Governance Policy Issues and Implementation:
Sarah F. Liebschutz
Distinguished Service Professor Emeritus
State University of New York at Brockport
Adjunct Professor of Political Science
University of Rochester Paper
developed under the auspices of the
National Academy of Public Administration
Standing Panel on the Federal System
Prepared for the International
"The Challenge to New Governance in the 21st
Achieving Effective Central-Local Relations"
July 27-29, 1998
Sarah F. Liebschutz
The United States economy is fundamentally unplanned. Both
capital and labor are mobile. Local governments, in contrast,
are fixed in specific locations. As product cycles recede
and advance, population and industries migrate, local governments
face two choices. They can either adapt to change or yield
to the natural forces of the marketplace.
Not all local governments in the United States have the same
level and intensity of preference for economic activity; most,
however, prefer more rather than less. This is especially
true for America's largest cities, particularly those historically
reliant on now-eroded manufacturing bases. Many of their local
officials aggressively promote economic development strategies
to retain, expand, and/or attract business. The strategies
include financing and tax incentives directed to the private
sector and direct investments by governments in the local
Local governments do not pursue these strategies alone. The
national government has long been involved in efforts to revitalize
America's distressed inner cities. States-the intermediate
level of government in the American federal system-also have
an important stake in the health of local communities within
their borders. They, too, especially since the 1970s, have
become increasingly active in economic development
Do national-local and state-local programs make a difference
in economic development in the United States? Do different
policy interventions, e.g., financing and/or tax incentives,
public infrastructure improvements, have different effects?
What intergovernmental strategies work best to promote sustainable
local economic development? This paper is organized to consider
those questions as follows:
- First, the general context for economic
development in the United States is presented
- Next, generic approaches of government
used to influence private sector decisions are described
- Then, research issues and findings about
the effectiveness of the public sector in stimulating local
economic development are discussed;
- Finally, the current major national government
initiative, the 1993 national Empowerment Zones/Enterprise
Communities Program, which targets public incentives on
distressed cities, is analyzed. Original field research
by the author on state and local economic development initiatives
in seven large United States cities is presented.
These are the paper's main points:
- Job creation in the United States rests
fundamentally in the private sector.
- Decisions to induce private investment
are local, but incentives involve local, state, and national
- Subsidies targeted directly to private
firms include tax expenditures and public infrastructure
and service improvements.
- Subsidies to local governments take the
form of national and state grants-in-aid.
- State and/or local business incentives
seem to have the greatest effects on location of investment
- Economic gains, in general, appear to
- Political rather than economic logic
explains the embrace of economic development by local officials.
- Economic and job development activities
dominate urban empowerment zone strategies
- Reuse of environmentally contaminated
urban industrial sites, "brownfields," is supported
by local, state, and national levels.
- Governance difficulties evident early
in the urban EZ program-between citizens and city hall,
and between local and state governments-seem to be abating.
From the beginning of the American federal system to the present,
economic development has been dominated by the private sector.
At the same time, governments at all three levels have played
important roles. As Theodore Lowi and Benjamin Ginsberg (1990),
authors of a widely used textbook on American government,
write: "Most of the [public] policies in the history
of the United States have been distinctly capitalistic; that
is, they have aimed at promoting investment and ownership
by individuals and corporations in the private sector"
(p.680) Such public policies, in the broadest sense, are intended
to "protect public order and private property; control
or influence markets; and defend or enhance the vitality of
our capitalistic economy " (p. 759). At a more localized
and focused level, they are intended to influence individual
firms to locate (or expand or remain) in a specific geographic
location to perform a specific type of activity. Both broad-gauged
and targeted policies rest on a single assumption: job formation
is a decentralized, private sector function, but government
incentives can influence business decisions.
Public sector employment represents a small, and decreasing,
share of the total United States workforce. In 1970, for example,
16 million government workers accounted for 19 percent of
the total work force of 82.7 million persons. In 1980, the
public sector work force numbered 18.3 million, or slightly
more than 17 percent of the total workforce of 106.9. In 1990,
the total workforce grew to nearly 126 million persons; public
sector employment increased to 20.4 million. The public sector
share decreased to 16 percent, where it remained as of 1994
(ACIR and RIG, 1998). Job creation in the United States, thus,
is largely a private sector function.
Government spending, in contrast, has increased relative to
the United States economy. In the first quarter of the 20th
century, government spending was small. In 1927, for example,
expenditures by all governments (national, state, and local)
represented only 13 percent of personal income. Personal income
is used here as an indicator for the economy. While gross
domestic product may be a preferable indicator, it is not
available on a timely basis for state or local economies.
See American Council on Intergovernmental Relations and Rockefeller
Institute of Government, 1998, p. 8, footnote 4. During World
War II, they grew rapidly as the national government responded
to national defense needs, rising to nearly 45 percent of
personal income by 1946. National government spending represented
80 percent of that proportion. During the next three decades,
total government spending as a percentage of personal income
decreased. Starting in the mid-1970s, as defense and public
welfare expenditures grew, it returned to its earlier level.
"Spending relative to the size of the economy was generally
highest during and shortly after the recessions of 1975-76,
1980-82, and 1990-91 as countercyclical spending, such as
unemployment insurance and welfare, rose"(ACIR and RIG,
1998, p. 9) In 1994 total government spending represented
46 percent of personal income, with the national government
share half of that total.
Although the federal government spends more than state and
local governments, its share of the public sector workforce
is the smallest. Local governments have the largest number
of employees, nearly 12 million in 1994, or 61 percent of
the total, with state governments (4.7 million) at 24 percent,
and the national government (4.6 million, including 1.6 military
employees) at 15 percent.
Why the discrepancy between public spending and public employment?
The explanation is straightforward:
- The national government's responsibilities
include defense and foreign affairs, Social Security and
Medicare, interest on the public debt, and payments to state
governments for public welfare programs. "By comparison,
state and local governments do not pay for the national
defense. . . Social Security or Medicare. Furthermore, because.
. . they cannot by law run budget deficits. . . their interest
expenses for general debt are relatively small"(ACIR
and RIG, 1998, p. 10).
- Local governments in the United
States bear the greatest responsibility for delivering services.
