The 2007 State New Economy Index by the Information Technology and Innovation Foundation and the Ewing Marion Kauffman Foundation examines a number of key indicators in every state to assess their ability to compete in the emerging global economy.

As Southern states fall all over each other to recruit new auto-manufacturing jobs with big incentives, the report suggests that much of the South is falling behind in a new economy that began taking shape in the post "mass-production and corporate economy" of the 1940's and 1950's.

Read more after the jump...

According to the study, the new economy is defined as "a global, entrepreneurial and knowledge-based economy in which the keys to success lie in the extent to which knowledge, technology, and innovation are embedded in products and services." It has the following attributes:

- Today’s economy is knowledge dependent.
- Today’s economy is global.
- Today’s economy is entrepreneurial.
- Today’s economy is rooted in information technology.
- Today’s economy is driven by innovation.

The report ranks states on 26 indicators that "measure the differences in the extent to which state economies are structured and operate according to the tenets of the New Economy. In other words, it examines the degree to which state economies are knowledge-based, globalized, entrepreneurial, IT-driven, and innovation-based."

In the overall rankings, there are some bright spots for the South (Virginia at 8th, Texas at 14th, Georgia at 18th). But the bottom of the list is populated with the usual suspects (Louisiana at 44th, Kentucky at 45th, Alabama at 46th, Arkansas at 47th, Mississippi at 49th, and West Virginia dead last at 50th place.)

There are other bright spots in some of the individual rankings. Virginia ranks 3rd in knowledge jobs, and Georgia ranks 20th. Virginia ranks 1st in IT employment. Georgia had the fifth highest improvement in workforce education. Texas ranks 2nd in export focus, and South Carolina had the second best improvement for this indicator.

In globalization, Texas ranks 3rd, South Carolina 5th, Kentucky 10th, and Georgia 14th. (One of the factors is workforce employed by foreign-owned companies, so it's possible that the massive foreign investment in auto manufacturing helped Kentucky and South Carolina in this regard. In fact, South Carolina is ranked first in foreign direct investment.)

So, what accounts for the South's overall not so great showing in the results? From the report:

The two states whose economies have lagged most in making the transition to the New Economy are West Virginia and Mississippi, with nearly identical ranks in 2002. Other states with low scores include, in reverse order, South Dakota, Arkansas, Alabama, Kentucky, Louisiana, Wyoming, Montana, and Hawaii. Historically, the economies of many of these and other Southern and Plains states depended on natural resources or on mass production manufacturing (or tourism in the case of Hawaii), and relied on low costs rather than innovative capacity to gain advantage. But innovative capacity (derived through universities, R&D investments, scientists and engineers, and entrepreneurial drive) is increasingly what drives competitive success in the New Economy.

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Regionally, the New Economy has taken hold most strongly in the Northeast, the mid-Atlantic, the Mountain West, and the Pacific regions; 14 of the top 20 states are in these four regions. (The exceptions are Florida, Georgia, Illinois, Michigan, Minnesota, Texas, and Virginia.) In contrast, 15 of the 20 lowest ranking states are in the Midwest, Great Plains, and the South. Given some states’ reputations as technology-based New Economy states, their scores seem surprising at first. For example, North Carolina and New Mexico rank 26th and 33rd, respectively, in spite of the fact that the region around Research Triangle Park boasts top universities, a highly educated workforce, cutting-edge technology companies, and global connections, while Albuquerque is home to leading national laboratories and an appealing quality of life. In both cases, however, many parts of the state outside these metropolitan regions are more rooted in the old economy – with more jobs in traditional manufacturing, agriculture, and lower-skilled services; a less educated workforce; and a less-developed innovation infrastructure. As these examples reveal, most state economies are in fact a composite of many regional economies that differ in the degree to which they are structured in accordance to New Economy factors.

