Economic Development

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Economic development, generally speaking, is a process of change that is focused on

the betterment of the community, state, and/or nation. Defining economic development
can be difficult. The first term in this phrase—"economic"—refers to an accepted
paradigm for organizing the business and financial and even to some extent the
governmental sectors of a nation. Economics is viewed as the foundation for building
a prosperous society. However, it is the second term—"development"—over which
there is considerable debate. People's perceptions of development vary. For some,
development has the appearance of successful commercial enterprise; for others, the
face of development is one of economic equality. Nevertheless, the concept of
"economic development" has the attention of government, the business sector, and the
citizenry. We pursue economic development as one of the goals of a successful
country, state, or city. It captures the attention of the news media and impacts, as well
as is impacted by, political objectives.
Measurement of Economic Development
Economic development in a community can take many forms. However, before we can
discuss the process of economic development, we must first understand how economic
development has been measured, particularly at the national level. It is within this
framework that communities have pursued their goal of improving the local economic
environment. In fact, standardized measures of economic development are being used
throughout the world, not just in the United States.
Standardized measures of economic development are used to identify the status of
one's country, state, or local community. We use these measures for a number of
different purposes, including identifying trends and understanding patterns of








economic development in communities that face different resource opportunities and
constraints.
One of the most common methods of measuring economic growth is by calculating the
gross national product of a country. Gross national product (GNP) is the value of
goods and services produced by an economy's factors in a given period of time (e.g.,
the value of all goods and services produced by U.S. operations throughout the world
in a given year). Gross domestic product (GDP), on the other hand, is the value of
goods and services produced in an economy in a given period of time (e.g., the value
of goods and services produced in the United States in a given year). When these
measures are adjusted for inflation, we correct for any changes in the GNP or GDP that
are due simply to increases in the price level in the economy. Real GDP, for example,
is the value of goods and services produced in an economy adjusted for changes in the
price level. This is particularly important when comparing across different economies
because changes in price levels will not necessarily be uniform from one country to
the next.
The general purpose of using measures such as real GNP or real GDP is to collect and
analyze information related to a country's economic transactions. Real GNP or real
GDP provides analysts with an indication of how quickly the business sector of the
economy is growing in a country. It also serves as a guidepost for local communities as
they address economic development issues at a local level.
Trends in national economic development reflect changes occurring at the state and
local levels and can impact local economic development planning. For instance, if the
real GD of a country has increased, then we conclude that the country has experienced
economic growth and the economy has improved. This information sends a signal to
local economies suggesting that the national economy is in the growth phase of the
business cycle. Communities can use this information to identify their position relative
to the current trend and to plan future economic development. If, however, real GNP
has declined, then the economy is thought to have experienced an economic downturn
and a community can use this information to anticipate the impact of future economic
downturns.
Trends in Economic Development in the United States
Positive trends in growth at the national level do not guarantee that individual
communities are or will be successful in developing their local economies. The needs
of local communities have changed as the patterns of growth at the local level have
changed. Thus the rules of local economic development as they relate to attracting new
business in order to promote economic growth also have changed. As communities

compete with each other to attract new businesses and hence jobs to the local
environment, they are discovering that the traditional methods of tax abatement and
low-interest loans, coupled with job training, are not sufficient to guarantee a level of
development that improves the economic base of the community. In fact, communities
are looking for ways to ensure that they will get more from the investment than it will
cost them in terms of tax abatements and infrastructure costs.
As firms increasingly engage in multi location operations, communities are finding
that, in addition to attracting new businesses, encouraging local firms to develop is a
valuable economic development tool. The community's view of its resources has
expanded beyond providing the traditional tax incentives to expand a community's
economic resources to include factors such as a well-educated work force and
adequate public services. Communities are now more likely to target the type of firm
that is "right" for the community. The emphasis on locating manufacturing enterprises
has diminished as communities look to "healthy" businesses that fit the changing needs
of the work force and infrastructure. Explicit consideration of the impact of the new
business on economic equity in the community is also becoming more important, and
growth and equity are increasingly recognized as complementary rather than opposing
goals.
Many of these changes can be summarized in the phrase "sustainable development."
The case of sustainable development is appearing more and more frequently in
discussions of community economic development. What is "sustainable
development"? Sustainable development is a process of development that "ensures the
needs of the present are met, without compromising the ability of future generations to
meet their own needs." (World Commission on Environment and Development, 1987,
p. 9) The vision of sustainable development is one of developing within the capacity of
our resources an ability to replenish themselves; by analogy to the financial sector, it
means living off of the interest as opposed to the capital of our investment.
In the sustainable development context, economic development is managed and
controlled in a way that recognizes the dynamic nature of social, political,
technological, and economic factors in a local community. Ultimately, the process of
economic development is changed from one of identifying incentives for business
growth to one of comprehensive planning to address social, economic, and
environmental concerns. The themes of economic development also change.
Traditional local economic development policies pursue increases in economic activity
and thus in the income levels of local residents. A larger tax base and lower levels of
unemployment are equated with business expansion. Sustainable development means
that growth occurs alongside community goals of increased self-sufficiency and

