Economic Base Theory

1
The Importance of Theory to Practice

• Theory vs Practice
• Theory is an abstraction of reality that explains
  something. Theory is developed so that a causal
  model can be developed. It is developed to guide
  our actions.
• Practice is the actions that are undertaken to
  change the world. Practice should be guided by
  theory, but not beholden to it (free will).
• Why Understanding Theory is Important
• Theories used by economic developers determine,
  either explicitly or implicitly, how these
  developers understand economic development, the
  questions they ask about the process, the
  information they collect to analyze development,
  and the development strategies they pursue.
  (From EDAs Overview of Economic Development web
  page.)
• How These Theories Can Help You as a Practitioner
• To help you arrive at your own understanding of
  the realities and workings of the economic
  development process.
• To help you understand how others may think about
  and approach economic development.

2
Economic Base Theory

• Categorizes the Economy Basic vs Non-Basic
  Sectors
• Definition of Development A quantitative
  increase in the rate of growth of output
  (products), income, or employment
• Essential Dynamic External demand for a regions
  products drives the local economy Economic base
  multiplier effects
• Strengths Very simple to apply Data available
  to measure these changes VERY popular theory
  Good for short-term prediction
  Identifies/Emphasizes the importance of most
  critical local industries
• Weaknesses Overemphasis on the basic sector
  Only indirectly points to the need to develop the
  non-basic sector Arbitrary distinction between
  basic and non-basic Does not recognize that
  regional economies are an integrated whole of
  mutually dependant activities
• Applications Industrial recruitment and
  promotion Facilitate expansion of existing
  export industries Improve efficiency of the
  export economy through infrastructure upgrades
  Use of economic base analytical techniques (LQ,
  Shift-share, Base Multipliers, etc.)

3
Staple Theory

• Categorizes the Economy Prime Exporting Industry
  vs Non-exporting Industries
• Definition of Development Export-led and
  dominated economic growth
• Essential Dynamic Successful production and
  marketing of export staple(s) in world markets.
• Strengths A historical and political perspective
  for economic development Provides insights into
  local values, politics, and wealth Explains how
  growth over time (in the early stages) is often
  due to a local staple
• Weaknesses Hard to apply the theory Better at
  explaining past development than providing
  guidance for local actions
• Applications Practitioners should focus
  resources and policies upon the local staple as
  long as it remains competitive Government
  intervention should occur to improve the
  competitiveness of the staple Do not focus on
  diversifying local industry as long as the staple
  is strong

4
Sector Theory

• Categorizes the Economy Primary (Agri.,
  Forestry, Fish.) Secondary (Manu. and Mining),
  and Tertiary (Trade and Services) sectors
• Definition of Development Greater sectoral
  diversity and higher productivity
• Essential Dynamic Per capita increases and labor
  productivity drive technology which leads to
  sectoral diversity
• Strengths Focuses on the internal economic
  structure Provides theory for the detailed
  analysis of the local economy Measures
  structural change in the economy Can be
  empirically tested
• Weaknesses Very simplified categories, too crude
  to provide real insights (especially the tertiary
  sector) Doesnt directly take into account role
  of exports in local growth
• Applications Reminds practitioners that
  strengthening the internal economy is an equally
  viable way to achieve economic development
  Allows practitioners to compare the relative
  prospects of different industries, thereby
  indicating where efforts might best be focused

5
Theories of Concentration and Diffusion

• Categorizes the Economy Industries
• Definition of Development Diffusion of growth
  Growth in surrounding region (Structural change,
  Increasing incomes)
• Essential Dynamic Propulsive industries attract
  growth (poles of growth) which leads to
  trickle-down effects (or backwash) for
  surrounding areas
• Strengths Investigate how growth works across
  space Takes into account the agglomerative
  tendencies of firms Highly popular and
  operationalized family of theories
• Weaknesses Highly abstract and vague Theory can
  be applied many ways An unclear definition of
  what a growth center (aka pole) actually is
  Assumes strong linkages between individual cities
  and their periphery Results of application of
  theory have been very poor
• Applications Growth center policies have long
  been a hallmark of economic development efforts
  (major infrastructure investments,
  hi-tech/research parks, etc.) A common strategy
  for depressed small town/rural areas

6
Neoclassical Growth Theory

• Categorizes the Economy Looks at entire economy
  as a whole
• Definition of Development Increasing rate of
  growth (per capita) at the regional or national
  level
• Essential Dynamic Savings and investment promote
  capital formation, which drives the economy The
  national/regional economy naturally gravitates
  towards equilibrium
• Strengths A supply-side model Widely popular
  theory
• Weaknesses Does not recognize the role of the
  demand-side Accepts decline of areas Implies a
  limited governmental role
• Applications Early NGT emphasized free trade,
  lack of government role Neoclassical economics
  now argues for an important governmental role --gt
  Fostering business development through
  infrastructure provision, business services,
  providing information on markets, etc.
  Government should promote economic integration
  both nationally and internationally Government
  should tolerate social inequality and spatial
  dualism

