States Confront Challenges of Changing Economy

Once known more for cow chips than computer chips, Austin, Texas is booming.

Thirty years of solid economic growth and recent spectacular gains have catapulted this once-sleepy government and university town into the upper-echelon of the nation’s economic performers. Austin is now positioned among the likes of California’s Silicon Valley, Boston, Mass., and Northern Virginia as a leading center of technological development and wage and job growth. Dell Computer and Trilogy Development Group are just two of the many hundreds of semiconductor, personal computer and software firms that call this Texas town home.

The story of how Austin primed itself for success is by now a well-known tale. A Reader’s Digest account would go something like this: a first-rate university coupled with strategic public investment produced a culture of learning and innovation that made Austin fertile breeding ground for high-tech start-ups and an attractive spot for outside investment in new plants and relocations.

The states have heard this tale and are heeding its message. Many are revamping their economic development strategies with an eye towards fostering technological innovation, hopefully creating better jobs and raising wages in the process. They are investing heavily in post-secondary education — especially engineering and the sciences — and they are building strategic partnerships with the private sector that include increasing venture capital, building advanced communications networks, and offering research vouchers and targeted tax breaks.

In the past, state economic development was viewed as a zero-sum game — the states advertised low costs in their competition for large manufacturing plants — a process that some criticized as a race to the bottom. “The big tool was you put a tax break on the table,” says John Thomasian of the National Governor’s Association. “You identified a big manufacturing plant. You said ‘I’ve got natural resources, I’ve got roads, I’ve got cheap labor.'” While this kind of development is still common, a new perspective is taking hold.

The focus now is on grooming an educated workforce that can grow its own jobs from within and attract high-paying technology firms looking for a new home. “Now, you’re trying to attract labor, not plants,” says Thomasian. “From the labor, businesses follow. In the old days, you brought in business and labor followed.”

These changing economic development strategies reflect changing economic times.

States now compete in a global — not just national — marketplace for labor, capital investment and the sale of their products. For example, advances in telecommunications allow software designers in Boise, Idaho to outsource to engineers in India and have the final product mastered in Germany, without anyone ever having to hop on an airplane.

The economy of the last century, especially post-World War II, was dominated by manufacturing and driven by natural resources. The products were heavy — cars, trucks, steel, farm equipment. But the strong growth of the last twenty to thirty years has been in computers, information technology, medicine and pharmaceuticals. This new, lighter economy is characterized by its dependence on knowledge and ideas, not natural resources and heavy machines. , one of the nation’s poorer states, hopes that embrace of the new economy will bring better jobs and higher wages to its rolling hills. Its first step in a twenty-year development plan has been a complete revamping of its post-secondary educational system to improve technical training and stimulate public-private research and development partnerships.

“Explicitly, in this state, we acknowledge we are around 81 percent of the national average [in per capita income],” says Daniel Rabuzzi, a former investment banker recruited to serve on Kentucky’s Council on Postsecondary Education. “We have an explicit target. We wish to be at least at the national average by 2020.”

“We’re recognizing we can’t simply catch up by getting into the industrial revolution of the 20th Century. We did this when we landed the Toyota plant in the 1980’s,” he adds. “We need to get into a 21st Century economy.”

Gov. Paul Patton has been at the forefront of Kentucky’s reform efforts. During his tenure, all but one of the state’s 14 community colleges have been wrested from the University of Kentucky’s hands and placed with 15 technical schools — together they will provide basic training for the state’s workforce. The University of Kentucky, now ranked 42nd among the nation’s public universities in National Science Foundation research funding, has been charged with climbing into the top 20 by 2020. And over $600 million of new funds have been invested in higher education. He has also continued K-12 reforms begun before he assumed office in 1995. “We’ve got to begin to think in terms of human capital,” says Ron Carson, a veteran Kentucky official, also of the Council on Postsecondary Education. “From a state government programming perspective what that says is higher education — particularly focusing on the research institution and the community technical college program at the other end of the spectrum. Those have to be the drivers of economic development. They are really two sides of the same coin.”

To mark its progress Kentucky will be keeping one eye on per capita income and the other on out-of-state investment dollars. With a twenty-year time horizon, any indications of positive economic change could be a long time in coming.

Just a stone’s throw northwest of the Bluegrass State, Illinois is embarking on its own ambitious economic development program. Graced with leading research institutions such as Northwestern University, the University of Chicago, and the University of Illinois at Urbana-Champaign, as well as a diverse industrial and agricultural base, the state’s economy has been humming right along.

But just as a would-be buyer kicks the tires and peeks under the hood of a new car, Gov. George Ryan commissioned studies of the guts of the state’s economy soon after assuming office. What he found was a crumbling transportation and education infrastructure and a burgeoning technological revolution the state could do more to support. , which sets aside $1.9 billion over five years for education, venture capital, the health sciences, bio-technolgy and information technology.

“There’s been a lot of talk about the Silicon Prairie,” says Brian Reardon, spokesman for the Department of Commerce and Community Affairs, referring to the inevitable Silicon Valley comparisons that accompany new economy aspirations. “But we don’t produce any silicon in Illinois.”

Instead of trying to recreate the success of California’s most famous valley, Reardon says, the goal of these programs is to leverage the state’s natural economic strengths — agriculture, central location, industrial tradition and respected universities — into an even stronger and more diverse economy.

The level of private sector investment in the state will be a key indicator of the programs’ success, according to Reardon. Already, Illinois can claim the largest increase in private venture capital financing among the states over the past year — a remarkable increase from $63 million in first quarter 1999 to $600 million in first quarter 2000.

This past February, the National Governor’s Association’s launched a New Economy Initiative to explore America’s changing economic landscape and how states can meet the challenges it presents. In a statement introducing the initiative, Utah Gov. Michael Leavitt offered a stark assessment of governing in these changing times: “States can fight the changes and die, accept them and survive, or lead and prosper.”