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Programming Considerations of Local Economic Growth
Five Stage Approach for Local Economic Development
Local Economic Development can be orchestrated from a number of viewpoints, but most typically, local government ownership is essential. Without strong leadership from either the political or administrative leadership, LED strategies have little chance of long-term impact. Developing the strategy in consultation with stakeholders and publicizing the results will build support and facilitate implementation of the LED plan. Broad input through consultations, dialogues and market research can strengthen community buy-in to the economic development strategies. In assessing economic potential, cities should seek information from as many sources as possible, including small and large businesses, city staff, original surveys, universities, government agencies, citizens, and NGOs. Economic assessments should incorporate resources of all types: natural resources, including land; physical infrastructure; human capital and links to markets. Data from existing environmental maps and/or risk assessments can be extremely useful in examining the long-term costs and benefits of a given economic trajectory. Once implementation has started, it is important to continually monitor progress not only to confirm that actions have been completed but that the strategy is resulting in actual improvements of the quality of life for local residents.
For USAID staff or development practitioners interested in undertaking a LED strategy, a broad five stage approach is generally recommended:
- Organize Local Economic Development Effort
- Assess Economic Potential
- Define Local Economic Development Plan
- Implement Plan
- Review and Monitor Plan
See the World Bank LED Strategic Planning Website for more information on this approach.
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Workforce Development
Cities seeking to increase productivity and generate jobs, often pursue inward investments. However, prior to offering generous incentives for foreign investments, cities should assess their human capital capacity and determine the need for additional investment. Many cities may already have a skilled workforce in an industry that has transferred overseas, as is often the case in manufacturing. LED plans can target a sector with high potential for growth and investment and begin to build the necessary workforce to service such a sector. Investing in "soft" infrastructure, such as strengthening the skills of the local workforce through general education or specialized training programs, investing in research, and supporting the development of business and trade associations, can lead to long-term human capital gains.
Building linkages with local universities and vocational schools will lead to a targeted workforce with the skill base to attract specific industries. When LED plans coordinate with local educational institutions, linkages between civil institutions and the local government form creating flexible labor markets. Similarly, partnerships with business and trade associations can inform LED plans to meet the demands of the local private sector. Business and trade associations will also serve as platforms of knowledge dissemination and information sharing once the LED plan is in effect. Such coordination is essential in building sustainable plans that can be altered in the future.
Workforce Development activities generally seek to achieve the following:
- Assess the needs and impacts of workforce development;
- Foster increased public-private sector stakeholder collaboration in addressing workforce and competitiveness skill needs;
- Analyze the "skills value chain" to help industries improve their competitiveness,
- Assist host country governments, PVOs, NGOs, trade unions and education institutions to assess, design, implement and evaluate workforce development programs;
- Increase host country capacity to develop and implement their own sustainable strategies for workforce development;
- Improve education and skill development policy and reform efforts to produce a skilled citizenry;
- Facilitate access to technology-based on-demand learning and employment opportunities; and
- Broker new partnerships between Mission country organizations and their U.S. counterparts, such as trade organizations, technical and community colleges, professional organizations and NGOs.
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Location, Physical Capital and Natural Resources
In order to attract new business and particularly foreign investment, cities and regions should market the competitive advantage of their location and physical capital. For example, the proximity of a city to a port or trading hub encourages businesses interested in trade. Similarly, cities located in regions of aesthetic beauty such as mountainous zones or coastal areas can seek to build tourism sectors. Assessing all the natural and physical capital advantages of a city is an essential step in planning for LED. In Rwanda, the City of Kigali's economic development strategy focuses heavily on transportation improvements identified by its business sector as crucial to the city's competitiveness and to lowering the cost of transporting rural goods to market.
Possible projects to enhance the physical environment can include:
- Building or improving key access roads;
- Improving the transportation hubs, such as railways, airports, or ports for passenger and goods services;
- Developing, improving and/or expanding industrial sites and buildings;
- Developing, improving and/or expanding commercial sites and buildings (for shops and offices);
- Increasing the availability of industrial and potable water;
- Improving and/or expanding the sewerage disposal system;
- Improving and expanding the telecommunications systems;
- Improving and expanding the energy systems;
- Environmental enhancements; and
- Crime prevention equipment installation.
Although these projects can involve significant costs, LED strategies emphasize public-private partnerships. As the benefits of improved infrastructure will be shared by all, determining co-financing for such projects is critical. A LED strategy can help local governments prioritize infrastructure investments according to need, potential for cost-recovery, opportunities for leveraging additional resources, etc.
In rapidly growing cities, infrastructure construction is a good source of job creation and skill acquisition in and of itself. Either in partnership with large development firms or through small-scale community-based initiatives, improving service delivery can be cost-effective and profitable when designed in coordination with a broader economic development strategy. Initiatives of this kind can strengthen civic participation and enhance service delivery at the same time they create jobs.