But, the report suggests that there is an opportunity for the South to leverage it's strengths:

While lower ranking states face challenges, they can also take advantage of new opportunities. The IT revolution gives companies and individuals more geographical freedom, making it easier for businesses to relocate, or start up and grow in less densely populated states farther away from existing agglomerations of industry and commerce. Moreover, metropolitan areas in many of the top states suffer from increasing costs (largely due to high land and housing costs) and near gridlock on their roads. Both factors will make locating in less congested metros, many in lower ranking states, more attractive – especially those with a high quality of life.

So, how did the South get here? Again, from the report's analysis:

The last time the United States underwent a major economic transformation, after World War II, there was a similar reordering as regional labor, capital and consumer markets transformed into national ones. That “new economy” of the 1950s and 60s faced its own “globalization” challenge, but companies were not moving to low-cost Southeast Asia, they were moving to low-cost Southeastern United States. The completion of the Interstate Highway System and the emergence of jet travel, coupled with the mass adoption of air conditioning, electrification, and telephony, opened up the low-wage South as a viable branch plant location. Like today, there were large income differentials, making relocation to the South an attractive way to cut costs. As a result, Northern industries flocked south, leaving behind shuttered factories, devastated communities and unemployed workers.

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Then, as now, low-wage regions established economic development programs and offered substantial incentives to lure industry inside their borders.

There is a warning in there somewhere to Southern states competing to attract "old economy" manufacturing jobs.

The final section of the report outlines a number of progressive policies that states should pursue to be competitive:

In order to succeed in the new global economy, then, a growing share of regions can no longer rely on old economy strategies of relentlessly driving down costs and providing large incentives to attract locationally mobile branch plants or offices. Even low-cost regions will have a hard time competing for facilities producing commodity goods and services against nations whose wage and land costs are less than one-fifth of those in the United States. Rather, regions, even those that followed the low-cost, branch plant path to success since World War II, must now look for competitive advantage in earlier-stage product cycle activities. This strategy can mean either fostering new entrepreneurial activities or helping existing firms innovate so that they do not become commodity producers searching for any number of interchangeable low-cost locations. In short, regions need to be places where existing firms can become more productive and innovative and new firms can emerge and thrive.

The key strategies discussed are:

1. Align Incentives behind Innovation Economy Fundamentals
2. Co-Invest in an Innovation Infrastructure
3. Co-Invest in the Skills of the Workforce
4. Cultivate Entrepreneurship
5. Support Industry Clusters
6. Reduce Business Costs without Reducing the Standard of Living
7. Boost Productivity
8. Reorganize Economic Development Efforts

While there are sure to be controversial elements in some of the specific recommendations, there are a number of thought-provoking ideas here.

For example, "align incentives behind innovation economy fundamentals" means to tie incentives to specific state goals that support the "building blocks of knowledge, innovation, and entrepreneurship." The report also recommends rethinking incentives to accomplish such things as making them contingent on higher wages, targeting distressed areas of the state and enhancing "key industrial centers."

One particular strategy in this regard is quite interesting:

Stress innovation incentives instead of job creation incentives. Forty-five states have job creation incentives. While their goal may be worthy, especially during periods of higher unemployment, the means are not effective. Unless job creation tax credits are very large, they seldom induce companies to hire. Companies hire more workers if they believe that the demand for their products or services is going to increase, not if the government offsets the cost of a new employee by a small percentage.

Indeed, when the state of North Carolina evaluated their job creation tax credits, created by the William S. Lee Act, they found that only about 4 percent of jobs claimed under the Act were actually induced by the tax credits.

There is a second reason job creation tax credits are ineffective. Job creation tax credits try to lower the cost of labor relative to capital, hopefully spurring the substitution of labor for capital. But this is exactly the wrong goal. While developing nations use the strategy of cheap labor as a way to grow, states should instead ensure that their workers have better capital (equipment and skills) so their productivity is high enough to offset developing nations’ lower costs.

The report's recommendations on investing in an educated workforce and partnering with universities to innovate are also good examples of how good business and progressive policies intersect.

The full 92 page report (PDF format) should be required reading for every governor of every Southern state, and anyone else interested in ways to move the South along into the "new economy."

(This article first appeared at Facing South)