Dynamics of economic impact studies

By Chang Se-moon

Let us assume that the city of Cheonan, my hometown, pursues its bid to host a Summer Olympics or an Asian Games. There is no way it can pay for the expensive event. To ask South Chungcheong Province or the Korean government for financial assistance, Cheonan may want to prepare a statement to show that the events will have a significant impact on the economy of South Chungcheong Province and Korea as a whole.

Turning to the United States, many companies, large or small, prepare impact studies, especially when they want incentives for its relocation or expansion. If the calculated positive impact is large, the assistance in say, preparing an access road or a water-sewer line, that they ask could also be large. When Hyundai opened a plant in Alabama, the media widely reported the large economic impact it would have on the state’s economy. Alabama provided a incentives package that totaled nearly $250 million.

Private businesses are not the only ones interested in preparing impact studies. Non-profit organizations are also interested in impact studies that they can present to funding agencies for continued or increasing support. Economic impacts included in these studies usually include the effect on new jobs, wages, retail expenditure and tax revenue.

One important question relates to who can prepare economic impact studies? In the U.S., there are three reliable places that can prepare accurate, not exaggerated, impact studies. They are IMPLAN, REMI, and RIMS II that are all based on regional input-output models. IMPLAN and REMI are private companies that have many customers. RIMS II multipliers are prepared by the U.S. Bureau of Economic Analysis, and impact studies based on them are usually prepared by consulting economists and AUBER research centers that are familiar with such estimations. AUBER stands for the Association for University Business and Economic Research.

All impact studies employ what is known as a multiplier. Multiplier effects arise when initial expenditures are re-spent on such items as groceries by those who are paid during initial expenditure. The process of re-spending generates multiplier effects until finally the initial dollars leak out of the study area. The reason why I listed the three is that there are many people who prepare impact studies for money. Many of these studies, however, tend to overestimate the real impact to make their clients happy. In the long run, corporations and other organizations interested in having impact studies prepared may want to consider working with one of the three that I recommended. Let me give you examples of how impacts can easily be over-estimated.

One assumption underlying impact estimation is that there are no constraints in local supplies of input. If everyone is already employed in the impact area, for instance, there will be no employment multiplier effect. Another assumption is that new expenditure by one firm does not lower expenditure at another firm in the study area. For instance, if a new Wal-Mart or an H-Mart leads to the closing of smaller firms in the area, the impact of their opening needs to be reduced proportionately.

Another assumption underlying multipliers is that the event or project is permanent such as a new Hyundai or Samsung plant, not a short-term event such as a sporting event or a festival. This is because the length of time that it takes for the economy to settle at its new equilibrium after an initial change in economic activity is unknown. If the initial event or project is a one-time event, firms in the local area may increase output without hiring as many additional employees as the multiplier suggests. Although impact studies utilizing multipliers can be a powerful tool in business decisions, they can just as easily be abused.