EC 1005 A Local and Regional Economic Development

EC 1005 A Local and Regional Economic Development Lecture 2 - Theories Monday, 19 th January 2015

Reminder • What is Local and Regional Economic Development? • What does it do?

Research Local & Regional Development • V&A Project - Dundee

Local and Regional Economic Development Economic Growth? Attracting and maintaining employers? Sustainable Development? Public policy to increase competitiveness? A method of strengthening inner city and rural economies in order to reduce poverty and inequality? • Job creation, training, increasing wages? • • •

Today • We will discuss whether theories can contribute to our understanding of Local and Regional Economic Development. • There will also be further reading - a hand out summarizing some of the main theories, their advantages, disadvantages and policy implications.

Reading • Blakely & Leigh (2010) Planning Local Economic Development, 4 th edition • Chapter 3 Concepts and Theory of Local Economic Development p 73 -100

Local and Regional Economic Development Theories • LED is complex and an evolving discipline. • Yet, it is useful and important to have a theoretical framework for economic development practice. • Linking theory to practice

• So, theoretical approaches are important in order to understand the dynamics of local economic development. • Theories will help LED practitioners understand how the economy works. • Understand the link between theory and practice

LED theories • There are numerous theories drawn from a range of different disciplines (Bingham and Meir, 1993). • Theories borrowed from economics, planning, economic geography etc. • No one particular theory can explain everything!

Some of the main theories • Neoclassical model - assumes freely operating markets and free movement of prices • Cumulative causation theory - highlights that success can lead to more success - and failure can lead to failure • Economic Base –model stresses the importance of having strong industries and services in a locality which are able to export, thereby retaining wealth within the locality.

• Location Theory –stresses the importance of concentrations, or agglomerations, of economic activity. • Core-periphery models. –Show that localities have different functions within the economic subsystem.

• Industrial Districts. –Stresses the importance of networks, entrepreneurship, innovation, cooperation and flexibility for successful regional economies. • Porter’s theory of competitive advantage - places an emphasis on the complexity of economic systems and their need to continually innovate. • See word hand out for further more in-depth information.

Neoclassical theory • Assumes freely operating markets and free movement of prices. Market mechanism will result in equilibrium where all regions enjoy similar economic conditions. • The neoclassical model of economic development is known as an equilibrium model (state of stability).

• Neoclassical economic theories rely upon market responsiveness to price changes. • Suggests that all economic systems achieve an equilibrium if capital is allowed to flow without restriction. In a free market, capital will flow from areas where the costs of production (land labour) are high to low cost production areas.

• An successful/flourishing area will attract inflows of labour because of high wages. • Investment will also be attracted because of high levels of productivity, which create a good return on investment. • This area will have the highest economic growth. • But, eventually this will push up wages and other costs of production, the area may become less attractive than other perhaps more peripheral areas. • Capital will then flow to these less developed areas to take advantage of lower costs of production.

Neoclassical theory • Strengths - The advantage of the Neo-classical theory is that it can be used at local, regional or international level. • Weaknesses - Disadvantages include the assumption that businesses are all motivated by making a profit. Additionally, it does not consider that different areas have different strengths and weaknesses. • LED policy implication –Although the Neo-classical theory maintains that intervention should only be allowed on grounds of efficiency, if markets cannot operate efficiently on their own (for various reasons) it could be used as a template for intervention to encourage investment.

The Cumulative Causation Theory • The Cumulative Causation theory is a direct opposite to the Neo-classical Theory. • According to Blair (1995) “Cumulative causation refers to the process in which a change in one direction may reinforce other tendencies for change in the same direction. ” • This theory suggests that market forces pull capital, skill and expertise to certain areas which develop major competitive advantage over other local economies however, this might result in an increase in inequalities between areas

Cumulative Causation Theory

Example - Myrdal (1957) • Stated that higher income families tended to move to the suburbs leaving behind families with greater public service needs and lower ability to pay taxes. • This decline further contributes to other types of deterioration for example, fewer amenities and higher crime levels. It may also contribute to retail and other services moving to the outskirts of the city. • Consequently, the new area starts to flourish, businesses are attracted and higher incomes allow for more amenities and additional investment may be attracted.

