Future Economy Relies on Education (Market Forecast)

There are a lot of folks running around the state of Arkansas talking about economic development. Unfortunately, there is no “one size fits all” economic development strategy.

States differ significantly in demographic and geographic characteristics. These differences limit what is possible in the short run and the costs of enacting long-run strategies that move a state far from its “natural” path. That said, it is informative to take a look at what has been and is going on in the state.

The historically dominant economic development strategy in the state, as it is in the vast majority of states, is industrial recruitment. Industrial recruitment was born in the South, taking advantage of relatively low-cost labor, land, business taxes, electrical power and a pro-business environment.

Through the decades of the 1950s, ’60s and ’70s, jobs migrated from the Midwest and northeastern parts of the U.S. to the Sunbelt. Coupled with increases in educational attainment, the South became a manufacturing mecca.

The implications for Arkansas can be seen in the rise in Arkansas per capita personal income relative to the national average. Arkansans made substantial progress relative to the national average after World War II.

Industrial recruitment has conventionally involved creating employment through the location or relocation of a manufacturing facility. Incentives for this type of job creation are usually tax breaks of one type or another, subsidized wages and worker training and perhaps discounted or free land. The size of the incentives is traditionally tied to the number of jobs created.

Shift From Manufacturing

Obviously, states compete with one another and increasingly with other nations to attract these types of jobs. The competition is fierce, (witness the competition between Arkansas and Texas for the Toyota truck plant several years ago). It is also expensive, with the edge going to wealthier states with the ability to offer more. This is an important consideration for Arkansas, which is relatively poorer than the majority of our competitors.

Moreover, it is expensive in ways that the average person doesn’t usually think about. With so much effort directed to simply competing, whether you win or lose, a considerable amount of money, energy and talent is used up in the process. Further, myopic reliance on industrial recruitment can entrench the economic development apparatus of the state making it difficult to respond to changing economic realities. This is precisely what I think is occurring today.

While it is impossible to abandon the old strategy completely, it needs to be reevaluated and probably reduced in importance.

Frankly, the impact of technology and free trade on domestic manufacturing employment has significantly lowered the value of chasing manufacturing and the probability of success. What is interesting is that despite the persistent decline in manufacturing employment, the percentage of gross domestic product from manufacturing activities has remained stable for decades. The bottom line is productivity gains in the manufacturing sector.

We simply don’t need as many people working in production to generate the same amount of output. Couple the gains from integrating technology into the production process with the pressure of low-cost labor from other parts of the world, and manufacturing just isn’t the ticket to relatively high-wage job creation it once was.

Yet, wooing manufacturing employment remains the dominant goal of the economic development community.

Obviously, this is sobering. We are heavily vested in a strategy with declining benefits and increasing costs. Want more evidence the dog is chasing its tail? According to Alliance Capital, from 1995 to 2002, manufacturing employment in the U.S. declined 11.1 percent. During the same period, manufacturing employment in China declined 15.3 percent. Declining Chinese manufacturing employment occurred despite the fact that according to World Bank and Bank of America estimates, the average production worker in China made three cents on the dollar compared to the average production worker in the U.S. in 2003.

Well, if not manufacturing, then what?

The economy of Arkansas has done a pretty good job of creating employment. The gains have been concentrated in the services and government sectors.

Metros and Education

If we examine the geographic location of new employment, several interesting facts are evident. Looking at the most recent decade’s worth of data, roughly 157,000 net new jobs were created in the state. Approximately 77,000 of those jobs were created in the Fayetteville-Springdale-Rogers metropolitan statistical area. This represents almost half of the total for the state. Looking at other key metro areas in the state, the Little Rock-North Little Rock area was responsible for 22 percent or more than 34,000 net new jobs and the Fort Smith metro generated 11 percent of the net new jobs for the period, or 17,000 and change.

Added together, these three metros accounted for 82 percent of the net new job creation that occurred in the state. This is a recurring theme nationwide. The economic advantages are increasingly falling on places that have critical mass — bigger is better.

A tongue-in-cheek conclusion might be a policy of wholesale annexation of smaller communities into larger ones to build the economy. I do believe there would be advantages to merging smaller municipalities with larger ones, but this is hardly an economic development strategy.

The best answer seems to lie in making critical investments in ourselves. Simply, we need to simultaneously create better jobs and better workers. This was effectively what was accomplished during the heyday of industrial recruitment. High school graduation rates improved significantly, and jobs were created for those better prepared workers.

Other states, places and countries have figured out this strategy and have been employing it with considerable success for some time, perhaps no place better than Ireland. Once thought of as a European backwater, Ireland has a booming economy built on a highly productive, highly educated workforce. The returns to education are substantial.

Simply put, education is economic development. Integrating our educational institutions with our economic development institutions is a strategy worthy of exploration.

(Click here (PDF) for a chart on productivity.)

(Jeff Collins is director of the Center for Business and Economic Research in the University of Arkansas’ Sam M. Walton College of Business. You can e-mail him at [email protected].)