Economic development: the ABCs of recruitment

New Mexico Business Journal, Feb, 1997 by Mark Lautman

You don't have to be an economist to know that some enterprises are more important to the local economy than others. In fact there is a core group of enterprises on which all other business in the local economy depend. These special companies are the fountainhead of currency for the community and the ultimate source of paychecks local residents use to support their families. This special group of enterprises makes up the economic base of the community and their jobs are referred to as economic base jobs.

Economic base jobs are those where the product or service being produced is sold outside the local economy. When economic base jobs are being added to the local economy, job choices increase, paychecks get bigger, area small business become more profitable, school districts and local government have more revenue and times are good. When economic base jobs are lost, the opposite happens.

In our economy it takes about 1,500 economic base jobs to carry every 2,500 local service retail jobs (4,000 total). Since it takes about 4,000 jobs to support every 10,000 population, losing just 1,500 economic base jobs would mean that 10,000 local residents would lose their financial means of support.

Adding economic base jobs is the only way over the long term to raise the real personal income and net worth of citizens, help small business entrepreneurs ring up bigger sales, and increase local government resources without raising taxes.

If this were not true, we could eliminate unemployment and increase prosperity by opening 500 new dry cleaners next year and raise the hourly minimum wage to $20.

The distinction between economic base jobs and all others in the economy is central to any discussion of economic development and provides the moral rationale for the special treatment accorded some corporations. It is also the reason why competition is so fierce for the few footloose economic base employers up for grabs every year.

Economic development has become a brutally competitive, winners-take-all game now played by every growing major city in the world. No company in our economic base is safe from competition in the global economy and recruiting new ones is getting tougher every year.

Whether recruiting a new company, helping a local company to expand, or trying to prevent one from leaving, it all comes down to getting. management to make a decision to risk their investment in your community instead of somewhere else.

In economic development nothing happens until a deal is made. Economic development programs are fundamentally different from other local government activities because they must be the best in order to be successful.

Economic development deals are won with a combination of competitive economic geography infrastructure (roads, schools, utilities, affordable housing), skilled pursuit and problem-solving by the local economic development team and incentives

The Decisive Role of Incentives

While incentives cannot compensate for competitive market deficiencies in critical areas such as labor availability, building availability, infrastructure capacity, or geographic location, some type of incentive almost always plays a decisive role when the contest is close or a single cost parameter needs to be offset. As a result, incentives have been offered or used on practically every contested economic development deal New Mexico has won in the last 15 years.

In New Mexico there are five kinds of economic development incentives:

* Training

* Tax incentives

* Gap financing

* Local infrastructure contributions

* Utility volume discounts

Training. The In-plant Training Program provides state funding to economic base employers to train New Mexico residents for new jobs. The program compensates the employer for productivity lost when they hire and train inexperienced citizens instead of bringing in trained out-of-state labor. The incentive not only causes more New Mexicans to be hired but it directly improves their productivity, which raises their personal income.

Tax incentives. Most tax incentives are designed to lower the state and local tax burden on a prospective economic base employer. This is done by exempting, abating, or compensating for a portion of future taxes on the company's means of production. The community does not give up any existing tax revenue but agrees to forego a portion of future revenue to get the employer to invest in the economy. The tax incentives are used most often to offset the exaggerated tax burden our tax code places on enterprises that require extraordinarily high investment in plant and equipment.

Gap financing. Gap financing programs are designed to close the lending gap between the very large companies that enjoy substantial economies by borrowing from the major capital markets and the small business trying to compete with them with much higher financing cost of their local commercial lenders. The federal government has perfected several programs that essentially reduce the risk and raises the return to local lenders that finance these smaller enterprises.