Chairman Manzullo, Ranking Member Velazquez, and Members of the Committee, thank you for this opportunity to appear before the Committee on Small Business to discuss the Federal government's role in addressing the challenges in the rural economy and, specifically, the Economic Development Administration's focus on addressing the critical needs of rural America. Background on EDA

The mission of the Economic Development Administration (EDA) is to help our partners across the nation (states, regions and communities) create wealth and minimize poverty by promoting a favorable business environment to attract private capital investment and higher-skill, higher-wage jobs through world class capacity building, planning, infrastructure, research grants, and strategic initiatives.

EDA was created in 1965 to help communities generate new jobs, retain existing jobs, and stimulate industrial and commercial growth in economically distressed areas of the United States. Assistance is available to both rural and urban areas of the nation experiencing high unemployment, low per-capita income, or other severe economic distress. In fulfilling its mission, EDA is guided by the basic principle that distressed communities, rural or otherwise, must be empowered to develop and implement their own economic development and revitalization strategies through close collaboration with the private sector, local governments, and other local resources such as universities and non-profit organizations.

Based on locally and regionally-developed priorities, EDA partners with state or local governments, regional economic development districts, public and private non-profit organizations, and Indian tribes to help provide pro-active strategies to confront long-term economic distress, sudden and severe economic dislocations due to natural disasters, the closure of military or other installations, changing trade patterns, or the depletion of natural resources.

Since its creation nearly forty years ago, EDA has invested over $12 billion to help distressed communities create an environment conducive to job growth and economic opportunity. This is a small fraction of the overall federal investment in economic development activities over the same period. According to a General Accounting Office study of federal economic development programs conducted in 2000, there were at least 30 federal economic development programs which provided approximately $7 billion to support economic development activities. (GAO: Economic Development: Multiple Federal Programs Fund Similar Economic Development Activities, Letter Report, 9/29/2000,GAO/RCED/GGD-00-220) And yet, despite this significant allocation of federal resources, many communities remain economically distressed.

EDA has worked with Rural Development at the USDA and nearly every other agency to advance economic development in rural America. We look forward to continuing to work with these agencies in our sister departments for better coordination and simplification.

Regions Compete Globally with Innovation and Competitiveness

To compete globally, every region in America must leverage its unique set of assets, ideas, and skills to compete in the global marketplace. The key question we have been trying to answer at the Economic Development Administration is: Why do some regions succeed in creating higher wage jobs and a higher standard of living while others seem to fall short? The answer is competitiveness. That is, how effectively do regions build upon their inherent assets and advantages and deliver innovative solutions to the marketplace.

Private sector companies drive competitiveness through effective, innovative business strategies. While the private sector is the primary agent in economic development, good government policies and regulations can provide a business environment that supports investment, innovation, development, and job creation. Competitiveness arises from a region's economic, political, and institutional environment in which the private sector does business.

Coordinated actions of corporate and governmental entities can improve a region's competitiveness. In any economy, government alone cannot create sustainable competitive advantages. As President Bush has said, "The role of government is to create conditions in which jobs are created in which people can find work.

Innovation - the Real Competitive Advantage

In the past, the federal government too often relied solely on transfer payments, i.e. subsidies, to bolster under performing economies. We have learned first hand that ongoing subsidies do not create a competitive advantage, but, instead, they thwart innovation. To put it another way, if the basic premise is that innovation is a key driver of competitiveness, those actions that diminish innovation also, in turn, diminish competitiveness. In many instances, past policy had the effect of thwarting innovation and stifling the ability of rural communities to gain regional competitive advantage. Subsidies not only fail to create competitive advantage, but subsidies also act as a force that slows innovation, degrades competitiveness, and stunts economic growth.

Research confirms that one major difference in regional economic performance lies in a region's capacity to innovate, transforming new ideas and new knowledge into high-quality products or services. Additionally, it is vitally important to understand that innovative activity is not limited to high tech sectors.

Although some regions have targeted high technology sectors as a means to increase productivity and economic performance, any industry can innovate to become more productive. Even low-tech companies can apply technology more efficiently.

Cluster Theory

EDA's work with such leading researchers as Professor Michael Porter of Harvard Business School and the Council on Competitiveness also shows that the capacity for regional innovation is driven by industry clusters, providing broad networks of companies, suppliers, service firms, academic institutions, and organizations in related industries that, together, bring new products or services to market. Clusters significantly enhance the ability of regional economies to build prosperity because they act as the incubators for innovation. Clusters possess the primary elements needed to transform ideas into prosperity, for example, universities or research centers churning out new knowledge; companies transforming knowledge into new services or products; suppliers providing critical components or equipment; and marketing and distribution firms delivering the product to customers. By developing several diverse clusters, regions can inoculate themselves against cyclical industries and market trends. Regions with successful clusters enjoy innovation, higher average wages, increased productivity, and expanding rates of business formation.

The case for clusters is clear and compelling. Government policy-makers must now ask the question: What's next? The answer is that individually and collectively, we must move from policy to practice, especially for rural America.

Culture of Investments and Results

At the Economic Development Administration, we are moving forward. We are modeling ourselves much like a venture capital firm. We are seeking to create a culture of investment and results. We are focusing our limited public dollars on those partners that understand that simply subsidizing outdated practices is not conducive to meaningful and robust economic growth.

The pace of innovative activity and competitiveness must be driven by the private sector at the regional level, but public sector policies can play a supporting role. Economic success, particularly in distressed regions, can be supported by active and flexible partnerships between federal, state and local governments and private sector leaders, which support the research infrastructure, talent pool, and environment for small business growth. National leaders, such as those in the room today, can serve as a catalyst by bringing key stakeholders together.

