The old ways of economic development

Someone told me the other day that their boss said he was very uncomfortable giving financial incentives to a company that had no corporate debt. He was very uncomfortable, in other words, giving taxpayer dollars to a company that “doesn’t need it”.

Now this may seem intuitively like an realistic statement but in fact it goes to the core of why much of our economic development has been such a failure in Atlantic Canada.

Don’t confuse the issues. This is not about governments providing incentive programs. We can agree or disagree on the value of incentive programs and even on the legitimacy of such programs. That is not the point here.

My point here is that if we do provide incentives we have to provide them to companies that have good balance sheets and have good business models. Why would we risk taxpayer dollars on bad companies and suspect business models?

For many years -decades in fact – a lot of old school government economic developers believed that it was the government’s role to step in when the private capital markets didn’t fill a local need. Or it was their role to fund local companies that couldn’t get bank financing or it was their role to be “lender of last resort”.

As a result, a lot of government funding went to projects that had suspect business models, were not adequately capitalized or were provided funding because of political motivation.

In my opinion, putting aside the rightness or wrongness of incentives, if we are in the game, we should look for good companies with good business models.

The dirty little secret is that places like Atlantic Canada end up giving funds to tier two or three projects (in terms of quality) while places like Quebec and Ontario fund big name, well branded multinational corporations. Sure there is potential for those firms to fail but it is far more likely that a cottage cluster in New Brunswick funded with 60% government money will fail than a billion dollar auto plant in Ontario. It’s just that when the latter fails it is more spectacular.

I am shocked at just how many people in the upper echelons of the ‘economic development’ system in Atlantic Canada really don’t know the mechanics of economic development.

This entry was posted in Uncategorized. Bookmark the permalink.

0 Responses to The old ways of economic development

  1. mikel says:

    How do you define what is ‘good’? Atlantic Yarns had a ‘good’ track record when it set up, UPM has a great record, and of course Irving does too. The first two ended up with little value in that they closed anyway, the latter we just don’t know. People in rural areas fund city’s success with their resources, why exactly doesn’t a rural area deserve at least a paycheque for awhile and then EI while they find another job in the same area?

    The problem is not what is ‘good’ and ‘bad’, some of the most successful companies have had horrible business models that banks wouldn’t touch with a ten foot pole. You just heard the guy from Fatkat saying that without the government they would not be in business, what exactly makes an animation company in a province that has no venue for animation a ‘good’ prospect?

    That’s not a question of not knowing the ‘basics’ of economic development, that’s just having a different perspective of what its all about.

    It’s a pretty valid one too. Why should NBers pay Irvings property tax when they have billions and NB is one of the poorest regions on the continent? That is exactly the thinking that led to UPM getting three million two years before they closed the mill. IF a company is making tons of money and STILL wants your taxpayers money, then its certainly not a stretch to say that that company is a lousy one to base your economic development on.

    The corporate welfare model is corporations getting the most handouts-it sounds like you are saying that ‘only the wealthy deserve to be bribed’.

  2. Dan F says:

    well branded multinational corporations

    I’d be an Irving debt slave before I work for Pepsi-co any day.

    If you economists cannot even come out with the truth that globalism is nothing more that a pyramid scheme writ large, please stop promoting it over local establishments just to prolong the lunacy.

    P.S. – there’s nothing new about any of this.