Fostering Alaska Business Development A Commonwealth North Report Financial Support Provided by First National Bank Alaska March 26, 2002 Edward Lee Gorsuch Chancellor University of Alaska Anchorage

3 Principles A Rising Tide Lifts All Boats Growth Doesn’t Equal Development Growth Is a Double Edged Sword

Principle #1: Rising Tide Growth Increases Output (Gross Product)

Principle #1: Rising Tide Growth Puts Alaskans to Work

Principle #1: Rising Tide Growth Increases the Market (Personal Income)

Principle #1: Rising Tide Growth Drives Down the Cost of Living

Principle #2: Growth Not Development Permanent Fund Dividend Payout (mill 99$) What accounts for the economic growth that did occur in the 1990s? There were two important, but largely invisible forces pumping money into the economy at unprecedented rates. Largely due to stock market gains, the amount paid out to Alaskans through the PF Dividend doubled (99$) between 1995 and 2000, increasing by nearly $600 million. In 2001 it fell slightly. This increase is like adding an entire new industry to the state over 5 years with a payroll of $550 million—like the construction industry—or oil and gas.

Principle #2: Growth Not Development Federal Aid Per Capita: #1 in Nation Federal grants to state and local governments (and others) per capita have always been higher than the US average. In 1990 they were highest in the nation and , at $2000, about double the national average. Growth from 1990 to 1995 was modest, but since 1995 the increase for Alaska has been quite dramatic, particularly compared to other high recipient states. Today per capita grants are over 3 times the national average ($3,468 in 2000). This is pumping over $2 billion into the economy each year. Total federal spending in the state has also been on the rise and in 2000 was nearly at $6 billion--$9500 for every man, woman, and child in the state.

Principle #2: Growth Not Development Job Growth Slowing

Principle #2: Growth Not Development Real Income Growth Since 1990

Principle #2: Growth Not Development Per Capita Income is Falling Behind

Principle #2: Growth Not Development Out-Migration During Growth

Principle #2: Growth Not Development Population Aging Since 1990 (000) Older In the last 10 years infusions of new young Alaskans from migration slowed to a halt, the baby boomers aged, and seniors chose to stay in Alaska. Although population increased 14 percent—76 thousand, the under 40 population fell by several thousand, the number of middle ages Alaskans grew by 70 thousand, and the over 65 population increased 60 percent compared to 11 percent for the US as a whole. This was the fastest growth rate in the US except for Nevada. More Diverse Racial and Ethnic Minority populations increased faster than whites and now comprise about 1 in 4 statewide. Anchorage in particular is fast becoming a diverse community with inmigration of Alaska Natives and minorities from outside the state. More Stable Alaskans are more likely to have been here 5 years ago than at any time in recent history based on trends from the US Census. Figures for 2000 are not yet available but should confirm a continuation of that trend. More Urban Population is concentrating in the Railbelt from the Kenai Peninsula up to Fairbanks and in Juneau in the Southeast. In the last 10 years over 90 percent of all the statewide population growth was in the Railbelt and Juneau.

Principle #3:Economic Growth is a Double Edged Sword Competition from Outside firms Economies of Scale Market Dominance Expatriating Jobs and Profits Consumer Benefits Lower Cost of Living Recycled Savings

Principle #3:Economic Growth is a Double Edged Sword Growth Brings Outsiders Walmart Safeway Wells Fargo National Trends Toward Consolidation BP/Amoco Phillips/ARCO/Marathon National Trends Toward Devolution DELL Auto Manufacturing

4 Strategies Increase Exports Add Value to Exports Substitute Local Production for Imports Manage Fiscal Policy

Strategy #1: Exports Definition - Expand Goods and Services Sold Outside Alaska Payoff Potential—Big

Strategy #1: Exports

Strategy #1: Exports Examples Oil and Gas Mining Tourism Education Seafood Challenges World Markets for Traditional Resources Supply Constraints

Strategy #2: Value Added Definition - Process What We Produce Payoff Potential—Modest

Strategy #2: Value Added

Strategy #2: Value Added Examples Seafood Processing Refining Timber B&B’s GTL’s Veneer Challenges Distance to Market Cost Scale

Strategy #3: Import Substitution Definition: Do for ourselves what we currently pay others to do Payoff Potential--Modest

Strategy #3: Import Substitution: Progress in Recent Years

Strategy #3: Import Substitution: Wholesale Trade Deficit

Strategy #3: Import Substitution: Services Deficit

Strategy #3: Import Substitution Examples Jet Fuel Oil Field Modules Health Education Engineering and Related Services Challenges

Strategy #4: Managing Fiscal Policy Fair Sustainable Realistic Gradual Complete Strategic Flexible Efficient Stable Transparent

Strategy #4: Managing Fiscal Policy The Alaska Disconnect: Best Case Scenario Assumptions New Basic Sector Jobs in Anchorage New Workers have Families Families Use Local Services and State Transport Services Families Pay Their Share of State & Local Taxes New Development Pays it Pro Rata Share of State and Local Taxes

Strategy #4: Managing Fiscal Policy The Alaska Disconnect: Best Case Scenario Fiscal Results [ Excludes PFD] Each New Basic Job creates a $1,100 Annual Burden on Public Finances Revenues = $5,200 Expenditures = $6,300 Local Government Net Benefit = $300 State Government Net Burden = $1,400

4 Promising Opportunities Traditional Resources New Resources Import Substitution / Services Quality of Life

Promising Opportunity #1: Traditional Resources Oil North Slope Exploration Support Gas North Slope Gasline Support Cook Inlet Gas Exploration GTL Technology, Finance, and Design Mining Tidewater Smelter

Promising Opportunity #2: New Resources Tourism New High End Attractions Music, Theatre, Eco-Tourism New Destinations Air Cargo Warehousing Assembly Manufacturing Technology Engineering Finance Telecommunications

Promising Opportunity #3: Import Substitution / Services Health Care Professional Services Prisons Higher Education Federal Research and Development

Promising Opportunity #4: Quality of Life Telecommuting Footloose Industry Retirees

6 Roles for Public Policy Target Opportunities and Compete Create Investment Attractive Environment Secure Federal Regulatory Relief Invest in Human Capital and Infrastructure Expand Mechanism for “Buy Alaska” Support a Policy Research Agenda

Fostering Alaska Business Development A Commonwealth North Report Financial Support Provided by First National Bank Alaska March 26, 2002 Edward Lee Gorsuch Chancellor University of Alaska Anchorage