The case for public investment in economic development

I am sensitive to those that are wary of government spending on economic development.  I share some of their concerns but there are a number of reasons why there should be a role for government in support of economic development.

For example there are cases where something is clearly in the public interest but where there is no easily discernable private market solution.  Take the example of promoting your community or province far and wide as a good place to do business.  We know the competition for business investment is more vigorous today than ever before but it is hard to see how the private sector would pony up the cash to pay to market a community or province.  There are many examples of the private sector stumping up some cash (think the Moncton strategic partnership) but that is more philanthropic and not tied to a direct business case for the investment. It is in the public interest to promote the community but there is no easily discernable private market (profit motive) solution.

Think about investments in R&D.  Governments around the world pour substantial sums into R&D – if we say no – we put ourselves at a competitive disadvantage.  We still have to seek value for money but there does seem to be a public interest.

Then if you think about slightly more controversial government spending such as “lender of last resort”, investments in intermediaries (industry development groups, incubators, etc.), targeted investment in infrastructure that is public in nature but supports private sector activity (i.e. airports), the philosophy is the same even though we will disagree on specifics.  There could be a distinct public interest (i.e. we need a strong economy) but no easily discernable private market solution.

This is an important distinction.  Where there is a discernable private market solution the government should be wary of intervening as it ends up displacing and distorting markets.  For example, if a project could be funded by private market sources but the proponent asks for government funding because it is easier money – that doesn’t really lead to economic development – just public funding crowding out private funding.  This is not as simple a calculus as you might think because of the competition. If jurisdiction X is prepared to provide company Y with $1 million to set up there and NB says no – even though the province would get $5 million in new tax revenue  – that is a harder thing for me to justify.

But the core principle remains intact.

An intelligent economic development model can discern between the two – when there is a public interest but no discernable private market solution versus initiatives where there is a discernable private market solution but the proponent (s) think that government money is a easier source.