Economic Development - Theories

Introduction:

Economic development encompasses a wide range of concerns.  To most economists, economic development is an issue of more economic growth.  To many business leaders, economic development simply involves the wise application of public policy that will increase U.S. competitiveness.  To those who think that government should more actively direct the economy, economic development is a code phrase for industrial policy.  To environmentalists, economic development should be sustainable development that harmonizes natural and social systems.  To labor leaders, it is a vehicle for increasing wages, benefits, basic education, and worker training.  To community-based leaders and professionals, economic development is a way to strengthen inner city and rural economies in order to reduce poverty and inequality.  To public officials at state and local levels, economic development embodies the range of job creation programs broadened since the 1980s in response to the decline of federal domestic assistance.

Theories of economic development abound. Varying in basic, fundamental ways, they make different behavioral assumptions, use different concepts and categories, explain the development process differently, and suggest different policies. The theories used by economic developers determine, either explicitly or implicitly, how these developers understand economic development, the questions they ask about the process, the information they collect to analyze development, and the development strategies they pursue. Ultimately, theoretical insights influence how successful economic developers are in promoting local competitiveness.

To apply a theory successfully, the economic developer must understand its language.  The major theories of economic development are each summarized in terms of five fundamental elements.

• Basic categories--the fundamental classification or distinctions used to lay out the theory
• Definition of development--what economic development is or should be according to the theory
• Essential dynamic--the key variable or relationship that drives the logic of the theory
• Strengths and weaknesses--how well the theory enables one to understand economic development Applications--the ways in which the theory can be used in economic development practice k

1. Economic Base Theory:

The basic categories of economic base theory are the industrial sectors of the regional economy assigned to either the basic sector or the non-basic sector. The definition of local economic development is equivalent to the rate of local economic growth measured in terms of changes in the local levels of output, income, or employment.  The essential dynamic of the theory is the response of the basic sector to external demand for local exports, which, in turn, stimulates local growth.  The economic base multiplier transmits change in output, income, and employment from the basic sector to the entire regional economy.  The theory's major strengths are

• its popularity as a basis for understanding economic development in North America
• its simplicity as a theory or tool for prediction.  Its major weakness is its in-adequacy as a theory for understanding economic development, especially in the long term.  Economic base theory strongly supports attracting industry through recruitment and place marketing.

2. Staple Theory:

Staple theory identifies industrial sectors as its basic categories.  It defines economic development as sustained growth over the long term.  The essential dynamic is the external investment in, and demand for, the export staple that leads to the successful production and marketing of the export staple in world markets. The theory's major strengths are its historical relevance to North American economic development and its emphasis on understanding the region's economic history.  Its major weakness is that it describes, more than explains, the development process. Staple theory provides a general strategy of development by recognizing the connections of the economic base to the political superstructure. Economic developers should continue to build on and improve the export staple as long as it remains competitive in the larger economic system.  The idea is to "stick to one's knitting," since strengthening the existing specialization may be more sensible than attempting to diversify the economic base.  Eventually, footloose economic activities (that is, those not closely tied to specific resources, inputs, or markets) will be attracted to the area if its market achieves sufficient size or if it offers urbanization economies that can be exploited by other exporters.

3. Sector Theory:

Sector theory uses three aggregate sectors as basic categories.  The level of development depends on sectoral diversity, emphasizing a prominent tertiary sector, and labor productivity.  The essential dynamic involves the income elasticity of demand and labor productivity of primary and secondary sectors: as incomes rise, the demand for income-elastic products grows; output increases as labor released from primary and secondary sectors is employed in tertiary sectors. Although sector theory is attractive because it can be applied and tested empirically, the primary, secondary, and tertiary categories are too crude to be useful in practice.  The overriding application is the need to attend to industries producing income-elastic commodities in order to achieve sustained growth.

