Local Economic Development - Research Paper Example

LOCAL ECONOMIC DEVELOPMENT Contents Sr.# Topic Pg.# 1. Introduction 2 2. Issues of Worsening Economy on Local Economic Development 3 2.1. UK competitiveness: The Output Gap 4 2.2. The Local Labor Market: Worklessness, Inequality & Productivity Gap 6 2.3. Impact on Business & Employment 8 2.4. Environmental Challenges to the Local Economy 10 3. Government Policy and Key Solutions 12 3.1. Economic Policy 12 3.2. Social Policy 14 3.3. Environmental Policy 15 4. Conclusion 16 References 17 List of Figures F1 UK Productivity Growth Rates 5 F2 Rate of Worklessness for Working Age Households 6 F3 Working Age Employment Rate 7 F4 Jobs by Industry Sector 9 F5 Total Weekly Hours Worked 9 1. Introduction The world today, finds itself caught up in probably one of the worst economic crises witnessed, since decades and as this economic catastrophe continues to unravel rapidly, governments all over the world are immersed in devising wide scale measures to cushion its effect. The magnitude of economic setback has engulfed a wide range of sectors including employment, public as well as private sector organizations, financial institutions, international trade, as well as public spending and investment. The current state of economy is in dire need of reformative measures, beginning from local levels, as common citizens, everywhere, are thrust towards a growing sense of insecurity coupled with desolation and adversity. The need for strengthening local economic developmental measures is thus, increasingly being felt, to restabilize the plummeting economy and revitalize the nations’ economic health. Local Economic Development (L.E.D) provides a range of opportunities for the local government, the private sector, the not-for-profit sectors and the local community to initiate collaborative efforts to develop the local economy. L.E.D strives to augment competitiveness and thereby promote inclusive sustainable development. The basic underlying rationale behind the concept of L.E.D. is to fabricate the economic competence of a local region in order to enhance its economic potential and the quality of life for one and all. It is a course of action which facilitates members of the general public, business and non-governmental sector associates to work cooperatively and create better conditions for economic prosperity through employment generation.1 This paper on Local Economic Development addresses various issues triggered off by the ongoing economic crisis ranging from its impact on U.K.’s competitiveness, the ensuing productivity gap, the state of the labor market, issues concerning work and Worklessness, impact on business and employment as well as on the overall local economy; to the governmental measures and key government policies: including social, economic, financial, environmental as well as local government policies; implemented or likely to be implemented to address such critical issues. 2. Issues of Worsening Economy on Local Economic Development The recent economic downturn has deeply affected global economies and has caused a huge setback in terms of widespread economic challenges to the local government. These include: higher inflation, sharp rise in interest rates, lack of adequate credit, fall in property values, etc. This has further caused a sharp decline in employment opportunities, adequacy of proper public utility services, and has taken a toll on public health as a consequence of heightened fear of insecurity, Worklessness and destitution. Some of such issues are discussed in brief, hereunder. 2.1. U.K. Competitiveness: Productivity Gap2 Productivity is the most crucial indicators of a nation’s economic strength and in the long run it must be followed by real income growth and ultimately rise in the standard of living as a result of rise in labor productivity. Currently, there has been a substantial gap in U.K’s productivity, which is an aftermath of the ongoing economic downturn. The most widely used measure of labor productivity is the output per hour worked. In the UK, market sector economy, the output per hour worked is almost 40% less than that in the United States, while the productivity gap as compared to other EU member states such as France and Germany is approx. 20%. The output per worker in U.K is far better than that in Germany however, according to statistics; UK workers take longer time, approximately 16%, to produce the same quantity of output as compared to the workers in Germany. The principle reason behind such deficiency in labor performance is on account of lack of availability of skilled labor and low investment in human capital. The productivity gap is driven by a range of factors which include competitiveness, amount of capital investment in development of human resources, availability of skilled labor, innovation, public sector productivity, application of technology etc. Figure 1: UK Productivity Growth Rates3 Productivity growth tends to be at its peak in industries having better product market competition - whereby less productive firms succumb to pressure and external market competition and eventually shut down while new more productive ones thrive and grow. The remarkable limitation of aggressive force in several sectors of the UK economy is being battered with oppressive public policies such as deregulation and reinforced legislations against anti-competitive norms. Thus, policies encouraging competitiveness would in fact help in restoring the loss in productivity and ultimately achieve considerable success in closing the productivity gap. Capital investment in human resources also plays a significant role in stimulating productivity. The physical capital per worker in the UK is relatively lower than in other EU countries such as France and Germany, which may be on account of macro-economic instability, ambiguity in policy making and short term policies. UK has a shortage of skilled labor, which again has a negative impact on labor efficiency and hence affects productivity. Moreover there is a shortfall in productivity from the service sector which accounts for merely 15% of the total employment in UK. In order to accelerate development and increase productivity, adequate investment has to be made in the service sector to ensure better employment within that particular sector. 