Economic Development: Analytic Hierarchy Process
Issue
Economic development continues to be a focus for states – especially here in South Carolina as the state strives to attract businesses. The most recent challenge for economic development agencies is the diverse visions of what economic development should provide for the community. These visions seem to have become more divisive as tensions increase due to a lack of success. Where once new jobs were the only factor to consider. These days, new jobs compete with environmental concerns, quality of life, wage rates, tax incentives and a host of business, community and regulatory concerns.
AHP
The Analytic Hierarchy Process (AHP) economic development targeting tool is one solution to meeting the needs of diverse perspectives. AHP is able to compare or rate varied perspectives, assisting policy makers in narrowing economic development strategies. The process was developed by Saaty. (Saaty, T. L., and Alexander, J.M. (1989) Conflict Resolution: The Analytical Hierarchy Approach. New York: Praeger.) Saaty’s approach is outlined in Targeting Regional Economic Development. Goetz et al (2009).
Process
The process is a method that weights or prioritizes outcomes when several considerations are relevant. For example, when attempting to reconcile survey results taken from different constituents, the process uses pairwise comparisons of several outcomes. The goal of AHP, when comparing different criteria, is to determine relative importance of each criterion in achieving the goal. The math includes solving a “weighting” problem using an eigenvector P (Matrix) corresponding to an eigenvalue equal to K, or the matrix rank (Saaty 1980). Typically the Lanczon Algorithm is used to calculate the matrix. In this case, the hierarchy of importance (range from equal importance to extreme importance) is limited to 9 levels to reduce error.
Results
Traditional industry targeting methods answer a variety of questions independently of one other. However, without some type of preference elicitation process, those results simply do NOT answer the question of which firm or industry is most attractive to the region. One of the earliest applications of AHP to solve this problem, was Cox et al. (2000). The example below demonstrates how Cox used the process to rank regional expectations or needs that were most important to the community. These criteria were then compared to industry characteristics or used to develop a strategy of industry selection, rejection or negotiation parameters.
BEA RIMS II and Lucky Charms
Recently I have had number of questions concerning the Bureau of Economic Analysis (BEA), Regional Input-Output Modeling System, or RIMS II, data set. I use these data primarily for scoping, to determine whether there are any surprises in the economic study region that may help me formulate a plan. It performs superbly in this application. From the RIMS II handbook pp1:
“Using RIMS II for impact analyses has several advantages. RIMS II multipliers can be estimated for any region composed of one or more counties and for any industry or group of industries in the national I-O table. The cost of estimating regional multipliers is relatively low because of the accessibility of the main data sources for RIMS II. According to empirical tests, the estimates based on RIMS II are similar in magnitude to the estimates based on relatively expensive surveys. To effectively use the multipliers for impact analysis, users must provide geographically and industrially detailed information on the initial changes in output, earnings, or employment that are associated with the project or program under study. The multipliers can then be used to estimate the total impact of the project or program on regional output, earnings, or employment.”
RIMS is a solid input-output modeling system for the right phase of a project because it is able to provide final multipliers for many different industries. However, this is where the capability ends. It is like eating a bowl of Lucky Charms. You can find yellow moons, orange stars and green clovers the marshmallows, but no meat and potatoes. In this case, the good stuff is the impact on affected local industries. With RIMS it is necessary to know that information up front, which is unlikely. From the handbook manual case study, pp15:
“These changes consist of the decline in the purchases of goods and services that results from closing the military base and the decline in purchases by military personnel. For both types of purchases, the user must determine which purchases occur in the economic area and then must show these purchases in producers’ prices.”
So although we know something about direct industries – likely a guess determined through a review of an available budget – we have no way of knowing the relationships of these impacts to the broader economy other than the multiplier, which gives us an accurate, yet gross estimate of impacts.
Below is an example of the RIMS II output, pp18:
Missing from the basic calculation are the indirect, induced and industry details such as taxes, proprietor income and relationship of these data to other regions either within or outside the study area. In other words, we do not have a complete picture of the money flows as a result to a change in the economy. Although some calculations can be completed using Type I and Type II data, it is these missing details that fill out the play book for a competent economic development analysis and subsequent plan.
Summerville, SC Flowertown Festival- 200,000 people!
The 37th annual Flowertown Festival was recently held here in Summerville, SC. The spring time in SC is simply amazing (Think Augusta and the Masters, but better) and is a time of year we really need to celebrate. Unfortunately sometimes we get a little overzealous with our visitor estimates. It seems harmless but this error can truly hold back an event, as well as a community. The Flowertown Festival, as reported by The Post and Courier, again stated that they expect the festival to draw about 200,000 attendees.
