Intergovernmental Fiscal Relations & Local Financial Management Course

1. Intergovernmental Fiscal Relations &Local Financial Management Course ISS - MDP - UMI - WBI Local economic development A.H.J. (Bert) Helmsing

2. Overview • Topics to be covered • Local economic development: why important? • Local economic development approaches • LG policies and instruments • Networking for local economic development

3. Local economic development • Why local economic development? • Growing unemployment and underemployment • Rapid urban growth but declining urban productivity: • Congestion, crime, social discontent • Unavailability of basic infrastructure (interruption in electricity) • Rising urban transaction costs (cost of doing business) • Lesson from Structural Adjustment: • market institutions and private sector investment response do not emerge spontaneously

4. Local economic development • Liberalisation with globalisation: • exposes local producers to global competition • also new opportunites (e.g. Ethiopean leather manufacturers on e-commerce) • Growing recognition of importance of business environment • externalities • coordinating private and public investment • Decentralisation to local governments: • need to develop local fiscal base • public sector as a source of private sector growth

5. Local economic development • Sources of local economic growth • Demand • Supply • externalities • learning • Governance: economic institutions

6. LED: Sources of growth • Demand • internal demand not enough to get out of low-level trap • tap external demand both nationally, regionally and globally • what do buyers want? • how to get entry to export markets? • how to overcome production and transaction barriers?

7. LED: Sources of growth • Externalities: • advantages from agglomeration • concentration of labour skills • specialised inputs at lower costs • information and technological spillovers • potential for collective efficiency • by joint actions local producers can: • advance specialisation among them • organise flexible specialisation and subcontracting networks

8. LED: Sources of growth • potential for collective efficiency (2) • joint action to create private support institutions • garment manufacturers establishing a fashion information centre • joint export efforts • procurement of inputs • joint action towards government • partner on policies • lobby for infrastructure

9. LED: Sources of growth • Learning • being low cost is no guarantee for success • acquisition of new knowledge is key • competences of firms: • knowledge of inputs, products and processes • knowledge of clients, suppliers and markets • How do entrepreneurs find out? • invest in learning • invest in research & development

10. LED: Sources of growth • Entrepreneurs draw on other sources of knowledge • employees, suppliers and clients • universities and research centers • business associations • business support centers • Collective learning • creating an innovative milieu

11. LED: Sources of growth • Governance: • bringing actors together: creating a supportive business environment • enterprises in a supportive business environment have a competitive edge over firms that do not • Only applicable to formal sector?

12. Overview • Local economic development: why important? • Local economic development approaches • LG policies and instruments • Networking for local economic development

13. LED Approaches & strategies • LED actions • to mobilise actors, organisations and resources • to develop new institutions of LED • to create greater rationality in the economic system through dialogue and strategic actions

14. LED Approaches & strategies • Attract external investment, firms and people • selective inward investment (brokers of knowledge) • linked firms, export intermediaries • knowledge professionals

15. LED Approaches & strategies • Establish a basis for local collective action • organise producers • identify basis for collective action • supply and demand for collective action and support

16. LED Approaches & strategies • Urban based LED strategies • Locality development • Enterprise development • Community economic development • Human resource development

17. LED Approaches & strategies • LED strategies for rural regions • agro-specialisation: product specific chains • rural industrialisation: product chains • natural resource exploitation & (eco-) tourism

18. Overview • Local economic development: why important? • Local economic development approaches • Policies and instruments • Networking for local economic development

19. Locality development • Policies directed at: • image building • amenity improvement • business improvement

20. Locality development • Improving physical environment of towns • Infrastructure and site development projects • differentiated supply of industrial and commercial stands • Housing & urban amenities • Physical security • Zoning regulations

21. Locality: instruments • Fiscal instruments • tax holidays on property tax • subsidies on utility charges • sale of stands at subsidised prices • fiscal competition • reduced effectiveness • prisoner's dilemma • Locality marketing

22. Locality marketing Target markets Investors Consumers Marketing factors Manufacture People Trade Actors Infrastructure New residents Administration Firms Attractions Education Tourists Source: kotler et al 1993

23. Locality marketing • What instruments are used? • Publicity campaigns • leaflets, promo tours, presence at fairs,website • Event based strategies • major sports or cultural manifestations • trade or community fairs • Urban design and place marking • Townscaping

24. LED Strategies & instruments • Enterprise or business development • client group • new firm formation (start ups) • attracting new firms • expanding existing firms • business innovation and graduation • manufacturing and services

25. Enterprise development • Fiscal incentives • Business support services • Infrastructure, land and buildings • Special LED programmes

26. Fiscal incentives • investment subsidies • x dollars per 1000 of investment (many countries) • subsidised land or assets • designated geographical areas (selective application) • employment premium • x dollars per job (UK, South Africa) • tax incentives • company tax • profit repatriation guarantees

27. Fiscal incentives • in kind incentives • "advance" factories or free land • effectiveness of fiscal incentives • incentive competition reduces effectiveness • attracts mobile investors • Real or financial support? • Financial subsidies compensate for locational or competitive disadvantage • Real support seeks to create new competitive advantages

