Intergovernmental Fiscal Relations & Local Financial Management Course ISS - MDP - UMI - WBI Local economic development A.H.J. (Bert) Helmsing.

Intergovernmental Fiscal Relations &

Local Financial Management Course

ISS - MDP - UMI - WBI

Local economic development

A.H.J. (Bert) Helmsing

16-11-2000 2

Overview

Topics to be covered

• Local economic development: why important?

• Local economic development approaches• LG policies and instruments• Networking for local economic development

16-11-2000 3

Local economic development

Why local economic development?• Growing unemployment and underemployment

• Rapid urban growth but declining urban productivity:– Congestion, crime, social discontent

– Unavailability of basic infrastructure (interruption in electricity)

– Rising urban transaction costs (cost of doing business)

• Lesson from Structural Adjustment:– market institutions and private sector investment response do

not emerge spontaneously

16-11-2000 4

Local economic development

• Liberalisation with globalisation:– exposes local producers to global competition

– also new opportunites (e.g. Ethiopean leather manufacturers on e-commerce)

• Growing recognition of importance of business environment

– externalities

– coordinating private and public investment

• Decentralisation to local governments: – need to develop local fiscal base

– public sector as a source of private sector growth

16-11-2000 5

Local economic development

Sources of local economic growth• Demand

• Supply– externalities

– learning

• Governance: economic institutions

16-11-2000 6

LED: Sources of growth

Demand• internal demand not enough to get out of low-

level trap• tap external demand both nationally, regionally

and globally• what do buyers want?• how to get entry to export markets?• how to overcome production and transaction

barriers?

16-11-2000 7

LED: Sources of growth

Externalities:• advantages from agglomeration

– concentration of labour skills

– specialised inputs at lower costs

– information and technological spillovers

• potential for collective efficiency– by joint actions local producers can:

* advance specialisation among them

* organise flexible specialisation and subcontracting networks

16-11-2000 8

LED: Sources of growth

• potential for collective efficiency (2)– joint action to create private support institutions

* garment manufacturers establishing a fashion information centre

* joint export efforts

* procurement of inputs

– joint action towards government * partner on policies

* lobby for infrastructure

16-11-2000 9

LED: Sources of growth

Learning• being low cost is no guarantee for success• acquisition of new knowledge is key• competences of firms:

– knowledge of inputs, products and processes

– knowledge of clients, suppliers and markets

How do entrepreneurs find out?• invest in learning• invest in research & development

16-11-2000 10

LED: Sources of growth

Entrepreneurs draw on other sources of knowledge

– employees, suppliers and clients

– universities and research centers

– business associations

– business support centers

Collective learning– creating an innovative milieu

16-11-2000 11

LED: Sources of growth

Governance:• bringing actors together: creating a supportive

business environment

• enterprises in a supportive business environment have a competitive edge over firms that do not

Only applicable to formal sector?

16-11-2000 12

Overview

• Local economic development: why important?

• Local economic development

approaches

• LG policies and instruments

• Networking for local economic development

16-11-2000 13

LED Approaches & strategies

LED actions

• to mobilise actors, organisations and resources

• to develop new institutions of LED

• to create greater rationality in the economic

system through dialogue and strategic actions

16-11-2000 14

LED Approaches & strategies

Attract external investment, firms and people

• selective inward investment (brokers of

knowledge)

• linked firms, export intermediaries

• knowledge professionals

16-11-2000 15

LED Approaches & strategies

Establish a basis for local collective action

• organise producers

• identify basis for collective action

• supply and demand for collective action and

support

16-11-2000 16

LED Approaches & strategies

Urban based LED strategies

• Locality development

• Enterprise development

• Community economic development

• Human resource development

16-11-2000 17

LED Approaches & strategies

LED strategies for rural regions

• agro-specialisation: product specific chains

• rural industrialisation: product chains

• natural resource exploitation & (eco-) tourism

16-11-2000 18

Overview

• Local economic development: why important?

