4. The role of local governments in economic development policy

Local governments are important actors in economic development. They are more familiar with the local economy than any other level of government, they are in close contact with local stakeholders, and they can ensure that policies are adapted to local conditions, promote specific advantages and address important bottlenecks. Few local governments, however, use all the tools at their disposal to support the local economy. Further efforts are needed to achieve higher levels of economic growth and well-being in all urban areas.

The importance of local governments in economic development does not mean that national governments have no role to play. National and local governments play complementary roles. Neither level can provide effective support for the economy without the contribution of the other. For example, only national governments can initiate major investment projects, such as the construction of an international airport. However, quite apart from such transformative projects, economic development relies on many small steps, such as the training of skilled workers, the design of an effective intra-urban road network and the efficient allocation of land to firms. Many of these tasks are among the core functions of local governments.

Moreover, national governments rely on local governments to implement many national economic development programmes. Such programmes may be in the field of education, infrastructure development or business development. For example, a programme that provides financial aid to small businesses to support capital investment might be better administered by local governments than by the national government. If it is successful, such a programme can attract tens or even hundreds of thousands of applications. A national administration would be quickly overwhelmed if it had to process all these applications, and it can be more effective if local administrations are responsible for processing them. Moreover, since local administrations are more familiar with local businesses, they may be better able to judge the merit of an application than the national administration.

Many African countries are highly centralised, and their local governments have lower levels of responsibilities and resources than local governments in other economies with similar income levels. Not only does this limit their ability to pursue economic development policies, but it has a negative impact on economic development. Further decentralisation is an important measure for supporting economic growth throughout a country, thus facilitating economic development at the national level.

The high degree of centralisation also needs to be considered in evaluating the possible options. If local governments with weak capacity try to do too many things at once, they may spread their resources too thinly. In such instances, it can be preferable to focus on doing a few things well rather than trying to do everything at once. Before undertaking the activities discussed in this chapter, local governments should thus evaluate the administrative and fiscal resources needed and prioritise accordingly.

The possible ways that local governments can support economic development are extensive, but not every policy intervention is appropriate in every context. This chapter does not aim to provide a blueprint for local economic development policies for governments to follow. Instead, it presents principles for developing local economic development policies and discusses why these principles are relevant. Because the informal sector makes up a large fraction of the economic activity in African cities, these principles must be applied to the formal as well as to the informal sector in order to design effective local economic development policies.

It is impossible in a single chapter to cover a topic such as local economic development policy exhaustively. Readers who are interested in local economic development in Africa are referred in particular to the Local Economic Development Training Series by UN-Habitat and EcoPlan International (2005[1]), which contains guidance for practitioners, and also to the local economic development implementation survey by UCLG Africa (2018[2]), which covers the current state of local economic development policy across Africa.

Cities differ from each other in various dimensions. Their businesses are active in different sectors, and their residents have different levels of education and skills. They have different levels of infrastructure, and the nature and spatial scale of their economic interactions varies. Some cities are close to a large metropolis, while others are important market towns for rural hinterlands or are located close to important natural resources. Others are centres for long-distance cross-border trade. These characteristics, meanwhile, do not remain constant. Given the pace of urbanisation in Africa, cities’ economic profiles can evolve rapidly.

The diversity of local contexts and the varying scales of economic and social interactions require a territorial approach to policy making. Policies need to be designed and targeted to the territories that are concerned by an issue, ranging from the neighbourhood to the metropolitan, national and continental level. Different sectoral policies need to be co-ordinated to account for the fact that their effects depend on each other as well as on the conditions in a city or region. Instead of applying sectoral policies uniformly across a country, a territorial approach to policy making thus uses cross-sectoral policy packages at varying geographical scales.

