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1: Defining Local Economic Development and Why Is It Important?

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1: Defining Local Economic Development and Why is it Important?

Why does economic development take place in some areas and not in others?

 International organizations (World Bank, IMF) are willing to provide structure


adjustment loans. But in one condition, the government would roll back their direct
intervention controls over market and production.
 Their main method was, less government and more market.
 Reforms focused on reducing governments and markets are expected to emerge
spontaneously. However, for a long time, the private sector investment response to
structure adjustment was not forthcoming. But why? What delay the investment
response? 3 Fundamental issues were ignored:

Rationale for LED


1. Institutions supporting the local economy.
 Markets rely on functioning economic institutions which help to reduce the cost of
doing business
 These institutions regulate, spread information, reduce risk, and in general, contribute
to reduce transaction cost.
 If these costs are very high, few people will be willing to start their enterprise or to
expand their business.
 This refers not only to the rule of law and property rights, but also to practices, norms
and standards that are specific on particular products, industries and occupations. And
certainly, at early stages of development of an industry, market and market supporting
institutions are insufficiently developed.
 These institutions need to be crafted and built up over time. And often from scratch.
Local action to build such institution is an important factor determining economic
performance in an area.

2. Complementarily of investment
Investment opportunities do not reveal themselves so easily. Information is hard to
combine and risks can be very high. More importantly, investment in one-by-one
economic actor is depended on parallel investment by other actors. So, for example, a
small entrepreneur of farmer who wants to innovate in a grass crop, could spend a lot of
time and efforts to grow a new crop. Only to find out that there are few local buyers. All
the packaging, transport and finance are bottlenecks. In my example, complementary
investments would be needed in the packaging plants, in transport equipment, in roads,
and/or require effective response of banks and traders.

So, success is critically dependent on simultaneous complementary investments by other


sectors including government. In order for complementary investments in private and in
public investments to emerge, collective and public action is needed, and this implies
economic coordination with constitutes a key ingredient of local economic development
management. In other words, the opportunities and constraints for a local producer are
embedded in the opportunities and constraints of an idea industry in an area. Particularly
in situations where potential markets are small and networks between economic sectors
are poorly developed, a dead look may result and keep an area in economic isolation.

3. Localized externalities
The third issue is that even if markets exist, they do not necessarily allocate resources
efficiently. They can be effects on third parties that are not incorporated in prices of court
and services. There are different types of search market failures and some of them play a
positive role in local economic development.

Four types of Market Failures

1. Knowledge Spillovers (of existing economic activities)


Information about ins and out of an industry are in the air. And all local producers can
benefit from this pool knowledge. This facilitates learning and lowers the cost from local
firms but also makes the place attractive to new entrepreneurs and for other firms to
locate in the same area. So, if many firms grow a new crop, they can learn from each
other about how to combat disease. Nearly by observing and interacting with each other.

2. Network Externalities
This facilitates information exchange and coordination between economic actors. Related
to the example earlier, the farmers know who can provide articular inputs and services.
And these network externalities often require locational proximity, closeness. Their
presence is also a powerful factor that attracts other firms to the area.

3. Learning from Entrepreneurial Failure


It is a private law that many others can learn from this and avoid making the same
mistakes. This raises the probability success of their own startups or investment
decisions.

4. Stimulus from Entrepreneurial Success


The external effects arising from entrepreneurial success. As it is well known that a
successful entrepreneurial activity attracts other people to start their own firms.
Furthermore, other economic actors, like banks, universities and investors have then also
experienced in dealing with startups. And then all these factors come together in an area,
they can give a powerful boost to economic performance to the particular area. And this
helps to explain why certain areas light up on the google maps while others remain in the
dark.

A Powerful non-economic factor.

1. Ancestral Roots
Many people have an emotional attachment to or interest in the place where they have
been born or where their ancestors lived. This cannot be reduced to simply some house or
a piece of land. It also refers to the social networks and to the local ties that bind, as well
as to the norms, values and local practices and customs that structure one’s life.
2. Future Generations.
This attachment also provides a motivation to enhance the living conditions in an area for
the benefit of future generations.

Both these considerations emphasize that individual actors belonged to the community
and have community collective interest at heart.

