Mapping ED effort to an overall strategy

I know there is criticism of the Acadian Peninsula fund and just about every other fund used for economic development.

I personally don’t have a problem using public funds to support economic development efforts if they lead to tangible economic outcomes (jobs and tax revenue) – i.e. a good return on that investment.  It can help build strong local economies and create the jobs that will keep people here and attract people to our communities.

But these funding programs can easily devolve into an ad hoc source of funds for a wide variety of disparate small efforts.  I am not comfortable with governments just doling out money right and left with no real strategy or ROI.  It becomes a very complicated scenario when companies automatically turn to government to get funding for projects.  I am going to hire a new staff person so there must be a government program for that.  My bank won’t give me a loan without the government loan guarantee. 

There are government funding programs now for training, trade development, staff expansion, becoming evironmentally friendly, succession planning, recruitment and on and on.

I think these things should be used very carefully and they should be mapped to specific strategic objectives.

Let me give you one example.  Both the provincial goverment and ACOA spent a considerable amount of money and time on ‘trade development’.  In New Brunswick, I estimate that somewhere between $2-$3 million spent in this area (both in terms of money given directly to companies and the staff and program administration at the economic development agencies). 

To get a payback on that $2-$3 million, we would need to generate from those efforts at least 400 new jobs and $83 million in new exports.  Here is the back of the napkin calculation for that: at $35,000/year, the average worker contributes around $6,000 to the provincial tax coffers.  You would need 416 of them to reach $2.5 million.  The export revenue per worker is in the range of $200k per worker (not including stuff like oil refining which would be far higher) so that is the $83 million in new exports. 

Now, you would argue that the ‘payback’ on this effort could be over three years (because the tax revenue is generated each year while the cost is generated once) and that is fair as well.  So in this model you would need to generate and sustain close to $300 million in new exports directly from these programs every 10 years to get a reasonable payback on the expense (three year payback).

However, we know that if we exclude energy and pulp, exports are actually down in New Brunswick. 

Now defenders will say that we ‘retained’ or ‘sustained’ existing (or even declining) levels of exports.  In other words, without us it would have been worse.  But that kind of ‘managing decline’ shouldn’t even be considered economic development.

So let me give you an alternative way to generate a payback on your trade development efforts.

What is the biggest export from Nova Scotia (not including offshore gas)?

Tires.

Attracting one large firm (and three plants) called Michelin has led to $819 million in export sales last year and almost $4 billion over the last five years.

You could easily add up all the trade development efforts targeted small firms in New Brunswick over 50 years and you wouldn’t get to that level of exports.  From one firm.

Again, I am not bashing small business here.  I think we need to continue to understand how economies develop and debate these issues without the old time stereotypes.  If we have export oriented firms in New Brunswick and we can use a small amount of tax payer money to leverage a large boost in their exports, giddy up.   But we can’t drib and drab funds out willy nilly with no accountability and no real knowledge if any incremental economic value was created in the local economy.

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One Response to Mapping ED effort to an overall strategy

  1. richard says:

    It’s interesting to compare the approaches used in the US and Canada towards federal/state funding of small and large business. In the US a lot of this activity is done via the infamous earmarks which are tied to various bills. Members of Congress add riders to various bills that basicaly direct money to pet projects/industries in their region. Its obvious who is taking care of who. For small businesses, there are also things such as the SBIR programs at the federal level. Unlike earmarks, these are well-documented external-reviewed funding programs where small businesses can make a business case to get govt dollars for R&D and start-up activities. I believe the review docs are available under access to information regs.

    In Canada, by contrast, this is all done thru government agencies and quite a bit of secrecy seems to be involved. There is perhaps no direct input from MPs, but it seems obvious that many of the grants, loans, etc are politically motivated and that MPs are pulling the strings. MPs hide under the cover provided by bureaucrats to avoid taking responsibility for their actions. In other words, what should be ED is just vote-buying by politicians. That’s why you see the dribs and drabs approach you were referring to; its vote-buying, not ED. Just another example of the lack of transparency here vs other countries when it comes to spending tax dollars. Atlantic Canada has received billions in vote-buying, but damn little for ED. I predict the same thing for the Southern Ontario agency you referred to earlier.

    If we took the dual earmark / SBIR approach here and gave MPs a pile of loot to hand out in their region, everyone would know what was going on. Perhaps then we could convince the politicians to keep their noses out of a proper SBIR-like ED program. We need a more rigorous and open process for these kinds of programs.

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