improved environmental quality. In fact, different forms of growth are encouraged.

The sustainable development initiative is not opposed to growth but rather focuses its
efforts on answering the question, "How do we grow?"
Successful economic development has been achieved in many communities pursing a
sustainable development approach. Among the success stories is Kansas City,
Missouri. This city faced one of the most urgent economic development problems of
urban areas—urban sprawl. From 1960 to 1990, the population in the metropolitan
area grew by less than one-third while the land area developed more than doubled. The
city's population was moving to the suburbs while the inner city was slowly being
abandoned. As a result, the jobs moved with the population, and the communities in
the outer ring of the city used traditional economic development tools, such as tax
incentives, to attract new business. The central city attempted to compete by providing
additional incentives. The burden, however, was clearly felt by taxpayers, as this
increased over this period.
Recently, however, a Metropolitan Development Forum was formed to address the
community development issues associated with urban sprawl. The forum has been
successful in many areas: they have identified regional transportation needs, achieved
agreement on the role of tax incentives in the region as a whole, created a metropolitan
greenway, and created local initiatives for economic development planning.
One community that has achieved long-term success is Portland, Oregon. Portland has
channeled the economic growth in the city such that employment in the formerly dying
downtown area grew from 50,000 jobs in 1975 to 105,000 jobs in 1998. This strategy
has been successful because they focused the development of business in areas that are
close to developed transit systems, limited commuter parking, and controlled the
expansion of growth into the rural areas.
Kansas City and Portland are only two of many examples of successful sustainable
development initiatives across the country. As a community's needs change and as
development is more broadly defined to include social as well as economic indicators
of progress, sustainable development and planned growth initiatives will continue to
take hold. There are many opportunities ahead for local economies to grow and
prosper in ways that recognize the importance of improving the quality of life as well
as the economy's overall productivity and income levels.
Bibliography
Parkin, Michael. (1998). Macroeconomics, 4th ed. Addison-Wesley.

 Shaffer, Ron. (1998). "Playing by New Rules in Local Economic Development."

Community Economics Newsletter, No. 263. Center for Community Economic
Development, University of Wisconsin-Madison.
Shaffer, Ron. (1995). "Sustainable Community Economic Development." Community
Economics Newsletter, No.224. Center for Community Economic Development,
University of Wisconsin-Madison.
Thomas, Margaret G. (1999). "Strategies for Sustainable Economic Development."
Community Economics Newsletter, No. 267. Center for Community Economic
Development, University of Wisconsin-Madison.
World Commission on Environment and Development. (1987). Our Common Future.
Oxford: Oxford University Press.
[Article by: ELLEN JEAN SZARLETA]
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Britannica Concise Encyclopedia

economic development
Process whereby simple, low-income national economies are transformed into modern
industrial economies. Theories of economic development — the evolution of poor
countries dependent on agriculture or resource extraction into prosperous countries
with diversified economies — are of critical importance to Third World nations.
Economic development projects have typically involved large capital investments in
infrastructure (roads, irrigation networks, etc.), industry, education, and financial
institutions. More recently, the realization that creating capital-intensive industrial
sectors provides only limited employment and can disrupt the rest of the economy has
led to smaller-scale economic development programs that aim to utilize the specific

 resources and natural advantages of developing countries and to avoid disruption of

their social and economic structures. See also economic growth.
For more information on economic development, visit Britannica.com.

