Principles for rethinking the federal government's role in economic development.

This article begins with a discussion of differences between economic and community development. A three-dimensional policy framework for analyzing subnational economic development policy is presented. One dimension consists of the goals of efficiency and equity. The confusion between the equity objectives of poverty alleviation and helping distressed communities is explained. The second dimension includes three sets of government and market failures that are rationales for federal intervention--provision of public goods, the mismatch in political and economic federalisms, and the mismatch between political and economic time horizons. The third dimension is the funding mechanisms for development programs--people, places, and people through places. The last section contains recommendations for restructuring federal policy.

How should the nation invest in lagging regions and economically marginalized communities, be they economically isolated rural communities or deteriorated inner-city neighborhoods? What is the difference between community development and economic development, and should these differences be reflected in program design and evaluation? If the decision is made to undertake economic development investments, should they be targeted to individuals (irrespective of where they are located), should they be made in specific places, or should they be made to individuals through places.(1) These three questions have arisen in two program reviews conducted from 1995 to 1997 as part of the federal government's attempt to "reinvent" the administration of its economic development programs and they have led to a reexamination of the legitimacy of governmental development activities.

Many studies have examined the federal government's role in enhancing the economic performance of cities and lagging regions (Bartik, 1994; Dabson, 1994; Engberg, 1996; Haynes & Slough, 1997; Rivlin, 1992; U.S. General Accounting Office, 1996; Wolman, Hanson, Hill, Howland, & Ledebur, 1992). Two recent studies were commissioned by the Economic Development Administration (EDA): one by the National Academy of Public Administration (NAPA) (1996) and the other by the Economic Development Assistance Consortium (EDAC).(2) In this article, I weave together findings from these two reviews to develop a series of policy principles that can be used to reposition the federal government's involvement in subnational economic development that respects the federal structure of government, has a firm economic rationale, and recognizes the primacy of market mechanisms in developing the economy. True reinvention means going back to principles--not responding to individual programs and their established constituencies. Returning to principles requires answering the series of questions posed above.

Before discussing NAPA's (1996) report and the work of the EDAC, it is as important to note what these reports do not address as it is to comment on them. Neither is an evaluation of the EDA. Nor is either one an assessment of specific development programs. Instead, they focus on the proper role of the federal government in subnational economic development activities and make broad suggestions on how to restructure those activities. These reports are explicitly normative. Their tone and coherence reflect their structure. The NAPA report is the product of a panel and, as such, speaks in a unified voice, but that voice reflects compromises that members of the panel made to reach consensus. The EDAC report does not speak with a unified voice because it is a collection of papers that reflect the thoughts (and assignments) of each author.

ECONOMIC DEVELOPMENT OR COMMUNITY DEVELOPMENT?

There are many definitions of what constitutes subnational economic development. Most economists would define development as growth in per capita income. The Corporation for Enterprise Development defined economic development as the process by which wealth is created (Schweke, Dabson, & Rist, 1996, p. 15), echoing an earlier definition provided by the American Economic Development Council (1984).(3) Both of these definitions reflect outcomes of changes in the real economy of goods and service production. However, many practitioners and politicians use the terms community development and economic development as synonyms; they are not. Subnational economic development is concerned with the factors that expand the production possibility frontier of coherent regional economies--areas where people both live and work. This implies that economic development strategies, policies, and investments need to be regional in scope, where the region is defined by the extent of the real economy of goods and service production. This is best approximated by the extent of the regional labor market.

Community development is a much broader area of policy and inquiry related to the quality of life and, as such, deals with issues of consumption (such as health, housing, and environmental quality), skills development (the quality of the supply side of the labor market), and the strength of the social fabric of the community. As Michael Teitz discussed in his 1989 article, community is primarily a social construct based on social and cultural relations that may be shaped, or influenced, by the economy. The economic value of a particular community is based on what it offers on the supply side of the economy as a source of labor and as a site for production, and on the demand side of the economy as a place of collective and private consumption. In this vein, Jeremy Nowak (1997) discusses how low-income urban neighborhoods need to be connected to their larger regional economies as part of poverty alleviation efforts. Hill and Bier (1989) show how the economic connection between neighborhoods and the larger regional economy depends in large part on the occupational characteristics of the resident workforce. The link between economic and community development is with the competitive potential of the factors of production that are located in that community--especially the supply side of the labor market--and the resulting level and distribution of income.

In metropolitan areas, community and neighborhood development are synonyms. These are investments in places where people live and where some may coincidentally work. In metropolitan areas, economic development addresses the performance of regional product and labor markets. The link between community development and economic development in urban America lies in access to employment (both in terms of physical access and information flows about jobs), the quality of the workforce, and the influence that housing, environment, and quality of life have on attracting both employers and workers. In rural areas, where people live and work are more apt to be coterminous; it is difficult to separate community development from economic development because communities need to be much more self-sufficient in terms of employment than do urban neighborhoods.

Another confusion that exists between community and economic development is created when an economic development rationale is used to sell a community development policy, program, or project. There is vast demand for community development spending on infrastructure, health services, education, and other important ingredients of a healthy community that are frequently missing in poor areas. At the same time, the language of economic development is more politically palatable than is the language of redistributive spending and community development. This provides a powerful incentive for community development programs and objectives to be sold under the different--and inappropriate--label of economic development.

Local development and elected officials would like to see federal economic and community development funds lumped into a large pot to allow municipal and state governments to divide the funds as they see fit. This would be a mistake. First, local and state politics can result in the alleviation of distress being assigned a very low priority. Second, combining programs makes it difficult to ensure accountability and to evaluate program effectiveness and efficiency. However, linking economic development and community development investments is important because they are interdependent. This should be done at the local level, and federal grant making can recognize and provide incentives for linking community and economic development efforts.

THE NATURE OF THE DEBATE

Richard McGahey (1997) characterized the debate on the federal role in economic development as being more about the degree and type of federal involvement than about the fundamental legitimacy of that involvement. He states that the debate is "centered around the proper mix of public and private roles; the appropriate level of government for different activities; and the types of policy that are critical to economic growth and prosperity" (p. 105). He also believes that the federal government will always be involved in the economic development business, either directly or indirectly through other forms of expenditure, such as highway and infrastructure spending. McGahey implicitly states that if the national government is going to be indirectly in the economic development business, it might as well be directly involved and increase its accountability. Bennett Harrison, Amy Glasmeier, and Karen Polenske, in their 1997 article, agree with McGahey. They state that the current national debate is about the devolution of functions from …