.
3. Implication and Conclusion
Three main observations have been made that economic development, typically real estate development, is just an aspect of urban development and thus should not remain priority at the expense of other inventions. However, if they are initiated they must reflect the “public purpose” which is to ensure the efficient and effective use of public funding through public private partnerships that are mutually reinforcing between actors and among sectors. Since the choice of revenue tools will also have an impact on the ability of local governments to deliver services and attract business, “it is imperative for local government to integrate performance standards and constant monitoring of public investments in line with the public good as well as identify alternative ways of raising revenue” (UN-Habitat, 2009). Therefore local governments should review their mechanisms for attracting businesses, increase efforts at “stabilizing displaced workers’ reemployment earnings, and matching workers to jobs more quickly” (Greenstone and Looney, 2010). These policies must be policies to support specific types of creative economy strategies taking into cognizance “broader changes in economic development policy” as well as “strengthen the ability of small and medium size cities to pursue small and medium scale alternatives such as providing “technical assistance to increase management skills focused on creative work”, integrating small and similar economic ventures to access support, increase focus on subsidization and low taxes for small and medium enterprises. This would help in building the effort to promote the public good through grass-root interventions (Christopherson, 2004).
Alan Peters and Peter Fisher (2003). Enterprise zone incentives: How effective are they? In Financing Economic Development in the 21st Century, Sammis White, Richard Bingham and Edward Hill (eds.), Armonk, NY: M.E. Shape, pp.113-130.
Michael Greenstone and Adam Looney (2010). The Hamilton Project. An Economic Strategy to Renew American Communities, Strategy Paper October 2010.
Rachel Weber (2003). “Chapter 3: Tax Increment Financing in Theory and Practice” In Sammis B. White, Richard D. Bingham, and Edward W. Hill, Eds., Financing Economic Development in the 21st century Armonk, New York: M.E. Sharpe, pp. 53-69.
Rachel Weber (2007) "Negotiating the Ideal Deal: Which Local Governments Have the Most Bargaining Leverage?" In Reining in the Competition for Capital, Ann Markusen, ed. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, pp. 141-160.
Sammis B. White, Richard D. Bingham, and Edward W. Hill (2003). eds., Financing Economic Development in the 21st Century. Armonk, NY: M.E. Sharpe
Saskia Sassen, The Global City (2005). Introducing A Concept. Brown Journal of World Affairs, Winter/Spring 2005 Volume Xi, Issue 2.
Susan Christopherson (2004). Creative Economy Strategies for Small and Medium Size Cities: Options for New York State, Revised version of paper prepared for the Quality Communities Marketing and Economics Workshop, Albany New York, April 20, 2004
Susan S. Fainstein (2001). The City Builders: Property Development in New York and London, 1980-2000. Second edition, Studies in Government and Public Policy. Lawrence: University Press of Kansas
UN-Habitat (2009). Guide to Municipal Finance, The Human Settlements Financing Tools and Best Practices Series, United Nations Human Settlements Program, Nairobi.