An enterprise zone is a well-defined geographic area in which certain governmental rules and regulations are set aside so as to intensify economic activity within the zone's borders. It is generally hoped that through the relaxation of government strictures—most often in the form of tax breaks—the enterprise zone will become revitalized through the attraction of new industries and businesses and new investment in already existing economic activities. The creation of new jobs is always at the head of any list enumerating the hoped-for benefits of enterprise zones.
The term "enterprise zone" was coined in 1978 by Geoffrey Howe, a member of the British House of Commons who later became chancellor of the exchequer, a post similar to the U.S. secretary of the treasury, and foreign secretary under the conservative British prime minister, Margaret Thatcher. Howe argued for the removal of many government regulations within a number of small, economically depressed sections of British cities. Howe envisioned enterprise zones to be roughly a square mile or so in area and revitalized because of an environment free of government interference—a free enterprise environment. Howe believed that the revival of these areas would come about where more traditional government social welfare and development programs had failed.
In 1979 then-Congressman Jack Kemp of New York read a paper on enterprise zones written by the Heritage Foundation of Washington, D.C., and he quickly became a champion of the idea. By the 1970s it had become apparent to Washington insiders that programs of the 1960s, such as Lyndon Johnson's 1966 Model Cities program, had, for a variety of reasons, failed to live up to expectations. Another approach was needed if America's deteriorating inner cities were to be revitalized and were to overcome their numerous debilitating problems, including political indifference. "Few businesses could be induced to locate in the ghettos, despite vacant land and surplus labor, due to fear of crime, redlining by banks, and a poorly educated work force," wrote Susan Hansen, an economics professor and authority on tax policy and economic development. "By the 1980s, there was little political support, either in state capitals or in Washington for policies to deal with such urban problems," according to Hansen. Kemp, a conservative Republican teamed up with Robert Garcia, a Democrat from the South Bronx, to sponsor enterprise zone legislation that conceived of enterprise zones differing markedly from the original British concept.
According to Stuart Butler of the conservative Heritage Foundation think tank, Howe envisioned enterprise zones as inner-city industrial parks in which there would be rapid industrial development from which a general economic revival would radiate. Enterprise zones would ideally be established in areas literally devoid of inhabitants, and workers would not necessarily be expected to live within their borders. "The zones were not seen as tools to revive depressed neighborhoods," Butler wrote. "They were not intended to be a tool to reinvigorate specific small communities." To Jack Kemp and Ronald Reagan, the concept of an enterprise zone was a "supply-side program" to save blighted neighborhoods. It complemented the conservative philosophy of stimulating economic growth by reducing taxes and government regulation. A broad array of political interests quickly jumped on the enterprise zone bandwagon, including the National League of Cities, the NAACP, the National Urban League, Republicans, Democrats, the Reagan administration, and the Congressional Black Caucus.
This diverse coalition was held together by the belief that the renewal of poor neighborhoods in America was to be the primary goal of enterprise zones. This was unlike the British belief that enterprise zones are meant to stimulate economic activity—not revitalize neighborhoods. American neighborhoods in enterprise zones would be revitalized through the attraction of new businesses and industries or investments in existing ones. This would lead to new jobs for local residents. "Thus the quintessential enterprise zone has been assumed in America to comprise a distinct neighborhood, not an entire city nor a vacant area," wrote Butler.
In the 1950s and 1960s urban renewal had come to mean the demolishing of neighborhoods accompanied by the construction of freeways and sterile high-rise "projects." Proponents of enterprise zones, however, believed that existing neighborhoods should be built upon rather than torn down. Finally, according to Butler, another factor that shaped the American version of enterprise zones was the belief that the key to economic growth, especially in depressed neighborhoods, was the resuscitation of small businesses. There were numerous reasons for this belief. "Small entrepreneurs in poor neighborhoods establish small firms, not Fortune 500 companies," wrote Butler. Other reasons include the availability of existing infrastructure, such as small or abandoned buildings, and the belief that small start-up entrepreneurs would be more likely to hire from the local unskilled labor pool.