Let’s put that 200,000 in perspective. If there were 2 persons per car that visited the festival, and we take the average car to be about 14 feet (no room for an SUV in this crowd), that would be a line of cars, bumper to bumper from Summerville to Atlanta! The United States Open Golf Event, a world class draw, attracts a little over 200,000 (documented) over the full seven days (28k/day). The Cooper River Bridge run drew 31K persons in 2009 (documented through registration). Note the picture of the runners in one small section of the race. That is a lot of people, but most of them are local. The North Charleston Coliseum seats a little over 13K packed to the brim. Think of the parking that venue requires.
So what do we have here? – a really cool event that likely attracts 2 to 3 thousand (non-Summerville) visitors. It is these non-local visitors who are most important since they bring money to spend from some other region. Unfortunately many of these persons are from the Low-Country, like myself, so I just shift my spending from Hollywood to Summerville at the expense of the Hollywood vendors.
It is important that all events in the Lowcountry collect, analyze, and then understand their data in order to maximize the positive affect of the event, not only for the small geography in which they operate, but for the greater community, sponsors, and vendors that participate.
“the ground has shifted beneath them”
The Governor of South Carolina has outlined his agenda for more tax change for business. Tax change is great, but as President Obama has stated about businesses, ” The ground has shifted beneath them.” The issue we face both in the country and in the state is a significant decrease in demand. The old adage of tax breaks, by themselves, does not work in a deflationary environment, and the Governor should be aware of this fact. In an environment of rapidly declining prices, private industry is unable to create demand, thus that responsibility falling on government. Martin Wolf of the Financial Times wrote a nice analysis of why a bailout is needed. In his article, ”Why Obama’s plan is still inadequate and incomplete,” he discusses how employment and GDP are related in this recession. It is important for our government here in SC to understand the concept that we have both demand and productivity problems in the state, the two items really holding us back. To debate isues like paying unemployed workers is futile, since the affect on demand would put us into a further spiral. The cut-backs in state government can be felt especially by small business. There are, of course, good people working at the State, but they lack the resources to make them more productive. When you cut back, you have to replace that cut with increased productivity. When you don’t have the tools and processes for increasing productivity, you can not succeed, a lack which has brought the system to its knees. How to raise money? Come on – cigarettes, trailer and car license tax increases, dump money sucking machines like the state utility and the port – the list goes on. The ground has shifted, so it’s time to put old thinking behind (Trust a bank lately?) and start applying new solutions that fit our current situation.
Occupations in Demand (OID)
Occupations in Demand or OID is a data set that assists educators in matching their curriculum to occupational opportunities in the workplace. It is also a tool for governments, job seekers, and businesses to identify employment and business recruitment opportunities within a region. There are three data components used to create OID: job vacancy survey (JVS), occupational employment statistics (OES) , and unemployment statistics (UI). Two of these data sets are already available from SC Labor Information Office (LMI). The third data set (JVS) needs to be administered. This process is already in place within other states; thus the methods and procedures are already developed and can be transferred to South Carolina.
Benefits of this program are threefold. Data can 1) assist educators in assessing the impact of their education strategy, linking curriculum to real world economic conditions, 2) guide state agencies in assisting individuals to evaluate job opportunities, and 3) guide the state of SC and its different regions in evaluating industry recruitment opportunities.
To create this data set, a twice annual job vacancy survey (JVS) is needed. These data are then analyzed with the other state data to create the OID data set. This process is currently handled by the LMI offices of many states but can also be developed by local technical schools or other learning institutes as a part of their business education or economic development departments.
JVS Examples: Louisiana, Washington State, Missouri
Formal presentations designed for individual institution are available. Contact information: scott moore
Enterprise Network System (ENS)
Enterprise Network System (ENS) is a process used to connect local industries in such a way as to identify new industry potential in a region. The University of MN-Duluth and the Minnesota Department of Employment and Economic Security (DEED), developed ENS in hope of attracting new businesses to rural areas of Minnesota.
The paper presented by the U of MN-Duluth outlines the community project that took place in 2005. As the lead analyst from the State of MN, I assisted in the method and database design. The basic process is outlined in this flow chart.
There were a number of articles written on the process, one from the State of MN. Another group that has an ongoing project in Minnesota is the Initiative Foundation.
ENS is a process that can be done for any community but is best used in rural communities that are trying to work together to attach new industries to their area (enterprise-network-system_example). I’m sure there are a number of questions about this process, so feel free to ask.
