As the 1990-91 recession grinds on, the central question for Maryland is whether it will prove able to resume in the 1990s the favorable growth rate relative to the nation that it enjoyed in the late 1970s and 1980s.

As is always the case, there are economic signposts pointing in both directions. But the preponderance of the evidence suggests that the answer to this question may well be "no," unless serious corrective action is taken.

That, at any rate, is the central conclusion of a two-year study of the state's economy recently completed by the Johns Hopkins Institute for Policy Studies. The message for Marylanders, therefore, is that the end of the recession will not suffice to bring prosperity to the state in the 1990s. Additional medicine is also needed. To appreciate this point, it is necessary to understand the past strengths and current challenges facing the state.

Past Strengths

Until the 1990 recession, serious conversation about Maryland's economic problems was largely left to academic economists and other congenital pessimists, and for what appeared to be good reason:

State per capita income already stood at 7 percent above the national average as of 1979, and over the next decade it climbed to 17 percent above. Also, Job growth was robust and unemployment consistently lagged two or three points behind the U.S. average.

These favorable trends reflected several state strengths:

* Limited reliance on manufacturing.

In the first place, at a time when international competition was knocking the bottom out of U.S. manufacturing, Maryland benefited from the fact that its economy depended less on manufacturing than that of many states and of the country generally.

As of 1965, for example, slightly more than 20 percent of Maryland workers were employed in manufacturing, compared to close to 30 percent for the nation as a whole. When the oil shock of 1973 and the subsequent expansion of global competition undermined the U.S. manufacturing sector, Maryland was therefore affected far less severely than the more industrial regions of the northeast and Midwest and was able to gain ground on the nation.

* Producer services.

Not only did it benefit from its smaller manufacturing base at a time of manufacturing decline, but also Maryland benefited during the 1970s and '80s from the fact it built an alternative

economic base centered on services, and particularly producer services, during a period when these services were expanding mightily.

As of 1986, nearly 80 percent of Maryland's output came from services. More significantly, 42 percent came from so-called "producer services" -- such as banking, finance, computer programming, research, engineering, law, accounting and the like. This was well above the U.S. average (34 percent) and reflected Maryland's proximity to Washington, with its tremendous research and information needs.

Such services generally have higher wage rates than the service economy as a whole and contribute to economic growth almost as powerfully as manufacturing. The fact that this had become Maryland's dominant industry by the late 1970s thus positioned the state to gain ground on the nation during the turbulent '70s and '80s.

* Technical personnel.

One useful consequence of this producer services strength has been the establishment in Maryland of a solid cadre of technical personnel. Thus, the state ranks eighth in the nation in its concentration of employed scientists and engineers; third in per capita federal research funding; and fourth in total university research funding, behind only Massachusetts, New York, and Texas -- all much larger states.

At a time when brain power has replaced "brawn power" as the key to economic growth, this technical base represents a powerful economic asset.

* Amenities.

Contributing further to Maryland's growth potential is its outstanding natural and cultural amenities, which are especially

important in a knowledge-based economy in which the key to success is the ability to attract and retain skilled personnel who, thanks to modern communications, can operate almost anywhere.

The Challenges

Given these considerable strengths, why should there be concern about Maryland's economy once the national recession eases?

The answer is that Maryland's economic strengths are accompanied by at least six structural problems that could stall any recovery unless they can be fixed.

* Regional disparities.

In the first place, most of the state's recent economic growth has been concentrated in the Baltimore and Washington suburbs. Elsewhere, conditions have been far more difficult. In fact, while average per capita income for the state exceeded the U.S. average by a substantial margin, most of the state's 24 local jurisdictions remained below the national average. This reflects the fact that the producer services industry that has been responsible for the state's overall progress is largely concentrated in the suburban areas. The rest of the state has 15 percent of the state's population but only 7 percent of its producer service jobs.

* Federal retrenchment.

Even the Baltimore and Washington suburbs face problems, however, because the principal stimulant of their growth -- the federal government -- is now deeply in debt and cutting back. While increased pressures for "privatization" may channel increased business to Maryland firms out of the amounts the federal government spends, it seems likely that those amounts will grow much more slowly in the 1990s that they did between the mid-1960s and the mid-1980s.

* Competition in services.

Complicating matters further is the fact that foreign competition, which bloodied U.S. manufacturing in the 1970s and 1980s, may be poised for a similar assault on producer services in the 1990s.

Already, advances in communications are allowing overseas data processing firms to convert printed records to computer-readable files far more cheaply than their domestic counterparts. The "back offices" of many American corporations can therefore just as easily be located in Taiwan and Singapore as in Towson or Salisbury.

Many of the region's largest banks have been purchased by overseas companies.

