Enterprise Zones and the Fight to Stop Economic Decline

The issue of regional inequality is endemic to modern developed economies. While some regions experience growing populations and economic innovation, others are subject to decline. Even within specific high-growth metropolitan areas, there are neighborhoods that do not share the growth. Enterprise zone (EZ) programs are policy interventions that aim to combat economic decline and revitalize underperforming communities. EZs are intentionally designed to improve the business climate in an area so that companies can expand or relocate to those areas. In order to provide a sufficient incentive, businesses are offered an array of tax breaks and regulatory relief. EZs are supported by both the federal government, under the U.S. Federal Enterprise Zone program, and local governments.

Until recently, there was a gap in the literature regarding the efficacy of these programs. Most existing research focused on the short-term employment impacts of enterprise zones. In order to rectify this problem, Christopher Hooton and Peter Tyler conduct an evaluation of EZs to determine their long-term economic impact. Their evaluation aims to examine multiple outcomes (such as employment, poverty, population, and number of firms) over a 15-year time frame in a variety of regions. The authors focus on Detroit, Miami, and Washington, D.C., as their cities of interest, each of which has both the U.S. Federal Enterprise Zone program and at least one other local initiative.

The authors compare areas that were in or near an EZ with demographically similar areas that were not. They examine the outcomes before and after the policy intervention to determine what, if any, impact the EZ had on the participating neighborhoods, compared to their business-as-usual counterparts. After conducting their econometric analysis, Hooton and Tyler find that enterprise zones have mixed results. On the positive side, they find significant reductions in the Detroit poverty rate in EZ areas, with estimates ranging from a 2.3 to a 10.4 percentage point decrease, depending on the model used. However, in Washington, D.C., they find that one program had a 2.1 percentage point decrease in employment, while a separate program had a 6.1 percentage point increase. To explain the disparity, the authors point out that enterprise zones do not usually reverse the trend of the area. That is to say, the overall performance of the zone will align with that of its surrounding neighborhoods. The authors note that in areas that are economically growing, nearby EZs experience faster growth; in areas that are economically declining, nearby EZs experience a slower decline.

Although these results are promising, enterprise zones should not be viewed as a panacea to economic decline. Rather, they ought to be considered one of the many tools used in a broader strategy to revitalize communities. Policymakers who consider using EZs should take into account the circumstances specific to each region, especially those related to economic structure, associated costs, and the concerns of citizens regarding displacement and environmental costs. One cause for concern is the use of tax abatements in EZ programs to incentivize businesses to move. The associated fall in tax revenue could lead to increases in municipal debt or reductions in public services. Fewer public services, such as public transport or local libraries, could make the neighborhood less attractive to workers and renters. Citizens’ concerns are especially important in cities like Chicago, where enterprise zones are in neighborhoods populated predominantly by minority ethnic and racial groups. Incentivizing businesses, especially ones that are not minority owned or operated, to move to minority communities could lead to higher property prices and gentrification. Overall, it is incumbent on the policymakers to consider the second- and third-order impacts of creating an EZ, some of which might counteract their stated aim or harm the existing population.

Stimulating growth in economically depressed areas is a vast policy challenge that can often intersect with issues of equity and justice. Hooton and Tyler’s research provides a basis for thinking about enterprise zones as one potential intervention that can support modest economic growth. If properly tailored to each community, these zones might help cities achieve sustainable economic growth and provide widespread welfare gains.

Article source: Hooton, Christoper A. and Peter Tyler. “Do Enterprise Zones have a role to play in delivering a place-based industrial strategy?” Cambridge Journal of Regions, Economy and Society 12, no. 3, (2019): 423–443.

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