Regional Development

(excerpted from the following reference; for a more complete explanation consult:  Power, Thomas Michael, The Economic Pursuit of Quality, M.E. Sharpe, Inc.: Armonk, NY, 1988)

 

Export Base Model of Cumulative Development

·         Assumes that Total Economy of a region is divisible into an Export (Basic) sector and a Residentiary (Non-Basic) sector

·         E(t) =  E(ex) + E(res)

·         Effective demand for Export Base sector is external to the region itself

·         Effective demand for Residentiary sector is internal to the region itself

·         Export Base sector is considered to play the primary part in the promotion of economic development (as measured by size or number of transactions, in other words, amount consumed)

·         Assumed that the relationship between the two is constant over time—given this assumption it is possible to calculate the impact of the change in the export base sector on the residentiary sector and, thus, the region as a whole

·         Assume a relationship of 1: 1.5 (exp : res)—for every one export job there are 1.5 res jobs

·         So an increase of 2000 jobs in the export sector will result in an additional 5000 jobs in the residentiary sector—This called the direct multiplier effect

·         Direct effect followed by a series of chainlike indirect effects depending upon the number of linkages existing between firms—the degree to which the region is integrated (interconnected)

·         Income from local consumption is based on two steps:

·         Residents spending part of their income on local goods and services creates local sales dollars

·         Amount of local sales dollars influenced by:

·         Level of income

·         Propensity to consume locally (assume locals tend to spend 50% locally; rest may go into savings, or taxes, or be spent outside region)

·         Only part of that local sales dollar will become local income (income propensity)

·         Some will be spent on inputs outside originating outside the region—imported goods, wages to non-residents, etc. (assume avg. proportion remaining local is 40%)

·         For every dollar of local income, 50 cents will be spent locally and 40% of this 50 cents (20 cents) will remain as local income—this is only the direct effect

·         Half of the additional 20 cents will be spent locally, and 40% of this (4 cents) will remain local income—this is the indirect effect

·         The indirect effect will continue in sequential ripples until the local income “leaks” completely out of the region

·         In addition to this short-term effect can be added a longer-term multiplier effect responsive to a local propensity to invest in local capital goods

 

The strength of the Direct and Indirect multipliers will differ from region to region…it will depend upon the strength of the linkages connecting all economic actors to each other within the region—the study of this pattern of regional linkages is called Input-Output Analysis.

 

Economic Base Theory: Questionable Relevance

 

Economic well-being is taken to be a quantitative entity that is the direct result of economic growth

·         Economic Growth = Economic Development

·         If economic well-being means only those valuable things gotten through commercial businesses then the economic base can be envisioned as the source of jobs and income

·         Focus is on what “injects” money into the region as described above

·         Expansion (development) stops when all the new income has gone to purchase imports

·         Key Point—Imports, not exports, are the economic objective

·         But the less an area depends on imports, the less it needs to export

·         The lesser dependence on imports will also increase the multiplier effect

 

As it happens, economic development (qualitatively) is driven by:

·         Improvements in technology

·         Improvements in work force quality

·         Improvements in knowledge and organization

·         Levels of savings and investment

·         Entrepreneurial spirit

·         Economic attitudes toward work and consumption

 

Population increases, aging, preferences, workforce participation will also influence economic structure (inclination to import and export)

 

Economic Base Model either ignores or takes for granted all these dynamic forces because it focuses entirely on exports…without even explaining why exports happen or change.

 

Big Problems with Economic Base Multiplier Growth Solutions

·         No mention, nor idea, of how long it will take to experience this expansion

·         Households and businesses do not react instantaneously to increases in income

·         There may be excess capacity in the structure to be used first

·         Export firms may be more or less connected with other local firms…interdependent with local firms to provide parts of the exported good or service

·         Single multiplier probably won’t be very useful to predict impact

·         Virtually impossible to know the extent of these linkages with businesses hesitancy to disclose this information and unsuitability of using other “model” areas to determine how yours is structured

·         Without empirical knowledge of the internal structure, nothing can really be known

·         Most activities are partly export and partly residentiary…how much of each should be considered?

 

Direction of Causality should be reversed

·         A highly diverse, complete, and integrated (well-connected) regional economic structure, plus positive economic attitudes, abilities, and willingness to innovate are what attract firms to an area

·         Those firms then produce both for local consumption and export

·         Local oriented economic activity drives expansion…exports are a result, not a cause

·         It is more plausible, actually, that both end up working together and reinforcing each other

 

Economic Base Model is NOT politically neutral

·         Focus on exports can lead to an emphasis on manufacturing, mining, and agriculture to the detriment of retail trade and services…which may be as wrong as it is right

 

The Model is supposed to guide our public policy—Some pertinent questions:

·         Why are things we do for each other that make life comfortable, convenient, and satisfying not counted as contributing to our welfare in a primary way?

·         How can our well-being be tied to sending the useful things we make away for others to enjoy?