A territorial approach to policy making is not only needed to respond to specific local challenges, but also because the consequences of a given policy can differ strongly from place to place. Take for example the case of a policy aimed at improving the connectivity of poorly accessible towns close to large cities. Two towns in a metropolitan area might meet the conditions for inclusion in such a policy. One town is home to large disadvantaged groups, who are cut off from jobs because they are not easily accessible, which has led to a vicious circle of increasing social deprivation. A second town might be home to well-off residents for whom the lack of accessibility, or seclusion, is in fact perceived as desirable. Improved accessibility could enhance well-being in the first town, but it might reduce it in the second town. A space-blind policy that does not take into account the policy’s impact on different cities or regions could result in inefficient investments and might make matters worse in some circumstances.

Local governments are key actors in implementing place-based policies. Their exclusive focus on a city gives them an intimate knowledge of local circumstances and they are often well connected to local actors, such as businesses and educational institutions. By collaborating with each other, local governments can also implement policies across different geographic scales, depending on the policy issue at hand. Local governments are thus often better suited than national governments to targeting policies in the local economic context, identifying relevant stakeholders and co-ordinating actions among them. These advantages become more relevant the more specific to the local context a policy decision is.

Many problems cannot be addressed by local governments alone. Often, different levels of government need to become active in addressing issues that fall within their policy domain. For example, setting up a new system of schools for vocational training might require framework legislation and funding from the national government, while local governments would have to build and operate the schools. Effective multilevel governance is essential for implementing place-based policies (OECD, 2019[3]). Moreover, national governments need to implement place-based policies and territorially differentiated policies, such as national urban policies discussed in Chapter 3 (see also OECD/UN-Habitat (2018[4])).

Even strong place-based and territorially differentiated policies by national governments are only a complement, not a substitute, for the role of local governments. National governments are unlikely to be able to achieve sufficient policy differentiation on their own. Partly, this is a simple capacity issue. National administrations would quickly be overwhelmed if they had to devise specific policies for each city and region in a country. Beyond capacity constraints, informational constraints can be even more important. It is more difficult for policy makers in national ministries to grasp the local context fully than for local policy makers. They usually live in the capital, at a distance from the city in question, they lack local contacts, and their work obliges them to deal with a large number of cities and regions, rather than focusing on a specific place.

Local governments can only play their important role if the right legal and institutional frameworks exist and if they have sufficient fiscal and administrative resources. Almost everywhere, local governments have only those powers that are explicitly granted to them by the national government or, in some federal countries, by the respective state governments. Equally important are the fiscal resources that local governments control and the way they raise revenues. Whereas local governments in some countries have the power to raise a wide range of taxes and to take out loans or to issue bonds, they are almost entirely dependent on transfers from the national government in other countries (OECD/UCLG, 2019[5]). Finally, it matters whether local governments can use their powers and resources effectively. Given the comparatively small size of most local administrations, administrative capacity is an important constraint on their ability to conduct effective local economic development policies.

Local governments in Africa operate in challenging environments. They have very low levels of resources and poorly defined roles and responsibilities. On average, the African countries for which data is available spend only 14.1% of their staff budgets on local government. In Benin, the share is 3%. By comparison, the global average for that percentage outside Africa is 29.4% (OECD/UCLG, 2019[5]). Local governments in Africa also face other constraints on basic resources that prevent them from operating effectively, such as shortages of basic IT equipment. In Nigeria, 38% of civil servants in the federal government have regular access to a computer. By contrast, the share of Nigerian local government employees with access to a computer is just 6%, and local governments on average have internet access only on 3% of workdays. In Ethiopia, the percentages are higher, but still low, at 8% and 21%, respectively (Mo Ibrahim Foundation, 2018[6]). Five out of 18 local governments in Nigeria surveyed by the Mo Ibrahim Foundation (2018[6]) even report having no access to electricity. The same report, however, also documents instances of decentralisation that led to improved resource access and better service delivery by local governments.

