A GLOBAL PERSPECTIVE
2.3 A Brief History of Economic Development
Local economic development philosophy and planning in South Africa have been influenced by the economic development experiences of the United States of America and Britain, where extensive literature on the subject matter is available (Rogerson, 2009).
Australia‘s answer to declining small towns further presents interesting parallels for South Africa (Rogerson, 2009). Local Government, the third sphere of government in South Africa, is in direct contact with communities. According to Sections 156 and 157 of the Constitution, it has, therefore, a developmental role to fulfil, including the provision of basic services, housing, electricity, water, sanitation, transport systems and to facilitate local economic development (LED) as required by Sections 152 and 153 of the Constitution (Republic of South Africa, 1996).
According to Todaro and Smith (2011) following World War II, the field of economic development embraced the following grand models: the linear-stages-of-growth model, theories and patterns of structural change, the international dependence revolution and the neoclassical, free-market counter revolution, summarised in Table 2.1. Today an eclectic approach is in use that draws on all these classical theories. Meyer-Stamer (2003) questions whether LED‘s popularity is due to desperation rather than to a convincing track record. Todaro and Smith (2011) concur with Meyer-Stamer‘s view (2003) that the field of study and practice of economic development, characterised by ideological, theoretical and empirical controversies, is challenging and exciting, feasible yet multifaceted to bring
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to fruition, and in the words of Todaro and Smith (2006:140) ―development is both possible and extremely difficult to achieve‖.
Table 2.1 Classic Models of Economic Development
Grand Models Theories of Economic Development I. Linear stages of growth
model (1950s and 1960s) Development is a series of successive stages of economic growth which all countries must engage in.
Development was equated to rapid comprehensive economic growth, with required amounts of saving, investment and foreign aid, so as to assist developing nations to pursue the economic growth path followed by developed countries. Rostow illustrated this doctrine and the Harrod-Domar Growth Model (AK model) was developed. Criticisms include: that saving and investment is inadequate for accelerated economic growth, and that developing nations are constituents of multifaceted international systems.
Economic Base Theory: emphasises growth in output, income or employment.
Staple Theory: stresses export-led economic growth.
II. Theories and patterns of structural change (1970s) Modern economic theory and statistical analysis explain the internal process of structural change that a developing country must engage in to generate and sustain a process of rapid economic growth, transforming from a
traditional/subsistence culture to an urbanized/ industrially diverse manufacturing/service economy.
Patterns-of-development analysis of structural change focus on sequential change.
Essentials for economic growth: savings/investments, physical/human capital and changes in the country‘s economic structure/functions (transformation of production, changes in consumer demands, international trade, use of resources, socio economic changes).
The Lewis two sector model replicates economic growth in the West illustrating two scenarios: a transfer of labour from the traditional agricultural sector with zero marginal labour
productivity where excess labour can be removed without a loss in input, to the modern productive urban industrial sector, where increased employment and growth depend on the rate of
industrial investment and capital accumulation. However, this model assumes the presence of certain characteristics in contemporary developing societies: that the rate of labour transfer and employment creation in the modern sector is proportional to the rate of modern sector capital accumulation;
that surplus labour subsists in rural areas; that the competitive market sector ensures constant real urban wages until the supply of rural surplus labour is exhausted; that there are decreasing returns in the modern industrial sector.
Supporters of Hollis B Chenery‘s model of structural change reason that the facts should be observed rather than adhering solely to theories such as stages of growth. Development is a particular process of growth and change with all countries sharing similar features. The choice of development policies in the country, and international trade and foreign-assistance policies impact on development whilst domestic and international constraints are emphasized.
Consequent to developed country patterns such as the falling off of the labour force in agriculture over time, many developing country policymakers have tended to overlook this vital sector.
Sector Theory: defines development as greater sectoral diversity and higher productivity per worker.
Growth Pole Theory: describes development as propulsive industry growth leading to structural change.
19 III. International dependence
revolution (1970‘s) Underdevelopment is
characterized by international / domestic power relationships, external/internal institutional constraints, and structural economic rigidities, leading to dual economies and dual societies (dualistic development).
Centred on policies to eliminate poverty, to provide diversified employment opportunities, to decrease income disparity within a growing economy.
The Neo-colonial Dependence Model: underdevelopment is a result of the capitalist system of rich/poor country relationships.