The largest function of local government is education (elementary
and secondary), which accounts for more than half of all
local government employees. It is in this area that the
major distinction between service delivery and service financing
occurs; "most states finance a large share of these
costs via aid to local school districts, but the districts
actually deliver the service. In fact, aid to local school
districts is the largest component of total state government
spending, exceeding both Medicaid and higher education"
(ACIR and RIG, 1998, p. 10) Local governments are also primarily
responsible for police and fire services. State and local
governments share the financing and service delivery in
highways, health, hospitals, and a variety of other services,
including the environment, parks and recreation.
A clear, but complex, trend has characterized private investment
in the United States since the end of World War II. In
general, older central cities in the northeast and
midwest regions of the country have lost economic activity,
while less built-up areas-suburbs, rural areas, growing cities
in the south and west-have gained. "The process is
not simply the movement of existing enterprises; it also involves
a bias in the choice of location of new activities"(
Nathan and Webman, 1980, p. 93).
The shift of private investment away from older cities "began
with manufacturing firms but [then] extended to business services
and retail and personal services as well. As manufacturing
. . . declined, many older large cities. . . lost population,
jobs, and large parts of their tax base" (Nathan and
Webman, 1980, p. 93). The explanation for this trend? The
"transportation, infrastructure, density, and other advantages
of the older cities no longer outweigh the advantages of other
more dispersed places-the suburbs, rural areas, and newer
cities in the South and West" (Nathan and Webman, 1980,
One particular aspect of private sector disinvestment involves
"industrial and commercial sites that are abandoned or
underused because of real of perceived contamination"
(ICMA, 1997, p.1). The redevelopment of these "brownfields"
is often thwarted by the high and uncertain costs of remediation
associated with cleanup of contaminated areas and liability
for past and future environmental consequences. (ICMA, 1997).
The consequences of private sector disinvestment are distressed
people and distressed places. "Individuals or groups
with special needs-the poor, unemployed, homeless, handicapped,
educationally disadvantaged, elderly, or those living in crowded
or substandard housing-illustrate the people dimension. Communities
with structural, organizational, and fiscal limitations-high
proportions of substandard housing units, declining property
tax bases, limits on taxing and/or annexation powers, or comprehensive
functional responsibilities-illustrate the place dimension"
(Liebschutz, 1989, p.3)
Despite losses of jobs, population, and tax bases, large,
older cities still have one important comparative economic
advantage-" the convenience of center-city locations
that facilitate 'face-to-face' contacts" (Nathan and
Webman, 1980, p. 93) This convenience makes them natural locations
for such service activities as law, finance, advertising,
publishing, information services, government and medical specialties.
Private sector disinvestment linked to industrial decentralization
has resulted in what Michael Pagano and Ann Bowman (1995)
term a "polycentric urban field." They write, "Just
as the industrial revolution established a new hierarchy [among
American cities], the decentralization of industry is generating
still another. The changing economy has contributed to the
alteration of urban space, [with] the metropolis. . . becoming
a polycentric urban field rather than one dominated by a primate
Within the polycentric urban field, politics matters. The
aspirations of local officials for their communities make
a difference in whether "cities. . . adapt to their changing
environments or succumb to the invisible hand of the marketplace"
(Pagano and Bowman, 1995, pp. 2, 34). Leadership vision and
city image explain why even fiscally healthy cities pursue
economic development activities.
Local public officials, thus, have choices. They can yield
to the natural forces of the marketplace, or they can consciously
adapt to change. Not all local governments, as we stated at
the outset of this paper, have the same level and intensity
of preference for economic activity. The political leaders
in most of America's largest, distressed cities, however,
prefer more rather than less. Their challenge is to choose
the most effective economic development strategy to counter
market failure and to achieve redistributional aims.
The term economic development incorporates the concept of
comparative advantage and the perspective of the long term.
Comparative advantage pertains to the special attraction for
a particular economic activity that a locality possesses so
that it becomes the center for the production of goods or
services that are sold to people from other areas. The exchange
of the good and/or service produced in the local area for
income from outside customers is the "export" product;
it is the foundation for the economic growth of the local
area. Economic development, embodying the long term view refers
to the "transition-sometimes orderly, sometimes chaotic-of
the local economic from one export base to another as the
area matures in what it can do as rising per capita income
and technological progress change what the national [or global]
economy wants done" (Thompson, 1965, p. 3).
When markets fail and/or redistribution of resources is
desired, government intervention is generally justified.
When markets fail, the purpose of intervention is to enhance
efficiency of production, and the competitive posture of firms
and the local area. When redistribution is the goal, the purpose
of intervention is "to ensure the commonly recognized
needs for dignified survival" for the least advantaged
members of the local community (Weimer and Vining, 1989, p.
In distressed cities-those marked by private sector disinvestment
and labor surpluses-"one way to increase the supply of
goods is to give direct subsidies to the [actual or potential]
suppliers of the goods. The subsidies may be directed at either
private firms or lower levels of government"( Weimer
and Vining, 1989, p. 138).
Subsidies targeted directly at private firms involve:
- Financing incentives, designed to reduce
the costs of capital for new construction or plant modernization;
- Tax incentives, designed to reduce the
costs of ongoing operations; and
- Government spending on local infrastructure
or technical assistance or job training or public services,
designed to improve investment potential.
Subsidies directed at lower levels
of government, known as inter-governmental grants-in-aid,
are intended to reduce the costs of local public sector intervention.
With or without matching requirements, the intergovernmental
grant stimulates local government spending that would otherwise
not occur at the level resulting from the grant, or at all.
These grants-in-aid facilitate the infrastructure investments
and job training programs by local governments that make localities
more attractive to private businesses. Both kinds of subsidies-those
directly targeted at private firms and those made available
by national and state governments-are currently in widespread
use by city governments.
Economic prosperity is necessary to protect
the fiscal base of local government and to enable elected
officials to deliver a reasonable quality of public services
at reasonable tax levels. Economic development activities
are politically popular. And "most local officials have
a sense of community responsibility and want to do what is
good for the community." (Wolman, 1996, p. 117). Thus
activities to enhance local economic development are generally
viewed as appropriate.
