Indian states are grappling with not only the issue of job creation, but also creating them for locals. Accordingly, in recent times, states have been pursuing competitive policies, even considering that a percentage of private sector jobs be reserved for locals.
Economists have long scorned on 'place-based' policies, arguing instead for market-based spatial emergence of economic geography. However, as is the case with all such theoretical and evidence-free orthodoxies, this too should be taken with a note of caution.
For sure, there are several distortions possible with 'place-based' policies. But that does not mean leaving location completely to market determination.
Sometime back I had blogged about a proposal by Charles Sabel and Dani Rodrik to create good jobs for the economy.
Tim Bartik of the W E UpJohn Institute has a new paper on 'place-based' policies to promote local economic development and job creation in the US. He defines such policies as meeting two criteria - main goal is to increase the number of good jobs in a particular local labour market, and it also targets individual businesses or industries but with the goal of catalysing broader benefits.
It discusses the various cost-effective policy options involving both the supply and demand sides - target job creation into distressed areas and use workforce programs to link unemployed workers with jobs.
A clear takeaway of policies,
For instance, tax incentives and cash grants to a few large projects are less cost-effective in creating jobs than providing a broader array of businesses with public services... State and local governments spend roughly $50 billion on economic development each year. Of this amount, $47 billion is spent on tax or other cash incentives for firms.
In fact, he finds such tax incentives and cash grants, aimed primarily at large companies, are a waste of public resources,
Based on the research evidence, incentives often do not tip firms’ decisions of where to locate. In 9 out 10 cases, firms are receiving a tax incentive for a location decision they would have made anyway, even if no incentive had been provided. As a result, incentives have high costs per local job they actually create and thus should receive less emphasis... the evidence suggests that on average, for every 10 local jobs created, 8 out of those 10 jobs go to in-migrants, and only 2 out of 10 boost employment rates for local residents.
Instead, his policy prescriptions,
Based on the research evidence, lower costs per job created can be achieved by public services to support business development. These public services to business—such as advice to small business and customized training—also tend to enhance the productivity of many small businesses, while firm-specific incentives often go disproportionately to a few large projects, which makes incentives a riskier strategy... More jobs will go to nonemployed individuals if local development policy is targeted to places with low employment rates. Nonemployed individuals also can be reached by linking local economic development policies with local workforce programs... customized job training programs can help recruit, train, and match local workers with job vacancies, and “success coaches” can help workers retain those job matches... successful local economic development strategies also tend to avoid focusing on a single dominant firm or industry. Instead, successful strategies seek to encourage local growth more broadly, in a diverse portfolio of many industries.
He argues that such policies require local initiative and state and federal governments need to support them since such distressed areas are exactly those which suffer from low tax base and deficient resources. So he advocates two federal interventions,
Federal policy could encourage capping some of the more excessive incentives awarded by state and local governments to the largest firms... A federal block-grant program that would be awarded to local labor markets that are 5 percentage points or more below the U.S. average in prime-age employment rates, for a 10-year period... this regional aid program would cost around $15 billion annually, or $150 billion over a decade... One size does not fit all, so any federal regulations or grants must avoid micromanaging local economic development strategies.
In a companion paper in the JEP, Bartik summarises the above in terms of six measures to improve place based policies,
First, place-based jobs policies should be more geographically targeted to distressed places. The benefits of more jobs are at least 60 percent greater in distressed places than in booming places... Second, place-based jobs policies should be more targeted at high-multiplier industries, such as high-tech industries... Third, incentives should not disproportionately favor large firms, especially given the renewed concern in economics over excess market power in product markets and labor markets. Fourth, place-based jobs policies should put more emphasis on enhancing business inputs. Customized business services, infrastructure, and land development services have the potential to be more cost effective than incentives as ways to increase local jobs and earnings. Fifth, place-based policies should be a coordinated package of policies attuned to local conditions. One area may need more infrastructure; another, training; and still another, better land development processes. Place-based policies are complementary. If the local nonemployed are more skilled, job growth increases employment rates more. If more jobs are available, it is easier to design effective training programs. Business inputs are complementary—boosting infrastructure helps growth more if the local economy also has customized business services. Sixth, place-based jobs policies should be evaluated better.
Much the same in terms of outcomes, diagnosis, and prescriptions is applicable to India. However, the weak state capacity and political economy means that the ability and autonomy of local governments to design customised local development programs is questionable. It is more likely to end up being pork distribution to local interest groups.
I see some areas for constructive judicial, central and state government interventions here in the Indian context.
1. The practice of reserving jobs for locals is arguably questionable on several grounds, including right to equality. A Public Interest Litigation and judicial intervention in this regard may be one of the more salutary example of judicial activism.
2. To stem the race to the bottom on provision of fiscal concessions to large companies by state governments, central government could impose a ceiling on such concessions. The central government could off-set any excess of tax concessions by reducing the state's share of central transfers. Is there anything possible for a Finance Commission conditionality here?
3. On a pilot basis, state governments could consider empowering the urban development authorities or corporations in metropolitan cities with a share of per-capita transfers to be used for certain pre-defined categories of local area development and job creation policies.
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