ABSTRACT
10.2. THEORETICAL FRAMEWORK FOR LED ANALYSIS
Two theoretical explanations of LED have been utilised in the analysis of the case studies.
Though neither of these theories has been used exclusively, both of them provide a basis for understanding local economic responses by small towns facing economic decline. These
theoretical frameworks are the Economic Base Theory and the Comparative Advantage Theory. These theories are summarized below.
10.2.1. The Economic Base Theory (Demand Side Approach).
Economic base or export base theory focuses on the principal demand-related factors responsible for the growth or decline of a local economy. This theory proposes that economic activity in a region can be divided into basic or export activities and non-basic or local activities33.
Using this approach, firms serving markets outside small towns were interviewed. The assumption was that they were bringing outside money into these towns. Small scale manufacturers that export to non local markets in Pinetown, as well as local tourism activities in Howick that attract outside visitors to these towns, were the focus of this thesis.
Using the economic base theory, this thesis. was able to identify the cause and effect relationships in local economic development. Through the analysis of the economic base of the selected small towns, prime movers and stimulators of growth in the local economy were identified. Income levels of these towns were analysed with the intention of understanding local economic growth indicators.
This theoretical framework also informed the selection of BRE as a non-basic activity aimed at the development of local trade and service through the promotion of the purchase of local goods by local individuals. This is aimed at increasing community income, as money traded circulates within the community.
The main assumption that accompanies this theoretical framework is that for every dollar generated by exports, part remains in the local economy creating additional employment, and part leaks out. An interesting facet of the economic base theory is that each dollar of basic income generates more than one dollar of total community income. This is referred to by
Barkley (2001) as the 'multiplier effect'. This therefore means that the total income and
33DavidL.Barkley, (2001) Employment generation strategies for small towns: an overview of alternatives.
REDRL Research Report, Regional Economic Development Research Laboratory, Clemson University, Clemson, se2%34-0355
employment generated is directly related to the amount of spending that remains in the local economy for the next round. With each round, some of the income received by households and local businesses is spent on goods and services acquired outside the local economy.
The economic base model is an appropriate tool for analyzing local economic development problems and potentials. Declining employment and incomes in small towns is generally attributable to a declining export sector, for example, the closing of the local textile operation in places such as Mooi River. Therefore, to stimulate local growth and development, using the economic base theoretical framework, small towns need to focus on increasing export activity, and/or decreasing the proportion of income leaking from these towns. Thus, the economic base theory is the justification for development programmes such as investment promotion, small business development, and expansion of the local service sector.
10.2.2. Local Comparative Advantage (Supply-Side Approach).
Another key assumption that has informed this thesis is the belief that, to focus only on the economic base theoretical framework is too narrow, since it focuses only on the activities of exportingfirms. The model provided by the economic base theory provides insight into why firms decide to migrate from small towns. The question of what small towns have to offer to attract economic activity is the supply side of the LED process which complements the demand side emphasis of the economic base theory.
A supply-driven model makes local econormc actIVIty dependent on the availability of resources for the production of goods and services. Accordingly, the starting point in the development process is the availability and quality of labour, capital, markets, transportation facilities, government goods and services, industrial sites, and imported inputs. This theory emphasizes that economic activity in a community will develop according to local comparative advantage, and each community will specialize in the activities which it can produce more efficiently than other regions.
The theory of comparative advantage provides much insight into factors contributing to the decline of many rural communities. Quite simply, communities stagnate or decline because conditions have changed such that these areas are no longer competitive in the provision of
goods and services. For example, in America mill towns have declined because the best location for textile manufacturing has shifted from the rural South to Mexico and the Far East.
Rural service centres have decliIied because interstate highways whisk potential customers to nearby metro shopping centres, Agriculturally based communities have declined because fewer farmers are needed to feed and clothe the nation
The economic development implications of the comparative advantage theory are fairly straightforward. Rural communities must improve the quality and/or availability of local inputs if they are to compete successfully for new industry. Three general strategies have been used by small towns to enhance their comparative advantages.
First, improvements in public education and the provision of labour training are long-run programmes aimed at improving the quality of the local labour force and, as a result, increasing the community's chances in attracting high-skilled and high-wage employers. In addition, improvements in the local quality of life enhance a community's ability to encourage skilled labour to move to the area to take advantage of employment opportunities.
Second, infrastructure investment (sewage and water systems, roads, etc.) is undertaken to insure that local public services are similar to those available in competing areas. Finally, financial incentives programmes (loans, tax forgiveness, and free land) are provided to overcome the cost difference associated with locating in a small town versus a lower cost urban location. "The cost of these educational, infrastructure, and financial incentive programmes will vary greatly depending on the characteristics of the community and the competition for the industry.