In a world characterized by increased globalization and urbanization, subnational governments are marketing their jurisdictions abroad, aiming to catalyze opportunities for innovation and cooperation.
Can city governments become strategic brokers that influence their city’s… and even their country’s …. position in the global urban hierarchy? With appropriate planning and support, the answer seems to be yes.
Some argue that cities need this kind of municipal entrepreneurship in order to seize the new opportunities offered by globalization and localization and to cope with the attendant challenges.
But others fear that increased competition within regions is causing cities to enter a race they cannot win, in which urban governments offering lavish and costly incentives to footloose investors force other local governments to follow suit.
Such corporate welfare is estimated to cost several billion dollars annually in the United States, where examples abound of states and cities providing massive subsidies that seldom lead to new jobs.
One intellectual justification for such subsidies is the infant industry or scale economy argument, which supports subsidizing a line of industrial activity until it achieves sufficient local scale to be viable.
But if all cities in a region adopt this strategy and begin offering excessive subsidies, they may well wind up with the same industrial base they would have had without the subsidies.
An obvious policy solution is a national agreement to harmonize or cap subsidies. Although such agreements are rare, they may become more common, given the recent bad press on local subsidies in the developed countries and related debates therein.
Even without regional agreements to limit industrial incentives, international trade agreements are limiting the scope for such incentives.
The agreement on subsidies and countervailing measures adopted as part of the General Agreement on Tariffs and Trade in 1993 prohibits any domestic subsidy that could displace imports in domestic markets or other countries’ exports in international markets.
Subsidies are defined according to the benefits they confer and the geographic area or industry they target.
This agreement may keep local governments from offering subsidies to specific industries within their jurisdiction or using tax breaks to attract particular firms.
By connecting local economies more fully to the global economy, globalization may expand the ability of trade agreements to limit such local industrial subsidies.
In the debates over subsidizing industry, both politicians and the public too often forget that the inputs most relevant to economic development are often beyond the control of local governments …. labor costs and skills, natural resources, climate, and energy prices.
Business surveys suggest that entrepreneurs care about operating costs and conditions most, followed by quality of life.
Transportation costs and wages are generally cited as the most important, followed by utility and occupancy costs. Among the public services that matter are transportation and safety. Taxes matter only at the margin in choosing among similar locations.
A municipality’s economic development efforts should focus on efficiently providing the services it is responsible for and easing red tape and excessive regulation.
A possible role for municipal activism does remain, however. The efforts of local governments to promote industrial development can be successful and cost effective if they focus on broad policies designed to form a critical mass for specific industries and not on firm-specific benefits.
Sector wide strategies are more likely to create a competitive advantage because they cluster activities that can lead to agglomeration economies.
For example, local governments can develop training initiatives adapted to local economic conditions and comparative advantages.
France and Italy are decentralizing vocational training on the theory that local governments are best suited to working with local firms and workers’ unions to identify needs and create potential partnerships.
Arrangements among local governments, employers, and unions aimed at providing vocational training facilitate these efforts.
What institutional arrangements are most likely to produce successful local development policies? Leadership is important, but it can emerge from many sources, either private or public.
A forum is needed within which the private and public sectors can communicate with each other and define a common goal or vision for a city. Such a forum requires the support of a common base of information.
Different cities have different forums and institutional arrangements that range from formal chambers of commerce and municipal commissions to informal ad hoc commissions organized around a single vision or project.
Whatever its structure, the forum needs to have the powers and means necessary to collect and process reliable information on the local economy. In economic terms, what is good for a country is good for its cities.
If the political, legal, and macroeconomic conditions for nationwide economic development are in place, urban economies are likely to grow. National governments will find it best not to attempt to stop or direct internal migration, since such efforts inevitably fail.
Local governments can facilitate urban economic growth in their areas by investing in trunk infrastructure and fostering an open land market.
But the key role of local government in economic development is to provide the basic infrastructure and public services needed to create an attractive environment for both businesses and households.