• Local economic development approaches

• Policies and instruments• Networking for local economic development

16-11-2000 19

Locality development

Policies directed at:

• image building

• amenity improvement

• business improvement

16-11-2000 20

Locality development

• Improving physical environment of towns

• Infrastructure and site development projects

• differentiated supply of industrial and commercial

stands

• Housing & urban amenities

• Physical security

• Zoning regulations

16-11-2000 21

Locality: instruments

• Fiscal instruments

• tax holidays on property tax

• subsidies on utility charges

• sale of stands at subsidised prices

• fiscal competition

• reduced effectiveness

• prisoner's dilemma

• Locality marketing

16-11-2000 22

Locality marketingTarget markets

Investors

Firms

Tourists

New residents

Consumers Marketing factors

Infrastructure

Attractions

People

Trade

Actors

Source: kotler et al 1993

Manufacture

Administration

Education

16-11-2000 23

Locality marketing

What instruments are used?• Publicity campaigns

– leaflets, promo tours, presence at fairs,website

• Event based strategies– major sports or cultural manifestations

– trade or community fairs

• Urban design and place marking– Townscaping

16-11-2000 24

LED Strategies & instruments

Enterprise or business development

• client group

– new firm formation (start ups)

– attracting new firms

– expanding existing firms

– business innovation and graduation

• manufacturing and services

16-11-2000 25

Enterprise development

Fiscal incentives

Business support services

Infrastructure, land and buildings

Special LED programmes

16-11-2000 26

Fiscal incentives

• investment subsidies– x dollars per 1000 of investment (many countries)

– subsidised land or assets

– designated geographical areas (selective application)

• employment premium– x dollars per job (UK, South Africa)

• tax incentives– company tax

– profit repatriation guarantees

16-11-2000 27

Fiscal incentives

• in kind incentives– "advance" factories or free land

• effectiveness of fiscal incentives– incentive competition reduces effectiveness

– attracts mobile investors

Real or financial support?• Financial subsidies compensate for locational or

competitive disadvantage• Real support seeks to create new competitive

advantages

16-11-2000 28

Enterprise development

Real enterprise support services

• Sign posting

• Business skilling

• Business advice

• Business assistance

• Business support

16-11-2000 29

Enterprise support: signposting

sign posting & re-regulation• reduce institutional disconnect and insecurity

• simplify public regulation

new answers• one-stop enterprise centres

actors and organisations• Chambers of commerce

• Special public agencies (CG, LG)

16-11-2000 30

Enterprise support: skilling

business skilling• entrepreneurship

• financial management & business plan

• marketing incl. exports

• production techniques (quality management)

actors• enterprise agencies, BIAs non-profit and commercial

agencies

• examples: Partners for Productivity

16-11-2000 31

Enterprise advice & assistance

industrial extension services• differences with agriculture

• tailor made advice

• emphasis on extra mural or on site support

formal and informal sector demands

actors• enterprise agencies; BAs, non-profit and commercial

agencies

• Carvajal Foundation; Women's World Banking

16-11-2000 32

Enterprise: support services

finance

marketing

technology and R&D

training

16-11-2000 33

Enterprise development

Special LED programmes• growth points • industrial estates• special economic zones (incl. export zones)• incubators & science parks• innovative environment (or milieu)• cluster development programmes

16-11-2000 34

Special LED programmes

Strengthening (potential for) local clusters and industrial districts• attracting suppliers of inputs• attracting end assemblers• common services• importance of local demand or market potential

16-11-2000 35

LED strategies & instruments

Community economic development• targeted at poor communities

aims• to stimulate local sense of community• stimulate self help/empowerment• create (self)employment• improve living & working conditions• create public and community services

16-11-2000 36

Community economic development

importance of housing improvement

settlement & slum improvement (basic services)

commercial (re-)development • retail trade, services, industry

• high demand: private financing

survival based economic activity• small asset base (backyard or street activities)