While resource shortages remain critical, the institutional environment for local governments in Africa has been improving. Only seven African countries had institutional environments that were favourable or somewhat favourable to local governments in 2012, but by 2018, this had increased to 16. Nevertheless, the institutional quality remains unfavourable or somewhat unfavourable in 34 countries, and some countries have actually regressed in their institutional environment (UCLG Africa/Cities Alliance, 2018[7]). Improvements have been noted in particular in the area of capacity building, as well as in frameworks to monitor and evaluate the performance of local governments. In contrast, the favourability of legislative frameworks has slightly deteriorated, as new constitutions were adapted that are less favourable to local governments, and as planned reforms to strengthen the role of local governments have been postponed.

Despite improvements in the institutional environment, the ability of local governments in Africa to develop and administer local economic development policies is constrained by a lack of administrative and fiscal resources (both in own source revenues and in transfers from higher levels of government). As long as local governments lack the basics of modern administrations, such as information and communications technology (ICT) and the staff trained to use it, they will not be able to establish effective local development policies. Providing the resources and developing the capacity for local governments is thus indispensable. Because administrations learn by doing, even governments with weak administrative capacity should attempt to develop local economic development policies if they have the opportunity to do so.

The reason local governments’ resources in Africa are so much lower than national governments’ is partly due to the fact that wealthier countries tend to be more decentralised than poorer countries (Bodman and Hodge, 2010[8]). Most African countries, however, have an exceptionally low degree of subnational autonomy, even compared to other countries with similar income levels (OECD/UCLG, 2019[5]). Most African countries undertook decentralising reforms in the 1990s and 2000s to strengthen local government (Crawford and Hartmann, 2008[9]). Meanwhile, deconcentration measures were initiated in many countries (Riedl and Dickovick, 2010[10]).1 Despite these efforts, African countries are still heavily centralised. In the 14 African countries for which data is available, local governments are responsible for only 11% of all public investment (Figure 4.1). In contrast, local governments in low and lower middle-income countries outside Africa are responsible for 34% of all public investment, which corresponds roughly to the global average. This may in part be due to the fact that most African states gained their independence only in the 1950s and 1960s. It is possible that consolidation of the national government was the priority, and that embarking on decentralisation was a less urgent concern.

Given the low level of fiscal and administrative capacity, further reforms to strengthen local governments are indispensable if they are to participate fully in local economic development. Yet, even within the current framework, local governments can play a greater role. Rodríguez-Pose and Tijmstra (2007[11]) argue that despite their capacity constraints, the conditions to pursue local economic development policies are in place in most administrations of large African cities. Smaller administrations face more severe capacity constraints, but they can often make progress towards more effective economic development policies by making economic development a prime political objective.

Strengthening the fiscal capacity of local governments is perhaps the most important step for enabling local governments to pursue more active economic development policies. Chapter 5 of this report discusses the issue in detail and provides examples of how national governments can use public funds to provide resources to local governments.

Designing and implementing local policies at the right geographical scale is essential for their success. While it is natural for local politicians and administration officials to focus on the jurisdiction for which they are responsible, this is often not the appropriate scale for a policy. In large urban areas, the jurisdictions of local governments often cover only a part of the urban area. In such a situation, local administrative boundaries do not correspond to the daily realities of residents and businesses. Workers commute daily from one local jurisdiction into another and may do their shopping in yet another jurisdiction. Likewise, firms have customers and suppliers and recruit their workers from the metropolitan area as a whole. In such cases, co-ordinating policy among local governments is essential for governing a metropolitan area effectively.

Most metropolitan areas are broken up into many local government jurisdictions. In Africa, administrative fragmentation of metropolitan areas is increasing rapidly. The accelerated growth of urban populations has meant that built-up areas expand into the jurisdictions of neighbouring local governments. The extension of public transport networks, and higher rates of car and motorcycle ownership, have also increased suburbanisation. Cities are thus growing in space even faster than in population, which has accelerated the spread of the urban agglomeration across multiple local jurisdictions.