The pace of local economic development activity
has increased greatly since the mid-1960s. Wolman (1996) suggests
four complementary explanations:
- Capital has increased substantially in
mobility of capital and is now international in scope; this
leads to increased competition among cities to maintain
their economic and fiscal bases;
- Slow national growth has resulted in
similarly slow growth or even decline in many urban economies;
officials are under pressure to take action to provide jobs
for residents and fiscal resources for local governments;
- International economic restructuring
has resulted in particularly hard economic times for cities
dependent on traditional manufacturing employment;
- Cutbacks in aid from the national
government have thrown local governments back on their own
resources if they are to undertake economic development
Two broad options
are available for local governments to induce private investment.
The first involves use of own-source revenues and inter-governmental
grants for (a) public infrastructure improvements (roads,
sewers, schools etc.), (b) job training subsidies, (c) improved
services, e.g., public safety or street cleaning; and (d)
other assistance to the private sector, such as reduced red-tape.
The second category involves foregone local revenues, or tax
expenditures, to subsidize operating and capital expenses
associated with private sector location or expansion.
Data for spending by local governments on
economic development activities-direct and/or tax expenditures-are
very hard to obtain. The U. S. Department of Commerce, Bureau
of the Census, does not collect annual data that conform to
the categories listed above. The most pertinent category used
by the Bureau of the Census is "Housing and Community
Development." By itself, however, it is an incomplete
indicator of the wide range of direct local spending for economic
development. The problem is further compounded by aggregation
of local and state expenditures. The Bureau of the Census
reports that state and local expenditures for housing
and community development have grown on a per capita basis
in 30 years by nearly 1200 percent, from $6 per 1965 to $76
in 1994 (ACIR and RIG, 1998). This rate of increase outpaced
the growth of 974 percent in total general expenditures by
state and local governments, from $284 per capita in 1965
to $4,125 in 1994 (ACIR and RIG, 1998).
Paul Peterson (1995) divides governmental
expenditures into developmental and redistributional categories.
"Developmental programs provide the physical and social
infrastructure necessary to facilitate a country's economic
growth. Redistribution programs re-allocate societal resources
form the 'haves' to the 'have-nots'" (p. 17). Peterson
( 1995) includes the following as developmental programs:
physical infrastructure-roads, mass transit systems, sanitation
systems, public parks and other basic utilities-and social
infrastructure-public safety, public health, and educational
institutions. Redistributive programs "transfer economic
resources from those who have gained the most from economic
development to those who have gained the least: the elderly,
the disabled, the unemployed" etc. (p.17). Peterson's
developmental programs include public infrastructure and job
training activities listed above, but not enhanced services.
His data for developmental state and local spending show an
increase of nearly 200 percent from 1962 to 1990, lower than
the increase in redistributional spending for the same period.
Thus, both the Bureau of the Census and
Peterson show trends over the past 30 years of accelerated
spending for economic development. This finding, however,
comes with two caveats: (1) the data incompletely reflect
economic development spending; and (2) they do not reflect
local spending alone.
Since the 1970s, state governments have
become increasingly active in economic development. They have
responded to the challenges of technological change and of
competition from abroad. They have developed training and
education programs, financed university research, created
financial incentives for foreign investors and for high-technology
business, and provided export assistance. Like the
national government, the governments of the American states
provide loans and grants to local governments (e.g., for training
and education programs). States, in addition, offer a wide
array of financing and tax incentives that offer relief to
firms from state-imposed taxes.
Such state economic activism has occurred in the context
of federal retrenchment in domestic policy, decentralization
of responsibilities to the states, and concern with the condition
of urban centers. During the 1980s, tired of waiting for
Washington to act to reverse abandoned urban industrial areas
and create jobs for the unemployed, 37 states and the District
of Columbia enacted their own enterprise-zone statutes. By
the time that the federal Empowerment Zones and Enterprise
Communities law (elaborated later) was adopted, there were
more than 2,000 enterprise zones in 41 states. Most states
use criteria of economic distress, of people and/or of places,
to designate state zones. Most provide some form of tax incentive
to private businesses-to hire disadvantaged persons living
in the zone and/or to encourage capital investment there-regulatory
relief, and direct state loans (Liebschutz, 1995).
The more energetic exercise of state economic powers does
not necessarily imply an eclipse of federal influence in the
national economy. The magnitude of the federal government's
spending as well as its central role in negotiating terms
of international trade assure that it will continue to have
a major effect on state and local economic development. Nonetheless,
the role of the states as important actors in stimulating
local economic development deserves attention.
National government grants to state and/or
local governments represented 13 percent of federal government
spending in 1994. More than half went for public welfare.
The remaining intergovernmental grants, $103 billion in 1994,
were for purposes ranging from construction of water and sewer
systems, resurfacing of roads, mass transit improvements,
employment and training services, to loans and grants to private
businesses. Table 1 summarizes eight major federal intergovernmental
grant-in-aid programs involved in economic development.
The national government also provides "a
large number of tax preferences for various kinds of economic
development activities" (National Academy, 1996, p. 12).
Such tax preferences represent foregone tax revenues from
tax subsidies and loan guarantees to private firms, and are
termed tax expenditures. The National Academy of Public Administration
(1996) estimates that federal government spending for economic
development in 1995 totaled $27.9 billion for direct expenditures
[such as discussed in the previous paragraph], $2.2 billion
"in estimated costs for federal loans and loan guarantees,"
and about $60 billion in tax expenditures measured in terms
of lost federal revenues" (p. 13). In other words,
tax expenditures were more than three times intergovernmental
grants. The Academy estimated "about 60 percent of [tax
expenditures] involve[d] various subsidies for research and
technology investments by firms, and another 22 percent subsidize[d]
the issuance of industrial development bonds by state and
local governments. The remaining 18 percent include[d] various
subsidies for agricultural and shipping firms, incentives
for housing rehabilitation, and targeted jobs tax credits"
Substitution is, in part, a redistribution
issue, involving both the nature and location of private investment.