• incremental improvements

16-11-2000 37

Community economic development

Creation of Community Development Corporations: CDC's in Sri Lanka• Multiple roles of CDCs• Community Resource Centres (Costa Rica)

Community construction contracts• (Sri Lanka, Ghana, Costa Rica)

16-11-2000 38

Community economic development

Savings & thrift societies (India, Kenya, Bolivia)

Community mortgage program (Philipines)Social funds:

• co-finance investment projects– with community groups– stimulates demand driven projects– facilitates community organisation, participation and

management

16-11-2000 39

CED: social funds

Role of NGO or private sector agency• provide technical assistance

– training in CO, CP and CM skills

• supports management of projects and funds– facilitation for community organisation and

planning– co-signatories for financial transactions

16-11-2000 40

Overview

• Local economic development: why important?

• Local economic development approaches

• LG policies and instruments

• Networking for local economic

development

16-11-2000 41

Actors and networks: firms

Firms/entrepreneurs• role in creating employment and restructuring• role in sustaining competitiveness of a cluster• role in developing enterprise common service • target of competitiveness policies• large firm facilitator of small firm change• social corporate responsibility

16-11-2000 42

Actors and networks: BAs

Business associations• different types• collective interest representation for members• intermediary organisation• intermediary towards support system• concertation at local and national level

(horizontal and vertical nexus)• private interest regulation

16-11-2000 43

Actors and networks: Banking

Banks and Development (Finance) Corporations• banks play key role in restructuring of firm and

sectors• cannot be ignored....• DFCs provide venture capital and investment

finance – local or regional corporations identify with

territory

16-11-2000 44

Actors and networks: IOs

Enterprise agencies (non-profit trust/foundation/corporation)• key provider of support services• can play role of lead actor in LED networking

Sources of finance:• donor/NGO contributions• CG subsidies• revenue generating activities• membership fees and donations

16-11-2000 45

Actors and networks: IOs

Sector specific support agencies• e.g. vocational training• marketing

Institutional modality• public (CG subsidies/enterprise levy)• partnership with private sector (joint finance)• commercial and non-profit (NGO) private

agencies

16-11-2000 46

Actors and networks: new civic actors

Community based organisations: types

Importance of 2nd tier organisation

Community enterprises (private law but community ownership) • to provide social services• credit and other services• own land• promote cultural heritage• train people in skills

16-11-2000 47

Actors and networks: LG

Shift in LG role• from service provider to supporting economic

restructuring (selective target groups)

• from hierarchical to entrepreneurial government

• increasing presence of local government agencies

Shift in LG role: use of public budget• co-financing private sector and community initiatives

• stimulating private sector development (contracting and privatization)

16-11-2000 48

Actors and networks: LG• Regulatory policies:

– reduce cost of inward and endogenous investment– reduce entry and exit barriers – reduce regulation compliance costs– land use planning is key instrument

• Tax policy:– taxation affects competitiveness

– business prefers benefit taxation

• Expenditure policy– co-financing private sector and community initiatives– stimulating private sector development (targetted expenditures,

contracting and privatization)

16-11-2000 49

Networks

Networks: purposes• to integrate vertical (and local) programmes• facilitate flow of information about

opportunities and resources• facilitate better attuning of decision making

among actors– thus preventing negative externalities

– generating positive externalities

• complement market institutions

16-11-2000 50

Network development

Network development is learning process

Network development stages

LED planning: strategies and actions• Concepts, Strategies and Projects (CSP)• Strategy• Projects: flagship and complementary

– implemented by different (sets of) actors

16-11-2000 51

LED planning: strategies and actions

Politics: how to create a basis for action• convincing politicians of importance of economics

• local community's own horizons and expectations

• openness of the political system to economic change

• can leaders, BAs, CBOs and NGOs agree on economic priorities?

• management and politics of change

16-11-2000 52

Local economic Development

a new course offered

by

MDP with ISS & WBI