Overseas architectural and engineering firms are likewise challenging domestic firms on their home turf.

While Maryland's relatively small manufacturing base limited its exposure to the surge of foreign competition in manufacturing in the 1970s and '80s, its heavy concentration in producer services makes it a prime target for the coming one in services.

* Continued manufacturing decline.

Against this backdrop, the continued decline of Maryland's manufacturing sector takes on special meaning.

Manufacturing's importance to economic development results not only from its direct employment and production but also from its role as a market for other goods and services, especially producer services.

With the prospects for federal growth quite dim, it might be hoped that some revival in manufacturing could help soften the blow on Maryland's producer service industry. Despite considerable state effort, however, the push to revive Maryland manufacturing has had disappointing results, in part because Maryland's manufacturing sector also depends heavily on the federal government. Manufacturing fell from 22 percent of state employment in 1965 to 10 percent in 1990 and has declined further during the past year.

* Work force gap.

A fifth factor complicating Maryland's economic future is a persistent work force gap. Despite a very favorable ratio of scientific and technical personnel, Maryland's population growth rate, like that of the nation, has slowed considerably in recent years.

Most of the new entrants to the state's labor force over the next twenty years will come from the population groups that have had the fewest educational advantages -- minorities, immigrants and women. Yet the educational system, despite serious efforts at improvement, is not performing well in preparing the state's citizens, particularly its disadvantaged citizens, for the high-skill economy that increasingly exits.

Indeed, the Corporation for Enterprise Development gave Maryland a "C" for educational performance on its 1989 "development report card," noting that the state ranked 21st among states in per pupil spending on elementary and #i secondary education and 35th in per pupil spending on higher education.

* Limited visibility and international contact.

A final factor complicating the state's economic future is the lack of international experience on the part of many of its businesses and its lack of visibility as a desirable business location:

Maryland ranks 39th in the nation in per capita total exports, reflecting its relatively limited industrial base.

Recent surveys of national business leaders reveal a striking lack of familiarity with Maryland and the Baltimore region as a desirable business location.

Strategic Approach Needed

Fortunately, state policy-makers have moved aggressively over the past four or five years to put in place a number of key programs to cope with these problems -- including a state performance measurement system for education, a network of technology centers, a seed capital fund, and various business and international trade promotion efforts.

What is now needed is a more coherent, focused way to bring these resources to bear on overcoming the state's considerable economic challenges. Five steps seem especially crucial:

* A statewide strategic audit.

As a first step, Maryland business and government leaders must come to recognize and prepare themselves to take full advantage of the state's considerable assets as a global competitor, regardless of where they are located. This will require a recognition that the real competitors of Maryland jurisdictions are not other Maryland jurisdictions, but other states and nations. It will also require a statewide strategic audit to identify what the state's assets and limitations are and how to make the best use of them.

* Targeting industries.

Secondly, public programs must be focused more effectively on key industries. Strategic choices will have to be made about which industries seem most promising and join public-private efforts mounted to understand the needs of these industries and design ways to respond to them.

The Greater Baltimore Committee has taken a useful step in this direction by singling out the life sciences industry as a strategic opportunity for Maryland and the Baltimore region and calling for concerted action to promote this industry.

At least equally important will be concerted action on the "producer services" industry that is the dominant industry in the state but one that now faces immense challenges.

* Investing in people.

Whatever else it does, Maryland must continue to invest in its people. No other investment is more important to its economic health. This will require intensified efforts in elementary and secondary education, including expanded resources, possibly linked to the new performance measurement system. But it will also require more concerted efforts at work force training and retraining through both public and private efforts.

* Promoting an entrepreneurial culture.

Continued efforts must also be made to ensure that Maryland reaps more economic benefit from its scientific and technical personnel. At present, the state excels in discoveries but not in patents or commercial applications. Incubators, co-ventures and other devices have recently been created to help turn this around, and these must be sustained and expanded.

* Better economic development organization.

Finally, the state needs a more coherent and regular mechanism for monitoring and fine-tuning its economic development strategy. This could include a regular subgroup of the governor's cabinet focused on economic competitiveness, a counterpart committee in the legislature and a network of regional public-private economic development councils.

Maryland has reason to be bullish about the future. But there is a significant danger that the state's past economic success will blind it to the serious challenges that face it even if the current recession eases.

In the increasingly competitive world of economic development, as in football, the best defense is often a good offense. Maryland must take care now to keep the pressure on and not assume that the end of the recession will cure the state's economic woes.

Lester M. Salamon is director of the Johns Hopkins Institute for Policy Studies. This article draws on his recent paper entitled "Maryland and the New World Economy: Challenges and Opportunities."