4. Growth Pole Theory:

Growth pole theory treats industries as the basic unit of analysis, one that exists in an abstract economic space. Economic development is the structural change caused by the growth of new propulsive industries.  Propulsive industries are the poles of growth, which represent the essential dynamic of the theory.  Growth poles first initiate, then diffuse, development.  Growth pole theory attempts to be a general theory of the initiation and diffusion of development based on François Perroux's domination effect. Although insights drawn from the theory are useful, it has failed as a general theory of development.  Growth center strategies are based on this theory. Also summarized in the table are the growth theories of Gunnar Myrdal and Albert Hirschman, which are consonant with Perroux's theory.

5. Neoclassical Growth Theory:

The basic categories of neoclassical growth theory are sectors or regions that comprise the macro economy.  Economic development is defined as an increase in the rate of economic growth, measured in terms of changes in output or income per capita. The theory has two essential dynamics. One, in aggregate models, the rate of saving that supports investment and capital formation drives the growth process. Two, in regional models, factor prices--specifically, the relative returns on investment and relative wage rates--stimulate factor flows that result in regional growth.  Growth theory suggests that economic developers respect the free market and do what is necessary to support the efficient allocation of resources and the operation of the price mechanism.  The simplest growth models imply that economic developers are unnecessary, but more complex formulations would support various economic development activities.

6. Interregional Trade Theory:

The basic categories of interregional trade theory are prices and quantities of commodities and factors of production, just as in microeconomics.  The implicit definition of development is economic growth that leads to greater consumer welfare.  The essential dynamic is the price mechanism (price-quantity effects) operating to eliminate price differentials and establish equilibrium prices (the terms of trade). The theory has two unique strengths. First, consumer welfare (increases in aggregate consumption benefits), not job creation, is the goal of development. Second, the price/cost-based theory is extremely precise, yet its precision is achieved with numerous restrictive assumptions and largely by ignoring the dynamics of development.  Economists use growth theory and trade theory to advocate less government intervention and freer international trade, more open regions, and, in general, more competitive markets.  The theories provide strong support for local infrastructure development, improvement in government efficiency, and other measures that could increase local productivity and lower input costs for all producers.  Local developers, on the other hand, often ignore the implications of growth and trade theory and instead support protectionist measures and growth strategies that do not always improve the economic well being of local consumers.

7. Product-Cycle Theory:

Product-cycle theory treats the developmental age of the product as its basic category.  Products are classified as new, mature, or standardized.  At any point in time, the space economy can be divided into regions where new products tend to arise and regions devoted to the production of standardized commodities.  The essential dynamic of product-cycle theory is new product development, which is one form of innovation.  From locations where new product innovation takes place, the product is eventually standardized and diffused to other locations in the space economy.  The process stimulates economic growth and development in both types of locations, but the character of development is different in each. These differences help explain why levels of development vary from place to place, and why differences can persist. The economic developer who wants to apply product-cycle theory in its most literal form must try to identify and work with manufacturing companies that can create new products.  Alternatively, the developer may be able to mobilize the resources needed to improve the local business infrastructure in ways that would support new product development.

8. Entrepreneurship Theories:

The basic category of economic development is the entrepreneurial function as embodied in the entrepreneur. Development proceeds as changes in firms and industries result in more resilient, diverse local economies.  The essential dynamic driving the development process is innovation. Innovation is conceptualized variously in different theories as new combinations, improvisation, or creative risk taking.  To its credit, Entrepreneurship theory is mediated theory; people make development happen.  This strength, however, leads to the weakness that Entrepreneurship theory is not easy to apply consistently.  The most general application is to support an industrial environment or ecology favorable to entrepreneurs.

