Privatizing State Economic Development Agencies: My Take

Last week, Good Jobs First published an informative and highly critical report examining recent efforts to privatize state economic development agencies in Florida, Ohio, Iowa, Wisconsin and elsewhere.   Their basic contention is that these newly privatized agencies are potentially subject to significant abuse in terms of fraud, corruption, and misuse of funds.    While some of these claims may be true, I’m more concerned that these efforts won’t work and significant time and resources that could be spent on improving economic development programs will be devoted to managing the privatization process.

Why am I concerned?  During the 1990s, I spent a lot of my professional life focused on issues related to privatization and outsourcing at the Department of Defense.  These efforts produced mixed results, and certainly did not generate the cost savings that I had anticipated.   However, we did learn some important lessons about how to effectively outsource or privatize.  Three conditions are essential:

1) The task must not be core to the government or agency mission.  Outsourcing of the cafeteria makes sense, but don’t outsource infantry soldiers or fighter pilots.

2) The outsourced activity ideally operates via a transparent, consistent, and easily understood process.   For example, we can all understand the process of running a call center or managing janitorial services.

3) The activity can be measured with clear and understandable metrics that allow for comparison with other similar activities or the same activities at other locations .  Again, we can assess a call center operation for both the volume and quality (via customer satisfaction) of this services and we can compare these outcomes across sites.

In my mind, none of these conditions exists when it comes to privatizing state economic development departments.    Governors regularly contend that economic development is a core mission so the case for outsourcing peripheral activities is weak.   In addition, the process of economic development is far from transparent even in the best of circumstances.  In some cases, such as site selection, some secrecy is required.  In others, there is no single one best way to do things.  This is typically the case in business coaching and mentoring programs.  Finally, while most economic development programs measure job creation, but not all jobs are equal and the time frames for job creation vary wildly.  Thus, it is almost impossible to do an “apples to apples” comparison of the diverse range of economic development programs run by state agencies.   They often include small business development, export assistance, community development, brownfield revitalization, rural development and the list goes on.   How can these programs be effectively compared to one another in a privatized state development portfolio?

Outsourcing or privatization of single function economic development agencies or activities (e.g. technology commercialization or foreign investment promotion) may make sense, but privatizing entire agencies and counting on the “magic of the market” is a risky strategy.   While I hope that these efforts do succeed in advancing the cause of state economic development, I fear that they will founder when they confront the everyday reality and complexity of the job facing economic developers.



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