While many people may have heard about the concept of enterprise zones, many still do not know that they exist or what they are intended to achieve. This short piece will explore some aspects of this concept.  The American Heritage Dictionary defines enterprise zone as “An impoverished area in which businesses are exempt from certain taxes and are given other economic advantages as an inducement to locate there and employ residents.”

Economic theory maintains that incentives matter to individuals, organizations, and societies.  The notion of enterprise zones flows from this idea. The enterprise zone, as a practical concept, has been be traced to Mr. Geoffrey Howe, the former Britain’s Chancellor of the Exchequer in the late 1970s. He took the position that excessive regulation and increasing government bureaucracy had constricted Britain’s economy. Only by effectively doing away with these regulatory burdens and constrictions, and letting loose the market forces on the economy, he argued could the economy extend the benefits of the market to all and lift up Great Britain once again.

A British-trained economist, Stuart Butler, has been credited with introducing the notion of the enterprise zone into the United States.  The former Housing and Urban Development Secretary, Jack Kemp, popularized it when he was a candidate for the U.S. Presidency in the 1980s.  Over the past twenty years, the Federal government, cities, and states have passed legislations and laws, and enacted ordinances that set up enterprise zones. How effective have the enterprise zone programs been?  The results have been mixed. This is partly as a result of the measuring techniques used and partly due to the scope of the programs.

The goals and objectives of the enterprise zones are not in question. The difficulties have centered on the philosophical underpinnings of the programs and the proper mix of incentives to achieve the desired results.  On the philosophical front, some have argued that the government should not be in the business of assigning cost advantages to some businesses to the detriment of others.  The argument may seem intuitively appealing, but lacks any persuasive punch since the particular advantages are equally available to any firm that is willing to set up shop in a particular enterprise zone.  Others have also argued that an enterprise zone represents unwarranted intrusion into the market by the government. Nothing could be farther from the truth.  The operation of the market system is predicated on, among other factors, a set of incentives. These incentives could originate in the private or the public sectors.

The effectiveness of the enterprise zone, hence forth EZ, has come under closer scrutiny particularly in regard to the issues of incentives and overall impact.  Do the programs have the proper mix of incentives to encourage businesses to move into depressed areas of a community? Do adequate safeguards exist within the programs to ensure that the members of the community in questions are getting the employment benefits that the program’s advocates promise?  Some have even argued that the programs worsen conditions in the communities that they are intended to help.  However, other studies suggest that the EZ areas tend to have much worse economic and social pre-intervention conditions than other areas. These would lead to reduced growth potential in the short term when compared to non-EZ areas.  While many states, counties, and cities have enacted EZs, some like Illinois have minimum boundary requirements. Some have income requirements. Some studies have also shown that EZ benefits decline as the number of zones goes up or as the geographical boundary expands.

Economic theory suggests that EZ programs will have a positive effect on output in the EZ area. However, their effects on wages and employment have been, at best, inconclusive. It is entirely conceivable that the incentives, not properly constructed, may have contradictory impacts on different categories of businesses within the EZs.   In those instances where the businesses already within the zones are failing, it is important for policy makers to identify bias within the programs. Are the program’s incentives geared to help the existing businesses or to attract new ones?  The best case scenario will be to have a mix of incentives that will support the existing businesses, while encouraging the establishment of new ones.

While research studies yield inconclusive results about the efficacy of the EZ programs in many states, the effects of these programs on output have been generally positive.  The goal of using a well-crafted set of incentives, mainly taxes, to unleash the market forces in EZ zones to untangle the residents from being part of permanent underclass is something we should all applaud.  And to the extent that such programs provide opportunities to the residents of the depressed area to change their lives and to become productive members of the community at large, it is not difficult to support them as long as there are equally in place proper measures of accountability to safeguard and maximize the impact of the tax dollars. This is an integral part of the message of the EZ programs.   ______________________________________________________________________

Dr. Charles C. Okeke, is a Professor of Economics and the Dean of Social Sciences and Education at the Community College of Southern Nevada. He could be reached at (702) 651-7425 or via e-mail at Cokeke1@msn.com