• Similarly, research by Bradford and Kelejian (1973) found that middle class families were more likely to live in the suburbs while poorer people lived in the inner cities, resulting in further declines in the middle class population in cities with associated poverty programmes. • Therefore, in order to permanently increase equilibrium incomes policies such as better urban design and convincing people of the advantages of city living can be used to alter the relationship between deterioration and income. (Blair, 1995).

The Glasgow Eastern Area Renewal Project • The GEAR project in the East end of Glasgow was an example where problems were addressed in an area which suffered from economic decline caused by cumulative causation. • A public sector led multi-agency partnership to tackle inner city urban renewal. • Set up in 1976 (until 1986) to tackle problems of inner city decline. The city had experienced closures of factories (such as large engineering factories) and loss of skilled labour. • People left living in the East end were mainly elderly, disabled or living on a low income. • Economic, environmental and social regeneration

GEAR Project • A large scale comprehensive urban renewal project. • £ 300 million of public money was spent over the ten years of the project, it attracted a further private sector investment of some £ 200 million.

Source of map – Geogonline (2014)

Successes of the project • The project provided new and renovated housing. • Many tenement homes at that time were overcrowded and did not have their own bath or toilet and only around 4% would have had central heating.

Successes of the project • • Landscaping, tree planting, restored historical buildings. Set up training scheme Some sources claim over 2000 additional jobs were created by GEAR between 1976 and 1985 New factory units were built to attract new industry to the area.

Annick Street Industial Estate, Shettleston, Glasgow around 1978 • The industrial estate was built by the Scottish Development Agency as part of GEAR, the Glasgow Eastern Area Renewal project. Fifty-five small factory units were built to provide accommodation for small businesses which eventually employed up to 300 people. • Source: Glasgow City Archives

However • The project had success in terms of housing and environment. • However, despite the project jobs were still lost to the city through economic decline and some authors suggest it failed in relation to achieving economic development. • East End of Glasgow still one of the most deprived areas of the UK

Another view - Damer (1990: 13) • “If one analyses the academic reports on the much vaunted GEAR, whatever its achievements, making inroads into local unemployment is not one of them. Precisely fourteen long-term unemployed East Enders got jobs as “small entrepreneurs” out of GEAR, generating another sixteen jobs”. • Damer S (1990) Glasgow: Going for a Song. Edinburgh University Press: Edinburgh

Glasgow Regeneration • Update - The 2014 Commonwealth Games – athletes village should result in more affordable and social housing which should regenerate the area further.

Cumulative Causation theory. • Strengths- provides a theoretical explanation for empirical evidence on growing economic disparity. The advantage of this theory is that it works better on a local level than the Neo-classical theory. This is mainly because decisions are taken not solely on economic grounds. • Weaknesses- Does not offer a method to prioritise areas for intervention. A disadvantage of this theory is therefore, although it recognises that there may be many causes of economic depression it does not show clearly how to stop the decline • Policy Implications – emphasises the need to act quickly to arrest decline. Policies must address the root causes of decline

• It is therefore important that economic development officials are aware of threats that could cause a city to go into a downward spiral. • Catalysts for such decline could be, the loss of a major employer, increasing bad reputation for crime or poor education or technological trends that render some processes uneconomical. (Blair, 1995).

Baumal (1963) • In addition, a mathematical model was put forward by Baumal (1963) to explain how a positive or negative change could bring about a cumulative upwards or downwards growth path. • The model is based on two relationships, ‘deterioration’ represents various aspects such as crime, poverty, and congestion.

• The first relationship is the higher the level of deterioration in any year, the lower the regional income in succeeding years. • The second relationship states that slow or negative income growth increase deterioration. • By using this model it is possible to see that deterioration to real growth can lead to more deterioration and cumulative decline.

