Proof that Industrial Incentives are Poor Bet

North Carolina stayed out of the incentive game for decades. The state paid millions to Dell Computer to open a manufacturing plant near Winston-Salem. Now the plant is closed.

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The headlines on two consecutive days said it all: Dell Computer closing shop and laying off over 900 workers and Cree Inc. adding almost 600 jobs. The difference: Dell – headquartered in Texas – was lured to North Carolina with the promise of over $300 million in incentives, while Cree – a homegrown business spun out of N.C. State University technology – requested no state incentives (although in fairness Cree did get an incentive a few years back to build an expansion plant).

When are we going to halt public expenditures on the “buffalo hunt” for footloose industry and instead focus our resources and efforts on the sector that produces by far most of the jobs – existing industry and homegrown business?

As a student of and participant in Southern economic development for almost 30 years, I have long been baffled and disappointed by the turn taken by this state in 1996 to enter into the incentives game. Until that time, North Carolina was seen as the leader in state economic development policies and investments – focusing on our great university system and infrastructure investments like the Research Triangle Park, the Board of Science and Technology, the Microelectronics Center, the N.C. Rural Economic Development Center, the community college system and the Biotechnology Center.

These investments built long-term capacity and supported the creation and maintenance of dynamic and growing businesses. Then, under pressure from the professional economic development community – including site selection consultants – the state enacted the William S. Lee Act, and we were off to the races in the escalating game of incentive-based recruitment.

North Carolina gave Dell Computer incentives to open a manufacturing plant near Winston Salem. The plant closed. More stable development is homegrown and homemade.

The argument is not against all recruitment – after all the Research Triangle Park was built on a recruitment strategy. Nor is the argument against all public investments in economic development – for example, water and sewer infrastructure, railroad spurs, access roads, industrial parks, etc. But what is indefensible is incentive-based recruitment in which public money goes into the corporations’ bank accounts in what amounts to corporate welfare.

We can see how easily it can get out of hand in hard times, as in the recently reported case of North American Aerodynamics in Roxboro, for which provisions of site selection competition and even the prevailing wage standard were waived!

In fairness, it must be said that the General Assembly has been willing to examine and change the incentives structure. In the past two years, legislators appropriated money for a major study of this subject by our Carolina Center for Competitive Economies in the Kenan Institute for Private Enterprise. There have been efforts to target the incentives to the areas of greatest needs and to make them “earned” by the companies instead of all granted up front.

However, the evidence is that these incentives do not redound to the benefit of distressed rural areas as intended. Dell, for example, was located in Winston-Salem.

In the 1930s and ’40s, Mississippi bragged about the success of its industrial incentive program. Subsequent studies have found that incentives of this sort are a hollow kind of development.

The scholarly literature on incentives shows that they are a very poor investment of public resources. And, of course, the business sector has become expert at playing off one state against another in something akin to corporate extortion; and who can blame them?

Imagine if the South in general and North Carolina in particular had put all of the money spent on industrial recruitment into education, training and small business support. We would be watching even more Quintiles, Cree, PPD, Southern Seasons, Performance Bicycle and other homegrown entrepreneurial success stories all across North Carolina. And, although there are no silver bullets in economic development, homegrown businesses are more likely to stay put, invest in the local community, provide stable civic leadership and keep the control and wealth local instead of away at some remote corporate headquarters.

This policy of incentive-based recruitment began in the 1930s in my home state of Mississippi, still the poorest state in the union. It spread throughout the South until the last holdout, North Carolina, signed up for this dismal strategy in 1996. Our state needs to abandon this policy and return to its investments in education, technical training and small business support.

Not only is this sound economic development policy, it removes the insult to ourselves that only “outsiders” can create the jobs and that we have to pay them to bring the jobs to our people. We can do better than that.

Jesse L. White Jr., Ph.D., is director of the Office of Economic and Business Development at UNC-Chapel Hill. He is a former federal co-chairman of the Appalachian Regional Commission and executive director of the Southern Growth Policies Board. This column first appeared in the Raleigh News and Observer and is reprinted with permission of the author.



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