What Makes Rural Economics Tick?

A focus on cluster-based development is more easily applied to urban or suburban settings. When it comes to rural economies, we must realize their challenges are different. At EDA, we are responding to these challenges by focusing our research and collaborative efforts on the question: What makes rural economics tick?

As we all know, rural wages are typically about 70% of urban wages and many rural communities are losing their most productive workers to urban areas with greater opportunities. In many rural communities, the boom of the 1990's completely passed them by and their situation grows more dire with each passing year.

EDA is pleased to be working with fellow panelist Mark Drabenstott and the Center for the Study of Rural America on this question of what makes rural economies tick. Our partnership has resulted in a growing appreciation of the critical role entrepreneurship plays in sustaining healthy rural economies. While Mr. Drabenstott will address this issue in more detail in his presentation, EDA is currently funding significant research on this subject and is in the process of evaluating research options for Fiscal Year 2004 that we believe will help us bolster entrepreneurship in the nation's rural areas.

EDA also is expanding our work with Professor Michael Porter to more specifically address the question of rural economies. We asked Dr. Porter and his team to look at rural regions through his competitiveness lens. Although Dr. Porter's work is still underway, I am pleased to be able to preview some of his findings today.

What is evident in Dr. Porter's research is that there is no overall strategic approach or consensus among leading practitioners and policy-makers on how to approach rural economic development. To make the challenge even more complex, rural regions are very heterogeneous groups that differ in performance, proximity to other economic areas, and business environment. As a result, it is necessary to look at the true economic region to design a customized economic development strategy. We expect that the research by Dr. Porter and other groups, such as the Council on Competitiveness, supported by the US Department of Commerce, will help all branches of the federal government identify common themes and opportunities to move forward together, implementing the appropriate strategies to improve the economic well-being of rural communities.

No Overall Strategic Approach to Rural Economic Development

Coordination of institutional networks serving rural regions is extremely complex. Through Dr. Porter's research, his team identified nine federal agencies, six regional organizations, six independent agencies and numerous state and local-level organizations serving rural regions. Although it is difficult to estimate the billions of dollars invested in rural areas annually by government and other organizations, suffice it to say that investments in rural communities are not made with an emphasis on maximum return on a collaborative investment strategy. Essentially, federal agencies have been described by experts as silos of rural development activity and attempts at coordinating the institutional network have largely failed. The lack of a cohesive conceptual framework and strategy is widely recognized among leading practitioners and policy makers. While it is difficult to quantify the effect on rural America resulting from the lack of coordination among federal assistance programs, I can say that the more coordinated the federal approach is, the more return the taxpayer will receive. As we achieve more coordination among federal assistance programs promoting rural economic development, we must also employ common and quantifiable measurements of success.

True Economic Regions--Necessary Collaboration between Urban and Rural Areas

Dr. Porter's research shows that U.S. Government policies and activities have targeted rural areas primarily as entities separate from urban areas. As a result, purely "rural" strategies may be missing an important dimension of regional competitiveness. Rural areas are linked to urban areas and distinguishing between "rural" regions and "urban" regions misses the true "economic region."

What one traditionally thinks of as a rural region, in fact, obtains products and services from, and sells outputs to, adjacent regions. In other words, industry clusters regularly cross over traditional rural-urban boundaries. If a strategy is developed for the rural region alone, it may overlook the very industry clusters that can drive the regional economy.

Instead, we can think about developing strategies for rural areas around "regional hubs" and "rural spokes". Every rural region needs a regional hub to which to connect. This hub does not have to be a major city but simply a hub with a greater level of activity than that of the rural region.

Connections to the hub, however, are critical. Therefore, in addition to building a strong local business environment, the rural "spoke" also requires efficient business linkages with a regional "hub, including highways, airports, water ports, and of course, telecommunications. Professor Porter's research demonstrates that to increase the prosperity in rural communities, we need to move away from thinking about purely "rural strategies" and focus on the economic regions in which entire competitive clusters are found and rural strategies and activities are linked to centers of economic activity.

Supporting Groundbreaking Research

The Department of Commerce is pursuing and fostering this innovation-based approach to building regional competitiveness through its policies and strategic initiatives. The old model of transfer payments to distressed regions, uncoordinated and without a comprehensive economic development strategy, is an obsolete paradigm that cannot drive higher-wages and increased standards of living.

Cluster development, strategic linkages, targeted investments in support of innovation, and the embedding of technology are among the factors that, when mixed properly, can set the economic development stage for regions to be competitive in our ever more dynamic global economy.

I am pleased to comment, with regard to EDA's Fiscal Year 2004 appropriation, that President Bush demonstrated his support for EDA's efforts with a request to increase EDA's appropriation by roughly $46 million over the Fiscal Year 2003 appropriation, providing a total of $364.4 million. I strongly urge all members of this Committee to support the President's request of $364.4 million. The House Appropriation Committee has included $318,680,000 for programs and administrative expenses in the bill they reported to the House. I urge the Congress to fund EDA at the President's requested level so that EDA can provide economic development investments at the level so critically needed in distressed communities across America, particularly in rural communities. In conclusion, The Economic Development Administration is focused on catalyzing the networks and infrastructure for innovation and providing the analytical tools regions require in order to improve their economic performance. We cannot afford to leave any distressed region behind or perpetuate ineffective models, and as the President has said, we are committed to leave no geographic or demographic sector of America behind when it comes to participating more fully in the American dream.

Thank you, Mr. Chairman, for the opportunity to address this distinguished committee. I appreciate your time and look forward to answering your questions.