The False Paradigm Model: underdevelopment is the outcome of unsuitable advice from international experts of assistance/donor agencies and organizations, leading to incorrect policies (often serving vested interests of domestic/international groups).
These theories provide a mediocre explanation of the manner in which countries initiate and sustain development, and the experiences of countries that have pursued nationalization and state run production has been mostly negative.
Government intervention is an important element of both the Regional Concentration and Diffusion theories, where higher income per capita is a requisite and Interregional Trade Theory where economic growth leads to greater consumer welfare.
IV. Neoclassical free market counter revolution (1980‘s and 1990‘s)
Failure to develop is a result of too much government
intervention and regulation of the economy.
Solow neoclassical growth model
Exhibits diminishing returns to labour and capital separately and constant returns to both factors jointly.
The emphasis is on the beneficial role of free markets, open economies and privatization of inefficient public enterprises, assisted by the ―invisible hand‖ and the ―magic of the market place‖ (Todaro, 2006) to guide resource allocation and stimulate economic development. The three approaches include: 1) the free market analysis which claims that markets alone are efficient; 2) the public choice theory (or new political economy approach), which concludes that there should be minimal government interference and 3) the market friendly approach, where, as a result of shortcomings in product and factor markets, governments have an important role to play in facilitating the operations of markets. The Traditional Neoclassical Growth Theory maintains that opening up of national markets brings in supplementary domestic and foreign investment and improves the rate of capital accumulation. In terms of GDP growth, this is comparable to raising domestic savings rates, which boosts capital-labour ratios and per capita incomes.
The residual factor explaining long term growth as technological progress, determined independently of other factors. Output growth results from one or more of the following: increases in labour quantity and quality (through population growth and education), increases in capital (through saving and investment) and improvement in technology.
Innovation is an essential dynamic of both Product Cycle Theory (new product development) and Entrepreneurship Theories (new combinations). Flexible Specialization theories are defined by constant growth through swift production, innovation and specialization.
Source: Compiled from Todaro and Smith, 2011, and Blakely and Leigh, 2010.
The Dualistic Development Thesis advanced during the International Dependence Revolution in the 1970s (Table 2.1), has been used to describe South Africa, where modern
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and traditional methods of production in urban and rural sectors coexist, as do many affluent and highly educated persons with masses of poor and illiterate people. This situation appears to be enduring and instead of improving may contribute to the
―development‖ of the underdevelopment (Todaro and Smith, 2006). The dual economy was epitomized by President Mbeki in 2003 as a double storey house where the rich occupy the top floor, while the bottom floor is inhabited by the majority of poor South Africans who have no ladders to access the top floor (DPLG, 2006).
Most development strategies outlined in Table 2.1 above necessitated structural transformation and a related role for extensive government involvement in development planning. Shortcomings in industrial programming and comprehensive planning certainly contributed to the demise of centralised industrial policy, further undermined by external pressure (based on "The Washington Consensus"), the weakening of internal governance and delivery capacity, and decentralisation policies delegating the promotion of economic development to provincial and local governments (Meyer-Stamer, 2003).
South Africa‘s trajectory through a series of successive development stages differs from that of many other countries because of its particular divisive history compounded by the fact that it is a resource based economy where the nation‘s prosperity is founded on the availability of an abundance of natural resources. This has typically resulted in a preference for the exploitation of given natural resources rather than the creation of a competitive advantage by laborious and risky individual and collective action. In the literature, this is regarded as the ―resource curse‖ (Meyer-Stamer, 2008). On the other hand South Africa appears to have mirrored developed country patterns as described in Table 2.1 (Theories and patterns of structural change) with the decline in the labour force in agriculture particularly during the 2000‘s and policymakers neglect of this sector (Department of Agriculture, 2001).
Bingham and Mier (1993) classify four time periods of economic development practice in the USA. They identify location incentives in the 1930s, and redistributive measures, including the expansion of economic opportunities by education, training, social services and community development in the 1960s. Programmes of economic revitalization in depressed areas and public-private partnerships with government assistance to government approved projects and private participation in the service industry, characterized the 1970s.
The 1980s was the decade of generative development with attention to entrepreneurship
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and small and medium sized firms, and government policy focused on facilitating market mechanisms to create wealth, which in turn would create jobs.