Economic Base Theory • Economic-base concepts originated with the need to predict the effects of new economic activity on cities and regions. • Economic-base models focus on the demand side of the economy. • Focuses on regional export activity as the primary source of local area growth. Therefore, this theory suggests that economic growth will be led by companies who export goods beyond regional boundaries.

Basic and Non-basic Sectors • Basic is production for export outside the region • Non-Basic is production of goods and services for consumption inside the region – Population Dependent or Residentiary • Total Economy = Basic + Non-Basic

Economic Base theory • Strengths • Simplicity of model • Highlights the importance of export industries. Focuses on the importance of exports for a regions economic health. • Attractive model for example, helped to explain wider economic effects of decline in coal industry since 1980 s. – employment in coal declined, demand for local services declined. • Demonstrates the effect of multipliers. Direct employment, Indirect and Induced multiplier effects. One sector sustains another. • Identifies key industries

• Weaknesses. Also simplicity of model. Lacks complexity Identification of key industries is difficult. Vulnerability of export industries. Narrow focus - Assumes that exports are the sole determinant of economic growth. But what about changes in taste or changes in production processes or labour migration? • Size of multiplier dependent on leakages and commuting • Time lag between investment and multiplier. Result depends on when research is carried out. • •

• Policy implications • Priority to support export growth firms. • Need to calculate local/regional multipliers. Multiplier value will differ within industries. (Which multiplier method to choose for example surveys) • Stresses the importance of exports. • Economic base theory strongly supports attracting industry through recruitment and place marketing.

Example- Scottish Government Economic Strategy (2011) • The Scottish Government Economic Strategy states that exports are an essential source of growth and will be vital to our future prosperity. • The government intends to support growth companies increase their exports • The government has set a target to increase the value of Scottish exports by 50% by 2017 • Scottish Exports to the rest of the world (not including the UK) stood at £ 26 billion in 2012

Industrial Districts • A lot of attention paid to this theory in recent years. The industrial district covers a specific geographical area. • Suggests within industrial districts there are strong networks of specialised small firms operating in the same sector i. e Industries such as Electronics (clusters) • Individual firms’ success is dependent on the success of the network. • Can apply to regions such as Silicon Valley USA

Industrial Districts • Strengths • Founded on empirical evidence (experience not theory). Therefore adds credibility. • Explain changes in industrial structure • Provide a model for increasing global competitiveness and keeping high wages and good working conditions.

• Weaknesses • Does not explain why some successful industrial districts do not confirm this model. • Tends to be time and location specific • Does not explain variations in performance of similar districts. • Quite complex and rather static

• Policy implications • Need to develop ‘soft’ infrastructure i. e. social economy, something for people to do when not working i. e. Canary Wharf. • Investment in physical capital (buildings) is not sufficient. • Are industrial districts born or made?

Foot wear sector - Italy • Successful industrial districts. • Footwear clusters • Clusters, forward and backward linkages, network of private/public institutions supporting economic development

• In the 1960’s Italian footwear industry mainly for domestic customers. • Now an important sector of growth. • Export led. • By 1985 Italy was the main exporting country in Europe for footwear. • 1990’s onwards – increased competition

Competitive advantage? • Brings about a competitive edge for firms belonging to the district compared to solitary firms. • Backward linkages – allow for suppliers to produce a wide variety of products with short delivery times

Italian Footwear • Some decentralisation of production to subcontractors in the industrial district – maintains linkages with them. • Technological co-operation among firms in the district. • Forward linkages were weaker– became more important since 1990 s.

Industrial Districts • • • Allow for a high degree of labour mobility. Spin-offs Subcontracting Former employees becoming entrepreneurs. Generating new enterprises. The proximity of the firms also speeds up business between firms.

Tutorial Questions • Why do you think it is necessary to understand the links between theory and practise in local and regional economic development? • In groups choose one economic development model and discuss the strengths and weaknesses of the model.