Capital Assistance for Small Firms: Some Implications for Regional Economic Welfare

Abstract

This paper analyzes the role of finance capital in regional economic development. A cost-benefit approach is invoked in order to estimate the welfare impacts of a re ional loan and guarantee program for small fm in Israel. that separates net from gross employment, is presented. An estimate of net wage benefits is then derived. This involves adjusting wages across diferent earnings classes in order to account for the variation in opportunity costs of labor at d$ ferent levels. The estimation of costs includes the opportunity costs of capital, administration, default, and tax-raising costs. Results point to substantial regional welfare efects. We stress the need to account for changing regional economic structure in this kind of evaluation framework. Program-create cf employment is treated as a beneft and an employment account The provision of finance capital to small firms (in the form of loans, grants, guarantees, etc.) is a standard prescription for jump-starting regional economic growth. Assessments of this approach to regional growth are usually couched in terms of the employment gains, increased investment, and income that ensue in the region. Cost-effectiveness analysis is often invoked in order to evaluate the impact of this kind of assistance and cost-per-job or subsidy-per-job indices are invariably estimated (Miller, Gaskins, and Liner 1969; Hart et al. 1993; Bangsund and Leistritz 1997). Welfare impacts and distributional issues, however, are often overlooked because the standard assessment frameworks are exclusively efficiency driven. This paper presents a new cost-benefit method and then applies it in an empirical evaluation of a capital assistance program for small firms, highlighting the implications for regional economic welfare. We distinguish between regional economic “growth” and regional economic “development.” The former is measured in terms of an increase in regional product, employment, and income. The latter refers to who benefits from that growth, the extent to which local welfare is really improved, and how this This research project was funded by the Department for Rural and Urban Development of the Jewish Agency, Jerusalem. Thanks to the anonymous referees for helpful comments on earlier drafts and to Adi Sidi for assistance with data management.