Does the incentive support a pattern of investment that
is different from current trends? Does the incentive alter,
however marginally, current locational trends? Using the example
in the prior paragraph, does the hypothetical Public Works grant
in the South Bronx, for a project, otherwise located in the
suburbs, reverse the polycentric pattern of service jobs in
the central city and manufacturing jobs in the suburbs discussed
above? If so, its effects are redistributional. However, if
the business, lured by incentives to locate within the South
Bronx, later moves out, the redistributional effects were temporary.
What difference do public sector programs make for economic
development decisions by the private sector? Do different
policy interventions have different effects? What strategies
work best to promote sustainable local economic development?
What is the net value of public sector programs?
Finally, are public sector investments in pursuit of economic
The first three questions focus on the influence of public
sector incentives on private (for-profit) actors and firms;
the fourth, on the larger context-the local region, or the
state or the nation. The last question focuses on local political
"Would a specific firm locate (or expand or remain)
in a specific geographic location to do a specific type of
activity without the assistance of a specific public sector
incentive?" This "but for" question asks:
"But for the subsidy would the economic activity occur?"
While the "but for" question may seem straightforward,
in fact, it is not, for it embodies within it the complexities
of substitution effects.
Substitution of public incentives for private investment
is, in part, a timing issue. Would the benefits of the
investment stimulated by the incentive have resulted without
it? Did the incentive accelerate the timing of an investment
that would have occurred later anyway?
The Public Works and Development Facilities Program, a national
government program, "provides distressed communities
with grants to help attract new industry, encourage business
expansion, and generate long-term, private-sector jobs"(GAO,
1997, p. 26). It is plausible that a certain activity would
be worthwhile, for example, if it were located in the South
Bronx [an economically distressed area within New York City]
and would be undertaken even without a Public Works and Development
Facilities grant. The question is whether it is undertaken
now or later. If the grant makes the whole development package
come together and happen in six months rather than in five
years, it has facilitated a natural economic decision process.
Accelerated timing of a private investment that would have
occurred anyway means the grant's effects are substitutional.
Redistributional effects are clearly intended by public sector
incentives that involve the reuse of brownfields sites.
Such reuse has potential benefits for cities (removal of blight,
creation of jobs and generation of income, and local government
revenues) and for regions (diversion of growth away from farmland
and open space). However, "the costs of remediation have
made otherwise attractive development projects economically
infeasible. Uncertainty about the presence of contamination
at many sites has meant that suspicion of contamination can,
by itself, obstruct development" (ICMA, 1997, p.1-2) If
public sector financial assistance to reduce the lender's risk
and reduce the borrower's cost of financing, and nonfinancial
assistance, such as loan packaging, results in diverting private
investment from suburban or rural "greenfields" to
urban brownfields, the effect would appear to be substitutional.
Even that conclusion, however, must be tempered. For, at the
same time that governments at all levels have taken action to
promote redevelopment of brownfields, other trends have also
been at work.
Developers, lenders, insurers, and other private sector parties
were gaining experience with the cleanup and development of
contaminated sites and were becoming more confident that
brownfields projects could generate profits without requiring
excessive risk. Rapid advancements in assessment and remediation
technology were making cleanup less costly, more predictable,
protective of public health. A strong economy and a tightening
market for industrial land made development of sites that had
previously been considered marginal more attractive (ICMA, 1997,
Thus, public sector incentives to promote brownfields development,
may not as easily meet the "but for" test as presumed.
The challenge for governance at all levels is to refine the
"but for" question so as to better determine and implement
local development strategies. This is easier said than done.
The "but for" question presumes that gains that
occur--in jobs created, in zone residents employed, in capital
investment generated, in sales, in quality of life for zone
residents and for city and rural residents generally--can be
sorted out from what would have happened anyway. Evaluators
of intergovernmental grants-in-aid have long struggled with
this vexing challenge.
Local governments cannot control what businesses, lured by incentives,
relocate from one area to another. Nor can states act like nations.
"They cannot control who lives within their boundaries
nor who leaves. If a firm moves outside the state, the state
cannot retaliate by imposing tariffs that protect forms making
the same products within the state. This openness makes states
[and local governments] very sensitive to forces outside their
control. [Their] efforts thus take place in a volatile environment"(Brace,
1994, p. 120). The value-added question, thus, is: Do
incentives for private sector investment yield a zero-sum game
that, in the aggregate, creates little, if any, economic benefit?
Many policy analysts have explored the relationship between
state and/or local business incentives and changes in economic
activity. The findings are not consistent.
Research conducted in the late 1970s and early 1980s found
that incentives had little or no effect
on an area's economic development. Two studies found that
state business incentives had little influence on the stimulation
of new business, measured either by the number of firms or by
the firm's size. Wage rates, energy costs, and the availability
of skilled labor were all found to be more important influences
on the creation and expansion of business firms (GAO, 1997).
These findings were confirmed in the 1982 Fortune Market
Research Survey of businesses: "relocation incentives
are not the most important factors in plant location decisions.
The Survey rank[ed] financing inducements 15th in
importance, far behind such factors as work productivity, efficient
transportation, and the state or local government's attitude
toward businesses" (GAO, 1997, p. 19).
Several more recent studies have found nuanced effects.
For example, tax considerations have greater effects on manufacturing
and capital-intensive industries than on other businesses (GAO,
1997). Additionally, state and local policies may influence
where firms locate within a region. While selection of a region
for an investment may be driven by economic criteria, such as
the availability of labor and transportation and proximity to
markets, selection of a particular site within a region may
be influenced by the availability of incentives (Bartik, 1991).
Finally, incentives for private sector investment may produce
a "zero-sum gain," where "the value of one state's
incentives is offset by the incentives offered by competing
states" (GAO, 1997, p. 19). The result, when "incentives
offered to new businesses to locate in an area may give them
a competitive edge over existing businesses, [is] a shift in
economic activity from established firms to new firms [but]
little change in a region's overall economic activity"
(GAO, 1997, p. 19).
The drawback common to these studies is that they are "economic
analyses, whereas the practice of state and local economic development
often follows a political logic"(Accordino, 1994, p. 218).
As John Accordino (1994) states: "The developers and businesses
most likely to benefit from particular programs or projects
generally wield considerable political clout. Moreover, practitioners
and the decision makers to whom they report are driven by the
electorate's demand for easily visible results to 'shoot anything
that flies and claim anything that falls.' For these reasons,
states and localities may pursue programs or projects that bring
no net results to the community" (p. 218).