2.2. The Local Labor Market: According to the estimates of Labor Force survey for the year 2008, the rate of worklessness with regard to working age households was 15.8%, after a 0.2 % fall from the previous year. The total number of workless working age households was approximately 3.06 million4. Figure 2: Rate of Worklessness for working age Households, 2008 The British unemployment rates reached a record high in the previous year, which is by far, the most substantial fall since the last recession experienced by the country. According to official government statistics, made available by the International Labor Organization, the unemployment standards showed a sharp rise by posting an increase by 164000 in under three months to a whopping 1.79 million by August 2008. The percentage of Brits rendered jobless and claiming jobless benefits showed a significant rise which increased steadily and consistently for a period of eight straight months. Economists predict a much worse state of the labor market in the coming years. According to the Guardian (2009) "Thousands of jobs are being lost in the city, where banks have merged or collapsed, and on the high street, where growing numbers of retailers are going bust"5. Figure 3: Working Age Employment Rate, 2009 2.3. Impact on Business and Employment There has been a sharp decline in the employment rates due to the current global economic crisis. The number of vacancies has declined sharply and a simultaneous rise in the claimant count (for individuals seeking jobless benefits) has been observed. According to the statistics made available by the Office for National Statistics, the working age employment rate was recorded at 74.1% in Jan 2009 which is down by 0.1 % compared to the previous year. The number of people in full time employment has also fallen substantially to 21.83 million by January 2009, which fell by 48,000 in the previous year. Similar reductions have been observed in people working in part time jobs. The number of people in private sector employment has also fallen drastically 13,000 in December 2008 while those employed in the public sector saw a minor rise. The fall in number of jobs has been recorded from almost all the major sectors of the economy including agriculture, construction, production, manufacturing, as well as service sector. However, the largest fall has been recorded in the finance and business services industry which fell by approximate 102,000 jobs6. Moreover there has been a sharp decline in the number of hours worked per week. The current figures state that in January 2009, the total number of hours worked per week was 935.7 million in the past three months which was down by 2.3 recorded in October, 2008. The total number of hours worked is representative of the productive efficiency of a country. Such a drastic fall in hours worked would significantly affect the productivity rates and thrust the economy backwards towards a dire state of joblessness and poverty and hence requires stringent measures on the part of the government to fuel and stabilize economic growth. Figure 4: Jobs by Industry sector, 2008 (Source: Office for National Statistics, 2009, Labor Market Statistics, available from: http://www.statistics.gov.uk/pdfdir/lmsuk0309.pdf) The total unemployment rate has risen to 6.5 % in the current year and needs drastic counter measures to prevent a further decline. The local economic development policies might play a significant role in stimulating the labor market by generating adequate employment opportunities in the service sector, which recorded a major fall, and restabilize the worsening economy. 2.3. Environmental Challenges Considering the enormity and scale of the existing economic crisis, communities across the globe are likely to confront a substantial economic meltdown characterized by timelessness and unimaginable magnitude. Such a setback in turn would intensely influence a wide range of sectors: public as well as private in U.K as well as internationally. One such territory which is so far unaccounted for and is largely neglected by policy makers includes the environment. Environment is directly connected to the quantity of resources consumed, and hence the considerable endeavors initiated with a view to revolutionize the ecological decline is likely to be highly expensive and hence beyond the reach of the already expanded budgets. One of the gravest consequences of the economic crisis is that the venture capitalists, who are primarily the major contributors / donors towards ecological protection measures may abstain from contributing to environmental causes and similar projects focused on energy conservation. The UK’s energy security and climate change policy was under the scanner again as a report from Ernst & Young concluded that Britain will need to double its investment in energy infrastructure to meet emissions and renewable