CURRENT ISSUE VOLUME 19 NO. 3 MAY/JUNE 2008
Face-Off
This issue's Face-Off question:
Is government an effective agent for economic development?
YAY
Wade Locke, Ph.D.
Professor of Economics
Memorial University
From a narrow, ideological perspective, perfectly-competitive markets yield efficient outcomes which can only be matched by perfectly planned economies that do not exist in the real world. Hence, the private sector is good and government intervention is bad. If only life were that simple!
A more sophisticated approach recognizes that in the presence of externalities, decreasing-cost industries, incomplete markets, or public goods, the unaided free market will yield neither an efficient nor a necessarily desirable outcome. It is well established that appropriate government intervention can improve the situation in the presence of these market failures.
Although governments cannot substitute for businesses, their activities can complement and increase the productivity of private investments. For instance, without adequate infrastructure, businesses could not fully exploit markets for their products. In effect, ports, railways, airports and highways are prerequisites for the full realization of the private sector's potential and a region's economic development. Similarly, in a knowledge economy, governments' support of education increases the competitiveness of businesses through access to well-trained workers, via research activities that benefit local entrepreneurs, and by enhancing innovation and productivity within the region.
Government actions that complement the private sector enhance development. However, it is counterproductive when governments try to substitute for private activities rather than meet the legitimate need created by a market failure. Specifically, these interventions either: lead to rent-seeking, reduced overall productivity and diminished long-term growth; or, send the wrong price signals that impede the adjustments that must occur in any economy.
As our understanding of economic development has grown, so too has our interpretation of the legitimate role of government. Consider, for example, how the Atlantic Canada Opportunities Agency (ACOA) has evolved from providing grants to SMEs to providing interest-free loans to higher risk investors from whom commercial banks have shied away in peripheral regions. Its Atlantic Innovation Fund has enhanced the region's innovation capacity by supporting university-based researchers and companies to develop and bring to market new technologies and processes. Finally, ACOA's policy advocacy and coordination role supports private-sector led initiatives such as Atlantic Gateway and Atlantica.
While the role of regional development agencies will continue to change as our understanding of the economic development process improves, it is important to recognize that government actions, appropriately applied, are necessary to ensure that full benefits of economic development are realized. The real question then is not whether the government should intervene to facilitate development, but how.
NAY
Charles Cirtwill
President (acting)
Atlantic Institute for Market Studies
No one seriously questions the ability of government to grow or shrink individual businesses. In fact, this premise has become axiomatic in economic literature: "tax it you will have less, subsidize it you will have more". But does that translate into an ability to effectively manage an entire economy?
Well, yes. It is possible for government to target and eliminate certain kinds of business. Don't like strip clubs? Tax their profits at 100 per cent and see them go away (or at least go underground, but that is a different discussion).
It is equally possible to support an industry at levels well above what the market would dictate. Soviet Russia did this quite successfully. That isn't a hidden slam, they did it, and they could still be doing it today. All it takes is two things, the willingness to pay the cost and the ability to pay it.
And there is the rub. Just ask the people now laid-off at various lumber mills around our region, the people displaced from the fishery, or from our "home-grown" steel industry. In each of those cases either the political will to support those industries or the simple fiscal capacity to do so vanished, and with them went the jobs.
So, the question isn't whether government is an effective agent for economic development, the question is should it be? Which economies work better, grow faster and are sustainable longer? Those that develop based on a sustainable business case focused on local skills, resources and comparative advantage, or those dependent on government largesse?
The answer is that, as a general rule, good government is about being boring: getting the tax system right, enforcing and clarifying regulations, and curbing the excesses of both business and labour. Unfortunately, that doesn't make for great photo ops.
Being a "lender of last resort", paying "table stakes" to get into the global business of business attraction, and "investing in local communities" make for far better politics and great headlines. As the follow-on headlines all too often demonstrate, however, no amount of public investment will sustain an unsustainable business case.
Now, building a bridge, opening a school, and expanding a hospital, are great photo ops and are also valid means for government to support economic growth. That said, investment in infrastructure needs to be balanced and appropriate. We need to not only build what we actually require, but also have a plan to pay for it, and a plan to replace it.
That too involves asking what should we not do today, and that question is the hardest one of all.
The above excerpt was taken from the most recent issue of Atlantic Business Magazine. Our complete editorial content is available in print form only. To receive a free subscription to Atlantic Business Magazine,
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