Rationale: Local actors should come together and engage in local economic development
management.

Local Economic Development


- A process in which relationships between local governments, communities and civic
groups and organizations and the private sector are established to manage existing
resources to create jobs and stimulate the economy of a well-defined area.
- This emphasizes local control using the potential of human institutional, physical and
natural of the area. Its initiatives mobilize actors in organizations and resources, develop
new institutions and local support systems and realize economic coordination through
dialogue and strategic actions.

2: Overview of the Four Drivers in the LED content

Why has local economic development management become a widespread practice in the last two
decades? My experience as an adviser and researcher tells me that there are four principal drivers
that help to answer this question.

Four Drivers
1. Globalization
Globalization has many different dimensions: economic, social, cultural, political. Here,
our focused on economic globalization. Its recent wave originated in the early 90s. In his
book global shift, some of this waved up the rise of the geo-economy. This can’t just the
interplay of three factors. Firstly, the diffusion of space reducing technologies in trans
program communication. You can think of here of containerization and the increase
frequency and reduce cost of air, ship and road transportation. For communication
technologies, think of the enormous pit of mobile phones, the internet, and the rise of new
social media.

The second factor is the computerization which led to big technological and managerial
changes in the production of goods and services. Firms could outsource, relocate an
offshore activity syntax. Computerization reduce the advantages of large-scale inhouse
production and made it flexible and possible to customize. The flipside of this change is
the internalization of firms and the growing importance of global production change that
coordinate this multiple and interconnected task carried out a various location across the
globe.
The third factor concerns the growing volume of people, capital, and firms that have
mobile across the globe. International migration has increase, capital moves around the
globe on a 24-hours/ 7 day a week basis, and the number of multinationals has grown
rapidly. Not just in western countries, but also an increasingly from emerging and
developing economies. Mobility has increased and so as the competition to attract firms,
capital, and certain people especially professionals. There are times countries and
municipalities increasingly compete with each other to attract these resources in order to
create local employment and income.

2. Decentralization (of State)


The transfer of powers and functions between levels of government. We can distinguish
three fundamental waves of decentralization. The first, gave local government a greater
role in public service delivery. The other two waves are responses to do growing
skepticism and reappraisal of the ability of public administration and politician to define,
manage, and target specific public services. New public management focused on the
question, “Will the government could be run like a business?” “Whether public goals can
be better achieved nonpublic means?” Private sector, voluntary nonprofit, community, as
well as regulated market solutions became alternatives to public sector delivery. This
were called a supplies side of local governments. The third wave refers to the demand
side of local governments. The identification of tasks the government have to undertake,
can improve by involving of the social actors who are better informed. Decentralization
then offers them avenue by which direct participation of citizens and interest troops in
decision making could improve the quality of government and the relevance of the avid
activities.

3. Changing Conceptions (of Competitiveness)

The third driver of local economic development management has been the recognition
and growing importance of the territorial dimension of competitiveness. Traditionally,
competitiveness is associated with specific, firm-level resources, and resume Patrion
Entrepreneurship. It is the firm and the entrepreneur particular who creates and renews
competences which enable the firm to compete, and innovation is fundamental. But
Michael Porter relecally change this firm-centered view by stressing the importance of
the business environment in which the firm operates. This can confirm confer important
competitive advantages to firms.

The business environment consists of factor conditions, the man conditions, structure of
the market and rivalry, as well as on the presence of related and supporting industries. In
no-small measure, business environment has a territorial dimension. The second inside
generated by Porter is that other actors as stakeholders in creating a competitive local
business environment, notably local governments, local business organizations, labor,
civic organizations, and NGOs. The coordination of their activities becomes a key feature
of local economic development management.
4. Socio-political Concerns (about Inequalities and Social Exclusion)
What distinguishes this driver from previous ones is that this is motivated by social-
political objectives and that it has a social economy in the later stage that became its
principal focus. It is generally known empirical fact that economic gross does not occur
simultaneously throughout the territory. But there at least selective and even, and has
accumulative character. And a central question is the structural permanence of regional
inequalities.

