Understanding Local Economic Development

Second Edition

Emil Malizia, Edward J. Feser, Henry Renski, Joshua Drucker

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000193992
• Edition: 2
• Topic: Politics & International Relations
• Subtopic: Local & Regional Planning Public Policy
• Index: Politics & International Relations

This book offers insights into the process and the practice of local economic development. Bridging the gap between theory and practice it demonstrates the relevance of theory to inform local strategic planning in the context of widespread disparities in regional economic performance.

The book summarizes the core theories of economic development, applies each of these to professional practice, and provides detailed commentary on them. This updated second edition includes more recent contributions - regional innovation, agglomeration and dynamic theories – and presents the major ideas that inform economic development strategic planning, particularly in the United States and Canada. The text offers theoretical insights that help explain why some regions thrive while others languish and why metropolitan economies often rise and fall over time. Without theory, economic developers can only do what is politically feasible. This text, however, provides them with a logical tool for thinking about development and establishing an independent basis from which to build the local consensus needed for evidence-based action undertaken in the public interest.

Offering valuable perspectives on both the process and the practice of local and regional economic development, this book will be useful for both current and future economic developers to think more profoundly and confidently about their local economy.

PART I
Fundamentals

1
THE PRACTICE OF ECONOMIC DEVELOPMENT

Local economic development in Paterson, New Jersey

The most prominent early intentional development project in the United States designed for economic improvement began when Alexander Hamilton visited Paterson, New Jersey, in 1778. The Great Falls of the Passaic River attracted his interest, the highest falls east of the Mississippi River after Niagara Falls whose elevation and volume of water could generate substantial waterpower. It was later calculated that the Great Falls and the Little Falls farther upstream could drive 325 undershot water wheels. (Undershot wheels were turned by water flowing from below.) With this water resource and energy technology, Hamilton saw that Paterson had the potential to become the young nation’s first center of industry (Kenyon 1960, p. 27). In November of 1791, Hamilton helped found the Society for the establishment of Useful Manufactures (SUM). SUM purchased from the state almost 800 acres of land adjacent to the river and the rights to channel some of the river’s water into raceways. Two years later, SUM started the first water-powered cotton spinning mill in New Jersey, one that failed after operating for three years (Scranton 1985).

Local economic development is an ongoing process, where problems are resolved, not solved, because current solutions give rise to new problems to tackle as competitive factors change. Industry in Paterson grew through a series of “boom followed by bust” cycles for more than a century. For some time period, the localization economies (Chapter 9) in the industrial district enabled the sequential success of cotton textiles, locomotive production and assembly, silk textiles, and aircraft manufacturing (Kenyon 1960, pp. 24–66). Since the cotton industry required machine shops to keep the mills running, skilled craftsmen increased in number as the industry grew. Machine-shop owners sought patents for ideas they developed. In 1840, the cotton sector peaked, and several cotton mill owners formed new companies to build locomotives to support the westward expansion of the railroads. Kenyon (1960, p. 39) identifies that year as the beginning of the “century of silk” when the Paterson area became “a diversified urban industrial complex.” Continuing through the 1920s, entrepreneurial companies were founded, grew, became well-established, and in many instances ultimately failed.

Paterson’s local economic base evolved and diversified over time. By 1900, the silk textile industry, locomotive manufacturing, and other manufacturing were flourishing. The most important factors leading to success were: (1) proximity to New York City for finance and distribution, but most importantly for early detection of fashion and design changes; (2) reliable power, first from year-round water power and later from coal-produced steam; (3) tariff protection that eliminated duties on raw silk but imposed them on imported manufactured silk products; (4) the influx of unemployed skilled workers who immigrated to Paterson after the silk sector in England was decimated by producers in France; and (5) synergies between the silk and iron industries, including largely female workers in silk and primarily male workers in locomotive production.

From 1870 to 1910, Paterson experienced impressive economic growth due to innovation, agglomeration economies, and proximity to New York City—the fashion capital of the country. The population increased rapidly, primarily from immigrant labor that provided the “hands” that worked in the factories. From 1870 to 1900, the population tripled to over 105,000, reaching 125,600 by 1910. During this time, Paterson became one of the leading silk manufacturers in the world, vying with Lyon, France, for top billing.

During the next 30 years, Paterson’s economic growth slowed dramatically. Silk manufacturing remained the dominant industry, accounting for 47 percent of manufacturing value-added projects in 1925. Over the next 15 years, the number of silk establishments decreased from 691 to 147 (Kenyon 1960, p. 62–65). The combination of new synthetic fabrics, the Great Depression, and labor strife took their toll (Scranton 1985).