In spite of broad support, enterprise zone legislation was not passed by Congress until 1992 for a number of reasons, including lack of support from key Democrats and minority group members of Congress. For instance, Representative Charles Rangel, a New York Democrat representing Harlem, felt enterprise zones would be of little help to people living in distressed urban communities "who have no access to essential housing, health care, nutrition, or education." Following the 1992 riots in Los Angeles, Congress passed a $500 million enterprise zone package as part of the Tax Fairness and Economic Growth Act. Although President George Bush initially endorsed legislation such as this "weed and seed" urban assistance program, he ultimately vetoed this particular act.
While Washington debated the pros and cons of enterprise zones throughout the 1980s and early 1990s, various states were much more active in passing their own enterprise zone legislation. By 1990 there were 2,000 enterprise zones in 37 states, although 1,500 of these were in Louisiana. The size of these state enterprise zones varied considerably—from an entire county to others as small as 50 acres. Most of these zones were based on regulatory relief, state loans made directly by states, and tax incentives to hire disadvantaged local inhabitants and/or to encourage investment. The ultimate goal of these enterprise zones also varied by region. Eastern states tended to hope for capital investment to revitalize an old and decaying infrastructure while western states looked for job creation.
In 1992 and 1993, however, the administration of Bill Clinton revived the idea of federal enterprise zones but under the moniker of empowerment zones and enterprise communities (EZ/EC). Enterprise communities are similar to empowerment zones but are located in rural areas. Surprisingly, one of the biggest critics of the new legislation was Jack Kemp, the longtime champion of enterprise zones, who had gone on to add secretary of housing and urban development to his resume during the Bush administration. "It's a tragedy, it's a hoax," Kemp told the Wall Street Journal in 1993. "It's not empowerment or enterprise, and anyone who voted for it should be ashamed." Butler agreed with Kemp, stating that "the basic elements of their plan are upside down or just plain wrong." What they objected to were Clinton's plans to pick six cities and three rural areas to share the $3.5 billion in tax incentives and grants. Kemp had envisioned hundreds of enterprise zones across the country from "East Harlem to East Los Angeles." Under the EZ/EC legislation there would be five empowerment zones in major cities, one in a medium-sized city, and three in rural areas, the latter to be chosen by the secretaries of agriculture and housing and urban affairs. The legislation included $2.5 billion in worth of tax incentives—in the form of wage credits to encourage the hiring of zone residents—and $720 million in social service grants.
Other observers were also critical of Clinton's version of enterprise zones. Jeffrey Finkle, at the time executive director of the National Council for Urban Economic Development, told the Wall Street Journal that New York, Los Angeles, and Chicago were shoo-ins for being selected. "That leaves the rest of the country to fight over the remaining three spots," he told the Journal. "That's terribly unfair to Gary, Indiana, Youngstown, Ohio, and Pittsburgh. You are creating a new entitlement for a select number of cities." Another urban analyst concurred. "The nine zones are in Fat City, while the 95 other ones get S&H green stamps."
By June 30, 1994, the deadline for applying for empowerment zone status, the Department of Housing and Urban Development and the Department of Agriculture had received 520 applications. 162 were for empowerment zone designation while the other 358 applications were for enterprise community designation. In December of 1994 Clinton announced the government's picks. Atlanta, Baltimore, Chicago, Detroit, New York City, and Philadelphia/Camden were chosen for empowerment zone designation and Kentucky (Kentucky Highlands), Mississippi (Mid-Delta), and Texas (Rio Grande) were the three sites chosen for rural empowerment zones. As "consolation prizes," Los Angeles and Cleveland were named "Supplemental Empowerment Zones" and five other cities were named "Enhanced Enterprise Communities." These latter designations carried with them lesser guarantees of economic development and social service grants.
Have these enterprise zones revitalized areas of urban blight and deterioration in the United States? That question was asked, although in a slightly different way, by Margaret G. Wilder and Barry M. Rubin, professors of geography and urban planning and public and environmental affairs, respectively. In 1996 they wrote an article for the Journal of the American Planning Association that summarized numerous studies investigating the effectiveness of both state and federal enterprise zones. In the article they asked a dual question: Do development incentives generate new investment and employment in declining urban areas and is any resultant economic activity effective in arresting and reversing urban decline? In answering their own two-part question they supplied a highly qualified "yes" and a highly qualified "sometimes," while admitting that their response was hampered by a shortage of empirical data. "Enterprise zones do appear able to stimulate new employment and investment in certain areas," but in other areas enterprise zones have failed to generate "significant economic growth." The authors also found that enterprise zones cannot solve all of an area's ills. "Enterprise zones do not have magical qualities that can overcome all physical, social, and economic barriers to revitalization."