Globalization brought about large-scale econometry structuring in Europe and USA


which dislocated entire industries such as textiles and clothing, footwear and cheap
building. This pushed entire regional economies to the brink of economic collapse as the
economic based has disappeared. As globalization advanced, large-scale structuring also
affected localities and regions in emerging and developing economies. And traditional,
centralized micro-social policies were only able to assess the symptoms of structural
regional employment crisis.

Social exclusion and inequalities increased. In reaction to this, new locally-based


employment initiatives were organized for a civic groups, private sectors, and local
governments through the social economy. They promote the re-entry of structurally
unemployed in the labor market and improved employability of the excluded people by
means of innovative forms of training an enterprise developed.

3: Globalization & Trade

In what ways does globalization of regions and localities will be resting about trade?

Globalization four components:


 International trade in goods and services (such as coffee and car)

 International capital flows (for example, when your pension funds buy Canadian
government bonds or shares in Philips)

 International labour migration (which is to cross border movement of 100 production


factor next to capital often with low-scaled migrants)

 Internationalization of production in global value chains (in which goods are produced
from design to packaging, small steps in the production process in different countries
across the world)

4: Globalization & Restructuring

Probably just like you, I’ve become increasingly aware that the city in which I live is no longer
only affected by local economic, social, and environmental forces but increasingly by regional
and global relationships.
Example: Brexit, the recent global financial crisis migration into Europe and climate change.
These relationships extend far beyond our borders and increasingly tie us together into an
interdependent global community. Based on this, we can say that globalization is equal to the
ties that bind us. We and our local economies are strongly connected together through networks
of information, culture, trade, financial flows, and transport. So dear learner, if these global and
regional flows are affecting the development of our cities, example, income inequality and
climate change should we not include this knowledge in how we govern our local economies? If
so, can we map these networks or test their effect on the development of our cities? Do you agree
that governing your economy can no longer only be confined to the municipal scale? To support
your answer, this video will be based on empirical data to show you how cities are connected to
financial flows and how this affects local economic development.

 Local economies do not develop in isolation, but are strongly affected by international
flows of capital.
 Global/Regional flow information can be included in how we govern local economies.
 We can map these networks and test their effect on the development of cities.

In the video, we see a 3D GIS animation of this investments into the cities. The higher the peak,
the more total investment received in a city. We also see that FDTI (Foreign Direct Investment)
is very unevenly distributed around the globe. There is an uneven geography of investment. Did
you notice that the global north receives the most investment? Especially regions like Europe,
North America, and Pacific Asia, which get the lion’s share. Africa receives by far the least
investment. What could be the reason for this? In relation to the video, let’s now look at the flow
of investment between the cities. What you see here is the GIS map of the top 1,000 investments
taking place between cities in the period 2003 to 2016. Again, we see that this investment flows
are mostly between wealthy cities in the global north. While in the global south, there is few
linkages.