In 1913, the Industrial Workers of the World (The Wobbles) and local socialists staged the “Paterson Silk Strikes” advocating an eight-hour day and better working conditions. Although unsuccessful, the strikes helped forge the American labor movement and were a precursor of New Deal reforms that brought the eight-hour work day, better wages, improved working conditions, restrictions on the use of child labor, better housing, and overall improvements in public health and living standards. Thus, the period of rapid economic growth from 1870 to 1910, when Paterson’s industries got bigger and more numerous, was followed by the period from 1910 through World War II when the lives of the workers in Paterson got better, which could be called the period of economic development (Chapter 2).

For 20 years after World War II, modest growth continued in Paterson, but subsequently the manufacturing base declined precipitously as companies left for low-wage, non-union locations in the South and outside the United States. Economic decline continued in the central city for many years, while the suburbs prospered, becoming bedroom communities of New York City. More recently, immigrants arriving from the Middle East, Mexico, Latin America, and other parts of the world have occupied cheap housing and have begun to revitalize Paterson. Over 200 years after Hamilton initiated “top-down” economic growth, Paterson’s workers and entrepreneurs will determine whether “bottom-up” actions will have positive economic outcomes. Will Paterson’s economy in the 21st century recover its past success or continue its flat trajectory?¹

Inflection points in local economic development

In this section, we present four major trends that have shaped state and local economic development practice in the United States since 1930. We describe them as inflection points and identify the relevant underlying theories of economic growth and development for each one. This presentation has two purposes: to place current practice in its historical context and to demonstrate the value of theory so that economic developers can better understand and improve their practice.

Industrial recruitment

The first inflection point came with the formulation of state-level industrial recruitment as an intentional development strategy to encourage industrial development in the “New South.”² Southern states initiated industrial recruitment, and their success was largely at the expense of places like Paterson and other cities in the Northeast and Midwest. It began in 1929, when Hugh White was elected mayor of Columbia, Mississippi. The lumber company he owned was in decline, and the local farming sector was weakening. As mayor, he formed the Marion County Chamber of Commerce and hired the Fantus Corporation based in Chicago to recruit companies. When Fantus found an interested prospect—Reliance Manufacturing—the mayor raised enough capital locally to provide the loan guarantee for the factory’s construction, including conditions that would now be called “claw back” provisions. The most important one was that the company would own the factory as long as it hired 300 (primarily female) workers and paid one million dollars in wages over the next ten years. The town signed up over 1,400 women interested in working at the factory satisfying the company’s questions about labor availability. Mayor White also created customized training for the women who were not paid until they became proficient. Reliance came to Columbia and hired these women at low wages, but the income of their families increased as a result. The new employer provided a buffer for the local economy as the Great Depression gained force.

Hugh White was elected governor on a platform that included “balancing agriculture with industry” (BAWI). From 1936 to 1940, he provided the leadership to pass legislation that allowed localities to finance land and capital for new industry to achieve the newly identified public purpose of providing employment, thus establishing the BAWI program state-wide (Cobb 1982). Thus, hiring workers was no longer simply a private cost that businesses incurred to generate product and profits. “Job creation” had now become a public purpose.³

By the mid-1950s, almost all of the Southern states had policies favoring industrialization and had established agencies with the mission of industrial recruitment. They unleashed their “industry hunters” on corporate boardrooms to the north. Favorable financing, prepared industrial sites, and customized training programs were often part of the package designed to lure companies to the South. Equally compelling were access to growing product markets, relatively cheap labor, cheap land, low cost of living, low taxes, and virtually no labor unions (“right-to-work states”).

Although state-sponsored industrial development for job creation began in the South, the idea spread throughout the country. State development corporations or departments of commerce took on this function partly in reaction to losing companies to Southern states. Counties and cities joined in, creating the infrastructure for industrial recruitment of jobs and tax base that exists to this day.

Industrial recruitment or what became called the “attraction strategy” focused on manufacturing because manufacturers were expected to have the greatest positive impact on local economic growth. Most economic developers know that economic base theory (Chapter 3) is the theory that rationalizes industrial recruitment.⁴ Companies that source labor and other inputs locally and sell products outside the area (the export sector) bring money into a region that stimulates employment in local-serving sectors (such as retail and personal services) through successive rounds of buying and selling (the economic base multiplier). In addition to higher multiplier effects, recruited manufacturers offered better wages and benefits in most instances than existing employers. Thus, manufacturing usually contributed to local economic development.

Small business development

The second inflection point occurred when small business became viewed as an important source of employment. This focus quickly expanded to important locally-based industries as well as educational, scientific, health-oriented, and financial institutions that could promote economic growth. Interest in small business began in 1979, when David Birch (1979) published a report about job creation. Using Dun & Bradstreet data, he showed that small businesses had created almost all new jobs in the United States during the previous decade. The story reported in the Wall Street Journal hit the industrial development com...