If you have been following the U.S. financial crisis you will have heard this term – Too Big To Fail and its acronym TBTF. It refers to those huge, globally interconnected financial firms that if they went down would drag down a significant part of the economy with them. The government reasons that the cost of the company going down is larger than the cost of bailing them out. Hence we get the Bear Stearns, Fannie/Freddie and AIG bailouts.
We have the same issue in economic development – although we haven’t used this clever acronym yet. That is companies that are perceived to be TBTF and are continuously bailed out by government. Think the coal industry in Cape Breton, textile mills in Northern NB, UPM’s mill in the Miramichi. The thinking is that the cost of them failing is higher than the cost of pumping more government money into them.
I think this point needs to be heavily debated among economic developers and public policy makers. I can’t think of one conversation, one report or anything else where this was properly debated. My own opinion, well known to readers of this blog, is that we need to be very reluctant to bail out companies and subsidize bad business models. There is hardly a situation where this is warranted in my opinion. As always, I would never say never with this stuff.
Take the issue Cape Breton. Something like $4-5 billion in direct subsidies to the coal industry over a 20-25 year period. I read that the industry didn’t make any profit going back to the early 1970s. That could be wrong but suffice it to say that there were huge government subsidies just to keep a dying industry afloat. Then it shut down anyway and left the island in a serious economic hardship that it is still trying to climb out of. I would said they should have wound it down when it wasn’t economically viable and invested those billions into new infrastructure and economic development.
Consider Tuscany. It’s a relatively poor region of Italy known for its beauty and you guessed it – tourism (the anchor of most poor economies). The EU is investing a billion dollars (and I assume there is Italian money in there as well) to tranform the Tuscany region into a high tech, research-oriented economy and to attract global technology firms. You can see their advertisments on Canada’s Business News Network among others.
You can sink hundreds of millions into losing projects, you can say enough is enough and just cut if off altogether or you can say there is a public interest in supporting the economic development of underperforming regions and you can strategic invest in them in a way that makes them more attractive for global business investment.