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A Competitive Government

As far as things go, Virginia really hasn’t done all that badly in this economy. Sure, we’ve suffered like everyone else, and our unemployment of about 7.1 percent is positively European, but compared to a national average pushing 10 percent with more dislocations on the horizon, we have much to be thankful for. In reality, because of Virginia’s diverse economy (defense, legal, financial, manufacturing, agriculture, tourism, government, marketing … you get the picture), we’ve been able to handle this recession fairly well.

That said we all know the situation is still quite serious. We’re still not seeing the end of this extended recession and any new growth is not likely to be particularly strong. The thing about national growth is that it needs an engine, and erstwhile forces- disastrously creative Wall Street finance and ‘frothy’ real estate – are obviously not suited to that task. For whatever reason, sustained growth from the 1980s to today has been founded on bubble after bubble, and we haven’t found the formula that produces sustainable economic growth on sustainable industry.

One thing is for sure, though; the best chance we have to achieve just that is to make the economic landscape bloom with promising leads. However, in this credit environment, private industry is in reactive mode and unable to fill those gaps without assistance; instead, such leadership must come from the public sector. Unfortunately, their incentive structure is not designed to accommodate rewards for good management, but to guard against screw-ups. In economic development, this has translated awkwardly into business assistance schemes, where in the best case scenarios some money is passed out on an ad-hoc basis in the pursuit of job creation or pumping up some other desirable metric. In general, this has not worked well for the economy.

Economic development needs to be proactive, entrepreneurial and investment-inclined. Public-side economic development efforts need to be matched with strong incentives for agencies to invest monetarily as well as politically to ensure a longer term success. Such efforts need to be systematic and based on the long term rather than the prevailing currents of the political cycle. Of course, no government program can be entirely divorced from politics, but to perform economic development well, a more business-minded approach needs to be taken.

The Economy Demands Increased Government Proactivity
This economic crisis has left a giant gap that has been created by the halted credit markets. In many cases, however, it’s not so much that the money isn’t there as much as the banks and equity investors are far more timid about taking the lead. This is where state economic development authorities could come in. By taking a second or even third lending position in a deal, the government could leverage considerable private capital. This isn’t a theory – it’s happening all over the country and even here in Virginia, but the key is to make it a more straightforward, deliberate process and part of a larger strategy.

Government Proactivity Doesn’t Mean Bigger Government
There is a difference between a proactive government and a large government. Virginia’s government need not be larger (or even this large) to be effective, but the lesson from today’s market conditions is that good and active governance is highly desirable. Again, while active governance is generally known as a byword for government overreach, this need not be the case. On the contrary, a proactive, entrepreneurial government is one that is leaner and more discriminating about its investments. Only in today’s government world does poor performance demand and often receive additional funding. Inverting this model could serve to downsize government and use existing resources far more efficiently. Seeing expenditures as investments rather than political buy-offs fills a necessary gap in today’s economic environment while setting the table for longer term solvency for the state.

A Rationalized Economic Development Approach is a Win-Win
In many ways, Virginia has benefited from its largely hands-off approach to economic development. This practice should not end. However, targeted and strategic investments in key areas can be a win-win for both Virginia and the industry involved. Competitive loan packages (or even equity investments) should not only benefit the projects, but should create decent returns for the state as well. The key here is for the departments and agencies responsible for disbursement to be able to retain earnings from investments to supplement their budget allocations. Accordingly, employees should be granted comparable benefits and incentives as their counterparts in the private sector.

This flow of capital could jumpstart projects throughout the state and keep the economy humming. The notion that the state should not compete with business on the investment side is a false distinction – the state must compete; where it falls short to its private sector counterparts it should withdraw, where it produces optimal impact it should take the lead.

Changing the style of governance from that of red tape spooler and money hole to active stakeholder in the economic development process is not just administratively desirable, but is an economic imperative in these times. To be sure, there are many ways an activist economic development sector can go wrong, but to change the conditions of success from political veneer to the bottom line will simply demand more sober assessments and allow for promising industries to bloom while liberating our highly competent, hardworking public servants from the maddening quotidian of rubber stamps and red pens.

It’s a scary time to be taking risks, but the climate tells us that the era of government sitting on the sidelines and consuming without a healthy ROI needs to come to a close. Virginia could – and must – take the lead in this direction, and to do so could serve to finally dislodge the Commonwealth from the facile more-government-less-government fits and starts that dominate our discussions and rarely produce results.

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