Wikipedia

economic development
Economic development is the development of economic wealth of countries or
regions for the well-being of their inhabitants. From a policy perspective, economic
development can be defined as efforts that seek to improve the economic well-being
and quality of life for a community by creating and/or retaining jobs and supporting or
growing incomes and the tax base.
Overview
There are significant differences between economic growth and economic
development. The term "economic growth" refers to the increase (or growth) of a
specific measure such as real national income, gross domestic product, or per capita
income. National income or product is commonly expressed in terms of a measure of
the aggregate value-added output of the domestic economy called gross domestic
product (GDP). When the GDP of a nation rises economists refer to it as economic
growth.
The term "economic development," on the other hand, implies much more. It typically
refers to improvements in a variety of indicators such as literacy rates, life expectancy,
and poverty rates. GDP is a specific measure of economic welfare that does not take
into account important aspects such as leisure time, environmental quality, freedom, or
social justice. Economic growth of any specific measure is not a sufficient definition
of economic development.
Local development
The term "economic development" is often used in a regional sense as well (e.g., a
mayor might say that "we need to promote the economic development of our city"). In
this sense, economic development focuses on the recruitment of business operations to
a region, assisting in the expansion or retention of business operations within a region
or assisting in the start-up of new businesses within a region. (See section 'regional
policy' below.)

In addition to economic models, the needs of constituency groups guide economic

developers actions. For example, a local economic developer working out of a mayor's
office may act towards decreasing unemployment by attracting businesses with large
labor needs (call centers). The economic developer working for the chamber of
commerce dominated by banks, real estate agents and utilities will recruit
manufacturers with large capital investments (steel and chemical plants). The
economic developer working for the state manufacturers association will lobby for
more workforce training money. The economic developer working for a university will
concentrate on business start-ups, specifically those based on intellectual property
developed by the university (biotech).
In its broadest sense, economic development encompasses three major areas:
1) Policies that governments undertake to meet broad economic objectives such as
price stability, high employment, and sustainable growth. Such efforts include
monetary and fiscal policies, regulation of financial institutions, trade, and tax policies.
2) Policies and programs to provide infrastructure and services such as highways,
parks, affordable housing, crime prevention, and K-12 education.
3) Policies and programs explicitly directed at job creation and retention through
specific efforts in business finance, marketing, neighborhood development, small
business development, business retention and expansion, technology transfer, and real
estate development. This third category is a primary focus of economic development
professionals.

Academic and institutional approaches

Economic development can be seen as a complex multi-dimensional concept involving
improvements in human well-being – however defined.
Professor Dudley Seers argues that development is about outcomes, that is,
development occurs with the reduction and elimination of poverty, inequality, and
unemployment within a growing economy.[citation needed]
Professor Michael Todaro sees three objectives of development:[citation needed]
• Producing more ‘life sustaining’ necessities such as food, shelter, and health care

and broadening their distribution

• Raising standards of living and individual self esteem

• Expanding economic and social choice and reducing fear

The UN has developed a widely accepted set of indices to measure development

against a mix of composite indicators:[citation needed]
• UN’s Human Development Index (HDI) measures a country’s average

achievements in three basic dimensions of human development: life expectancy,

educational attainment, and adjusted real income ($PPP per person).
• UN’s Human Poverty Index (HPI) measures deprivation using the percent of

