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Failed Evergreen deal puts spotlight on Patrick’s development policy

By Erin Ailworth
Globe Staff / January 30, 2011

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Evergreen Solar Inc.’s recent decision to shut its Devens factory, which received millions of dollars in state subsidies, has reignited a debate on the use of incentives to lure investment and jobs to Massachusetts. But underlying the controversy is a broader question: Should government favor specific industries in its economic policies?

The initial $58 million in incentives used to entice Marlborough-based Evergreen to expand in Massachusetts are part of a larger strategy by Governor Deval Patrick to identify, target, and support with taxpayer money industries that administration officials view as growth sectors. Patrick’s signature economic initiative, a 10-year, $1 billion program to bolster biotechnology and other life sciences is an example, as are the millions in taxpayer and ratepayer money used to support renewable energy, such as wind and solar power.

For critics, the Evergreen situation is another example of why government should stay out of the investment business, leaving it to venture capitalists and other pros. Patrick administration officials, however, say they are supporting sectors built on the state’s competitive advantages, such as strong research capabilities, to accelerate employment and economic growth.

“We haven’t tried to support or grow a cluster from scratch,’’ said Greg Bialecki, state secretary of Housing and Economic Development. “If someone wants to describe this as making bets, then we’re making pretty conservative bets.’’

The debate over whether government should champion industries goes back decades, to the emergence of Japan in the 1980s as a major US competitor, and continues today as China expands. Both these Asian powerhouses targeted industries from automobiles to electronics to alternative energy, providing subsidies and other government support to make them competitive globally.

Over the years, the discourse in this country has focused on whether such an approach, known as industrial policy, works in open, freewheeling economies driven by innovation, entrepreneurs, and private capital — as in the United States and Massachusetts. The issue: Should government or the market determine the next growth sector?

Robert Tannenwald, a senior fellow at the Center on Budget and Policy Priorities, a Washington think tank, said such decisions are best left to private capital. Chasing and propping up industries with tax and other incentives are “bad gambles’’ that rarely pay off, he said.

“Is it wise to play that game? No. You can say it twice,’’ Tannenwald said, “No!’’

Critics of industrial policy say Evergreen Solar provides an example of how government officials can be blinded by promises and overlook hard realities. Ultimately, Evergreen is in a manufacturing business that increasingly requires high production rates, large volumes, and lower costs. That’s just the type of manufacturing — from textiles to electronics — that has been leaving Massachusetts for the better part of a century.

Peter Brooke, chairman of the private equity investment firm Advent International, said it’s questionable that the state’s spending on Evergreen would meet normal investment standards. While Evergreen will return some $3 million of $21 million in direct grants, and forgo future tax breaks, the state is still out $18 million, for a manufacturing plant that is closing after 2 1/2 years and costing some 800 workers their jobs.

“It was obvious that production costs in China were declining rapidly,’’ Brooke said, “that we wouldn’t be able to match the low-cost labor of the Chinese, and that, in fact, manufacturing would have to be outsourced.’’

States have long used tax and other incentives to attract and build industries. Sometimes, it’s worked.

In the 1980s, for example, Texas won a bidding war among several states, including Massachusetts, to bring Sematech, a semiconductor research consortium, to Austin, helping to spur rapid growth of a technology industry that includes computer maker Dell Inc.

Frequently, however, targeting industries doesn’t work. In the biotech rush of the last decade, many states spent millions to launch their own biotechnology industries, but few succeeded, according to studies by think tank Brookings Institution and others. In one example of irrational exuberance, South Carolina several years ago offered more than $10 million in assistance to attract a 14-employee biotech to the state. The firm ultimately went out of business.

Instead of risking taxpayer dollars, Massachusetts should focus on building a business climate in which companies feel comfortable to invest and create jobs, without being wooed with cash, said John Regan, executive vice president at Associated Industries of Massachusetts. A better approach, he said, might be simplifying tax codes and developing broad-based incentives available to all companies that meet set standards.

“Let the market decide who is going to win and who is not going to win,’’ Regan said.

But Jeff Finkle, chief executive of the International Economic Development Council in Washington, said it’s naive in a competitive global economy to think states can avoid supporting key industries.

“The reality is Germany is picking winners and losers, Japan is picking winners and losers, China is picking winners and losers,’’ he said. “When we don’t pick winners and losers, what ends up happening is that key industries get stolen from us.’’

Bialecki said the state’s investment strategies have worked. The Patrick administration will tweak incentive programs to strengthen the state’s ability to recoup money when companies don’t fulfill promises, but continue to target industries such as film, life sciences, information technology, and advanced manufacturing, which produces high value products with highly skilled workers.

For example, administration officials said, the state so far has committed $215 million to academic institutions and companies, such as Shire HGT Inc. in Lexington, through its 2008 life sciences initiative, helping to create a projected 7,500 jobs. Alternative energy initiatives have helped the sector, which now includes about 500 companies, to grow to about 10,100 jobs from nearly 6,400.

“The fundamental question that Massachusetts is facing — that, really, the whole country is facing — is how do we move to a 21st-century economy, which is really going to be an innovation economy and not an industrial economy,’’ Bialecki said. “If we stand still, we are going to lose, it’s guaranteed.’’

Erin Ailworth can be reached at eailworth@globe.com.