28. Enterprise development • Real enterprise support services • Sign posting • Business skilling • Business advice • Business assistance • Business support

29. Enterprise support: signposting • sign posting & re-regulation • reduce institutional disconnect and insecurity • simplify public regulation • new answers • one-stop enterprise centres • actors and organisations • Chambers of commerce • Special public agencies (CG, LG)

30. Enterprise support: skilling • business skilling • entrepreneurship • financial management & business plan • marketing incl. exports • production techniques (quality management) • actors • enterprise agencies, BIAs non-profit and commercial agencies • examples: Partners for Productivity

31. Enterprise advice & assistance • industrial extension services • differences with agriculture • tailor made advice • emphasis on extra mural or on site support • formal and informal sector demands • actors • enterprise agencies; BAs, non-profit and commercial agencies • Carvajal Foundation; Women's World Banking

32. Enterprise: support services • finance • marketing • technology and R&D • training

33. Enterprise development • Special LED programmes • growth points • industrial estates • special economic zones (incl. export zones) • incubators & science parks • innovative environment (or milieu) • cluster development programmes

34. Special LED programmes • Strengthening (potential for) local clusters and industrial districts • attracting suppliers of inputs • attracting end assemblers • common services • importance of local demand or market potential

35. LED strategies & instruments • Community economic development • targeted at poor communities • aims • to stimulate local sense of community • stimulate self help/empowerment • create (self)employment • improve living & working conditions • create public and community services

36. Community economic development • importance of housing improvement • settlement & slum improvement (basic services) • commercial (re-)development • retail trade, services, industry • high demand: private financing • survival based economic activity • small asset base (backyard or street activities) • incremental improvements

37. Community economic development • Creation of Community Development Corporations: CDC's in Sri Lanka • Multiple roles of CDCs • Community Resource Centres (Costa Rica) • Community construction contracts • (Sri Lanka, Ghana, Costa Rica)

38. Community economic development • Savings & thrift societies (India, Kenya, Bolivia) • Community mortgage program (Philipines) • Social funds: • co-finance investment projects • with community groups • stimulates demand driven projects • facilitates community organisation, participation and management

39. CED: social funds • Role of NGO or private sector agency • provide technical assistance • training in CO, CP and CM skills • supports management of projects and funds • facilitation for community organisation and planning • co-signatories for financial transactions

40. Overview • Local economic development: why important? • Local economic development approaches • LG policies and instruments • Networking for local economic development

41. Actors and networks: firms • Firms/entrepreneurs • role in creating employment and restructuring • role in sustaining competitiveness of a cluster • role in developing enterprise common service • target of competitiveness policies • large firm facilitator of small firm change • social corporate responsibility

42. Actors and networks: BAs • Business associations • different types • collective interest representation for members • intermediary organisation • intermediary towards support system • concertation at local and national level (horizontal and vertical nexus) • private interest regulation

43. Actors and networks: Banking • Banks and Development (Finance) Corporations • banks play key role in restructuring of firm and sectors • cannot be ignored.... • DFCs provide venture capital and investment finance • local or regional corporations identify with territory

44. Actors and networks: IOs • Enterprise agencies (non-profit trust/foundation/corporation) • key provider of support services • can play role of lead actor in LED networking • Sources of finance: • donor/NGO contributions • CG subsidies • revenue generating activities • membership fees and donations

45. Actors and networks: IOs • Sector specific support agencies • e.g. vocational training • marketing • Institutional modality • public (CG subsidies/enterprise levy) • partnership with private sector (joint finance) • commercial and non-profit (NGO) private agencies

46. Actors and networks: new civic actors • Community based organisations: types • Importance of 2nd tier organisation • Community enterprises (private law but community ownership) • to provide social services • credit and other services • own land • promote cultural heritage • train people in skills

47. Actors and networks: LG • Shift in LG role • from service provider to supporting economic restructuring (selective target groups) • from hierarchical to entrepreneurial government • increasing presence of local government agencies • Shift in LG role: use of public budget • co-financing private sector and community initiatives • stimulating private sector development (contracting and privatization)

48. Actors and networks: LG • Regulatory policies: • reduce cost of inward and endogenous investment • reduce entry and exit barriers • reduce regulation compliance costs • land use planning is key instrument • Tax policy: • taxation affects competitiveness • business prefers benefit taxation • Expenditure policy • co-financing private sector and community initiatives • stimulating private sector development (targetted expenditures, contracting and privatization)

49. Networks • Networks: purposes • to integrate vertical (and local) programmes • facilitate flow of information about opportunities and resources • facilitate better attuning of decision making among actors • thus preventing negative externalities • generating positive externalities • complement market institutions

50. Network development • Network development is learning process • Network development stages • LED planning: strategies and actions • Concepts, Strategies and Projects (CSP) • Strategy • Projects: flagship and complementary • implemented by different (sets of) actors