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Land Reform
LED strategies should be designed to seek productive solutions to perceived problems. For example, large immigrant populations may be seen as a burden on public services and natural resources, but they also are a large, motivated labor pool to be employed by growing enterprises. Excess municipal land and buildings may be seen as a burden on city budgets, but their sale can increase the city's investment funds and reduce land prices and rents, thereby stimulating economic development. Budapest's Town Development Concept of 1998 included stimulating development of large tracts of idle property and former industrial sites. Most of them lay in the middle zone, between the center and the periphery. The city planned to stimulate infill development through rezoning to permit residential and mixed use development, with the goal of slowing growth at the far edge of the urban region, where infrastructure provision would be far more costly.
Reforms to stimulate the land market include:
- Simplifying the process for construction permits;
- Assessing and updating zoning regulations;
- Increasing the supply of land by selling unused city-owned property and encouraging the sale or development of idle plots;
- Improving land registration and property rights; and
- Publicizing real estate transactions.
Mapping basic infrastructure networks can identify areas where development can be accommodated at least cost, without massive new public investment. Ensuring that residents of informal settlements have secure tenure can stimulate their investment and permit them to participate in the wealth generation that comes from upgrading housing. Cities should assess their economic potential in the context of external factors, such as market and industry trends, national subsidies, trade agreements, etc. If these factors change, it is important to strategize to adapt.
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Business Regulation
A primary source of local economic growth is generated by small and medium-sized businesses that are already established in the community. Businesses supply work opportunities for citizens and tax revenues for city governments. Encouraging local business growth involves providing advice, support and resources, while minimizing the administrative procedures and regulations. These strategies are sometimes called business retention and expansion strategies.
Countries have found that unnecessary bureaucratic hurdles, in the form of duplicative paperwork, multiple licensing requirements, and unclear permitting rules, stunt economic growth, especially for small businesses. Quick and simple procedures for business registration as well as transparency, stability and predictability in business taxation will foster business development. Streamlining business regulations and marketing the benefits of legalization will also encourage pre-existing, informal enterprises to consider formalization.
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Informal Sector
The informal sector can often comprise up to 50% of the labor force in developing countries. Lacking access to formal education or employment, cities are filled with enterprising individuals that operate micro-enterprises without legal authorization. The informal sector can be essential to countries as they act as both an economic safety net for the poor or those laid off as countries down-size their formal sector activities and a source of small-business innovation and entrepreneurial talent. In many countries, the sector represents well over two-thirds of all economic activity. USAID Missions familiar with micro-enterprise activities, may seek to include the informal sector when designing pro-poor local economic development plans.
LED plans should not seek to promote foreign investment at the expense of the local informal sector. Too often public subsidies have exclusively targeted international firms in an attempt to coax them into relocating. Ill-conceived licensing regimes and punitive tax structures encourage inefficient industrial composition. Financial sector regulations and practices, such as the provision of only large-denomination, highly collateralized loans, also may create barriers to small business development.
Considerable evidence demonstrates the benefits of small capital injections through micro-credit facilities (especially those that target women) along side programs that target the poor with business development services, can have a positive effect on the longevity of these businesses. Working in partnership with associations that represent the informal sector, through microfinance institutions or urban poor associations, inclusive LED plans can find ways to create a healthier environment in which all members of a community can prosper.
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Clusters
In assessing economic potential, cities may find that they can support a cluster of businesses that benefit from the same type of infrastructure, or that feed each other in a chain of supply to a finished product. The value-chain approach can lead to a well-connected sector with value added income benefits from the small-scale producers at the bottom of the chain to the exporting firms at the top of the chain. Cities may want to take measures to support such business groupings through appropriate infrastructure provision and/or zoning. The benefits of such industrial communities should be considered in light of the benefits of diversifying the economy to guard against industry-specific shocks. In Jalisco, Mexico, loss of resources from the central government led regional governments to partner directly with the private sector in defining an economic development strategy. The resulting business cluster program consisted of the following stages:
- Identifying sector opportunities;
- Formation of groups of 25-30 businesses from the same sector;
- Preparation of studies and business improvement plans; and
- Implementation of integration projects, which received some government financing.
The region's supply of universities and technical institutes has helped to attract foreign direct investment. The local government with donor assistance established Cadena Productiva de la Electronica, A. C., to develop local suppliers as part of an input chain for the region's largest electronic exporters. The organization was financed by a joint fund of the local government, the three largest companies of the electronics cluster (all foreign), the foundation for technological innovation in small and medium enterprises, and donors. In the five years, 1995-1999, the local cluster expanded from 25 to 112 companies and became able to supply 20 percent of components going into export goods.
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