Local economic development (LED)

The term “local economic development” (LED) refers to a concept that shows the complexity and the interplay of the various dimensions of economic processes at the local level. We will use it to understand the economic benefits of CfW for communities (as opposed to economic benefits for individual participants).

In the following, we (i) provide a working definition of the term; (ii) elaborate on possible drivers of LED; and (iii) explain the so-called “multiplier effect”, which transforms a singular payment into a repeated benefit.

2.3.1 Definition and measurement

The concept of LED describes the sustainability of economic development processes at a local (that is, municipal or quarter of town) level. Just as economic development in general is more than just economic growth, we consider LED to be a multidimensional process, as well. In particular, equity, the inclusion of vulnerable groups and the reduction of multidimensional poverty (see Box 1), are taken into consideration. Local communities’

social, environmental, and political aspects of development are as much foci of analysis as are local labour, commodity and capital markets. This understanding is well reflected in the International Labour Organization’s definition of LED as “promoting participation and local dialogue, connecting people and their resources for better employment and a higher quality of life for both men and women” (ILO [International Labour Organization], 2018).

Following this definition, LED entails the two goals: quality of life and employment. While measuring employment is rather straightforward – and commonly done in national statistics collecting unemployment or labour

market participation figures – quality of life is much more abstract and difficult to measure. People’s subjective perceptions about their material living conditions, their capabilities to access health or education services, as well as their social interactions, the respect of their basic rights and environmental pollution also play a role. In the local context, ways in which material living conditions are affected and leveraged by multiplier effects deserve special attention (see below).

Box 1: The conceptual framework of multidimensional poverty

This study understands poverty as multiple deprivation of basic capabilities.

Capabilities are “the substantive freedoms [a person] enjoys to lead the kind of life he or she has reason to value” (Drèze & Sen, 2013, p. 43). These are determined not only by income and wealth, but also by education, health, social inclusion, political rights and many more factors. The capabilities of any person therefore depend not only on the person’s place of living and working but also on age, gender and social origin (class, family reputation, caste, ethnicity).

Thus, we argue – in accordance with the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD-DAC, 2001) – that poverty results from deprivation of one or more of the following subsets of capabilities:

• Economic capabilities refer to the ability to generate income, consume and have assets.

• Human capabilities include health, education, nutrition as well as access to clean water and shelter.

• Political capabilities comprise the respect for human rights, opportunities of political participation and having some effect on public policies and political priorities.

• Socio-cultural capabilities are the ability to take part as a valued member of a society.

• Protective capabilities are resilience, that is, the ability of people to resist economic and external shocks.

2.3.2 Factors and drivers

In addition to traditional drivers of economic development, such as institutions, physical and human capital and technology, social or political capacities, locality factors and local business cycles are also important drivers of LED.

The combination of those drivers and their resulting augmenting/multiplying effects also play an important role. For example, strong social or political

capacities can compensate limited resources. However, weak community or political capacities, which could be due to corruption, disorganisation, or cronyism, can hamper LED so that an endowment with natural resources might not necessarily translate into good capacities. Thus, infrastructure, natural resource availability, geographical location, labour markets, capital investment, entrepreneurial climate, transport, communication, industrial composition, technology, size, export market, international economic situation, and national and state government spending can all be considered drivers of LED (Blakely & Leigh, 2017).

As CfW programmes are expected to achieve at least a double dividend by offering wage employment and creating infrastructure, this study highlights labour markets and infrastructure as key drivers of LED.

Labour markets: Labour markets are an essential element of LED. The skill level of the workforce in a region is an important factor for attracting industries. Thus, the ability to upgrade the skill level of the workforce through training, education and development is crucial for a region to remain competitive and respond to changing labour demand (Pike, Rodríguez-Pose, & Tomaney, 2006). Various models highlight the importance of job creation and retention for LED (Salvini, in press). One example is the export-base/primary-jobs model that focuses on the effects of creating “primary”

jobs producing goods and services for export outside the respective local economy. The generation of income from the sale of these products increases purchasing power and demand for other products, which can be secondary or tertiary and also offer new employment opportunities (Greenwood, Holt, &

Power, 2010; see also below).

Infrastructure: Functioning infrastructure is essential for any kind of economic activity. In the context of LED, infrastructure subsectors such as energy, water and sanitation, telecommunications and transportation are particularly important. However, access to physical infrastructure alone does not foster gross domestic product (GDP), economic growth, or social returns at a macro-level. Studies find that a high level of poverty and bad governance weaken the effect of infrastructure on economic growth, while a competitive environment and well-made and clear regulations are associated with higher payoffs (Estache & Garsous, 2012).

2.3.3 Multiplier effects

In general, a multiplier effect can translate even minor inputs into considerable outputs. This effect stems from different processes, the most famous being the circulation of money within a closed economy: Here, every expenditure raises the income of not only the recipient but of many more people because the recipient of the payment again spends the additional income for her/his own purchases, and then the same money is spent over and over again to other people. So, unless an initial payment is entirely saved or spent outside the community, at least part of it is recycled at least once and thus benefits a second person as well. Unless she/he saves the additional income entirely or spends it entirely outside the community, this second person will pass it on again or at least some portion of it, and so on. In the end, at least parts of the initial payment can thus be passed on infinite times within the community benefitting many people rather than just the primary recipient. In 1936, John Maynard Keynes labelled this phenomenon the “multiplier effect” (Keynes, 2007, p. 117). And the multiplier m can be computed as follows:

= (1 ) = 1

+ = 1 + = 1 + = 0 Where s is the average share of the income that people save and i is the average share of the income that people spend outside the community.

There are two variants of this original multiplier effect: The first variant comes into play when employment is created: Somebody invests in a factory (for instance, a bread factory) and creates employment for several people in the region who achieve higher income and can then buy the products of the investor (that is, the bread).

The second variant is the so-called capacity effect, which results from a one-time investment in assets that enable, ease, or cheapen production. Thereby, owners of production facilities enjoy increasing sales figures or falling production costs. The local community also benefits because the additional income or saved spending can be used for other items, again adding to the multiplier effect.

For the analysis of LED, the multiplier effect is particularly important because it boosts the effects of one-time expenditures. This applies not least to the wages paid out by CfW programmes (Barrientos, 2008). However, of course, the size of the effect depends totally on the assumption that the

additional income is indeed spent locally. For example, if businesses are not owned by locals, or if labour is imported from outside the region, or local capital flows out of the region, the local community will benefit less from economic activity (Soifer, 2014).

In addition, there is very little empirical evidence so far for the existence of the multiplier effect of CfW but there are a few studies on other social transfer programmes (Bhalla, Kangasniemi, & Winder-Rossi, in press). Barrientos (2008) stressed that most empirical research has focused on the impact of social transfers at the household level and has thereby found multiplier effects mainly at the level of assets and the consumption by beneficiaries. A case study by Robinson & Levy (2014) on Cambodia found that social transfers have more positive effects on economic development if implemented along with productivity-enhancing local policies. A World Bank research project concluded that social cash transfer programmes in Africa “have a nominal income multiplier ranging from USD 1.34 to USD 2.52 for each USD 1.00 transferred” (World Bank, 2015, p. 2). Egger, Haushofer, Miguel, Niehaus and Walker (2019) estimated the multiplier effect of cash transfers in rural Kenya to be approximately USD 2.6 for every US dollar.