targets, and replace ageing infrastructure. Furthermore, the debate regarding the forms of energy generation to be implemented to reduce poisonous emissions and protect the environment, took a serious turn as four leading green thinkers vehemently advocated the use of nuclear power as opposed to the use of natural resources as alternative energy generation sources7. Moreover, the oil prices have fallen dramatically over the years and especially in the wake of the credit crunch, the demand for oil is likely to increase, taking the renewable resources, to the back seat. Consumers facing high levels of unemployment, and economic adversity as a consequence of joblessness are highly likely to opt for products and services that are more cost effective rather than energy efficient. Similarly, governments, battling with inadequate finances and with shoestring budgets, will be faced with acute financial crisis to invest in alternative energy projects. Although, governments across the globe may be devising green policies and raising awareness about reducing the carbon footprint through increasing reliance on renewable sources of energy, the practical application of such measures is going to be extremely difficult, since although the end products such as bio fuel for instance, might be relatively less expensive than conventional sources of energy like petrol or diesel, the infrastructure required to initiate such measures is of high financial magnitude and hence efforts in that direction are apparently futile, considering the current economic downturn and other severe and pressing issues related to humanitarian and socio – economic aids. Thus, irrespective of the duration for which the economic crisis may last, considering the fiscal shortages generated by it, it is likely to reduce the probability of facilitating any further investment in green projects. With the governments facing dilemma of encouraging green investments and supporting homeless citizens it is going to be a difficult choice to make. 3. Government Policy and Key Solutions The impact of the ongoing global economic recession has been far and wide, and has engulfed a wide range of sectors across the economy. In order to resurrect the country's plunging economic status and bring it back towards growth and development would require adequate government interference in the form of reformative measures and policies. Successful regeneration strategies may include policies concerning property development, increasing availability of skilled labor force, easy availability of finance, as well as ensuring a secure and attractive environment. The policies that are or likely to be implemented by the government to combat the credit crunch and devastating effects caused by the global economic downturn can be broadly classified into economic policies, social policies, environmental policies as well as fiscal policies. These policies are discussed in brief hereunder. 3.1. Economic Policy8 Part 4 of the Local Democracy, Economic Development and Construction Bill (clauses 63 and 64) places a new duty on county councils and unitary authorities to assess the economic conditions of their area. The legislation has put forward several recommendations to be implemented at the local government levels for improving the economy. These include preparation of assessments concerning the status of regional economic conditions, by all county councils and unitary authorities, applicable across England; ability to work in consultation and association with the district councils etc. The basic aim of such policy is to ensure and strengthen the contribution of local authorities in facilitating economic development. The government deems the ability and competence of local authorities as having a fundamental role in initiating economic developmental measures and rejuvenation of the economic prosperity of their respective regions. They have a vital responsibility in seeking developmental facilities which are fundamental for seeking growth in commerce and trade and enhancing the attractiveness and accessibility of a specified zone or region to new and existing employers. The local authorities have adequate capabilities of ensuring effective development and offering required assistance to local businesses through planning and provision of efficient infrastructure facilities as well as to ascertain that all such activities are properly linked with corresponding activities that seek to harmonize people with employment opportunities. The role of local authorities is hence central to the economic development, especially in view of the current economic crisis. The Government’s Review of Sub-National Economic Development and Regeneration (SNR) put forward a wide range of reformative measures that seek to facilitate regions and local areas to take immediate and effective counter measures against the economic challenges posed by the global meltdown. The SNR sought to make sure that: economic assessments are made at the most suitable spatial level; there is adequate precision in terms of responsibilities and aims for sub-national authorities concerned with the process of facilitating such economic development; and there is enhanced assimilation of economic, social and environmental goals. 