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Traditionally local government economic development policy has focused on attracting new business through incentives and subsidies. However, recognition that these economic development strategies often did not benefit low income residents or neighborhoods, led to development of new community economic development strategies during the 1970s and 1980s to target investment and control to local neighborhoods. Often initiated by non-profit community development corporations, these innovative approaches have come to scale and now attract support from the majority of local governments according to a recent survey.

Survey Results

Every five years the International City County Management Association conducts a nationwide survey of local government support for economic development. In the 1999 survey ICMA added a question specifically focused on economic development strategies targeted to low income neighborhoods and people. The survey was mailed to the manager/administrator of all cities and counties with populations over 10,000. Over 1000 municipalities responded (response rate 31%). The survey measured local government support for three broad types of economic development policy: incentives and recruitment, business retention and expansion, and community economic development.

Incentives and Recruitment

Business attraction and recruitment strategies gained great popularity during the 1970s when growing regions in the South and West were able to attract geographical mobile firms from the older industrial states in the North and Midwest via subsidies, tax abatements and infrastructure development. While the political salience of these recruitment strategies is well known, the actual effectiveness of these strategies has been challenged. Recruited firms may not stay long before moving to another, cheaper location. Research results, while contradictory, generally support the notion that businesses benefit more from governmental investment in infrastructure, workforce development and quality of life, than they do from tax breaks. Experienced industrial recruiters emphasize the need to target these incentives strategically and carefully evaluate their effectiveness.

Today, business attraction and business incentives remain the most common form of local economic development. Business incentives are supported by 68% of all governments and range from regulatory flexibility to tax abatements and subsidies. Planning and evaluation of such programs has increased. However, concern that incentives may encourage destructive competition between localities has led to increased interest in alternative economic development approaches.

Source: ICMA Economic Development Survey, 1999.

New strategies for local economic development involve planning to identify key characteristics of the local economy and to design strategic interventions which will enhance local competitiveness and support a cluster of local firms. These initiatives are characterized by public-private partnerships focused on strategic planning to identify and develop industrial policy for the local economy. Job training and marketing are addressed in addition to issues of finance and infrastructure. The focus is on the role of government and private institutions in providing information, technical supports and economic development infrastructure needed to support a range of local firms. These approaches may emphasize new technology related sectors, existing firms in the local economy, or economic development for low-income communities.

Business Retention and Expansion

Local economic development and job growth are largely determined by the success of local firms. Recognition of this fact has encouraged states and localities to develop business retention and expansion programs focused on enhancing the viability of firms already in the local economy. Technical assistance, workforce development, support for technology transfer and revolving loans funds all figure into business retention and expansion programs.

These programs have increased in popularity and the majority of responding governments support at least one retention on small business activity. Preventing a business from leaving and helping it expand does not garner the political headlines the way attracting a new firm does, however, the benefits of business retention and attraction programs may have more staying power since the firms assisted have already shown a willingness to invest and remain locally.

Community Economic Development

Community economic development strategies attempt to increase private capital investment in low-income neighborhoods through economic development zones and promotion of job training. They also use community development corporations and community development loan funds to make financing and technical assistance available to local residents and businesses.

Not surprisingly, local government support is highest for economic development zones that use a familiar tool, tax incentives, targeted to promote investment in neighborhoods with high poverty or high unemployment. Two thirds of responding governments report using tax incentives in this manner. Job training is also quite common. Again, this is a common tool (often part of a business attraction package) so expanding the focus to meet the training needs of a wider set of local workers and businesses is a natural extension. While less common, over half of all responding governments support community development loan funds and community development corporations. Programs specifically focused on welfare to work were also reported by almost half of all governments. Micro-enterprise programs were the least common, supported by only a quarter of all governments, but this compares favorably to those governments supporting small business programs more generally.

Importance of Partnerships with Local Government

These community economic development programs reflect an important set of partnerships between government and the non-profit sector. Local governments use non-profits to support community development corporations and micro-enterprise programs more than 50% of the time, and over a quarter of governments use non-profits to provide job training, welfare to work programs and community development loan funds. Non-profits combine social support, training, community organizing and economic development expertise. These collaborative public-private partnerships increase the scale and impact over what local government or non-profits could provide alone.

A challenge for the community economic development movement is to increase involvement of the for-profit sector. While private sector participation in traditional economic development programs averages over 55 percent, private sector support for community development approaches averages only 4-6 percent. Many for-profit institutions perceive limited profit potential from investment in low-income communities and are reluctant to make investments unless large subsidies or tax breaks are provided. However, community economic development programs have demonstrated that profitable economic development can be fostered in low-income neighborhoods. Community economic development programs, which promote neighborhood revitalization and workforce development, are beneficial to private sector competitiveness over the long term. While local governments have built important partnerships with the non-profit sector, they need to encourage more direct investment by the for-profit sector in community economic development programs.

For more information:

Community economic development trade associations provide a useful source of information on best practices. See:

Association for Enterprise Opportunity

National Association of Development Organizations, Washington, DC.

National Community Capital Association, Philadelphia, PA

National Congress for Community Economic Development, Washington D.C.

Mildred Warner is an Assistant Professor in the Department of City and Regional Planning at Cornell University where her work focuses primarily on the role of local government on community development. Her research addresses the financial impact of federal and state devolution on local government capacity for service delivery. By combining statistical and geographic analysis her research raises questions about new patterns of geographic inequality which accompany devolution. Research on devolution is complemented by research on local government service delivery restructuring - privatization, inter-municipal cooperation, and new patterns of labor management cooperation - which are managerial responses to meet service needs in the face of fiscal constraints. Working closely with public sector unions and associations of local elected officials at the state and national levels, Dr. Warner looks at the stability of these alternative forms of service delivery and the implications for equality, access and citizen voice.

Previously Dr. Warner founded and served for nine years as the Associate Director of the Community and Rural Development Institute at Cornell. In this capacity she worked with public sector unions and statewide associations of local governments in New York on economic development and government management issues. Before coming to Cornell she served as a program officer with the Rural Poverty and Resources Program of the Ford Foundation. She has a Bachelor's degree in History from Oberlin College (1979), Masters from Cornell in Agricultural Economics (1985) and Ph.D. from Cornell in Development Sociology (1997). Her experience with rural development spans the public and non profit sectors in the US, developing countries and newly emerging democracies in Eastern Europe.

Dr. Warner's "Restructuring Local Government" web site is designed to provide local governments and public sector employees with information on privatization, intermunicipal cooperation, and internal restructuring through labor-management cooperation.

Phone: 607-255-6816
Fax: 607-255-6681