How Does Economic Development Work and Is It Working?

I posted a short article on this subject last week. It turned out to be the most popular article in last week's ED Futures newsletter. Nearly 200 people downloaded the file I posted on the subject. That tells me the question deserves a serious answer. So, here goes.

Those of you who read the "How Economic Development Works" article and clicked on the link discovered it was a "trick" article. I posed the question to the "How Things Work" portal of Answer.com, which served up the reply: "No results available on this question." I copied this information into a PDF file and upload it to the website.

In reality, that is the correct answer. Honestly, there is no widespread consensus within and outside the economic development profession about how economic development works, or even the degree to which economic development is working in achieving its most important goals.

Before answering the question of how something works, we need to define the thing. According to the International Economic Development Council, there is no single, widely accepted definition of economic development. However, IEDC says there is general consensus about the overall goal of economic development, which is to contribute to an improvement in the economic well-being of people living in a geographic area.

With this observation in mind, perhaps we should re-phrase our question to this: "How do economic development efforts contribute to the population's economic well-being, and how effective are these efforts in enhancing economic well-being in local places?"

What is the best way to measure of economic well-being? According to the U.S. Census Bureau and many economists worldwide, personal and household income are the best measures of economic well-being.

Research on economic well-being indicates that:

1. Major disparities in personal income exist across the American population based upon racial status. American Indians, Blacks, and Hispanics consistently lag Whites and Asian Americans in personal income and wealth creation.
2. Several structural factors, including family structure and history, educational attainment, occupational status and related earnings, prejudice, and ownership of economic assets account in significant part for the personal income are seen as drivers for income growth in various population groups. Ownership of economic assets and educational attainment are two issues receiving much greater attention in the fight to achieve broad-based prosperity growth in America.
3. Personal income growth has slowed across America, but especially in those states experiencing major declines in their wealth-building industries, particularly old-line manufacturing.
4. Our national population is relying more on transfer payments, in large part income from retirements and stock market dividends, as a source of personal income. While earned income continues to be the major source of personal income, it has been slipping as an income source in the past decade.
5. Wages for average workers have been growing slowly across the country, and an increasing number of both low-skilled and higher-skilled jobs are being eliminated. Those geographic areas more dependent upon low-wage/low-skill jobs have seen the weakest wage growth.
6. Salary growth for middle management types has slowed considerably, and an increasing number of management level jobs are being eliminated because of corporate restructuring.
7. A larger number of American workers, across all occupational categories, are facing serious cuts in their retirement and healthcare benefits as employers apply the cost-cutting knife to these areas.
8. Technology continues to eliminate jobs in most industries as automation and the Internet reduce the need for people to perform "routine" work. On the flipside, technology is creating new many jobs, which tend to be highly skilled in nature and require advanced education.
9. Outsourcing, especially to offshore sources, is a major cause of job and personal income declines in both growing and declining areas across the country. New jobs created in new places are eliminating old jobs in old places.
10. Our nation's future path to prosperity appears more uncertain today than it has in a long time in our history. Economic development's role in: a) improving the economic well-being of Americans is not well documented; and b) finding this new, more productive, path to prosperity is unclear.

How does economic development contribute to an increase in the economic well-being of people? As a profession, our intent over time has been to help geographic areas compete for "good" jobs by capitalizing on the area's economic development advantages and by reducing or eliminating barriers (disadvantages) that inhibit the creation of "good" jobs that create wealth for people.

That intent has been embodied in a variety of policies and programs designed to: 1) create an advantage for businesses to create good jobs; 2) prepare people with the knowledge and skills to compete for good jobs; and 3) make geographic areas more hospitable (competitive) locations for business growth and job creation.

Frankly, our profession uses most of its resources to help businesses achieve "their" objectives, which are often not the same as a geographic area's economic development objectives. We keep hoping (and praying) that the help we give businesses will translate into a real improvement in the economic well-being of the community. Often, it doesn't.

Remember the old saying: "What is good for General Motors is good for America?" Don't believe it. At times, the two interests (community and business) are aligned, and at times they are not aligned. The ultimate test of an economic development professional's skill is to know when this alignment does and does not exist, and then institute the appropriate course of action that either improves the alignment of interests or helps the community adjust to business decisions that are harmful to local citizen's economic well-being.

