Overview

(Adapted from "What is Economic Development?" by Economic Development Administration, U.S. Department of Commerce, Washington, D.C., no date)

In the broadest sense, economic development enhances the factors of productive capacity. These factors include land, labor, capital, and technologies. Economic development is an issue at the national, state, and local (community) level, and the public sector is often a key player in setting the stage for development efforts and plans. Public sector economic development seeks to increase incomes, the number of jobs, and overall economic productivity in states, counties, and municipalities. In order to accomplish these goals, public sector organizations can impact and develop a wide range of economic development tools and approaches, including:

Labor force characteristics (workforce training, availability, and cost);

Community infrastructure (public utilities, transportation networks, and telecommunication systems); Business and community facilities (such as business incubators, industrial parks, and schools/colleges/universities);

Environment (physical, cultural, and entrepreneurial);

Economic structure (makeup of the economy); and

Institutional capacity (leadership, knowledge, and skills) to support economic development activities.

Economic development encompasses a wide range of issues, including community development, economic growth, sustainability, job creation, environmental protection, and strengthening local economies. The perspectives of those involved help define how they view economic development. For example, environmentalists may see economic development as a code phrase for industrial policy. To public officials at the state and local level, economic development represents a range of programs and activities that can help create new jobs. Business leaders may see economic development as the application of public policy to enhance business competitiveness. Thus it is important to remember that there is no single definition for economic development and that the term has a broad range of connotations and meanings, shaped by the perspective of the individuals and groups discussing economic development.

Just as there is no single definition for economic development, there is no unified theory of how economic development works in a modern economy. The various economic development theories vary in fundamental ways and make different assumptions about the way people and institutions behave, use different concepts and categories, explain development differently, and promote different policies. The major theories of economic development may be summarized in five basic issues:

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Basic categories: the fundamental classifications or groupings used to present the theory; Definition of development: what economic development is or should be according to the theory; Essential dynamics: the key variables or relationships that drive the logic of the theory; Strengths and weaknesses: how well the theory enables one to understand economic development; and Applications: the ways in which the theory can be applied in economic development practice.

Some of the more significant economic development theories are summarized below.

The basic groupings or categories of economic base theory are the industrial sectors of the economy under study. These industrial sectors are grouped into either a basic or non-basic category, with basic industries being defined as those that export their goods and services outside the local economy, thus stimulating local economic growth. New local economic growth may be measured through new jobs created, increased incomes, and increased output. Non-basic sectors in the economy are not engaged in exporting their goods and services outside the local economy and are therefore not able to stimulate new economic growth. Such industries serve a supporting role rather than a growth-promoting role. Economic base theory supports attracting new basic industry into the local economy and helping such industries expand whenever possible.

Staple theory defines economic development as sustained growth over a long period. The key element of staple theory is external investment in (and demand for) the export staple(s) of the local economy, which leads to the successful production and marketing of the export staple(s) in outside markets. Staple theory asks that economic developers continue to build on and improve whatever staples the local economy features, as long as such goods or services remain competitive in the larger economic system. If the economy's staples are successfully promoted and marketed over time, the theory contends, other non staple economic activities will be attracted to the local economy and economic growth will occur.

Growth pole theory treats industries (or, in some examples, clusters of industries) as the basic unit of analysis. Economic development may occur when there is structural change (growth) within one of these industries. These growth industries are the "poles of growth." Such industries initiate and then, after the first phase of their own growth, diffuse development to other sectors of the economy.

The definition of economic development under this theory is that economic growth should lead to greater consumer welfare. The essential dynamic is the price mechanism operating to eliminate price differentials and establish equilibrium prices. Consumer welfare, not job creation, is the goal of economic development. The basic categories of interregional trade theory are prices and the quantities of commodities and the factors of production. This theory supports local infrastructure development and other measures that could increase local productivity.

The key factors in these theories are found in the activities of entrepreneurs. Economic development proceeds from innovation and inventions brought about and developed by entrepreneurs who are willing to take risks. Under the various entrepreneurship theories, people make development happen.

Some theorists suggest that economic development and economic growth is not the same thing, although the terms are typically used interchangeably. These theorists argue that development is both a prerequisite to and a result of growth. Development, they contend, occurs prior to growth in the sense that growth cannot continue without the innovation and economic changes found in successful development. Growth, once under way, will drive new changes in the economy that result in new products and businesses to be created. Development and growth, in combination, allow the economy to be more productive.

Economic development theorists argue that the development process is fundamentally important to the economic health of the nation, individual states, and local governments. They contend that successful economic development is essential to keep the U.S. economy competitive against other world economies. Economic development is necessary to encourage greater productivity and higher incomes. Advocates argue that economic development helps create jobs and makes possible the earnings needed to support investments in education, infrastructure, and other services.

Some people mistakenly believe that economic development is a simple hands-on occupation. Under this view, economic developers promote available industrial properties, visit existing industries, recruit new businesses to the community, operate a revolving loan fund, and so forth. In reality today's economic developer may perform the tasks noted above, but the profession has grown well beyond these activities. The economic development practitioner engages in a host of new (nontraditional) activities, including improving local amenities (such as museums and libraries), reforming the K-12 educational system, or encouraging minority business enterprises. This broader range of activities and involvement reflects the fact that economic developers are increasingly aware of the importance of developing their communities as a whole, not simply focusing on improving the local economy through business expansions and industrial recruitment.