pa 6
hyy362
Module6Lecture.pptxEconomic Development Chapter 8
Definitions of Economic Growth
Common sense definition:
Economic growth is concerned with wealth enhancement, that is, increases in financial value (or loss).
Classical definition
Economic growth is the increase in the value of goods and services produced by an economy.
It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP.
A couple of perspectives on real GDP growth: Notes: See the effect of the Great Recession; see how China and India are the largest contributors to economic growth but the US is also a major contributor
Economic Growth & Quality of Life
Economic growth is a very important factor related to quality of life in society, but it is not the sole important factor.
Other important factors include:
Democratic equality
Equality under the law
Equal opportunity (e.g., for education, employment, etc.)
The environment
Quality of public spaces, and so on
Economic Development
Economic development refers to the concerted efforts of government, business, and communities to promote economic growth, but also the overall economic and social well-being of people in a specific area.
Question
As defined by the text, economic growth and economic development define two separate aspects of well being; economic growth refers solely to the financial aspects of social well being and economic development refers solely to the non-financial elements of social well being.
True
False
Government policies and actions related to economic development: three areas
Overall policy framework to enhance market stability and sustainable growth (e.g., tax policies)
Economic policies and practices to enhance employment, increase the tax base, and improve people’s level of living (e.g., business retention practices)
Programs and projects that provide critical infrastructure and services (e.g., affordable housing programs)
Theories of growth and economic development
Classic growth theory: Smith’s three factors—land, labor, and capital; underlying notion that capital will move to where land and labor are cheaper in a dynamic economic environment
Neoclassical economic theory: It is critical to reduce all barriers to the free flow of capital and a moderate or small government in terms of services is preferred
Question
A typical example of classical economic principles is when low-end manufacturing or services not reliant on location shift from one country to another based on labor costs.
True
False
Location theory
In contrast to classic and neoclassic growth theory (which focuses on the proper running of the overall economic system), location theory seeks to explain growth in terms of ALL the factors that contribute to it from a LOCATIONAL (or bottom-up) perspective.
Examples of factors that affect local economic growth:
Costs of transportation—distance from suppliers and markets where applicable
Storage costs
Infrastructure quality
Cost and quality of workforce
Public safety
Question
Location theory seeks to explain why some companies and some industries stay in or move to areas where both land and labor are expensive.
True
False
Variants of location theory
Economic base theory: emphasizes the need to export goods for economic growth (neo-mercantilism)
Growth pole theory: asserts that in many cases, a core industry is much more important than the cheapness of one or more classic factors (i.e., land and labor)
Central place theory: focuses on the importance of urban centers that serve local industries
Integration of these three perspectives: cluster theory (more fully discussed in the next chapter)
How Does Government Pay for Economic Development?
Financing Methods
Tax reduction (aka tax break):
Abatement
A partial reduction of the property tax liability of a given piece of real estate for a specified number of years
For new or rehabilitated industrial or commercial property, or blighted property
Exemption
Freedom from the obligation to pay a particular tax
For purchases, investments, and activities other than real estate development, e.g., raw materials, machinery, equipment
Credit
A reduction in the tax bill
For job creation or research and development expenses
Example
Company X moved to the city of New Wales. The company was sought after as a high tech firm and thus got a three years tax abatement of approximately 50% on their local property taxes. Upon moving to New Wales, they purchased almost all new equipment. Nearly all of the large items were eligible for a tax exemption. Because the company was located in a poor area of New Wales that was in an enterprise zone, it was also eligible for tax credits for each of the 10 positions it created on its state corporate income tax.
Question
When you do not have to pay as much tax because of the equipment you have purchased, it is called a tax credit.
True
False
Financing Methods
Public borrowing (based on future income)
IRB (industrial revenue bond aka private activity bonds): issued by state and local government public authorities. IRBs are at favorable rates because of the federal tax exemption they usually enjoy. Some IRBs provide property tax exemptions.
Financing Methods
Public borrowing (based on future income)
TIF (tax increment financing): using municipal bonds based on the expected increase in property taxes that are collected by an economic development agency. Not available in CA any more!
US Small Business Administration (guarantees loans), e.g., the 7(a) loan guarantee program
California Infrastructure and Economic Development Bank (e.g., loan guarantees and nonprofit revenue bonds 501(c)(3) bonds)
Note: many government loan guarantees are administered through commercial banks
Question
In terms of borrowing, Tax Increment Financing (TIFs) are more important than IRBs (industrial revenue bonds)
True
False
Financing Methods
Special taxes (earmarked for development), e.g.,
Hotel tax (Hotel or Transient Occupancy Tax),
Sin tax (not in CA),
Special sales tax
Financing Methods
General fund (other than tax breaks which are reductions from the general fund)
especially as the ultimate guarantor of investments
e.g., getting better rates through municipal bonds, less risk
providing insurance programs
e.g., flood insurance in coastal areas
improvements/services that promote development
e.g., new roads and other infrastructure, special programs to assist business such as training and education, etc.
seed money (one-time grants)
e.g., development revolving funds, loan of property for charitable purpose
Financing Methods
Public-private partnerships (joint ownership which enables larger projects, public land assembly powers, and/or public backing)
public pays part of the expenses for its portion of large projects through a variety of the above mechanisms
Example of a long-term public-private partnership: Veterans’ Hospitals and Medical Schools
Almost all medical schools are co-located with veterans’ hospitals. The Department of Veterans’ Affairs gets excellent lead doctors, and a reserve of inexpensive residents (doctors in training). Universities get substantial funding for teaching hospitals and can compete for very expensive research physicians by dual source funding.
Financing Methods
Federal sources (programs funded by federal taxpayers), e.g.,
Community Development Block Grant (CDBG)
Community Development Financial Institution
Technology Innovation Program (TIP)
Manufacturing Extension Partnership (MEP)
Compassion Capital Fund (CCF)
Job Opportunities for Low –Income Individuals (JOLI)
Non-financial Methods for Supporting Economic Development
Planning
The management process of thinking about and organizing the resources and activities in order to achieve a desired outcome.
involve the critical stakeholders of the local community to establish the vision for development,
engage in public discussions,
reach consensus on goals to be achieved as well as plans in general.
Planning
For example:
A city of Los Angeles Consolidated Community Planning meeting
The city of Pasadena (link to the city’s strategic planning document)
Zoning
The system of land-use regulation, which involves the practice of designating permitted use of land based on mapped zones separating one set of land uses from another.
Zoning regulations: e.g., acceptable activities, densities, building height, parking, etc.
Zoning for industrial or commercial use
Zoning variance
Zoning
Marketing
Government promoting their jurisdictions as prime locations for business
Websites
Special events (e.g., Los Angeles County Fair, Riverside County Fair, San Bernardino County Fair)
Corporate executive visits
Trade shows (e.g., Expo 2015)
National advertisements
Letters to companies
“junkets”
Question
Zoning is an important part of economic development because it seeks to maximize land use while protecting land use patterns.
True
False
Ombudsman Service
Service that assists firms to navigate the various government regulations, programs, and services
Resolving problems and complaints
Investigating commercial opportunities
Helping to identify and evaluate options
Recommending changes in policies or procedures
Eminent Domain
The inherent power of government to seize a private property and the individual’s right to due monetary compensation.
________________
From the Constitution, 5th Amendment:
No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.
Eminent Domain
Eminent Domain in China: A Highway Making Room for a Home of a Man Who Refused to Accept Government’s Offer
Question
In eminent domain cases, the primary consideration, and sometimes the only one actually considered, is fair compensation. However, in rare cases other factors can be considered such as historical, cultural, or environmental concerns.
True
False