Increasingly, economic development organizations (EDOs) have been giving more attention to the same driving issues that businesses are focused on: globalization and its effects; and technology and its effects. The real question is which economic development policies and programs aimed in these two directions will result in a tangible improvement in local citizen's economic well-being. That is a crucial issue the economic development is struggling with right now.

Globalization and technology are two-edged swords that both create new opportunities and destroy old opportunities. New opportunities (new types of jobs, businesses, technologies, etc.) often seem to come at the expense of old opportunities (old types of jobs, businesses, technologies, etc.) , and the growth of new places (new and emerging economies) often comes at the expense of older places (established and mature economies).

In my view, we are shortly about to reach the day when nearly any business or economic function can be performed just about anywhere in the world. This explains India's and other developing nations' success in attracting high-tech and knowledge-intensive businesses and jobs. These nations are moving along the "learning curve" very rapidly by using "leapfrogging" growth strategies.

Economic development advantage is becoming increasingly "portable" worldwide. Its portability is driven by globalization and technology, which are moving us in two opposing directions simultaneously: 1) reducing the gap between nations and local places to perform economic functions; and 2) increasing the gap between rich and poor people on all continents. These trends and directions suggest that economic development, as organized and practiced today, will have even less ability in the future to contribute to the economic well-being in local places.

If we do not act now, our long-held worst fear could come true: our profession is doing little more than re-shuffling the deck chairs on the Titanic. I believe the situation is just that serious.

Like most business managers and leaders, economic developers are too short-sighted. We're tinkering when we should be innovating. We're using the microscope more than we use the telescope. We are working separately more than we are working together as a team. We are thinking too much about how we can get more for individual communities, regions, and states, instead of thinking about how we work within a global economic network to serve the needs of others and in so doing improve our overall economic well-being.

Economic development everywhere is at a major crossroad when it comes to its ability to shape the economic well-being of those we exist to serve and many people in the field don't realize it. Most people sense that things are not right and that something "big" is happening, but most can't seem to put their finger on what exactly is happening. Like any crossroad, there are different possible directions any geographic area might take. The choices available to your area are defined by those you have the ability to see.

I believe economic developers need to re-dedicate themselves to their most important goal, which is contributing to an improvement in the economic well-being of people in a geographic area.

How we go about this goal must change. Here are five concrete suggestions on how we should approach this goal and make economic development work better in the future:

1. Accelerate Entrepreneurial Growth: Increase efforts to expand entrepreneurship and self-employment across America. People stand the greatest chance at creating wealth for themselves and others by creating successful new businesses that meet new market needs. Special attention should be given to "innovative" business development.
2. Globalize Your Area's Economic Strategy: Chart a global growth course for your local area and its economic base. Focus beyond foreign business recruitment and international trade development. Identify how businesses, industries, institutions, and people within your area can serve global market needs and how they can use the power of the global economic network to access resources and opportunities. Places with strong global relationships will be those where economic well-being is the highest in the future. Be a globally-connected place.
3. Invest in People: When it comes to economic growth, all roads in the future will lead back to human assets. We must do everything in our power to educate and train people for the jobs and industries of the future. We must also teach them how to become responsible global citizens with an understanding of and appreciation for people, cultures, and ideas worldwide. Give special attention to improving people's ability to "innovate."
4. Cultivate Leadership by the Many: We can't get there without effective leadership. Change the concept of leadership in economic development from leadership by a few to leadership by many. Every child needs to understand that they must be capable of giving effective leadership to his or her own life, and in so doing they will make a positive contribution to the world.
5. Become a Master Resource User: Most places today aspire to create wealth for themselves by creating their own resources for economic growth. A more effective strategy in today's economic world is to become a more "masterful user" of resources anywhere in the world. Your first choice should be to use what's out there, instead of blindly creating your own version of what already exists. Develop national and global partnerships with other economic groups to use, share, and trade resources vital to economic development. Special attention should be given to sharing technological innovation resources, which are costly to create and in many areas are greatly under-utilized.

Taken together, these five actions can strengthen economic development's ability to contribute to an improvement in the economic well-being of people. I believe it's worth a try. Don't you?