Table 2.2 Local Economic Development: Comparison of Strategies and Methods
Focus Tactics
1960s to early 1980s: First Wave Key strategies:
• manufacturing investment attraction from outside local area • attraction of foreign direct investment • making hard infrastructure investments
Organization: public sector, few partners Strategy: project-led, not strategy-led Implementation: almost universally public sector, little monitoring and evaluation Funding: almost all public sector
• large grants, tax breaks, subsidized loans for (big) manufacturing firms
• subsidized hard infrastructure investment
• industrial site servicing
• promotion of cheap labour, cheap land, cheap everything
• foreign direct investment marketing strategies
1980s to mid-1990s: Second Wave Key Strategies:
• retention/growing existing businesses
• continued emphasis on inward investment attraction targeted at specific sectors/areas
• focus on area regeneration programmes Organization: public sector driven, increasing consultation
Strategy: first steps in strategy development, but still mainly project-led
Implementation: public sector, some contracting
Funding: public and some private sector
• direct payments to local businesses
• targeted investment attraction methods
• business incubators/workspace provision
• industrial site and premises provision
• technical advice, and training for SMEs
• vocational skills training, especially for the disadvantaged
• business start-up support
• specialist business support (e.g. exports, services, marketing, etc.)
• hard and increased emphasis on soft infrastructure investment
Late 1990s onwards: Third Wave Key Strategies:
• making business environments favourable
• ―soft‖ infrastructure investments (e.g. HR)
• public/private partnerships and leveraging private sector • improving quality of life and security • highly targeted inward investment attraction, building competitive not just comparative advantage
Organization: public sector-led partnerships Strategy: holistic, building competitive advantage; sophisticated/transparent/
competitive project selection and prioritization processes; almost universally strategy-led, except donor and government sectoral programmes
Implementation: broader implementation by public, private, community sectors, agencies;
contracting and performance measures considerable effort to monitor and evaluate Funding: still public sector, increasing private sector and community funding
• integrated local/regional strategies
• focus on territorial not sectoral growth
• horizontal local government collaboration
• community/municipality networking/team
• knowledge gap/IT service support
• demand-led workforce training programmes
• strategic planning, benchmarking, SWOT
• emphasis on understanding/measuring local economy before strategic planning
• targeting in programme areas (human/
business/area/infrastructure development)
• facilitative business red-tape reduction
• grants/loans/venture capital to businesses with potential and comprehensive business support and capacity building tied to grants/loan provision
• quality of life investment programmes
• skills enhancement for the disadvantaged
• tailored business development services
• targeted support for prospective businesses
• highly targeted area regeneration programmes
• facilitation of business clusters Source: Adapted from Swinburn and Yatta, 2006.
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The view of Bingham and Mier (1993) largely coincides with the position of Swinburn and Yatta (2006) summarised in Table 2.2. According to Swinburn and Yatta (2006) the ―first wave‖ LED in western countries in the 1960s to the 1980s tended to be a very ad hoc process, normally project-led and crisis-driven. With the ―second‖ and ―third wave‖, experience confirmed that regional and local economies necessitated facilitating and planning to optimize growth, as evidenced by the strategic process in Table 2.3, which includes a wide range of hard and soft infrastructure projects (Swinburn and Yatta, 2006).
This new form of strategic planning was integrated, ―bottom up‖, undertaken sub- nationally, transparently and in partnership with public, private and community actors.
These features, illustrated in Table 2.3, are present in contemporary LED in South Africa (see Chapter 3).
Table 2.3 Ten Emerging Trends in LED Policy Making and Practice
Traditional LED Practices Modern (Third Wave) LED Practices Subsidise foreign direct investment
attraction, ignoring local businesses Invest in the whole local business environment, targeted business support on firms with growth potential
No national or local legal frameworks for
LED Increasing legislative frameworks enabling sub-
national economic development strategic planning and projects
Focus on manufacturing sector and
sectoral interventions Focus on relevant agriculture, manufacturing, service sectors enabling cluster development Hard infrastructure investments Increasing focus on soft infrastructure especially
human resource and business networking/collaboration support Actions based on little local economy
information Evidence based strategic planning
Public sector only real player, no
partnerships Public, private and community partnerships led by the public sector, local governments
Supply driven Demand driven
No consideration given to institutional mechanisms for LED except foreign direct investment institutions
Emphasis on building institutional mechanisms to support businesses, formal and informal
Sectoral interventions Territorial interventions LED undertaken within political
boundaries LED undertaken within Economic Space with
sometimes multiple jurisdictions Source: Adapted from Swinburn and Yatta, 2006.