In the map you will see green cities as well as blue cities. The green cities represent the outward
or source investment send to other cities. The bigger the green dot, the more outward investment.
The blue dots represent the inward or destination investment. This is the investment received
from other cities. It is clear that cities that have the highest outward investments are the usual
suspects Paris, Tokyo, London, and New York. These powerful cities control production and
markets around the world. It should also be clear to you that the strongest receivers of foreign
direct investment are cities like Shanghai, Singapore, London, and Dubai. You might also have
noticed that 7 out of 10 of these are in the East.
Now let’s zoom into Europe. It is evident here how complex the FDI system is. The key outward
investment cities are cities like London, Paris, Amsterdam, Frankfurt, and Zurich. It will also be
clear to you that there is a green outward investment corridor running from London to Milan.
This is one of the core outward investment regions of the world.
Empirical Studies on FDI and Local Economic Development
“Positive and significant relationship between FDI and economic growth” (Lu and Liu, 2005)
“Positive relationship, but conditional to a country’s levels of human capital, infrastructure,
financial market development etc.” (Kinoshita and Lu (2006))
“Insignificant relationship between foreign direct investments and economic (Onaran and
Stockhammer (2008))”
“The fate of world cities is no longer determined only by local factors but increasingly by their
position within global economic (investment) networks” (Alderson and Beckfield 2004)
Network Measures
Imagine a hypothetical world with only 12 cities. The grey-colored cities are source cities
investing into the cities that are colored blue. Their outward investments are called the out-
degree. The white lines depict the investments, the arrow shows the direction of the investments.
The Blue Cities receiving investments are called the destination cities and they express the in-
degree. It would be clear to you that City D receives the most investment, in other words, an in-
degree of 5. This is followed by City H with 3 investments and so forth.
At this point, you might be asking yourself “what has this got to do with city development?”
In this image, we now see the relationship with development. The in-degree is the measure of the
number of cities investing in a particular city. It is a measure of how integrated this city is in the
world investment system. According to the theory, the more a city integrated into the global
investment system, the better or worse it will perform in terms of development. In this sense, if
you look at City D, due to it having the highest number of city linkages, it would have the
strongest economic integration and therefore also the highest impact on urban properties like
prosperity, inequality or smartness. City D is followed in order by Cities H, G, and F.
Next, how do we convert this schematic data into useful data that you could use in a statistical
analysis. Here we see that the original city network diagram has been translated into a simple
matrix table. It concerns investments from City A to L in the rows, and the Cities A to L in the
columns. For instance, City A invests in City D, G and also H. City B in turn, only invests in
Cities D and F, and so forth. Now, we can add up all the investments in the rows to define the
out-degree of each city. If we add up the investments downwards in the columns, then we obtain
the in-degree. These measures can now be added to other city data to test their significance.
This is the measure of sustainability developed by the research group Arcadis and has been done
by many global cities. Some other indicators have been added to the analysis which serve as
controls. These are for instance population, urban land area, and unemployment rate. The
indicators with asterisk stars represent the indicators that significantly affects sustainability,
marked for your convenience in black. It is clear from this table that in-degree has a positive and
significant effect on urban sustainability in turn though out-degree has no significance on
sustainability. Population has a significant but negative effect on sustainability. While all the
other indicators remain insignificant.
This video has introduced you to the concept of Globalization as a network phenomenon of
interactions between firms and cities, and especially how this affects local economic
development. In other words, the ties that bind us. The video reveals that the city, region, or a
country is increasingly influenced by global economic forces, in this case, foreign direct
investment. In other words, you have discovered that external network characteristics also
importantly determine the performance of cities, not only local internal ones. You’ve also
learned how to represent city network relationships, but also how this can be interpreted into a
network matrix table and that network can be calculated and used for further statistical analysis.
Then, based on a real-world model, it was demonstrated to you that network measures
significantly affect the sustainability level of cities. I hope you agree with me that local
economic development is dependent on the ties that bind us.

5: Trends on Decentralization & Local Government 1

Decentralization concerns the transfer of responsibilities and resources from central government
to local government and also to other actors like private firms and citizens. Since the mid-80s, I
have been personally involved in decentralization processes as a researcher and as an advisor in
countries like Bolivia, Uganda, Zimbabwe and I followed these processes also in other countries
notably Colombia, Peru, Ghana and South Africa. In the past 30 years, decentralization policies
have redefined the role of local governments within a system of government and we are what we
ask local governments to do today is very different from what we asked them to do 30 years ago.

In this session, I will briefly outline the first of three consecutive waves of decentralization. After
this video, you will be able to situate local government as a key stakeholder in local economic
development management. Before looking at the three waves in detail, let us first look at some
basics.

Governments perform three types of functions.

 Allocation function
– they decide on what public services and merit goods will be provided and how
much will be spent on these. This also means that they have to decide how to finance
this, either through taxation or otherwise. If you are not familiar with the concepts of
public, private, and married goods, you may want to check them in the glossary.

 Redistribution function
– the second function is redistribution of income and wealth. It provides for social
welfare and complements the gaps in the economic system.

 Stabilization function
– the third function is stabilization of the economy. Here, we often distinguish
between short-term and long-term stabilization. The former points to dampen
business cycle fluctuation in the economy, either by increased or reduced spending.
The latter aims at improving the conditions for future economic growth. Most debates
on decentralization focus on the first function.

How does a country organize the provision and delivery of public and married goods?
and how does it finance these services? What can best be done at the central level?
And what at a local level?