people expected to die before age 40, the percent of illiterate adults, the percent
of people without access to health services and safe water and the percent of
underweight children under five.
Development economics emerged as a branch of economics because economists after
World War II became concerned about the low standard of living in so many countries
of Latin America, Africa, and Asia. There are, however, important reservations in
making development economics a branch of economics as opposed to the ultimate
objective of the study of economics.
The first approaches to development economics assumed that the economies of the
less developed countries (LDCs), were so different from the developed countries that
basic economics could not explain the behavior of LDC economies. Such approaches
produced some interesting and even elegant economic models, but these models failed
to explain the patterns of no growth, slow growth, or growth and retrogression found
in the LDCs.
Slowly the field swung back towards more acceptance that opportunity cost, supply
and demand, and so on apply to the LDCs also. This cleared the ground for better
approaches. Traditional economics, however, still couldn't reconcile the weak and
failed growth patterns.
What was required to explain poor growth were macro and institutional factors beyond
micro concepts of the firm, individual preferences, and endowments. Institutional
analysis has been able to explain the poor growth patterns much better than the market
failure theories did. However, there is no generally accepted institutional theory of
economic development that a large share of development economists agree upon.
There is not even agreement on how important institutional factors are.
Models of economic development
The 3 building blocks of most growth models are: (1) the production function, (2) the
saving function, and (3) the labor supply function (related to population growth).
Together with a saving function, growth rate equals s/ß (s is the saving rate, and β is
the capital-output ratio). Assuming that the capital-output ratio is fixed by technology

and does not change in the short run, growth rate is solely determined by the saving
rate on the basis of whatever is saved will be invested.
Harrod-Domar Model
The Harrod-Domar Model delineates a functional economic relationship in which the
growth rate of gross domestic product (g) depends directly on the national saving ratio
(s) and inversely on the national capital/output ratio (k) so that it is written as g = s / k.
The equation takes its name from a synthesis of analyses of growth process by two
economists (Sir Roy Harrod of Britain and Evsey Domar of the USA). The Harrod-
Domar model in the early postwar times was commonly used by developing countries
in economic planning. With a target growth rate, the required saving rate is known. If
the country is not capable of generating that level of saving, a justification or an
excuse for borrowing from international agencies can be established. An example in
the Asian context is to ascertain the relationship between high growth rates and high
saving rates in the cases of Japan and China. It is more difficult to introduce the third
building block of a growth model, the labor and population element. In the long run,
growth rate is constrained by population growth and also by the rate of technological
change.
Exogenous growth model
The exogenous growth model (or neoclassical growth model) of Robert Solow and
others places emphasis on the role of technological change. Unlike the Harrod-Domar
model, the saving rate will only determine the level of income but not the rate of
growth. The sources-of-growth measurement obtained from this model highlights the
relative importance of capital accumulation (as in the Harrod-Domar model) and
technological change (as in the Neoclassical model) in economic growth. The original
Solow (1957) study showed that technological change accounted for almost 90 percent
of U.S. economic growth in the late 19th and early 20th centuries. Empirical studies on
developing countries have shown different results (see Chen, E.K.Y.1979 Hyper-
growth in Asian Economies).
Also see, Krugman (1994), who maintained that economic growth in East Asia was
based on perspiration (use of more inputs) and not on inspiration (innovations)
(Krugman, P., 1994 The Myth of Asia’s Miracle, Foreign Affairs, 73).
Even so, in our postindustrial economy, economic development, including in emerging
countries is now more and more based on innovation and knowledge. Creating
business clusters is one of the strategies used. One well known example is Bangalore

in India, where the software industry has been encouraged by government support
including Software Technology Parks.
Surplus labor
The Lewis-Ranis-Fei (LRF) Model of Surplus Labor is an economic development
model and not an economic growth model. Economic models such as Big Push,
Unbalanced Growth, Take-off, and so forth, are only partial theories of economic
growth that address specific issues. LRF takes the peculiar economic situation in
developing countries into account: unemployment and underemployment of resources
(especially labor) and the dualistic economic structure (modern vs. traditional sectors).
This model is a classical model because it uses the classical assumption of subsistence
wage.
Here it is understood that the development process is triggered by the transfer of
surplus labor in the traditional sector to the modern sector in which some significant
economic activities have already begun. The modern sector entrepreneurs can continue
to pay the transferred workers a subsistence wage because of the unlimited supply of
labor from the traditional sector. The profits and hence investment in the modern
sector will continue to rise and fuel further economic growth in the modern sector.
This process will continue until the surplus labor in the traditional sector is used up, a
situation in which the workers in the traditional sector would also be paid in
accordance with their marginal product rather than subsistence wage.
The existence of surplus labor gives rise to continuous capital accumulation in the
modern sector because (a) investment would not be eroded by rising wages as workers
are continued to be paid subsistence wage, and (b) the average agricultural surplus
(AAS) in the traditional sector will be channeled to the modern sector for even more
supply of capital (e.g., new taxes imposed by the government or savings placed in
banks by people in the traditional sector). In the LRF model, saving and investment
are driving forces of economic development. This is in line with the Harrod-Domar
model but in the context of less-developed countries. The importance of technological
change would be reduced to enhancing productivity in the modern sector for even
greater profitability and promoting productivity in the traditional sector so that more
labor would be available for transfer.
Harris-Todaro model
The Harris-Todaro (H-T) model of rural-urban migration is usually studied in the
context of employment and unemployment in developing countries. In the H-T model,
the purpose is to explain the serious urban unemployment problem in developing

