Local Economic Development

This article introduces the concept of local economic development. It answers the questions: What is local economic development? Why is local economic development relevant today? 

While the history of local economic development extends decades, the actions taken by local organisations and institutions have become even more relevant in the face of increasing levels of global economic integration. Local economic development provides a valuable framework for designing and managing economic, business and employment development programmes and services.

What is local economic development?

Local economic development (LED) is the process in which local actors undertake actions that impact directly on their lives and opportunities. It is a participatory process designed to improve the competitiveness of a local area while recognising the global forces of change create uneven patterns of development where some localities grow and others decline.

Local economic development draws on wide-ranging schools of economic and social development and particularly focuses on local employment issues.

Beyond this general understanding, there are many definitions of local economic development, each emphasising different aspects of the process and the role of lead actors. One example is that of the World Bank:

“The purpose of local economic development is to build up the economic capacity of a local area to improve its economic future and the quality of life for all.  It is a process by which public, business and non-governmental sector partners work collectively to create better conditions for economic growth and employment generation.”

Why is local economic development important?

Local economic development has evolved from a policy approach used in the early 1970s to respond to the movement of businesses and capital between locations of competitive advantage. In Western Europe, LED emerged in response to structural economic shifts that created disadvantaged local communities (e.g., high unemployment, industry decline).

While the importance of location has always featured in economic and business development, it has perhaps become more significant in the context of increased globalisation. In 2020, Alexandra Tsvetkova and her colleagues argued the case for a localised response to the forces of globalisation:

The spatial dimensions of productivity performance are becoming more salient as the global megatrends, in particular globalisation and digitalisation, affect localities differently along the urban-rural continuum. As policymakers strive to ensure spatially-inclusive growth with no places left behind, spatially-conscious productivity research is needed to inform the design of efficient policies tailored to the needs of specific places. Such policies should help the more productive regions to enhance their standing and the lagging regions to close productivity gaps. 

While private investment drives growth, it is the pace and pattern of growth that influences the degree to which growth results in reduced poverty and inequality. The pace of growth is important because economies must expand fast enough to accommodate the increasing demands of population growth and new labour market entrants. However, the pattern of growth is as important as its pace because this affects who benefits from growth. For instance, the pattern of growth can depend on the sector or locality in which investments and growth occur. Thus, the pace and pattern of growth affect the extent to which growth can be ‘inclusive’. 

Inclusive growth, says the Organization for Economic Cooperation and Development (OECD) is economic growth that ‘creates opportunities for all groups of the population and distributes the dividends of increased prosperity, both in monetary and non-monetary terms, fairly across society. Thus, while private sector development contributes to inclusive growth by creating productive and decent employment, it is specifically focused in local economies on the needs and opportunities of local businesses, workers, products, and services. The OCED Framework for Inclusive Growth recommends investing in people and places, while supporting business dynamism, and creating more inclusive labour markets to contribute to rebuilding trust and strengthening social cohesion.

Place-based development

Recently, more attention has been given to the concept of place-based development, particularly in urban contexts. This is a more contemporary expression of the principles and approaches of local economic development.

Place-based development recognises the geographical context of development. It highlights the social, cultural and institutional characteristics of a place and is characterised by the identification and mobilisation of endogenous potential and resources. Place-based development pays particular attention to human capital and the innovative capacities of a location, while promoting strong and adaptable local institutions, building local ownership and promoting broad stakeholder engagement.

Place-based development models open new opportunities for inclusive growth, much of which can be driven by the development of the local business sector. All of these features correspond with LED.

All of these models, including Community Wealth Building and New Municipalism, seek to build new wealth from local resources by repositioning these assets to attract capital. Ed Blakely and his colleague use the term ‘community economic development’ to highlight the relevance of two traits. First, the community or neighbourhood should be the focal point for developing human, social and physical resources. Second, local resources, particularly human and organisational, must be the base for any development activity.

