Everybody Knows the Definition of Economic Development, Right?
Many people involved in community work think they know the definition of economic development. If you ask the average person, "What is economic development?" you'll probably hear about attracting businesses, industries, or construction of some sort into your community. In a stricter sense, the definition of economic development should be those activities that cause a net gain of money flow into the community. This is equally true in Tokyo, New York, Barcelona, Peoria, and a village in Kenya.
When I consult with communities, the benefits of economic development frequently perceived are jobs for community members, places to shop, and business owners or managers to approach for donations to assist your community. Sometimes people also associate economic development with an increase in property values, an increase in the tax base causing residential property taxes to remain the same or decrease, or a building boom. All of these are worthy thoughts, but a more sophisticated understanding of economic development will benefit the community in the long run and provide a sense of direction in recession or when a large employer leaves. What Is Economic Development?Economic development activities should be geared to creating what is called the "economic base" of your community. The economic base is economic activity where a surplus remains after the local consumption of the product, service, or activity has been satisfied. It's best to learn this through examples.The classic economic development activity in the U.S. in the twentieth century was industry. If your community hosted a toaster factory, for example, it would be pretty obvious that you were not making toasters just for yourselves. A majority of households, in your small town might buy the brand of toaster manufactured there. But the factory made many more toasters that it could "export" all over the country or the world. In this example, the money from the export of the toasters not used locally would be an economic gain for the community, and the net gain is economic development, using the stricter definition of the term advocated here. It's true that much of the money generated from the work of local laborers escaped from the community and enriched managers elsewhere and corporate ownership, whether the company is privately held or a publicly traded corporation. However, the wages of local workers are spent in the local community to some extent, and that in turn adds to the income of other community members who work for the local grocery store, own businesses on Main Street, own rental properties, and repair automobiles at the local garage. Thus there is a "multiplier effect" on the local economy when wages are spent at other local businesses. Because of the toaster manufacture, other local businesses do more business than they would otherwise. Why Selling Burgers to Each Other Is Not Economic DevelopmentContrast the toaster example with the example of a hamburger chain coming to your town. In the case of burgers, there is no surplus left at the end of the day if the business knows what it is doing. In most cases, most of the burgers are purchased by local people, so the community is not really generating a "surplus" that it can sell or "export." The notable exception is with tourism oriented communities, where people outside the community do indeed purchase local products.Just as in the toaster manufacturing example, if management and ownership of the hamburger chain reside outside the community, income leaks out of the community. Because the multiplier effect only kicks in when income is spent inside the community, the return of money to out-of-town managers, franchise fees, and out-of-town owners or stockholders represents a decrease in the amount of money that is available to feed the local economy. You can learn about computing a measure of your economic base by visiting our location quotient page. What’s Your Definition of Economic Development?Now I’ve explained the classic definition. I know from many experiences as a consultant that I probably haven't talked you out of thinking any new building is a great thing and OF COURSE it's economic development.Just consider that a better definition of economic development may prevent you from fruitless activity that doesn't raise the level of prosperity in your community over the long run. International economic development conversations also should focus on bringing in money from outside the community, not just recirculating the same money. That's why bringing in one cell phone to each isolated village is a potent tactic. Without contact with the outside world, a village that doesn't have a good road can hardly sell its goods. And without access to a good road or other dependable, regular transportation network, economic development won't happen. One more definition of economic development I often hear in lower income communities is raising income levels of individuals. Unfortunately the plain word "poverty" has fallen out of favor. That's a very important issue, and you'll find more about community poverty in developed countries on another page. Alleviating poverty in the developing countries often depends on building the transportation and communication infrastructure, as well as encouraging creativity and entrepreneurship. Return from Definition of Economic Development to Economic Development
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