Creating jobs, especially jobs for local residents, has always been touted as a potential benefit of enterprise zones. Again, Wilder and Rubin found great variance in the effectiveness of enterprise zones in achieving this goal. On the average between 20 and 30 percent of the new jobs in enterprise zones go to local residents; in some zones, however, this figure is less than 2 percent while in others it is greater than 90 percent. In Indiana alone, the figure ranged from 5 to 70 percent. Wilder and Rubin found no specific factors to explain this disparity.
They also found that the relationship between incentives and investment/development was complex and often ambiguous. For instance, many existing facilities that found themselves in enterprise zones made investments and expanded operations while ignoring government incentives for such activities. This was explained as the "placebo" effect whereby businesses respond to government commitment to an area while simultaneously paying little attention to government incentives and "rewards." It was also found that location was a more important factor in business decisions than incentives, but that incentives could sometimes "tip" business decisions in favor of locating in an enterprise zone. The authors also felt that more research is needed to determine whether or not enterprise zones are cost-effective. "Enterprise zones have not lived up to the broad panacea-like imagery conjured up by early Federal proposals and rhetoric," the authors concluded.
In an article in the Detroit News about the city of Detroit's initial experience as an empowerment zone, author Mark Puls reached many of the same conclusions as did Wilder and Rubin. The article is long on anecdotal information, especially interviews with job recipients, but admits that hard data is difficult to come by. "Almost midway through the ten year program—which brought tax breaks and $100 million in social service grants—the empowerment zone's administrative staff have no idea how many businesses have opened or expanded, how many residents are getting help or how effective the programs are." And while many new businesses have opened in the 18-square-mile zone, this may not be because of empowerment zone incentives. "A lot of the new business has more to do with the efforts of the mayor and the city than the empowerment zone," according to Noah Jerkins, editor of EZ Exchange, an independent newsletter dealing with enterprise zones nationwide. "But the empowerment zone designations have helped," the editor told the Detroit News. This parallels the conclusion reached by Wilder and Rubin that not all economic activity in an enterprise zone is due to government incentives.
Of course, enterprise zones are not unique to the United States, existing in many other countries of the world. But as with U.S. empowerment zones, the success of foreign zones has been mixed. Enterprise zones have long been an economic factor in the People's Republic of China with the first "special economic zone," as they are called, being established in 1979. The purpose of these zones, which are mostly located in coastal regions, was not so much to create jobs but to attract foreign investment that would subsequently fuel Chinese modernization programs. In 1997 the Shenzen Special Economic Zone attracted $2.42 billion in actual foreign investment, up 40 percent from 1995. By 1998, however, the luster of these enterprise zones was beginning to fade as exemplified by Shenzen's export growth rate, which fell to 2.4 percent in 1998, down from 20 percent in 1997. Much of this was due to Asian economic problems coupled with a strong Chinese currency—the combination of which worked against Chinese exports. In 1998 the export growth of China's enterprise zones dropped by nearly 50 percent. In many ways these special economic zones have become victims of their own success. China's enterprise zones initially brought in billions of dollars worth of foreign investment, which resulted in massive spending on infrastructure projects, such as a $1.2 billion planned subway in Shenzen. Much of this rapid development and heavy spending resulted in rising land prices and rising wages, which have hurt competitiveness and caused many companies and foreign investors to turn toward China's interior provinces for future projects.
Enterprise zones in America are probably here to stay. While their effectiveness in creating jobs for local residents and revitalizing neighborhoods has yet to be proven, it is generally acknowledged that they do little harm. This is in contrast to the federally funded urban renewal projects of the 1960s and 1970s which generally left the cities worse off. Writing for Fortune, Justin Fox noted that some economists argue that some cities are dying and any attempt to reverse this process is nonproductive. But city politicians do not want to see their constituents moving to the suburbs where jobs are being created, just as suburban politicians do not want to see an influx of people from the inner cities. The answer, which doesn't upset anyone, is the enterprise or empowerment zone.
[ Michael Knes ]
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