Accra, in Ghana, is one typical city broken up into many local government areas. In Ghana, districts are the most important level of local government. Its more than 250 districts, with an average of more than 100 000 inhabitants, they are of average size by international standards, and are responsible for such policies as development planning, education, basic infrastructure provision and land-use regulation (Ghana Local Governance Act, 2016[13]). Map 4.1. shows how Accra’s built-up area is spread across 30 districts. The two metropolitan districts in the city, meanwhile, are divided into sub-districts (Adusei-Asante, 2012[14]) and the city has started to grow into two neighbouring regions, increasing the number of actors involved in its governance.

Administrative fragmentation in metropolitan areas makes policy co-ordination important for several reasons. First, many policies require measures that need to be implemented in several local jurisdictions. This concerns in particular transport infrastructure and land-use planning policies, but also many economic development policies (OECD, 2015[15]). For example, a planned large-scale housing development will only be successful if residents are able to reach good jobs within a reasonable commuting time. In practice, this can mean that the location of the housing development must be co-ordinated with the upgrade of a road and the creation of a bus rapid transit connection that runs through several municipalities to reach the city centre. Moreover, the activities at an industrial site in a neighbouring municipality might need to be limited, so that it does not affect environmental quality in the new residential area.

In practice, municipalities co-ordinate their policies most often in the fields of land use and development planning, economic development policy and transport planning. A lack of co-ordination can create bottlenecks and dysfunctionalities, such as increased congestion, long commutes and inefficient land-use patterns, which affect the economic performance of a metropolitan area. These negative effects become worse as administrative fragmentation increases. For OECD countries, estimates show that metropolitan areas with twice as many local jurisdictions per 100 000 inhabitants have 6% lower productivity levels on average (Ahrend et al., 2014[16]).

A second reason for co-ordination among local governments within metropolitan areas is the creation of economies of scale in service provision. Many public services that are provided by local governments can be delivered at a lower cost when they are delivered at a certain scale. For example, it can be cheaper for several local governments to work together to organise their waste management or water provision, rather than each developing their own solutions. Establishing such co-ordination can be easier within a stable framework than on an ad hoc basis. Moreover, co-operation between local governments can help to improve the quality of local administration. Larger local governments with more administrative capacity can provide specialised administrative services to nearby smaller administrations that do not have the capacity to take care of them themselves. Such models of asymmetric administrative service provision are used by many OECD countries to account for differences in administrative capacities across local governments.

A third reason for co-ordination among municipalities is to reduce so-called “beggar-thy-neighbour” policies by local governments. The term describes policies that are used by local governments to achieve gains for their jurisdiction at the expense of neighbouring jurisdictions. For example, a local government might try to clear a slum without providing its residents alternative housing solutions. This displaces the slum population to other parts of the metropolitan area without solving the problem, not only harming the affected slum dwellers but creating problems for the jurisdictions to which they are displaced. Increased co-operation of local governments in a metropolitan area reduces the likelihood that they will engage in such mutually harmful policies.

No single best-governance arrangement exists to ensure policy co-ordination across local governments and levels of government. The most straightforward solution for administrative fragmentation would be a merger of local governments into larger units that correspond more closely to the actual footprint of the urban area. In some places, this can be an effective solution. South Africa created metropolitan governments in six cities, for example, by merging multiple local governments. The reorganisation was part of an ambitious decentralisation reform intended to overcome the spatial segregation in South African cities that was a legacy of apartheid (Pieterse, 2017[19]). However, such reforms remain rare. Experience shows that many countries struggle to create effective unified metropolitan governments, because mergers of local governments often meet resistance from local stakeholders, including local politicians, local administrations and the local population. In such cases, it is important to create the institutional arrangements necessary for policy co-ordination in the absence of a unified metropolitan government.