Pagano and Bowman (1995), who analyzed the effects of public
subsidies and investments on economic development projects in
eight American cities, take cognizance of "political logic."
They advise local officials to heed two factors, in particular,
in their economic development decisions-the state of the local
economy and public support.
The more healthy the city's economy,
the more likely a profit will be realized from the city's
investment. Officials in economically distressed cities would
be ill advised to invest in projects for the purpose of generating
a profit. Further, although innovative finance seems to enjoy
great popularity among city development finance experts, the
results from these projects suggest that the less complicated
and the more routine or standard the incentives offered (especially
by economically healthy cities), the greater the probability
of revenue-generating success-although the significant level
of .115 certainly tempers this inference.. . . Although the
data indicate that city governments support both low-risk
and high-risk projects, city officials should mobilize public
capital only for projects that enjoy wide local support. City
leaders should gauge public apprehension about development
projects and postpone or halt funding for projects that generate
political conflict and controversy (p. 104).
The Empowerment Zones/Enterprise Communities Program was enacted
into law by the United States Congress in 1993. The successor
to federal (national) programs enacted in the 1950s, 1960s,
and 1970s, it has been characterized as "the most significant
effort launched by the Federal Government in decades on behalf
of the Nation's distressed inner cities"(Price, Waterhouse,
1997, p.1) Unlike prior federal programs, which focused separately
on urban infrastructure renewal or social programs, the EZ/EC
program is holistic. Its subsidies to local governments and
its incentives to private business enable a comprehensive
approach to physical, economic, and social revitalization.
For background on prior federal programs for distressed areas,
see Liebschutz, 1995; and Rubin (1994). The EZ/EC program
is further differentiated by an intergovernmental approach
to economic development that combines federal mandates for
inclusive and comprehensive planning with decentralized interpretation
Two tiers of beneficiaries-nine empowerment zones (six urban,
three rural) and 95 enterprise communities (65 urban, 30 rural)-were
authorized in the EZ/EC program. Urban zones are larger in
population; rural zones are larger in area. Urban zones can
contain from 10 percent of the city's population or 50,000,
to a maximum of 200,000 people; rural zones can extend up
to 1,000 square miles.. Poverty, unemployment, and general
distress threshold criteria are identical for urban and rural
zones. Each nominated area must have a poverty rate
at or above 20 percent for each census tract, or 25 percent
in at least 90 percent of the census tracts, or 35 percent
in at least 50 percent of the census tracts.
Federal (national government) benefits to both empowerment
zones and enterprise communities include subsidies to local
governments, through grants-in-aid and waivers from federal
regulations, and tax expenditures directed to the private
sector. Each urban EZ grantee receives a large grant, $100
million, of social services block grant (SSBG) funds, each
rural EZ, $40 million. Each enterprise community, in contrast,
receives only $3 million of SSBG funds. The SSBG grants can
be used for job training, education, housing, and/or social
services for disadvantaged persons. The EZ or EC designation
is in effect for ten years, but the SSBG funds must be spent
within two years of receipt.
Tax expenditures take several forms. Federal financing incentives
for the private sector stem from the ability of the EZ and
EC designees to issue up to $3 million in federal tax-exempt
bonds for new construction or expansion in the zone. Qualified
EZ businesses also can claim enhanced deductions (in lieu
of depreciations) for certain property investments. Federal
tax incentives are available for businesses located in empowerment
zones; they can claim a federal wage tax credit of 20 percent
on the first $15,000 in wages on each employee who lives and
conducts a substantial portion of business in the zone.
The EZ/EC program is fully intergovernmental, involving
not only federal, but also state and local governments.
States have an explicit role in the EZ/EC program. State governments
must nominate local communities for EZ/EC designation. They
must also certify that each applicant community satisfies
poverty, unemployment, general distress, and other criteria;
and agree to appropriately distribute EZ/EC social services
block grant funds to designated communities. Beyond these
stipulations, they are given wide latitude in their relationship
with the local community. The legislation states that their
assistance can entail "providing support to implement
the strategic plan, including . . . 'reinventing' their [own]
roles and coordinating programs" (Federal Register, 1994,
The term "empowerment" is key to the depth of latitude
allowed local governments in the planning process and plan
design. "Your application," applicants were informed
by the departments of Housing and Urban Development and Agriculture
(1993), "will be judged both by the substance
of the strategic plan and the extent to which [it] reflects
the participation of community residents, citizen groups,
the private and nonprofit sectors, and your local governmental
entities" (p. 6).
Federal grant applications frequently contain detailed guidance
regarding process and content. Instructions to local governments
seeking EZ/EC designations, in contrast, were relatively general
and non-directive. Population, area, and poverty criteria
(noted above) constituted the threshold for eligibility. Applicants
were instructed to focus comprehensively and strategically
on economic, physical, and social dimensions of urban or rural
development and to demonstrate participation and commitment
by community groups to the strategic plan. They were given
general guidance regarding logical steps to arrive at a "common
vision" of the future, and suggestive "vision concepts."
They were asked to stipulate how federal resources (SSBG funds,
tax incentives, etc.) would be utilized, what performance
benchmarks would be applied, and what implementation structure
or process would be created. But beyond these directives,
and consistent with a bottom-up, empowering approach, the
local strategic plan was intended to reflect community choices.
That plan, in effect, was the application.
In December 1994, President Clinton announced the designation
of 104 empowerment zones and enterprise communities out of
520 applications for EZ/EC status. The successful urban EZ
- Atlanta, Georgia
- Baltimore, Maryland
- Chicago, Illinois
- Detroit, Michigan
- New York, New York
- Philadelphia, Pennsylvania /Camden, New
The successful rural EZ applicants were
in Kentucky, Mississippi, and Texas. For an analysis of the
key factors in the legislative background, details of the
program, and selection of EZ/EC designees, see Liebschutz,
1995. In addition, two cities (Los Angeles, California, and
Cleveland, Ohio) were designated "Supplemental Empowerment
Zones;" the remainder, in forty-two states, were designated
Local public officials, as we have written above, have choices.
