Access-to-Enterprise Zones

ACCESS-TO-ENTERPRISE ZONES are geographic areas in which taxes and government regulations are lowered or eliminated as a way to stimulate business activity and create jobs. The zones are also referred to by different writers as enterprise zones, free trade zones, export zones, empowerment zones, and market zones. The argument for access-to-enterprise zones rests on the idea that by reducing taxes and regulations in poverty-stricken areas, government can induce businesses to invest in those areas. The investment is expected to create jobs and other opportunities for the area residents. The ultimate goal is to reduce poverty, dependence on tax-supported welfare programs, and crime rates.

Access-to-enterprise zones have historical antecedents going back to the Middle Ages. In modern times, however, the idea is credited to Peter Hall (1981), a British economist who specialized in urban planning. Since 1980, zones have been widely implemented in the United States, the United Kingdom, and to a lesser extent in other countries. The theory of access-to-enter-prise zones is simple. Their practice has proven more complicated. Four factors seem to be significant in their success or failure.

First, studies have found that if an area has good general economic conditions and infrastructure, a zone is more likely to stimulate business investment and employment. However, good economic conditions and infrastructure are seldom found in areas that house substantial numbers of lower-income people, the improvement of whose welfare is the reason for creating the zones.

Second, a zone must offer the right mix of incentives to encourage development. However, the right mix depends on the geographic region, the existing tax and regulatory environment, economic conditions, and the types of businesses that might be induced to invest in a zone. As of 2005, no one had discovered a formula for determining what the mix should be. The wrong kind of incentives can actually be harmful: Leslie E. Papke [Page 3]notes that certain types of investment subsidies can reduce wage levels in the zone, making the inhabitants worse off than they were before.

Third, incentives must be large enough to motivate businesses to invest in a zone, but not so large that they choke off funding for public services and infrastructure that is also part of investment decisions.

Fourth, it must be possible to measure the effect of establishing the zone. Some firms might have invested in the area even without the extra incentives, so the zone itself had no effect on their investment decisions. Other firms might have invested nearby, so that a zone simply causes investment to move around in the area without causing any growth in total business activity. Still other firms see the prospect of a slight extra profit from zone incentives as less important than good infrastructure and public services, so a zone either has no effect or actually discourages them from investing.

Evidence that the zones help to reduce poverty is uneven. Papke found that most zone programs in Britain only caused businesses to relocate from outside the zone, leading to no net increase in economic activity. In the United States, Indiana's zone programs in the 1980s led to a 19 percent drop in unemployment claims. However, the same zones also experienced a $172 drop in per capita income, while per capita income grew by $568 in nearby nonzone areas. Other studies have had similarly ambiguous results. However, if designed carefully and administered conscientiously, access-to-enter-prise zones can be one option for improving the material condition of the poor.

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