Where amalgamations of local governments are impossible or undesirable, other solutions have to be found. Usually, these involve co-ordination arrangements for a limited number of policy areas within the responsibilities of local governments, in particular for spatial planning and transport policy (Ahrend, Gamper and Schumann, 2014[20]). Globally, a wide variety of institutional arrangements exist to ensure policy co-ordination. They range from “soft” co-ordination bodies that serve primarily as a forum for exchange among local policy makers to metropolitan authorities that take over some of the functions of independent local governments (OECD, 2015[15]). The decision-making structures of such bodies, their legal responsibilities and their revenue raising and spending powers vary widely. As Haas and Wani (2019[21]) show, all approaches have advantages and disadvantages. The right choice of an institutional arrangement depends on a variety of factors, including the responsibilities of local governments, their administrative capacity, the size of the metropolitan area and its fragmentation into several local jurisdictions.

One of the most important characteristics of metropolitan governance arrangements is the difference between voluntary and mandatory co-operation. Voluntary co-operation relies on mechanisms that facilitate exchange and co-operation between local governments, but do not oblige them to find a mutual position. It works well if all actors involved have an interest in co-operating, and it has the advantage that it is a flexible form of co-operation, which can be quickly adapted to newly arising issues. However, voluntary co-operation is not effective if the actors are not willing to co-operate, due to diverging political or personal interests. Moreover, voluntary co-operation leaves all legal responsibilities with individual municipalities and does little to overcome capacity bottlenecks within local administrations. In policy areas where local governments have insufficient administrative capacity, it can be more effective to delegate responsibilities to a dedicated metropolitan authority. This can then build the administrative capacity needed to perform advanced functions, such as complex infrastructure planning, more easily than local governments (see OECD (2015[15]) for an in-depth discussion of how to structure statutory co-operation arrangements).

Despite the multitude of approaches and the wide range of advantages and disadvantages associated with each approach, the evidence shows that some degree of policy co-ordination at the metropolitan level is better than no policy co-ordination at all. Studies for OECD countries have shown that metropolitan areas with metropolitan bodies in charge of policy co-ordination have lower levels of sprawl and residents who report higher rates of satisfaction with public transport systems by approximately 12 percentage points. The benefits of improved policy co-ordination are also reflected in higher levels of productivity, as metropolitan authorities reduce the “productivity penalty” of administrative fragmentation by approximately 50% (OECD, 2015[22]).

Strategic planning is probably the most important activity for developing successful local economic development policies. Effective strategic plans ensure policy consistency across governmental departments and external stakeholders as well as over time (UN-Habitat, EcoPlan International, 2005[27]). It is not only the plan itself that matters, however. The planning process is equally important because it is an opportunity to define common objectives to learn about the local economy and to connect stakeholders. This section provides a brief overview of the importance of strategic planning for local economic development.

Economic development is the consequence of efforts by many actors, including private businesses, different levels of government and various departments within a government, other public and semi-public organisations such as universities and international donors, as well as civil society. Many of the efforts of these actors are complementary, which means that the actions of one actor enhance the positive effects of the actions of another actor. Conversely, the absence of an action by another actor can create a bottleneck that renders another policy ineffective even if it is otherwise well designed. Therefore, co-ordinated policy packages are more effective than individual policy initiatives (see below). Strategic planning is a tool that can help formulate and co-ordinate such policy packages.

The purpose of strategic planning is to create a common understanding of the current situation, to define common objectives among all stakeholders and to devise steps for achieving the objectives. To fulfil these functions, strategic planning must be a collaborative process in which all stakeholders are represented, rather than a top-down process in which a local government presents a strategy without giving other stakeholders a chance to influence it. In particular, it is important to give an adequate voice to participants in the informal economy, which are often underrepresented in the policy-making process despite their importance in the economies of African cities.