3.2. Social Policy The social reform policies initiated by the government are intended to be implemented in three distinct phases: short term, medium term and long term with distinct objectives and goals designed for each of the three phases. In the short term the government seeks to make an additional investment amounting to £1.3 billion in Jobcenter Plus and the local job providers so as to provide assistance to a larger number of people who are currently on Jobseeker's Allowance. In the medium term the policy aims to develop and restructure the market for employment services by creating appropriate and adequate inducements and structures to get the best possible benefit from the private, public as well as voluntary non government and not for profit sectors, working closely in association with each other, to enable more and more people get back to their jobs. The Gregg Review recommends a radical vision – that of ‘personalized conditionality’ matched by personalized support. These policies are drawn from the best of international welfare systems such as the Scandinavian and Dutch models9 whereby bespoke support is matched by comprehensible commitments on individuals. The proposals particularly affect the lone parents and partners with younger children. The Employment and Support Allowance is developed and implemented to ensure that only those individuals who are authentically incapable of work are offered this benefit. This would further ensure appropriate utilization of funds. According to the government report the basic vision behind the development and application of such policy is to ensure the creation of a society where there is equality for all, especially the disabled people. The government is resolute in initiating active measures required to assist in building their potential and augment the influence they have over their lives. To sustain these goals, the previously available Incapacity Benefits has been replaced with the Employment and Support Allowance. These measures are likely to improve the employment status of individuals and strengthen the economy. 3.3. Environmental Policy UK has taken substantial steps in preventing climate change through developmental and implementation of innovative and creative policies such as the Climate Change and Sustainable Energy Act, the £535 m green stimulus package, as well as the Stern Review. All these acts and policies are aimed at reducing activities that are detrimental to the environment. The key provisions put forward by the Climate Change Act10 include: setting legally binding targets pertaining to green house gas emissions, setting up a carbon budgeting system whereby the government is required to report to the Parliament regarding the various policies and measures implemented to adhere to the budgets; including measures to reduce harmful emissions by the international aviation and shipping sectors; introducing domestic emission trading schemes, encouraging use of biofuels for commercial as well as household consumption, recycling of waste, etc. The basic aim behind such an act is to ensure efficient carbon management and smooth transition towards a sustainable low carbon green and environmental friendly economy and thereby demonstrate a strong UK leadership on the international sphere. 4. Conclusion The chief aim of this paper was to scrutinize the outcome of global economic recession on local economic development and identify the strategies adopted and implemented by the central and local government to combat the challenges posed by the sudden economic downturn. On the basis of the discussions presented above, it can be safely concluded that the authorities responsible for facilitating local economic development must ensure and elaborately analyze the tools and measures used for stimulating economic growth. Apart from identification of appropriate policies the authorities must also take active steps to market and promote such measures. The local economic development is by far the most efficient means of providing social, environmental and economic benefits for developing a sustainable economy and the policy makers as well as the authorities in charge, must therefore, take into account the national as well as local priorities, pretest their assumptions about the economic progress likely to be achieved by their strategies, as well as display a clear understanding of the relationship between social, economic and environmental values, on one hand and the state and its citizens on the other, prior to implementing their policies. The local authorities must be practical and realistic while administering the resources available at their disposal for dealing with any obstacles that may arise and use all their discretionary powers, both legal and those achieved from being a major contributor in the local economy, to facilitate development within their respective regions and deal with and recuperate from the challenges posed to them by the economic recession. References: The World Bank (2009), Local Economic Development, viewed: April 21, 2009 from: E.S.R.C. (2009). The U.K.'s Productivity Gap, Economic and Social Research Society, viewed: April 21, 2009, from: UK National Statistics (2009). UK Productivity Growth Rates, viewed: April 21, 2009 from: Office for National Statistics (2009). Work and Worklessness among Households, viewed: April 21, 2009 from: The Guardian (2009). Sharp Rise in Unemployment as Financial Crisis Hits Jobs Market, viewed: April 21, 2009 from: Office for National Statistics (2009). Labor Market Statistics, March 2009, viewed: April 21, 2009 from: ODAC (2009). The Oil Depletion Analysis Center, viewed: April 21, 2009 from: Communities and Local Government (2008) Prosperous Places: Taking forward the review of sub-national economic development and regeneration – the Government’s Response to public consultation Office of Public Sector Information (2009). Climate Change Act 2008, viewed: April 21, 2009 from: Read More