LED in developing and emerging economies

In developing and emerging economies, local economic development places particular importance on economic development. This includes:

• Spontaneous networking. Many areas in developing countries suffer from broken social, political and economic networks. Local economic development promotes local participation and aims to re-establish social networks through economic activities aimed at restoring basic living conditions.
• Social inclusion. Local economic development can explicitly address the exclusion of people who are unemployed or living in poverty. Local economic activity engages these communities and builds networks and social inclusion.
• Poverty alleviation. A general increase in the local economic activity is likely to increase the general living conditions of the local population. The enhanced turnover and competitiveness of local enterprises encourage higher levels of local and foreign investment, while increasing economic activity and production, and boosting local jobs and consumption.
• Informality. The informal economy needs to be considered. In some localities, the informal economy represents a significant part of the local economy. The local informal economy is often connected to formal activities and provides the economic basis for the majority of the poor.
• Innovation. More than ever before, socio-economic growth depends on the process of change and innovation in response to shifting national and international markets. Fostering local entrepreneurship and enterprise creation plays an important role in achieving economic development outcomes.

The practice of local economic development

The practice of local economic development is characterised by four approaches:

1. Participation and social dialogue. All forms of local economic development engage a wide cross-section of local actors in development processes. Many of these actors may not have previously been involved in development work. In some cases, local economic development builds on the social capital within an area. It engages with local institutions, organisations and networks to respond to local economic opportunities and challenges. The practice of local economic development represents a shift from representational forms of engagement to participatory forms. While traditional forms of development focus on national growth in which resources are distributed to needy areas, local economic development looks for ways for actors in all localities to engage in the process of development. Participation reduces the risks of conflict and fosters social and political cohesion.
2. Based on territory. Local economic development occurs within a defined territory, which may be geographically or culturally determined. This proximity promotes the conditions for growth, innovation and development. This is because local stakeholders possess a superior knowledge of their needs and resources. It is also because territory focuses common interests and cultural affinities. Moreover, territory enables frequent social, economic and political interaction among local actors, which can generate social capital.
3. Mobilising local resources and competitive advantages. Local economic development involves the identification of local resources that can be put to use in development efforts. These resources, may be physical (e.g., unused buildings), financial (e.g., local savings), human (e.g., local skills, commitment to the area, time to participate), or based on the physical features of the location––being the inherent advantages of a particular area that give it a kind of advantage (e.g., location amid common transport routes, tourism potential, fertile agricultural grounds). LED builds on these assets while attracting external resources where required.
4. Locally owned and managed. Local economic development is a participatory, ‘bottom-up’ approach to development. Local actors own and manage the design of development processes and structures. External agencies wishing to promote local economic development respond to local demands, rather than imposing their will on these communities.

Local economic development expands the circle of recognised actors of economic life, introducing local governments, municipalities and local community-based organisations in economic activities. It highlights the competition among local territories within national boundaries. This competition drives good economic outcomes while opening the doors to mutual cooperation of several local governments in the design and implementation of economic development initiatives, resulting in a better quality of life for local communities.

Good practice in local economic development requires tailored approaches to local conditions. The following guiding principles characterise many successful practices:

• An integrated approach that includes social, environmental and physical, as well as economic issues.
• A carefully developed strategy built by all relevant partners and based on a shared vision.
• A range of projects (i.e., short, medium and long-term) are used to catalyse partnerships and build stakeholder confidence.
• Influential and effective local leaders bring commitment, credibility and an ability to unite stakeholders.
• Capacity building of management and ‘on the ground’ teams are essential to project implementation.
• Local economic development strategies should be owned or co-owned by the local government with a demonstrated strong political will to implement it.
• Political, financial and technical support from other levels of government adds value.
• Projects and action plans should be undertaken only where a responsible manager or champion has been identified who is committed to successful implementation.

Summary

Local economic development has two enduring and significant traits. First, it defines local responses to the challenges of development in an increasingly globalised world. While global market forces increase, localities are able to respond to these in strategic and valuable ways. Second, it broadens the base of actors involved in economic development. LED does not rely on centralised politics or economic elites. It creates opportunities for local public, private and community stakeholders to take direct actions that improve their economic opportunities and quality of life.