Functions of Government

Late 1940s:
 Local Government often ignored
 Central Government main protagonist

In the early development decades after the World War 2, local government was not considered to
be important. In fact, it was often ignored, repressed, and in some countries, they didn’t even
exist or they were disbanded after independence. And central government was seen as the
principal protagonist of development, focusing all efforts on one level of government was seen to
be the most effective and efficient in view of limited financial and administrative resources.
Moreover, in many countries, national elites or vanguard parties wanted to be in control of the
development process.

Late 1970s:
 Berg Report on African Governments
 Central Governments incapable of providing public services adequately
 Attention turned to Local Governments
 First wave of Decentralization

In the late 1970s, the berg report came out in Africa with a critical view on African
Governments. In this report, the author claimed that central governments with their direct
interventionism in markets crowded out and thought of the emergence and growth of the private
sector. Moreover, central governments were seen as incapable of providing public services
adequately and they ran large deficits. Structural adjustment policies that followed drastically cut
the direct interventions of central governments in foreign exchange, in trade and financial
markets and reduced public spending, and this brought up the question, “how the provision of
public services could be more efficiently organized?” Attention then turned to local
governments. They were seen to be closer to people and businesses, and therefore, would be
better able to respond to their needs and demands. This is how the first wave of decentralization
policy started.
Let’s review this historical process. The first wave of decentralization was dominated by the goal
of fiscal federalism, that means transfer functions from central government to local government.
By doing so, increase efficiency and reduce overall cost. In this sense, we have to consider
different combinations of decentralization of expenditures and of resource acquisition.

Prudom’s Model
On the vertical axis, we put decentralization of revenues that is percentage share of total taxation
and other public revenue regeneration by local governments. On the horizontal axis, we put
decentralization of expenditures that is percentage share of total public expenditure realized
through local governments. In point C, only expenditures are decentralized. In point D, all
taxation is livid locally. In point A, everything is centralized and in point B, all is decentralized.

The reality of course lies in between these extreme points. In Prudom’s view of the world, there
are dangers constituted by decentralization, especially as regard to distribution and stabilization
function. He therefore concluded that when considering all three functions, decentralization of
expenditures is the most desirable then and is more desirable than decentralization of revenues.
Leaving in this way, the distribution and stabilization function mostly was in the sphere of
central governments.
In an ideal setting, the degree of decentralization of taxation matches exactly the decentralization
of expenditures. When one balances the other, we are on the 45-degree line which starts from the
origin in our diagram. Do you think that this balance is the case in your country? My short
answer would be that in the real world there are no countries where local government fully
finances their expenditures. There can be very different reasons such as history, mobility of tax
bases, administrative capacity, etc. What results is an imbalance that restricts decentralization of
expenditures. Local governments depend on fiscal transfers from central government. This
means that central government continues to have financial leverage, thus, maintaining overall
control over the decentralization process, this can be an advantage. The disadvantage is that local
officials may look upwards to what central government is willing to finance instead of looking at
what citizens and enterprises want them to do. What is more important in your country, the
advantage or the disadvantage?

In the late 1980s and early 90s, decentralization processes were set in motion in some 60
developing countries spread over Africa, Asia, and Latin America. Colombia and Uganda were
leading examples in their respective regions. Without Public Services, our local economy cannot
function

6: Trends on Decentralization & Local Government 2

You will recall that we identified four drivers that explain why local economic development has
become an important issue.

The third driver of local economic development initiatives namely, decentralization and local
governance is examined in this video and in the previous one.
1. Why had local economic development become an issue?
2. Globalization
3. Decentralization and local governance
4. Changing perspective on competitiveness
5. Local Responses

In the previous session, I have outlined the first of three consecutive waves of decentralization

Three consecutive waves of decentralization:


1. Fiscal federalization
Vehicle fiscal federalization placed local governments on the map. As a local provider of
public services, partly dependent on the transfer of central government to finance these
expenditures.

In this video, I will outline the other two waves of decentralization policy which alter the
role of local governments. These are new public management and democratic
governance. After this video, you will situate local government as a key stakeholder in
local economic development management.