7
Interregional Trade Theory

• Categorizes the Economy Commodities, including
  attributes of price and quantity
• Definition of Development Greater consumer
  welfare leading to more spending and continued
  growth (and more consumer welfare)
• Essential Dynamic Equilibrium is arrived at
  through the trade of goods
• Strengths Unique emphasis upon consumer welfare
  and price effects Belief in power of the free
  market Pursuit of the lowest cost goods, freeing
  resources to be used more efficiently Evidence
  that trade is a means of equilibrium across
  regions/countries
• Weaknesses Doesnt address how development
  occurs Narrow theory focused exclusively on
  trade and trade relations Evidence that trade is
  not mutually beneficial Ignores negative social
  effects of growth that are not included in the
  prices of goods
• Applications Governments should promote free
  trade, programs to do this include infrastructure
  investments, lowering tariffs, more efficient
  government Government help to move resources out
  of inefficient industries

8
Product-Cycle Theory

• Categorizes the Economy Product stages New,
  Maturing, Standardized, Declining
• Definition of Development Continuous creation
  and diffusion of new products
• Essential Dynamic Innovation (aka Creative
  destruction) A good product mix is the
  foundation of a strong economy
• Strengths Describes relationship between
  innovation, structural change, and economic
  development outcomes Describes the research and
  production process very well A theory of
  development not growth
• Weaknesses Poor at explaining the services
  sector Does not take into account product
  differentiation Unclear on issues of ownership
  and control
• Applications Analyze local economy to determine
  its ability to compete for either new or
  standardized products Identify and support
  industries that are producing new products
  Promote a good local product mix Provide
  incentives to firms and entrepreneurs that are
  more likely to develop new products

9
Theories of Flexible Production

• Categorizes the Economy Production regimes
  Industrial organization
• Definition of Development Quantitative increases
  (growth) through agile production, innovation,
  and specialization
• Essential Dynamic Flexibility among producers
  allows for competitiveness and growth
• Strengths Emphasizes structure and fast-changing
  characteristics of the post-modern economy
  Uncertainty is dealt with by the theory
  Recognizes the internal structure of the firm as
  important to development (industrial organization
  matters!)
• Weaknesses Does not recognize that business
  flexibility leads to worker and community
  hardship (firm relocation periodic unemployment,
  child labor, etc.) Theory does not take into
  account local economic structure
• Applications Encourage flexibility Three
  aspects of flexibility to be addressed 1)
  flexibility in machinery (hard costs), 2)
  flexibility in the organizational structure (soft
  costs), 3) flexibility at the economy level
  Encourage technological upgrades Develop
  industry networks and industry clusters
  Movement towards just-in-time (JIT) production

10
Entrepreneurship Theories

• Categorizes the Economy Entrepreneurs vs
  non-entrepreneurs
• Definition of Development Resilience, Diversity
• Essential Dynamic Innovation process New
  products and new combinations (Schumpeter) Human
  agency drives development
• Strengths Recognizes/Emphasizes the important
  role of entrepreneurs Recognizes importance of
  capital in business formation Emphasizes
  potential change in economy over the current
  structure
• Weaknesses The very high rate of entrepreneurial
  failure is overlooked Does not take into account
  existing economic structure (ability to
  innovate) Relevance to rural areas, small towns
  is unclear
• Applications Support Entrepreneurs!! Business
  development strategies (incubators, loans)
  Lower barriers to market entry by minimizing
  costs for taxes, space, services
• Must recognize difference between 1) new
  business development, 2) small business
  development, and 3) entrepreneurial business
  development

11
Human Capital Theory

• Categorizes the Economy Does not, Looks at the
  workforce
• Definition of Development Value-Added Services
  and Goods
• Essential Dynamic Development is based on the
  skills and valueadded capacity of the workforce
• Strengths Fits recent research into ED Clear
  connection between skills of workers/education
  and economic growth Helps locals as well as new
  residents Emphasis on cultural and economic
  diversity and openness
• Weaknesses Not well-formulated as a strategy
  yet Expensive and complex to implement Social
  capital theory has been found to be ineffective
  at predicting economic development success
• Applications Support skill-building in the
  workforce Invest in people through education and
  skills training Investments in amenities for
  individuals, not businesses (Quality of Life)

12
The Complete Theory of Econ Dev
Local economic structure (EB, Sect.)
Political and historic forces (Stap., Sect.)
Savings and investment, Role of capital (NGT,
Entr.)
Industrial organization (TFP)
The workings of the market (NGT, Trade)
Human agency, Innovators (Entr.)
Creativity (HCT)
A Complete Theory
Commodities (Trade)
Creative destruction (Entr., PCT)
Product cycle (PCT)
Human capital (HCT)
Exports (EB, Stap.)
Diversity vs Staple (EB, Sect. vs Stap.,Trade,
CD)
A means to analyze and quantify the local economy
(Most)
Geography (CD)
Internal economic structure (Sect.)
Internal economic structure (Sect.)
Agglomeration and Diffusion (CD)