The folly of transposing social development policy with economic development policy

This should be a central theme in the discussion around economic development. I discuss it at a high level but I don’t know if we have ever really had a genuine debate about it. What I am talking about is our longstanding tendency to treat economic development in the same way we treat social development in our society.

I heard the other day that the head of one of the larger economic development organizations in Atl. Canada said that they basically thought it was unconscionable to give a government grant or incentive to a company with no debt and a strong balance sheet. This thinking has bothered me for years but I have come to the conclusion that many many many economic development folks at the highest levels in government and in ED agencies think this way.

When it comes to social policy, we are looking to find ways to support those who need it. The unemployed, the single parent, the folks who are down on their luck. And so should we. Social policy should be about finding ways collectively to alleviate poverty and distress. Social policy should be about building infrastructure that helps people migrate out of a bad situation.

But we can’t take that thinking and move it into the economic development realm. Even if it feels right to many of us. Intuitively it seems a bit creepy to give a company that is successful a grant or a government tax break or support with training, etc. However, have to find a way to get beyond these inbred ideas. Economic development is not about helping the poor and oppressed companies. I am sorry but if that is your model of economic development (and I would argue it has been for much of Atl. Canada for a long time) you are bound to fail.

In the Serengeti Plain of the business world, companies start up and fail – big and small. Governments shouldn’t inject themselves into this process and start trying to prop up those destined to fail. I am sorry but this is a reality. Governments can and should use public policy to help establish a strong environment where companies can be successful (competitive tax regimes, access to skilled workers, good public infrastructure, etc.) but not try and ensure that success.

This is not inconsistent with incentive programs as well. I don’t think incentive programs should be about funding companies that can’t get financing elsewhere. I think maybe in some exceptional cases this might be a good idea but on the whole, if a business plan isn’t strong enough to get access to profit motivated capital, how strong is it?

And I will say this and many people will not like it. I would rather give a million of taxpayer dollars to a large firm with a good balance sheet where the likelihood is that the province will get more than that million back in taxes in a couple of years than a million to a highly speculative project but that has some sentimental attachment.

I’ll close with this. People that run and lead economic development agencies must understand the fundamentals of economic development. They shouldn’t be in the business of risking public funds to top up shaky business plans of local residents. I would never say never about this stuff it out but I would position it as a general rule. Now, if there are business plans put forward to government for funding that are highly speculative but may be an interesting idea, maybe government should do a better job of trying to link up companies with risk capital. But that is not the same thing at all.

Imagine if the CEO of a company thought it was unconscionable to provide additional funding to its most successful divisions. Imagine if that CEO believed that it was the role of the leadership to try and prop up the underperforming divisions or to fund speculative ventures that were denied funding from lower levels of the organization. Again, in rare cases, this might be the right thing to do but on the whole that CEO wouldn’t have much time left at the firm.

And yet many of our guys/gals in ED leadership think that way. They should go back to HRSDC or some other department where that philosophy is right on the mark. But they should stay out of economic development.