The range of policies that should be covered by local strategic planning depends on the responsibilities of local governments. In many instances, land-use planning and transport policies are among the most important policies covered by strategic plans. It is no surprise that strategic planning is often the responsibility of metropolitan authorities and serves as a tool of policy co-ordination across local jurisdictions (OECD, 2015[15]). However, other policies, such as skills policies and regulatory policies, can be equally important.

Beyond contributing to the co-ordination of policies by different actors, strategic planning is important to ensure policy consistency over time. Many economic development policies take years to become effective. If a city makes the strategic choice to encourage economic growth in a certain sector, it may invest in specific infrastructure, develop new training programmes in collaboration with technical colleges, build an industrial park and engage in targeted promotion to attract foreign direct investment. Such policies cannot be implemented at once, and one-time initiatives are likely to fail. A strategic plan that guides policies over at least five to ten years helps ensure the consistency of policy necessary to carry out advanced local development policies.

Using strategic planning to guide future policies also has an inherent advantage, in making it easier for businesses to plan ahead. In many instances, a predictable policy environment is one of the most important factors in businesses’ investment decisions. A firm is more likely to invest in a new regional headquarters, for example, if it knows that the chosen location is linked to a public transport network that will grow progressively over the years. An effective strategic plan that guides infrastructure development over extended periods can provide this certainty. A strategic plan can thus have positive economic effects even before the first policy measures that it foresees are initiated. Of course, this positive effect emerges only if businesses trust that the measures in a strategic plan will be realised. Public trust in the willingness of local governments to adhere to their own plans is indispensable.

In all contexts, strategic planning and fiscal decisions must be closely aligned with each other, because most policies can only be implemented if sufficient funding is available (OECD, 2019[3]). Unfunded commitments in strategic plans are a major reason for their failure. The strategic planning process and the fiscal decision-making process thus need to be linked to each other, with the goal of aligning strategic planning and funding decisions.

As major funding decisions are always political decisions, strategic plans must reflect the political priorities of the key funders. Unless they do so, it is unlikely that funding decisions will correspond with strategic plans. It is important to keep in mind that strategic planning does not aim to replace political decision-making by governments. Instead, it has the objective of finding effective solutions for implementing policy priorities of governments and aligning them with the objectives of other stakeholders.

Strategic planning also contributes to another, often underappreciated, dimension of the policy-making process – the process of learning about what is effective. Although local policy makers are generally well informed about their cities, it is unlikely that they have all the knowledge required to prepare effective local economic development strategies. They might not know all relevant economic conditions in their city, nor are they necessarily aware of all economic opportunities and the conditions that are required to use them. Entrepreneurs tend to have a better knowledge of economic opportunities than civil servants, but even they are often not aware of new economic opportunities. Hausmann and Rodrik (2003[29]) argue that entrepreneurs underinvest in economic discovery because they reap only a fraction of the value of discovering a new economic opportunity, while most of it accrues as value to society.

The importance of developing administrative capacity on economic policies gives the strategic planning process another value that goes beyond the plans that are produced by it. The planning process is a key opportunity for policy makers to learn about the local economy. The insights gained in the process are important for many other policy decisions beyond those directly associated with the strategic plan. Therefore, local governments should aim to producing strategic plans internally and use external expertise only in limited ways. Outsourcing the preparation of plans to external consultants forgoes many of the learning opportunities associated with the planning process.

Maximising the value of learning that is associated with the strategic planning process is another reason to involve external stakeholders, such as businesses and universities extensively in the planning process. Not only does a greater involvement of external stakeholders help local officials collect more information about the local economy, it also creates an opportunity for stakeholders to learn. For example, it can give businesses the opportunity to better anticipate policy priorities, to learn about applied research conducted at a local university or to engage with businesses in other sectors. Any of these activities may lead to new partnerships or innovations that have commercial value and strengthen the local economy.