9. Flexible Production Theories:

Flexible production theories focus on production regimes and related methods of industrial organization as basic categories. The regional development implications of customized, batch, and long-run (or "Fordist") production regimes--as well as outsourcing practices, supplier relations, and processes of vertical integration and disintegration--are the principal concerns. Development is not just quantitative growth but also qualitative change in industrial mix, firm structure, and sources of competitiveness (for example, from least-cost or price-focused competition to that based on innovation, product differentiation, and niche marketing). More recent research has focused on the impact of flexible production on labor practices, compensation, and power relations between large and small firms.  The key variable or relationship (essential dynamic) that drives flexible production theories are changes in the nature of demand that require firms to become more agile; standardized, least-cost production is considered less and less viable as consumer tastes in industrialized countries become more sophisticated and global competition intensifies.  Firms adapt to this new environment by adopting flexible production technologies, managing supplier relationships, and utilizing interfirm networks for information sharing and joint problem solving. Among the principal strengths of the theory are a focus on rich, complex production dynamics within firms, between firms, and between firms and labor. Weaknesses are related to the strengths in that the focus on specific micro relations means that implications for regional aggregates are often neglected.  In terms of application, the theory informs industry cluster strategies, buyer-supplier networking initiatives, technology transfer programs, small-firm programs, and some types of worker ownership and labor management policies applied at the community level.

RURAL ECONOMIC DEVELOPMENT LINKS: -

• The Center for Rural Studies (CRS) is a nonprofit, fee-for-service research organization that addresses social, economic, and resource-based problems of rural people and communities. Based in the College of Agriculture and Life Sciences at the University of Vermont, the Center provides consulting, research and program evaluation services. The site includes guides and training materials for citizens and community leaders, as well as information on community development projects.
• The Georgia Rural Economic Development Center (GREDC) provides information and analysis on Georgia's rural economic development efforts. GREDC conducts research, seeks solutions to local, regional and state development problems, and collects and disseminates information on rural economic and social situations. GREDC provides grant opportunities for Georgia's community economic development projects and conducts economic development research as requested by rural community organizations.
• Located at the University of Maryland Eastern Shore, the Rural Development Center (RDC) aims to strengthen and diversify the rural economy of Maryland's Eastern Shore. Funded through a grant from the Economic Development Administration, the Center is a professional community and regional economic development agency concerned with the causes and consequences of social, political and economic changes in rural areas. The Center undertakes applied social and economic science, and research and technical assistance work.
• The North Carolina Rural Economic Development Center aims to promote and implement sound economic strategies to improve the quality of life of rural North Carolinians. The center serves the state's 85 rural counties, with a special focus on individuals with low to moderate incomes and communities with limited resources.
• The Rural Community and Economic Development page of The Welfare Information Network (WIN) provides an extensive list of publications and links on rural and community economic development. WIN is a special activity of the Finance Project, a national initiative to improve the effectiveness and efficiency of public and private-sector financing for education, children's services, and community building and development.
• The Rural Information Center (RIC) is a U.S. Department of Agriculture research center created as a rural assistance information clearinghouse for communities. RIC provides information and referral services to local, state, and federal government officials; community organizations; health professionals and organizations; rural electric and telephone co-operatives; businesses; and rural citizens working to maintain the vitality of America's rural areas. RIC collects comprehensive information on a range of categories affecting rural development. These include community development, small business development, tourism development and agribusiness. Other categories include health, education, environment, social issues, government, housing, labor and transportation. The site contains comprehensive information on rural funding sources, conferences, related links and a wide range of publications available to download
• Rural LISC is an organization that supports and builds the capacity of resident-led rural community development corporations (CDC). The organization seeks to increase rural CDC production and impact, demonstrate the value of investing in and through rural CDCs, and make the resource and policy environment more supportive of rural CDCs and their work. The organization provides technical assistance, training and information to rural CDCs.
• The USDA Rural Development Web site is a resource of the U.S. Department of Agriculture. The site contains an array of information including USDA programs for rural development, economic development, community empowerment, area partnerships and news and information. The site has a wide range of publications available to download on rural development planning, rural and business co-operatives, community development, utility publications and rural development fact sheets.
• Women and Rural Economic Development (WRED) is a federally incorporated charitable organization dedicated to enhancing the sustainability of rural Ontario communities. The organization promotes economic opportunity by providing programs that enhance business development, life skills, access to capital, access to information, business diversification and awareness of rural community economic development.

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