countries. The applicability of this model depends on the development stage and
economic success in the developing country. The distinctive concept in the H-T model
is that the rate of migration flow is determined by the difference between expected
urban wages (not actual) and rural wages. The H-T model is applicable to less
successful developing countries or to countries at the earlier stages of development.
The policy implications are different from those of the LRF model. One implication in
the H-T model is that job creation in the urban sector worsens the situation because
more rural migration would thus be induced. In this context, China's policy of rural
development and rural industrialization to deal with urban unemployment provides an
example.
Regional policy
In its broadest sense, policies of economic development encompass three major areas:
• Governments undertaking to meet broad economic objectives such as price

stability, high employment, and sustainable growth. Such efforts include

monetary and fiscal policies, regulation of financial institutions, trade, and tax
policies.
• Programs that provide infrastructure and services such as highways, parks,

affordable housing, crime prevention, and K-12 education.

• Job creation and retention through specific efforts in business finance, marketing,

neighborhood development, small business development, business retention and

expansion, technology transfer, and real estate development. This third category
is a primary focus of economic development professionals.
Economic developers
Economic development, which is thus essentially economics on a social level, has
evolved into a professional industry of highly specialized practitioners. The
practitioners have two key roles: one is to provide leadership in policy-making, and
the other is to administer policy, programs, and projects. Economic development
practitioners generally work in public offices on the state, regional, or municipal level,
or in public-private partnerships organizations that are may be partially funded by
local, regional, state, or federal tax money. These economic development organizations
(EDOs) function as individual entities and in some cases as departments of local
governments. Their role is to seek out new economic opportunities and retain their
existing business wealth.
Numerous other organizations whose primary function is not economic development
work in partnership with economic developers. They include the news media,

 foundations, utilities, schools, health care providers, faith-based organizations, and

colleges, universities, and other education or research institutions.
With more than 20,000 professional economic developers employed world wide in this
highly specialized industry, the International Economic Development Council [IEDC]
[1] headquartered in Washington, D.C. is a non-profit organization dedicated to
helping economic developers do their job more effectively and raising the profile of
the profession. With over 4,500 members across the US and internationally, serving
exclusively the economic development community. Membership represents the entire
range of the profession ranging from regional, state, local, rural, urban, and
international economic development organizations, as well as chambers of commerce,
technology development agencies, utility companies, educational institutions,
consultants and redevelopment authorities. Many individual states also have
associations comprising economic development professionals and they work closely
with IEDC.
There is intense competition between communities, states, and nations for new
economic development projects in today's globalized world, and the struggle to attract
and retain business is further intensified by the use of many variations of economic
incentives to the potential business. IEDC places significant attention on the various
activities undertaken by economic development organizations to help them compete
and sustain vibrant communities.
Additionally, the use of community profiling tools and database templates to measure
community assets versus other communities and is also an important aspect of
economic development. Job creation, economic output, and increase in taxable basis
are the most common measurement tools. When considering measurement, too much
emphasis has been placed on economic developers for "not creating jobs." However,
the reality is that economic developers do not typically create jobs, but facilitate the
process for existing businesses and start-ups to do so. Therefore, the economic
developer must make sure that there are sufficient economic development programs in
place to assist the businesses achieve their goals. Those types of programs are usually
policy-created and can be local, regional, statewide and national in nature.

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