 

·         The Economic Base vision, with its emphasis on exports, and dismissal of the productivity and value of locally-oriented economic activity and resources, distracts us from reality

·         By emphasizing growth in the gross volume of income and population as a measure of economic improvement, economic base models support the type of economic change most likely to benefit those in the local region who own the resources that are fixed in supply (private real estate, established banks, well-located businesses)…no wonder it is the development model of choice in influential public circles

·         A model that protects and enhances the economic well-being of the general population is more relevant to qualitative development

·         The message from the Economic Base Theory is “Don’t bite the hand that feeds you.”—which only encourages hopelessness, fatalism, and despair because someone else “holds the cards.”

 

Bottom Line

·         Export-oriented economies remain primitive, suffer through booms and busts, and go nowhere

·         Only through replacing imports does a viable economic base emerge

·         The development of local dependencies is what economic development is all about

·         The strength of the local economy is tied to the richness and diversity of what we can do for ourselves and our neighbors, not what we export or import

·         The real local economic base consists of all those things that make it an attractive place to live and work, or do business, which are provided for outside the commercial economy:

·         Quality of natural environment

·         Richness of local culture

·         Security and stability of community

·         Quality of public services and public-works infrastructure

·         Quality of workforce

 

Self Defeating Strategies of Economic Growth

 

According to this genre of development policies economic well-being is supposedly a function of:

·         An increase in the level of business activity—the amount of money changing hands should increase steadily

·         An increase in income—to support additional spending

·         An increase in the number of jobs—to provide more income

·         An increase in total population—the key indicator, apparently, of economic prosperity

 

The Missing Connection

·         Economic well-being, in the folk wisdom, consists of:

·         Improvements in the flow and quality of goods and services for existing residents

·         Improvements in the availability of satisfying economic activities for existing residents

 

·         Increased Dollar Volume of Business

·         Ignores difference between costs and benefits and adds the two together indiscriminately—goods purchased outside region count as benefits to locals

·         Double-, triple, or quadruple counts whatever benefits do exist—depending on the number of middlemen involved in getting the good to the consumer…the more, the larger the exaggeration

·         Ignores question of who receives whatever net benefits are generated—they may not accrue to locals, thus not boost local well-being

·         Increased Money Income

·         If income grows, and population grows, income available per household may actually fall or remain same

·         Increased Per Capital Income

·         If the additional income accrues to new arrivals instead of existing residents, then the benefit does not actually exist

·         Increased employment

·         Important question is who gets the jobs—for the new jobs to benefit the existing population they must be higher quality jobs than those currently available (not just pay more, but also be more dignified, or innovative), and must be accessible to local workers

·         Increased population

·         The number of warm bodies in a place is not in itself an economic good—might as easily bring problems…no reason to assume it will result in only good

 

Fatal Growth Strategy Flaws

 

·         Higher per capital incomes do not, in and of themselves, indicate superior well-being

·         When an area is particularly attractive place to live, per-capita incomes will be relatively lower, falsely indicating that the area is economically inferior

·         In an economy where the labor force is mobile, per-capita money income could serve as a measure of local economic well-being only if the following assumptions hold:

·         People do not care where they live and work

·         Businesses do not seek to minimize their labor costs

·         Both are patently false

·         Firms in a competitive market pay only what the market requires to attract and hold the work force they need

·         Firms do try to keep labor costs low, paying higher wages only when they have to get the workers they need…which may be difficult if workers and their families do not want to live where it is most profitable for the firm to be located

·         Higher money wages are not a sign of something that is unusually good about an area, but a sign of something unusually bad (like a high cost of  living, or crime, or pollution, or congestion, or prejudice, etc.)—they are the wage increase required to entice someone to give up their relatively attractive place (in a non-commercial way) for the unattractive.

·         Lower wages in a place are paid because the non-commercial benefits of living in that place hold the labor force there—they are a measure of the area’s advantages to its existing residents (for whatever reason, including tradition and community), not economic disadvantages

·         Expanding local employment opportunities will not necessarily put the unemployed there to work

·         The new jobs can as easily (maybe more easily) go to new migrants

·         Plus more people will likely show up than there are jobs for…unemployment rates may actually rise—plus problems associated with economic idleness (crime, alcoholic belligerence, etc.)

·         Creating more jobs will not keep kids at home

·         Empirical evidence shows that young people, in general, leave because they are young, curious, and adventuresome…not necessarily because there are few opportunities

·         Kids of migrants are more likely to migrate

·         Economic growth is unlikely to reduce tax burdens

·         As population increases, government spending per person also rises as education, environmental,  security, and social infrastructures become stretched

 

A Better Alternative?

 

Forces of national and international economies severely constrain local economies…modesty is an economic virtue when it comes to local development policy…base your strategy on local objectives that directly benefit existing residents

 

What Local Economic Development Policy cannot do

 

 

Can’t Lose Economic Development Strategy