The 80-20 Factor in Economic Development

Every economic development organization (EDO) wants to increase its impact and effectiveness. I’m all for it. As a professional advisor to EDO’s, I want to help your organization do just that. As most of you will attest, it’s not an easy job, especially when larger economic trends are working against you.

Last year, I was called in by the Regional Growth Partnership (RGP) in Toledo, Ohio to advise the organization’s board on key factors shaping RGP’s current and future success. Under assault by the Toledo Blade newspaper and local politicians, RGP was looking for help in putting Northwest Ohio’s slow economic growth into a larger context. It was obvious to me that the national economy was the region’s single biggest enemy but many folks in the community didn’t see it. I coined the “80-20 Factor in ED” as a way to explain the influence of external events in shaping a local economy’s ability to grow and develop.

My thesis is that approximately 80 percent of the change (growth and decline) that occurs in highly developed metropolitan and regional economies is driven by what happens to the national and global economies. The grounds for this thesis is in shift-share analysis, a common economic analysis technique that allows researchers to estimate the extent to which local economic growth and/or decline is shaped by: 1) national economic growth; 2) local industry mix; and 3) the presence or absence of key local competitive advantages. In analyzing several metro economies across the country using shift-share analysis, I discovered that the national growth component of their shift-share analysis results accounted for 75-80 percent of the change occurring in the local economy.

This is far from a perfect measure, or explanation, for how local economies develop, but it provides useful insights. It is incomplete for several reasons, including the fact that the little devil “chance” plays a significant role in economic events, and also the fact that unique and special factors play a role in the success or failure of particular economic development projects.

Since my Toledo experience, I have continued to explore this 80-20 rule. A recent analysis of the economic base of King County, WA (Seattle area) revealed that 234,000 (84%) of the 277,000 jobs created in the county during the 1990-2000 time period was explained by national growth factor of the shift-share analysis. I plan to do additional work in this area in the coming year for one simple reason: “It is essential to know how much of a local economy’s growth can be influenced by local actions by EDO’s. I think this analytic foundation can help to set more realistic expectations about what is possible through local economic development efforts. It’s certainly not 100%. In my judgment, the impact factor is probably closer to 20-25%.