2. New Public Management


1990s Run government as a business
In the 1990’s, a second wave of decentralization started to give space
to other actors in the delivery of public services. I refer here to the rise
of new public management which is an overall perspective that argues
that government can be run as a business. This means creating distance
between politicians and their policy process, and the actual delivery of
services of the services.
Public Goals can be achieved by non-public means
That is to say, services can be provided by local governments but not
necessarily be produced or delivered by them. This is called the:
Producer-Provider Split

Government can:
 Contract an independent company to carry out a public service
Government is responsible for the provision but service delivery can be privatized
or contracted out to other parties who compete either for or in a particular market for
services. For example, a local government may be responsible for solid waste removal
but contract actual waste collection to an independent private company.

 Privatize a service in a segmented market


Alternatively, it can give out on concession. Like for example for road
maintenance, where a company concerned raises revenue by means of charging a road
fee.

 Co-produce a service in a partnership with an independent company or community


organization
It was also advised to create public-private relationships. For example, where
local government makes an agreement with a private company which agrees to build and
operate a public bus terminal exploiting its retail potential. The company finances the
investment and recovers it via renting the services to the bus companies and renting the
premises to shopkeepers.

Government has to be a smart buyer:

How to select a contractor?


So, the nature of what local governments do radically changed in the old situation.
There was a public sector management of a service, where public goals were defined by local
government council are implemented by public sector management operating in a
bureaucratic hierarchy.

What is a good service delivery contract?


In the new situation, local government has to become a smart buyer, that is to say,
local government needs to design effective and efficient contracts with other actors who
actually deliver the service. Negotiating with other actors is not an easy task.
How to align private actor goals with stated public objectives?
Public goals need not be perfectly aligned. Information is often hard to come by and it
is difficult to foresee all possible consequences of what an actual delivery is. The overall
implication for decentralization was that negotiating with private sector and other actors thus,
became part of the local public process, which was thus redefined as local governance
process.

New public management has a clear orientation. Citizens are seen as clients. Customer
satisfaction is seen as a big advantage, but there are also other benefits for government
themselves. When a local government gives a service out in the concession, they neither have to
finance the required capital investments themselves nor do they run any expenditure risks.
Moreover, it reduces the need for public employees who are in many countries well-organized
can strike are difficult to fire and so on. And these benefits figured prominently on the hidden
agenda of new public management.

3. Democratic Governance
The third wave of decentralization began some 10-15 years ago. It was primarily
framed in the context of an overall strengthening of democracy by raising the legitimacy
and responsiveness of government.

Its three buzzwords were:


2000s Political competition/Multi-party competition
Multi-party competition would induce greater responsiveness to local
needs and simulate greater efficiency in service delivery as parties
would have to view for electoral favor.
Increasing consumer choice
Giving users of public services more choice. For example,
introducing education vouchers which they could use in public and
private schools. This would increase quality competition between
these service providers, as consumers can choose.
Raising citizen voice
Greater citizen participation in public decision making and
implementation would open up more opportunities for raising citizen
voice and for downward accountability of local governments. There
are many examples ranging from participatory budgeting and
participation in public decision-making process to the roles of
citizens group in monitoring public spending in participatory
budgeting citizens of a neighborhood can indicate their priorities for
local government spending. In the second phase indicate priority
projects for their neighborhood. In some countries monitoring
committees of citizens, monitor public sectors investments in their
neighborhood.
Decentralization effects on Local Governments
After having reviewed the three waves of decentralization. It will become clear that over time,
the role of local governments has become more complex.

They are charged with more responsibilities


At the same time, they depend more on central government and on for-profit and
non-profit actors to finance and implement their policies. Increasingly, they have to
render accountability for their actions not only upwards to central government but also
downwards to the citizens who participate more frequently in public decision-making
processes.

Economic growth more important


As local governments gain more wight in public spending and become more
networked with local service providers and communities and interest economic role
become more important to local producers and consumers. This will raise expectations
concerning specific local needs. And for local government to meet these.

Stakeholder for local economic development


At the same time, local governments also need to raise more local revenue and
this makes local governments themselves more aware of the need for economic growth
on both accounts. Local economic development becomes more important as an issue and
of local government as an actor.

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