The 1990s moreover saw a diffusion of LED ideas and practices from the global North to the South (Nel and Rogerson, 2005), which is viewed by some as an illustration of international policy transfer. Most contemporary definitions of LED contain features of the
―third wave‖ (Swinburn and Yatta, 2006) where both business and community
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environment are contributing to economic development with progressive individual business support services and sectoral development approaches, originating in the second phase (Rücker and Trah, 2007). Partnerships assumed increasing importance during the 1990s, following political and economic changes, the prominence of public sector dominated LED development efforts during the 1970s, and the influence of the private sector as development agent in the 1980s. It is purported that partnerships bridge the divisions in development thinking. In theory partnerships promise benefits arising from economies of scale, and the sharing of resources, commitment, and information (LMRF, 2008).
―Fourth wave‖ refers to the new global restructuring process centred primarily on economic globalisation (Clarke and Gaile, 1998, cited in Cele, 2009). Key features include:
a move from high volume to high value added production processes, in response to customer needs and the ensuing increase in the competitiveness of firms; transport and communication innovation resulting in the shrinking of economic space with a consequent increase in direct competition of firms, even at remote locations; the central role of human capital with requisite analytic and information skills for enhancement of the capacity of the local economy; an increase in the mobility of capital, firms and people toward more successful regions. Finally a strategy targeted at reducing the central capability of nation- states to undertake autonomous economic development decisions affecting its domestic markets termed as the ―hollowing out of the state‖ (Clarke and Gaile, 1998, cited by Cele, 2009:10).
As substantiated above, the phases of waves of development are both chronological and overlapping. The transition from business attraction to all-embracing perspectives on economic development is a dominant theme of the description of these phases (Blakely and Leigh, 2010). Economic development theory must evolve so as to parallel changing economic structures and remain pertinent to local development practice (see Table 2.4).
Blakely and Leigh (2010) advocate that LED practice should incorporate in the fourth phase sustainable local economic development. The authors acknowledge that from a development perspective, resources are often underused and that local capacity is important to turn resources into development opportunities. Thus the sum of historical theories is summarised as ―local and regional development = c x r‖ where c equals an areas capacity and r equals the areas resources (Blakely and Leigh, 2010). The theme of capacity, resources and sustainability will be further investigated in Chapter 5.
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Table 2.4 The Evolution of Economic Development Theory into Local Practice
Components LED Old Concept New Concept
Locality Physical location improves economic options (nearby natural resources, transport, markets)
A quality local physical and social environment constitute advantages for economic growth
Business and
economic base Firms and export industries create jobs and promote an increase in local business
Regional networks of clusters of competitive industries contribute to an increase in growth and income
Employment
resources Additional firms create extra jobs
(many may be minimum wage jobs) Skill development and techno-logical innovation contribute to quality jobs and higher wages
Community
resources Purposeful organizations can boost economic opportunities in the community
Concerted partnerships of many
community groups are required to create a base for competitive industries Source: Adapted from Blakely and Leigh, 2010.
Development economics has no universally accepted doctrine or paradigm but is distinguished by a continually evolving pattern of insights and understandings that in concert provide the basis for examining the possibilities of contemporary development (Todaro and Smith, 2006). Nel and Rogerson (2005) and Meyer-Stamer (2008), lend support for the view that with the rise of regional and local strategies local economic development (LED) appropriated selected economic development principles. This observation will be examined in the following sections in the global and African contexts, and in Chapter 3 within South Africa.
Hindson (2005) concedes that while there have been rapid advances in the local economic development process, there is less support in respect of the impacts of LED, such as economic growth and poverty reduction, in part due to the difficulty of measurement of these factors. Furthermore he is of the opinion that there is agreement over what does not work well in LED and less certainty over what does work well. Meyer-Stamer (2003c) concludes that one of the intrinsic reasons that LED is so difficult is that there is an unclear theoretical and conceptual background for LED. This chapter examines both the history and the theory of economic development as a backdrop to the investigation of LED.
Contemporary theories of local economic development are reviewed in Chapter 3 to recognize elements contributing to the development of the concept of LED and its understanding, thereby employing an approach that can potentially assist with the extension, application and implementation of LED strategies.