They can yield to the natural forces of the marketplace, or
they can consciously adapt to change. If they select to adapt
to change, their choices further expand. They can target narrowly
to sub-city areas to encourage investment by specific firms;
they can be selective in their use of available revenues for
infrastructure improvements or financing or taxing incentives.
Or they can choose to focus more broadly on the entire city,
and be less selective about investment incentives and business
targets. State governments, as well, have choices; they can
use state resources for direct spending, including technical
assistance, and for financing and tax expenditures. The EZ/EC
program, which encourages local determination of development
strategies, offers local and state officials many choices.
Atlanta, Baltimore, Chicago, Detroit, New York City, and Philadelphia/
Camden (a single, bi-state zone), the six urban empowerment
zones designated in 1994, constitute the sample for reference
in this paper. All six EZs meet the economic and social distress
criteria specified in the legislation. However, the seven
cities in which the zones are located also exemplify the wide
variation across the American states in what state and local
governments do. Their political and institutional structures
contrast, as do their relationships with their state governments.
Thus, these seven urban empowerment zone cities facilitate
investigation of the economic, social, and intergovernmental
dimensions of local development.
Both primary and secondary documents were used in the study
of the urban empowerment zone cities. Primary documents include
data from interviews conducted by the author between January
1997 and April 1998 with local and state government officials
in the seven cities and their state capitals, as well as government
documents (laws, regulations, internal memoranda) obtained
during site visits. Secondary documents include descriptions
and analyses published in government reports, journals and
These seven distressed cities present variations among
themselves in size, density, poverty, education, and employment.
They range in size from New York, the nation's largest city,
with more than 7 million population in 1990; to Camden, New
Jersey, with a 1990 population of less than 90,000. They vary
also in population density, with New York the most densely
populated, and Atlanta, the least. Nearly 70 percent of Atlanta
residents have at least a high school education; fewer than
half of Camden residents do. Nearly two-fifths of the population
of Camden was below the poverty level in 1990, and over one-third
of its households were headed by single mothers; New York's
shares of both characteristics were the lowest among the seven
cities. Finally, the cities' unemployment rates (proportions
of persons 16 years of age and over who were not working,
looking for and available to accept a job) varied from Atlanta's
6.5 percent to Camden's 15 percent. Tables 2 through 8
contain information on all of these characteristics for the
seven cities, seven states, and six empowerment zones.
These variations among the seven cities are much less dramatic
than their contrasts along the same dimensions with their
states. In every case, the cities are more densely
populated and their populations are poorer, less well educated,
and less able to own housing. They contain much higher proportions
of female-headed households than the states as a whole, and
their residents are much more likely to be unemployed. In
fact, these contrasts are understated since the state data
are inclusive of those for the city. (See Tables 2-8)
Finally, the six empowerment zones contrast substantially
with both their cities and their states. Their residents are
poorer, less well educated, and less likely to be employed.
The EZs are more likely to contain higher proportions of female-headed
households with children. For example, in the Philadelphia
part of the Philadelphia/Camden EZ, and
in the Atlanta EZ, persons in poverty were two or two and
one-half times the proportions in those cities as a whole,
and nearly five and four times the proportions in the states
of Pennsylvania and Georgia. One-third fewer residents of
the Atlanta, Chicago, Detroit, and New York EZs completed
high school than in the cities. Both the Chicago and New York
EZs had much higher proportions of female-headed households
than their cities or states. A final indicator of the deep
distress of the empowerment zones is the unemployment rate;
for the six EZs, the average of 21 percent was twice the rate
for the seven cities and three times that for the states.
Each of the urban empowerment zones crafted a development
strategy with associated activities that takes local needs
as well as assets into consideration. Although local plans
vary in details from zone to zone, they share common approaches
to local development. The Rockefeller Institute (1997), in
a report on the first 18 months of the program for the U.S.
Department of Housing and Urban Development, found that two
strategies dominated the intended spending of the $100 million
grants. Economic and job development was the primary thrust
of the strategic plans, followed by infrastructure and community
development. As might be expected, since these were social
services block funds, most activities in the first category
pertain to employment (training or placement or support services).
The following box illustrates these activities.
- Small Business Development and Growth,
facilitated by "an entity-along the lines of a community
development bank-to provide financial and technical assistance
to entrepreneurs and businesses in the zone"
- Job Training, through training
targeted at groups (female heads of households, young adults
with disabilities, persons returning from prison) and at
industries (construction, telecommunications, health care).
- Job Placement, through internships,
on-the-job training, school-to-work programs, with matching
funds from businesses.
- Human Services, such as child
care, transportation, health care.
- Public Safety, through community
policing, drug abuse treatment and prevention.
Source: Rockefeller Institute, 1997.
The second category consists mainly of investments in public
Infrastructure and Community
- Housing, both new construction
and rehabilitation, and encouraging home ownership through
"an increased funding pool dedicated to mortgage loans
and/or closing fees"
- Transportation, through more accessible
public transportation routes, and upgraded subway stations
and bus shelters.
- Cultural/Recreational Initiatives,
including cultural displays to promote tourism.
- Additional Community Development,
such as development of parks and playgrounds, educational,
and family-based services.
- Infrastructure Improvements, including
"improving the landscape, public spaces, as well as
removing toxic materials from the environment"
Source: Rockefeller Institute, 1997.
Leveraging Private Capital
Many activities, such as community development banks and home
mortgage lending pools, are specifically intended to leverage
private or other public sector capital. The "one-stop
capital shop," a centrally located technical and financial
assistance organization, is also designed for that purpose.
The "one stop capital shop" informs local businesses
and helps them apply for pertinent taxing and financing incentives
offered by national, state, and local governments.
The New York City Empowerment Zone for example, works closely
with the Department of Business Services of the New York City
government, to offer a wide variety of services to industrial
and commercial businesses. The Department of Business Services,
in effect, is New York's "One-Stop Capital Shop."
It offers information to businesses contemplating locating,
or expanding within the City. Such information ranges across
local, state, and national grants and loans, sales tax credits
on building costs, property tax relief, low-cost tax exempt
bonds, reduced utility costs, and wage credits. In addition,
the Department of Business Services helps new or existing
businesses within the Empowerment Zone to prepare applications
for these various benefits.
