Everybody Knows the Definition of Economic Development, Right?

Many people involved in community work think they know the definition of economic development perfectly well. If you ask the average person, "What is economic development?" you'll probably hear about attracting businesses, especially industries, into your community.

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 overall, an increase in the tax base causing residential property taxes to remain the same or actually 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 prevent disappointment when businesses leave after years of contributions of tax money or private sector money to economic development.

What Is Economic Development?

In a stricter sense, the definition of economic development should be those activities that cause a net gain of money flow into the community. These activities are called the "economic base." Economic development activities are those where a surplus remains after the local consumption of the product, service, or activity has been satisfied. Let's look at 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. Some people, even 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 is true that even in this example, 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 Development

Contrast 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 tourist-oriented communities or areas, 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, there is leakage of income out of the community. Since we have seen that there is a multiplier effect when income remains in the community and is spent there, the return of money to out-of-town managers, franchise fees, and out-of-town ownership or stockholders also 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 given you 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 frenetic activity that doesn't raise the level of prosperity in your community over the long run.

One more use of the term economic development is one I often hear in lower income communities. Unfortunately the plain word "poverty" has fallen out of favor, so it is common to hear "economic development" used to mean raising income levels of individuals. That's a very important issue, and you'll find more about community poverty on another page.

Return from Definition of Economic Development to Economic Development