Grand Forks Economic Development, Round 1

I get many questions about local economic development these days. The specific geography is usually either Grand Forks, city, county or metropolitan area, or the counties in northeast North Dakota. These questions come on the radio, from newspaper reporters, and general conversations from the public. The basic form of the question is, “What can or should Grand Forks do to grow and develop?”

There are two typical answers to this: 1) diversify the economy and 2) innovate/respond to growth by others. We’ll save the detailed numbers for a later discussion and right now deal with these ideas in the abstract. I am doing this because for the most part I do not like either of these choices and I will explain why.

Diversification

I think it is commonly accepted that diversification yields benefits in investing, at least in the personal finance context. So why not apply it to a regional economic portfolio? My concern here is that we likely fool ourselves into believing we have removed or reduced risk. The point of diversification is to reduce risk exposure and improve returns to the holdings.

Let’s start with the fact that a regional economic portfolio is not the same as a personal portfolio of assets. Different sectors in the local economy generate different returns and with different variances, but does a local area really have the ability to add or subtract these as municipal bonds in a portfolio? The fact of the matter is that at any given time the local area has its endowments of productive resources and industries and changing them takes significant time and effort. Sometimes it takes a great deal of effort in addition to incentives provided by the local area too. Even with this factors it is not clear to me that local areas really have the control of the portfolio necessary to make such a change.

A prerequisite to doing this correctly is being honest about your communities assets and liabilities. Discussions about the direction of growth too often romanticize the local area or seek to excuse away current problems as bad luck or advantages given to other communities. (There is a certain amount of cheerleading the local area required of economic development professionals.) All of this may or may not be true, but it seldom helps deal with the problem of looking forward.

So the two questions needing answers are: 1) What do we have now that can be a foundation for further growth? and, 2) What industries/sectors should we expand or invite to enhance economic growth and development?

Innovate?

There are still many choices left to discuss. Should we create a brand new industry unknown in the area before this? Should there be a more strategic element, acting as a part of the supply chain for industries in a different area? Again, there are no easy answers to these questions. There are advantages and disadvantages to both.

It is risky to bring new industries into areas where they previously did not exist. There may be a very good reason they did not exist, such as inadequate labor resources, or lack of technical training in the workforce. This could necessitate large changes in other local industries or institutions to create optimal growth and development conditions, not to mention a significant amount of time to realize those gains. Is the waiting game possible in the area?

It is no less risky being a part of the supply chain for another areas economic growth engine. In such a situation you cede control over your local economic policy, such as it is, to become the supplier of their needs. Your economic cycles then become based on the other regions performance. This is likely less risky in terms of the immediate gains, but long run returns are possibly even more uncertain here than with internal regional development. Is perhaps the only advantage that you clearly give up control over your local economic development?

Like I said earlier, I remain unconvinced that local areas have the ability to diversify in a meaningful way. A separate problem I have not dealt with yet, and will need to wait for another post, is that I am not convinced that diversification actually implies lower risk in this context. Ask people with well diversified portfolios how they did in September 2008? There are times and places when all such strategies become overwhelmed by larger economic events.

3 Comments, RSS

  1. lexslexus March 6, 2015 @ 8:29 am

    I’m not sure who you’re referring to when you say, “Should **we** create a brand new industry”, but I suspect you are talking about government bodies. It is highly unlikely that politicians, whose spending is done with the idea that it garners broad public support, would think too far outside the box. Further, since they are insulated from the cost of picking the wrong investment with mostly everyone else’s money, it’s highly dubious they would ever be wiser investors than those who risk mostly their own money.

    Don Boudreaux’s short blog on this topic would be very useful for your readers: http://cafehayek.com/2015/03/market-tested-innovation.html. This portion was particularly insightful, “Had I been a government planner in the 1970s or early 1980s – a planner with the finest training, the highest integrity, and a most intense desire to serve my fellow citizens well – I would have counseled against directing society’s scarce resources into the production and distribution of single-sized bottled still water. My reason would have assured me of the prudence and correctness of my decision. And if I were such a government planner whose diktat would have been heeded, no one would ever have learned that my decision stunk.”

  2. David March 6, 2015 @ 8:35 am

    Actually I was not speaking about a direct government order for the creation of a new industry. In my opinion those tend to generate less success than private market outcomes absent significant asymmetric information issues or externalities. I was more thinking about the notion that the community as a whole realizes there is a need for a new type of firm and there are some entrepreneurs that take on that risk and the public attempts to support that effort through their business.

    Government efforts in many, if not most, of these situations would be best directed to marketing efforts: making information available about the possible success of the industry and why they think it would be a success. This would help both entrepreneurs and the public at large understand their thinking and why they highlight a particular industry. The public can then disagree, if necessary, and make a counter case, all providing valuable information to new businesses.

    • lexslexus March 6, 2015 @ 10:47 am

      You say, “Government efforts in many, if not most, of these situations would be best directed to marketing efforts”. So the idea is that the government spends public resources “marketing” this idea to the exclusion of existing industries that are unsupported (or to a lesser extent) by this government marketing firm. A benefit, you claim, of this marketing is is to help “the public at large understand their thinking and why they highlighted a particular industry”. But wait, wasn’t this the “community as a whole [that realized] there is a need for a new type of firm”?

      “It is error alone which needs the support of government. Truth can stand by itself.” – Thomas Jefferson

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