Local governments, as we have written above, are "empowered"
in the EZ/EC legislation to plan, design, and administer their
revitalization programs. It is not surprising that the governing
structures in the urban empowerment zones-reflecting, as they
do, unique political institutions and citizen-government dynamics-also
contrast widely. The Rockefeller Institute (1997) has classified
these structures and their degree of integration with city
government as follows:
Atlanta: Zone-wide; moderate-low integration with city government.
Baltimore: Zone-wide and individual zones; low integration.
Chicago: Zone-wide; high integration.
Detroit: Zone-wide; moderate integration.
New York: Zone-wide and individual zones: high to moderate
Philadelphia-Camden: Zone-wide and individual zones: low
In both Atlanta and Baltimore, the EZ program is governed
by quasi-public nonprofit corporations; the Empower Baltimore
Management Corporation is more independent of the city government
than is the case in Atlanta. Detroit's EZ program is also
governed by a separate corporation, but "the city council,
through its power to approve all contracts with implementing
agencies, is the key EZ governing entity" (Rockefeller
Institute, 1997, p. 53). New York City's empowerment zone
corporation requires unanimity in decisions from its board,
which includes the mayor of New York City. Chicago's EZ council
proposes projects, but the City Council and mayor have final
approval authority. The Philadelphia/Camden empowerment zone
has a Bi-State Governing Board with broad responsibilities.
The reality is that Philadelphia's EZ program is governed
by local boards, whose chairs are appointed by the mayor of
Philadelphia. Camden's governance was in disarray for nearly
eighteen months after designation, when the city, state, and
federal governments created a nonprofit entity, the Camden
EZ corporation-with city, state, citizen, and employer representation.
Despite these variations in governing structures and their
relationships with the city government, ultimately, its is
the local political officials who bear responsibility and
will take credit or blame for the success or failure of the
local empowerment zone program.
The EZ/EC program, as already noted, allows much discretion
to the states. Such latitude contributes in important ways
to variations in involvement among the seven states whose
cities have urban empowerment zone status. State political
cultures, economic development priorities, and past state-city
relationships also contribute. The resulting variations range
across funds and programs.
The federal legislation does not stipulate that the EZ funds
be matched by state or local governments. Yet New York and
Illinois have committed their own funds to match, in whole
or in part, the federal dollars. New York 's situation is
especially notable, for the state and New York City governments
each fully match the federal SSBD grant of $100 million. The
result is $300 million of public sector direct commitments
for the New York City EZ. Illinois has committed $50 million
over ten years to Chicago, two federally designated enterprise
communities, and 19 unsuccessful applicants for the designation.
The Chicago EZ receives nearly two/thirds of the total, or
The financial contributions of all states take the form of
administrative costs expended for required oversight of the
federal spending. These contributions are not small; for example,
the Georgia Department of Community Affairs estimates that
it expends nearly $200 thousand annually of its own revenues
for this purpose.
Four of the seven state agencies that administer EZ/EC funds
have broad responsibilities for state public welfare and social
services programs (Illinois, Maryland, Michigan, and New Jersey).
The federal social services block grant program, of which
the EZ/EC funds are a small part, is managed by these state
agencies. Thus, their designation to administer the EZ funds.
In Georgia, New York, and Pennsylvania, EZ administration
is lodged with the state economic development agencies. In
all of the states, however, state EZ program involvement extends
beyond the designated state administrative agency.
Assessments of the EZ/EC program have been mixed. Communities
that received designation status exuded early optimism that
their community-based strategic plans would generate private
sector investment with positive spillover effects for residents
and local governments. For some communities, even the prospect
of the designation had salutary effects-of loan commitments
by banks in distressed neighborhoods, of resident involvement
in community-wide planning (Liebschutz, 1995). Some scholars
and journalists found the program "impressive" in
light of prior federal programs (Rubin, 1994); others discerned
faults (Lehmann, 1994). And others were skeptical about equity
in the selection process (Boyle, 1995; Liebschutz, 1995; Thomas,
Three and one-half years after designation of the urban
empowerment zones, implementation progress is best characterized
as uneven. The United States Department of Housing and
Urban Development (HUD), in a performance report for 1995-1996
(the first 24 months), found that;
- the six urban EZs had obligated (approved
and committed) 44
percent of the $600 million SSBG funds;
- over $2 billion of new private sector
investment had been
made or committed;
- the focus of the new investment
was economic opportunity: job
creation, investment pools for capital access and innovative
financing strategies, job and occupation skills-training,
entrepreneurial and business support and assistance (HUD,
However, HUD also noted that most
of the urban EZs had start-up problems. They ranged from organizational
and power-sharing difficulties between city governments and
neighborhood groups, to conflicts between city and state governments
over spending priorities, financial reporting, and monitoring
Implementation successes varied among the six urban EZs:
Baltimore and Detroit were praised by HUD for significant
overall progress in leveraging private investment. The Chicago
city government was commended for its commitment to the development
of industrial corridors and brownfields in the EZ. HUD noted
Atlanta's conflict with the state of Georgia over release
of funds, but expressed optimism about commercial revitalization
activities in the EZ. HUD observed that the EZ program was
"apparently on track" in the New York EZ, but expressed
concern about the uncertain status of New York State and City
matching funds. The Philadelphia part of the bi-state EZ was
commended for progress towards each of its strategic goals.
But the Camden part was named "among the lowest performers
in the program," having made "no progress in implementing
its strategic plan objectives" (HUD, 1997b, p. 2).
Some early difficulties in city-state relations were overcome
by the third year of the program. Pennsylvania and New York
state agencies developed smoother funds draw-down processes,
thus diminishing conflicts with the Philadelphia and New York
empowerment zones. However, Atlanta's contentious relationship
with the Georgia State Government continued; the Georgia Department
of Community Affairs issued a detailed report in November
1997 highly critical of the financial practices and excessive
use of administrative funds by the Atlanta Empowerment Zone
What is the appropriate role of national and subnational governments
in achieving a balance between economic development and environmental
policies? I have reconsidered and refined this question in
several ways in this paper. I have focused on local development
in the United States. While I have not neglected environmental
policies, I have considered them narrowly, as they pertain
to the redevelopment of contaminated sites. My examination
of the issues has been empirical and positive rather than
normative; I have emphasized the "what is" rather
than the "what should be."
