A recent issue of the Economic Development Journal is devoted to articles about Alaska’s economy, including three by ISER faculty members Gunnar Knapp, Bob Loeffler, and Mouhcine Guettabi. The journal is published by the International Economic Development Council (IEDC), and this issue was released ahead of IEDC’s annual conference, held in Anchorage in October. The articles by ISER faculty are now available on the ISER website, with permission of the publisher.
Resource Revenues and Fiscal Sustainability: Lessons of the Alaska Disconnect (PDF, 522.9KB), by Gunnar Knapp, ISER director and professor of economics
Oil revenues have largely paid for state government operations in Alaska since the 1980s, and unlike other states, Alaska doesn’t collect any personal income, sales, or other broad taxes from households and businesses. Gunnar Knapp explains what other national or state governments can learn from Alaska’s experience of relying so heavily on a single, volatile resource revenue: that it’s a good idea to maintain some level of broad taxes on households and businesses as well. Why?
The lack of such broad-based taxes has created the “Alaska Disconnect,” a fiscal problem named years ago by Scott Goldsmith, a professor of economics at ISER. In other states, economic growth and government revenues are connected: new businesses and their workers increase the demand for public services, but they also typically pay enough in taxes to cover additional government spending for services. But in Alaska, with no broad-based taxes, development and revenue are disconnected: no economic development other than oil production brings enough money into the state treasury to cover the additional costs it creates.
So over time, as the economy grew, Alaska has come to depend more and more on the oil industry and became even more vulnerable to falling oil prices and declining production. The recent steep drop in oil prices—and the sudden gaping hole in the state budget—makes that vulnerability clear. Dr. Knapp includes an illustration of how taxes, costs of government services, and population growth determine whether economic development generates enough new revenue to cover increased costs for public services.
Mining and Sustainable Communities: A Case Study of the Red Dog Mine (PDF, 482KB), by Bob Loeffler, ISER visiting professor of public policy
Alaska’s remote Northwest Arctic Borough has 11 small, isolated Inupiat communities where wage jobs are scarce and subsistence hunting and fishing are very important. It also has the Red Dog mine, one of the world’s largest producers of zinc and lead. The mine is on land owned by NANA Regional Corporation, which was created to manage money and land awarded the region’s Inupiat people under the 1971 Alaska Native Claims Settlement Act. Bob Loeffler describes how NANA’s ownership of the land—and the operating agreement it negotiated with the mining company—have been the spring board for job, education, and other benefits the mine has created for NANA shareholders and borough communities. He also discusses lessons the Red Dog example can offer for resource development in other rural areas.
The mine has been operating for 25 years, and today 30% of mine profits go to NANA; NANA shareholders make up nearly 60% of employees at the mine site, which is high by global standards; NANA companies provide support services at the mine; and joint community/company committees oversee mine activities and work out subsistence issues those activities raise. The mine also provides the tax base that made it possible to establish the borough government and school district—giving residents much more self-determination and young people more education options. The school district’s high-school graduation rate is now the highest among all rural, predominantly Alaska Native districts.
Professor Loeffler also points out that while the regional communities have seen considerable benefits from the mine, there is room for improvement—for example, in shareholder employment, educational achievement, and in resolving subsistence concerns of the villages clostest to the mine. But such changes will take time and will require continued cooperation between NANA, the mine operator, the borough government, and the school district.
The Determinants of Small Business Success in Alaska: A Focus on the Creative Class (PDF, 240.6KB), by Mouhcine Guettabi, ISER assistant professor of economics
Small businesses make up most of the businesses in Alaska and around the country, and they also create most of the new jobs nationwide. In recent times, researchers have increasingly focused on the importance of entrepreneurs in establishing small businesses that benefit both the entrepreneurs and the communities where they settle. Entrepreneurs are broadly defined as people who take risks, have innovative ideas, and create wealth. Some analysts believe these entrepreneurs are more likely to come from what they define as “creative” occupations—that is, occupations in science, engineering, architecture, arts, and other areas that often involve developing new ideas, technology, or products.
Some studies done at the national or state level have suggested that municipalities could attract more entrepreneurs—and so boost their economies—if they invested in amenities or took other steps to improve the local quality of life. But few such studies are at the county level, and few places have the wide variation in community characteristics that exists in different areas of Alaska. In his article, Mouhcine Guettabi looks at how various factors influence the potential for development of small businesses in boroughs and census areas around Alaska.
Dr. Guettabi finds that having more residents with jobs in “creative” occupations is certainly an asset for Alaska communities hoping to stimulate their economies. But any development strategy aimed at attracting entrepreneurs has to recognize the reality of many other factors that influence entrepreneurs’ decisions about where to live and whether new businesses succeed. Those include the size of the community, the severity of winters and other climate characteristics, the local economic base, roads and other infrastructure, the cultural environment—is it welcoming to people of different backgrounds?—proximity to markets, and potential demand for new products or services.