There are no two ways around it. A game-changing strategy is essential to get Rhode Island’s economy to turn around. And as counter-intuitive as it may sound, a multimillion dollar financial-aid program built primarily around small businesses may be the best approach to lift Rhode Island out of its economic doldrums.
Research indicates that the bones of Rhode Island’s economy are supported by its small-business component. According to data reported by the R.I. Department of Labor and Training for March 2009, almost 60 percent of private sector employees in the Ocean State work for enterprises with fewer than 500 workers. With the national mean approximately 50 percent, this statistic underscores the state’s reliance on small firms.
Many of these entrepreneurs are cash starved. They are frantically searching for financial assistance to expand in the tight credit markets that exist today, for despite the recovery in some sectors of the economy, Rhode Island is not out of intensive care yet.
In fact, for 2009 the Ocean State economy was one of the hardest-hit states in the nation by the Great Recession. Its economic maladies were crippling.
Among the most pronounced problems were:
• A severe unemployment rate, which was 12.7 percent as of November.
• A dramatic drop in the value of real estate.
• One of the highest residential foreclosure rates in the nation.
• A horrific personal bankruptcy rate.
Chronic state budget deficits were the natural fallout of this economic storm, and all combined to create an extremely inhospitable climate for small businesses.
To recover from the Great Recession and to expand in the future, this sector, while resilient, will require state help.
My proposal for an economic-development plan is designed to place its greatest effort on encouraging local small businesses to expand here. But it should also attempt to lure fledgling, out-of-state companies to locate in Rhode Island. To be effective, such a dual-edged, aggressive, economic-renewal program is likely to cost at least $250 million, based on the number of potential beneficiaries.
The state would do well to emulate the North Carolina model. Twenty years ago it was in a depressed economic condition akin to Rhode Island. North Carolina lost its two mainstay industries, textile and furniture manufacturing.
The state became proactive and invested a huge sum of money in biotechnology. In the last decade, the Tar Heel State has pumped more than $1.2 billion into facilities, research, training programs and tax incentives for expanding biotech companies. North Carolina’s efforts have created 55,000 new jobs in more than 500 firms, which for the most part are characterized as small businesses. Its Research Triangle is ranked as the third-largest center for biotechnology in the nation.
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The machinery needed to put Rhode Island’s economy on a faster track depends in large measure upon political will. State officials and voters seem ready for action. They sense that an economic crisis can present an opportunity. However, the implementation lag in order to get this program activated is estimated to be two years.
Thus, even a multimillion dollar economic-development program will take at least several years to pull the state’s economy out of the worst recession in decades. But there should be a public relations benefit, if a statewide approval of this plan becomes a political reality in 2010. The achievement of having put forward a viable plan would signal that Rhode Island has taken an important pro-business step. In addition, adoption of an economic plan will give the state nationwide recognition for economic leadership and lift business confidence.
The state’s economy will receive a great boost, assuming Rhode Island is able to put forward a strong rebuilding program for business and labor growth. By the beginning of 2012, the state’s Gross State Product (GSP) should be expanding at a 4.0 percent rate, and the unemployment rate should be heading down on a much lower trajectory. As a result of this improvement, the economy will be placed on a stronger footing. This development should mean that the state will experience an upswing in tax revenue, making a balanced state budget seem possible by 2013.
If, however, Rhode Island fails to act to make itself competitive for new businesses, then the economic outlook appears grim. By 2011, its unemployment rate may reach 13.5 percent, and chronic budget deficits will become much more difficult to resolve. Making the forecast worse is the likelihood that population contractions will exacerbate the downturn in tax collections.
It is my contention that the state has been much too conservative in pursuing ways to stimulate its economy. As a result, it is risking economic stagnation over the next decade. This bleak outlook may even cause Rhode Island to look down the barrel of the insolvency gun with respect to the management of state finances.
Rhode Island must avoid becoming another Michigan, which is suffering from the collapse of its auto industry and which may be facing an economic depression for at least the intermediate term. The unemployment rate in Michigan had climbed to 14.7 percent as of November, the highest in the nation.
In addition, this plan must nurture old-line growth companies as well. These two economic driving forces are always searching for a lower-cost location in which to operate. Rhode Island can exploit this golden opportunity with generous tax breaks and financial assistance to small businesses that have plans to expand in the Ocean State. The net result should be an updraft in the creation of new jobs.
According to my calculations, a $250 million economic-development program has the capacity to significantly increase the annual historical rate of growth for Rhode Island’s GSP starting in 2012. A two-year implementation lag must be taken into account in its construction. This development could translate into 2,500 new jobs by 2014. But the gravitational pull of the national economic recovery and the impact of the employment multiplier will combine to enhance the overall job-creation effect. Consequently, the unemployment rate for Rhode Island has the potential to drop to 9.9 percent within five years. Further progress on the state’s employment front will depend largely upon forward-thinking economic leadership.
The linchpin for Rhode Island’s economic success over the next five years lies with legislative and voter approval of a $250 million business-development effort. Passage of this bond referendum will represent an investment in the future for all Rhode Islanders. It will symbolize that Rhode Island has gotten serious about heating up its business climate.
Without a viable economic plan to put forward, the state runs the risk that firms here will develop a slow freeze. Small businesses will need the most help. Rhode Island must establish a warmer climate where business and labor will become more efficient and productive. •
William B. Sweeney is a professor emeritus of economics at Bryant University and is a member of the R.I. Industrial-Recreational Building Authority Board.