These, in summary, are the paper's main points:
- Local economic development in the
United States occurs within two controlling contexts: an
unplanned economy, and a federal system. Job creation
rests fundamentally in the private sector. Decisions to
induce private investment are local, but incentives involve
local, state, and national governments. Subsidies targeted
directly to private firms include tax expenditures and public
infrastructure and service improvements. Subsidies to local
governments take the form of national and state grants-in-aid.
- The effects of public incentives on
private investment are frequently neutral. Incentives
to business most affect location of investment. These effects
are largely timing and redistribution. Economic gains, in
general, appear to be "zero-sum."
- Economic development incentives are
widely embraced by local, state, and national public officials.
At the local level, symbolic and redistribution benefits,
with largely invisible cost to taxpayers, constitute the
political rationale. State officials, in light of urban
blight and national government decentralization, view economic
development activities as proper. And national-level politicians,
as well, agree on the appropriateness of actions to stimulate
private sector investment.
- The Empowerment Zone and Enterprise
Community Program, the latest variant on a national urban
policy, seems to hold out promise for distressed urban areas.
A holistic, intergovernmental initiative, that involves
all three levels of government, it combines incentives for
capital investment by the private sector with relevant social
investment by the public sector. In the urban empowerment
zones, these incentives extend to reuse of "brownfields."
Governance difficulties-between citizens and city hall,
between local and state governments-evident early in the
urban EZ program, seem to be abating.
What conclusions can we draw about
public sector governance and economic development in the United
States? Weimer and Vining (1989) analogize that policy adoption
and implementation are like courtship and marriage. Once the
policy has been adopted (and the courtship ends), and implementation
begins (as does the marriage) "Unless the couple admit
failure and divorce, implementation goes on and on" (p.
305). If the logic of the policy (the underlying theory) is
reasonable; if the assembly of essential elements from those
who control them is well anticipated; if the facilitators
and fixers of the implementation process are creative and
competent, the prospects for success are enhanced. These elements
have obvious relevance for the implementation of public policies
intended to attract private investment, create jobs, create
sustained local comparative advantage, and enhance the tax
base and quality of life for America's currently distressed
cities. Not only does the theory not predict perfectly where,
when, and whether private investors will respond to public
incentives, the public and private sector interests and actors
make the assembly process particularly challenging. The stakes,
however, are sufficiently high that public officials at local,
state, and national levels are likely to continue trying-if
not to implement current policies, then to enact new ones.
Economic Development Administration
Loans for wastewater treatment faculties
$1.7 billion, FFY 1996
Department of Housing and Urban Development
Housing rehabilitation, neighborhood revitalization;
water and sewer systems
$4.6 billion for Entitlement Communities
(cities > 50,000) and Small Cities,
Department of Health and Human Services
Shelter and food emergency services, nutrition
programs, education and employment activities.
$357.4 million, FFY 1994
Department of Labor
Basic readjustment assistance, occupational
training, supportive services
$1.09 billion, FFY 1996
Department of Housing and Urban Development
Department of Agriculture
Job training, business and tax incentives, economic
and social development activities
$1 billion to 6 urban and 3 rural empowerment
95 urban and rural enterprise communities
10 years, 1994-2004)
Economic Development Administration
Water and sewer systems, access roads, industrial
parks infrastructure improvements; tourism
$164.9 million (158 grants), federal fiscal 1996
Department of Transportation
Highway, mass transit, pedestrian, bikeway
$3.4 billion to states, FFY 1996
Department of Agriculture
Rural water and sewer systems
$963 million (loans and grants), FFY 1996
U.S. General Accounting Office, Economic Development
Activities: Overview of Eight Federal Programs, Washington,
DC: GAO, 1997.
14.7 27.3 54.7
70.9 69.9 43.1
* Per square mile
Nelson A. Rockefeller Institute of Government, Urban Study
Analysis of 1990 Census.
U.S. Department of Commerce, Bureau of the Census, County
and City Data
U.S. Department of Commerce, Bureau of the Census, Statistical
the United States, 1997.
U.S. General Accounting Office, Community Development:
Status of Urban Empowerment Zones, 1996.
8.3 21.9 41.8
9.5 21.0 22.5
* Per square mile
See Table 1
6.6 15.4 18.0
7.6 38.6 46***
7.5 34.5 22.7
** Per square mile
*** Camden part of the Philadelphia/Camden EZ
See Table 1
11.9 21.6 49.9
76.2 66.0 44.0
9.4 17.1 25.6
* Per square mile
See Table 1
9,295,297 1,027,974 101,279
9.2 13.1 29.0
13.1 29.0 47.9
76.8 62.1 49.0
* Per square mile
See Table 1
Population 18,184,774 7,332,564 199,375
7.2 8.6 18.0
13.0 19.3 42.4
74.8 68.3 47.6
* Per square mile
See Table 1
12,056,112 1,585,577 49,645
11.1 20.3 50.1***
6.9 8.0 24.0***
74.7 64.3 42.8
** Per square mile
*** Philadelphia part of the Philadelphia/Camden EZ
See Table 1
Georgia Mandatory local gov't Wage, investment,
property tax abatement retraining, child care,
tax credits; sales tax
exemptions; Brownfields aid
Illinois Wage credits; sales, utility tax $31.8 million matching
exemptions Brownfields incentives;
Maryland Local property tax credits; state Subsidized loans;
employment tax credits for zone loan guarantees
employers and for hiring economically
for working capital;
Michigan Waiver of state business, personal
disadvantaged employees daycare facilities:
income, education taxes; local housing purchase
property, income, and utility taxes and rehabilitation
loans; subsidies for
New Jersey Wage, business tax credits Customized job
tax exemptions; housing loans,
grants; other development
New York Investment, wage, capital and $100 million matching
sales tax credits; utility
rate priority re employment and
reduction; property tax training funds, business
permits; Brownfields aid
Pennsylvania Low-interest loans; tax credits; Investment,
local property tax abatements tax credits; utility
discounts; Brownfields aid
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