The folly of transposing social development policy with economic development policy

This should be a central theme in the discussion around economic development. I discuss it at a high level but I don’t know if we have ever really had a genuine debate about it. What I am talking about is our longstanding tendency to treat economic development in the same way we treat social development in our society.

I heard the other day that the head of one of the larger economic development organizations in Atl. Canada said that they basically thought it was unconscionable to give a government grant or incentive to a company with no debt and a strong balance sheet. This thinking has bothered me for years but I have come to the conclusion that many many many economic development folks at the highest levels in government and in ED agencies think this way.

When it comes to social policy, we are looking to find ways to support those who need it. The unemployed, the single parent, the folks who are down on their luck. And so should we. Social policy should be about finding ways collectively to alleviate poverty and distress. Social policy should be about building infrastructure that helps people migrate out of a bad situation.

But we can’t take that thinking and move it into the economic development realm. Even if it feels right to many of us. Intuitively it seems a bit creepy to give a company that is successful a grant or a government tax break or support with training, etc. However, have to find a way to get beyond these inbred ideas. Economic development is not about helping the poor and oppressed companies. I am sorry but if that is your model of economic development (and I would argue it has been for much of Atl. Canada for a long time) you are bound to fail.

In the Serengeti Plain of the business world, companies start up and fail – big and small. Governments shouldn’t inject themselves into this process and start trying to prop up those destined to fail. I am sorry but this is a reality. Governments can and should use public policy to help establish a strong environment where companies can be successful (competitive tax regimes, access to skilled workers, good public infrastructure, etc.) but not try and ensure that success.

This is not inconsistent with incentive programs as well. I don’t think incentive programs should be about funding companies that can’t get financing elsewhere. I think maybe in some exceptional cases this might be a good idea but on the whole, if a business plan isn’t strong enough to get access to profit motivated capital, how strong is it?

And I will say this and many people will not like it. I would rather give a million of taxpayer dollars to a large firm with a good balance sheet where the likelihood is that the province will get more than that million back in taxes in a couple of years than a million to a highly speculative project but that has some sentimental attachment.

I’ll close with this. People that run and lead economic development agencies must understand the fundamentals of economic development. They shouldn’t be in the business of risking public funds to top up shaky business plans of local residents. I would never say never about this stuff it out but I would position it as a general rule. Now, if there are business plans put forward to government for funding that are highly speculative but may be an interesting idea, maybe government should do a better job of trying to link up companies with risk capital. But that is not the same thing at all.

Imagine if the CEO of a company thought it was unconscionable to provide additional funding to its most successful divisions. Imagine if that CEO believed that it was the role of the leadership to try and prop up the underperforming divisions or to fund speculative ventures that were denied funding from lower levels of the organization. Again, in rare cases, this might be the right thing to do but on the whole that CEO wouldn’t have much time left at the firm.

And yet many of our guys/gals in ED leadership think that way. They should go back to HRSDC or some other department where that philosophy is right on the mark. But they should stay out of economic development.

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0 Responses to The folly of transposing social development policy with economic development policy

  1. mikel says:

    That IS an important topic, so I’ll pose my usual challenge-name the four biggest ‘corporate welfare’ payouts of the last four years.

    Atlantic Yarns is a southern ontario company with a fine balance sheet. Irving just blackmailed the government for $9 million with the threat of leaving. UPM got $3 million before closing their plant. Molson got millions, Tembec’s and that company from India did as well.

    Those are the biggest payouts. Now look at the jobs side of it, IF we want to pretend the government cares about jobs (oh yeah, dno’t forget Saskatchewan Potash).

    Molson gives 40 or 50 jobs, meanwhile, a fast growing company that has 30 employees-Pumphouse, doesn’t get money and can’t afford to supply export markets. They have an established company with almost guaranteed sales, yet can’t get equity financing.

    Some analysis is necessary because one comment is taken out context-namely ‘private financing’. Businesses have long complained that the ontario centred banks are the ones responsible for much of the industrial malaise as they only offer loans to very specific industry models and only at usury rates. Meanwhile, Irving gets a loan guaranteed by the province-or even worse BY the province.

    So that’s ‘private financing’, so again, the reason BEHIND government needing to get involved is the unfair business practices of banks, even the BDC (not always). I can’t remember who said it, but there’s a famous quote by some politician who said ‘keep democracy, all I need is control of the banks’. A long standing complaint in Canada is that, unlike the ‘capitalist’ United States, there are no controls that FORCE banks to invest in local communities.

    The reality is the OPPOSITE, governments LOVE giving money to companies with ‘healthy balance sheets’ (well, not love, they just do it far more often than ‘the little guys’ who need it). However, hate to say it, but just because you like a model doesn’t make it true. The reality of today is corporate blackmail-whoever gives the biggest handout gets the corporate investment. But again, we don’t know how good it is,but Irving is a good example of how it can go wrong. In the end the large companies end up with a disproportionate amount of economic power, and hold onto outdated technologies and models for longer than they are good for society.

    Forestry would be better for the society-almost clearly, if the licensees were kicked out of the province and crown land were divided between communities. Instead, forestry companies have the clout-even though they barely even supply the jobs anymore, to dictate forestry policy, all to the detriment of the province.

    That’s of course why Adam Smith maintained that capitalism needs MORE regulation than any other type of economic system (people regularly misinterpret the ‘invisible hand’ analogy to mean ‘get government out of the way of business’).

    We know you like the ‘one anchor industry model’, that’s fine, but don’t make the mistake of thinking that just because you think something its necessarily true-we aren’t talking about laws of physics. Take a look at europe, virtually everywhere you go you will find villages which have been there for hundreds of years, even thousands, with no ‘anchor’ but just a collection of small or medium ‘cottage industries’. It was the ‘company town’ that restricted the growth of so many canadian communities-the ‘Monty Burns’ effect.

    IF it were true that NB ED guys thought that way, then there would be more policies for entrepreneurs-more people would get money than those who are just politically connected. And of course where there is LITTLE industry, if the government stopped, there would be NO industry. Government doesn’t ‘prop up’ companies because it really loves to and thinks its a great way to spread cash around, they do it because they HAVE to. In some cases its true and politics has a hand, but like with cops, just because there are some rotten apples doesn’t mean you chuck the idea of having a police force.

    I know the big player models are your raison d’etre, but this is not 1995 anymore, and there are not just moral arguments about paying the big players to put little players out of business (which is the NB example, obviously its not true of a car manufacturer, but I’d have to agree that its highly unlikely you’ll see a car manufacturer, even ontario is having a tough time getting those).

    It’s becoming obvious that the big players are detrimental to the growth of economies-hell, we’d all be driving electric cars if it weren’t for ten companies. Actually, in the states they wouldn’t be driving cars much at all if it weren’t for ONE company-GM, which bought up all the transit systems in the aim of closing them down.

    That doesn’t mean a corporation x setting up shop won’t give a ‘good return on investment’, but it does mean that you can’t say that economic development DEPENDS on it. If NB did what Ireland did and made royalties on, say, books and music, tax free, you’d probably see an exodus from other provinces to the east.

  2. Anonymous says:

    Great post David.

    The best thing ED can do for small business is to land an anchor industry so entrepreneurs can sell to them and their employees.

  3. Censurer General says:

    I don’t understand how experts continue to look at their problems with fragmented minds.

    It’s all connected, David – where do you think the money comes from?

    Stop Corporo-Fascism!