1: Defining Local Economic Development and Why Is It Important?
1: Defining Local Economic Development and Why Is It Important?
1: Defining Local Economic Development and Why Is It Important?
Why does economic development take place in some areas and not in others?
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.
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.
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.
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.
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.
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.
In what ways does globalization of regions and localities will be resting about trade?
International capital flows (for example, when your pension funds buy Canadian
government bonds or shares in Philips)
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)
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.
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.
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
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
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.
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.
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.