For almost three years now in addition to serving as the head of the Liberal Arts and Education department at the University of Minnesota, Crookston, I have also been directing Minnesota’s Economic Development Administration University Center. The EDA Center, as it is known across the state is a federally-funded center that is designed to provide technical assistance to local, county, regional and tribal economic development agencies across Minnesota.
Due to the economic downturn of the past few years, economic development agencies have been under increased pressure to improve local economic conditions and seek new and creative ways to facilitate private capital investment and job creation. And as a result, the number of technical assistance requests from local agencies to our EDA Center has been on the rise. Sometimes those requests are to assist in the development of a new business incubator or to explore the feasibility of a new type of revolving loan fund. But quite often we are asked to evaluate a local EDA’s current operation or to provide assistance with organizational transitions and consolidations.
During these organizational assessments it often becomes evident that for an organization designed to facilitate business development, many local EDAs do not have established and written policies and criteria regarding what types of businesses they will provide assistance to and under what circumstances. Unlike banks that typically have formal and well-established lending and risk requirements, many local EDAs simply accept requests for assistance and make decisions without the benefit of such established criteria. And as a result, many of the local committees, often comprised of well-meaning city council members, lose sight of the difference between increasing economic activity in their community and increasing the size of the local economy.
Three principles that should guide local economic development committees in this regard are:
1. First is that the funds that EDAs utilize are public funds; and as such, it is important that the dispensing of such funds be congruent with the values of the local taxpayers who have provided those funds. So for example, while banks and other private lenders will examine collateral requirements and assess the risk of default, local EDAs understand that regardless, providing public funds to help establish a new adult bookstore or other such establishment is simply inconsistent with the use of public funds. Understanding community values is essential.
2. Second is that because these are public funds they should be dispensed with the goal of increasing the size of the local economy and not to increase the amount of activity within the existing economy. It is this principle that often leads local EDAs to only provide financing to manufacturing or other primary sector firms. Because these firms mostly export their goods out of the local economy and bring new cash into the local economy they help grow the size of the economic pie. To the contrary, while helping establish a new local bakery or coffee shop may be a valuable community amenity, such businesses only give local residents new consumer choices, but it does not grow the local economy. Economic development is about growing the economy, not providing greater consumer choice.
3. Third is because these are public funds derived from local taxpayers including local business owners, they need to be dispensed in a fashion that does not unfairly advantage new business ventures to the disadvantage of existing taxpaying businesses. For example, should it be our local government’s role to collect tax revenues from all the car dealers in town and then use these tax funds to help subsidize a new car dealer wishing to enter the market that will directly compete with these established car dealers? Most of us would say no.
While these three principles may seem rather simple and obvious, they are often the very factors that create contentiousness and controversy at the local level. And now that the economy is undergoing a slow and steady recovery, local EDAs will start receiving even more requests to assist businesses. Having a set of written policies and criteria are the most objective way to adhere to a set of principles that are fair, congruent with local values and are aimed at growing the local economic pie and not just creating new ways to slice up the existing pie.