Local economic development policies must fulfil two important roles. On the one hand, local governments are essential for the implementation of national economic development programmes. National administrations lack the capacity to carry out programmes throughout a country. They must thus rely on local governments to carry out many of the measures typically included in national programmes. For example, local governments may decide to process applications for targeted aid to small businesses. Due to the potentially large number of requests, the national administration would be quickly overwhelmed if it had to process all applications.

On the other hand, local governments need to pursue their own complementary economic development policies. While these policies must be aligned with national policies, they must also reflect local circumstances, including the local skills of the workforce, the availability of infrastructure and the roles and responsibilities of different levels of government as well as their administrative and fiscal capacities.

Due to this complexity, it is impossible to provide blueprints for successful local economic development policies that could be adopted anywhere. The more closely policies respond to both national priorities as well as specific local opportunities and challenges, the more likely they are to be successful. This section discusses five principles that can guide the formulation of local economic development policies.<to here>

Economic development requires the right conditions in many dimensions. Factors such as good infrastructure, effective institutions, an adequately skilled labour force and a customer and supplier base are all essential conditions for economic development. The absence of only one of these factors can create a bottleneck that prevents economic growth. It also implies that governments do not have any silver bullets to facilitate growth. In most circumstances, an isolated investment in any of the factors mentioned above will have a limited impact, because bottlenecks in other dimensions will persist that prevent the investment from realising its potential benefits. In a nutshell, this means that:

having good roads but no electric power leaves a place unattractive for private investors (Duranton and Venables, 2018[30])

Local economic development policies thus need to be multidimensional. Instead of pursuing individual measures, policy makers should aim at pursuing co-ordinated policy packages.

A co-ordinated policy package consists of a range of measures in several policy areas that aim at a common objective. Take for example the case of a local government that tries to attract an industry in a specific sector. As a first step, a local government could dedicate land to a new industrial park. Without accompanying measures such as providing road and electricity to the area, the project is almost certain to fail. Even a well-serviced industrial park, however, cannot attract businesses if other conditions are unsuitable. In many situations, governments should thus take additional measures to increase the likelihood that it can result in a success. Depending on the context, governments might advertise the industrial park to international investors. They could also create a contact point within the local administration to help companies navigate the administrative processes required to obtain the necessary permits. If the lack of a skilled workforce is a bottleneck, a local government could arrange a training programme at a vocational college, in co-operation with the companies that will locate in the industrial park.

Co-ordinated policy packages are valuable because their impact is likely to be larger than the sum of the effects of the individual measures. In practice, however, local economic development policies frequently consist of individual policy measures that are implemented in an unco-ordinated fashion. Partly, this is because competing interests among politicians and administration officials make it hard to agree on a common set of policy objectives along which policies can be aligned. Partly, it is also because it is more difficult in practice to develop co-ordinated policy packages than in the stylised example above. However, in many cases, a lack of strategic planning as discussed in the previous section is responsible for an ad hoc use of individual measures.

In contrast to many other issues, local governments with lower administrative capacity are not necessarily at a disadvantage in developing co-ordinated policy packages. Smaller administrations with fewer activities are easier to co-ordinate than a large administration engaged in many complex tasks. Moreover, the setting of common priorities across an administration is generally a political choice that does not depend on administrative capacity to the degree that the implementation of policies does.

Across countries, the distribution of economic activity is an important factor in their comparative advantages. However, at the subnational level, absolute advantages play a greater role. The idea of comparative advantage is a key concept in international trade that was originally described by Ricardo more than 200 years ago (Ricardo, 2015[34]). It implies that a country does not necessarily have to be the most efficient producer of a product to develop a successful industry around that product. Its industry has to be relatively more efficient in producing the product (as compared to producing other products) than the industry of other countries. The distinction from absolute advantages is important because it implies that every country has comparative advantages around which it can develop industries.

However, the concept of comparative advantage is not readily transferable to the subnational level, because the price adjustment mechanism essential in theories of comparative advantages is imperfect within countries. Relevant price adjustments occur primarily through changes in exchange rates and real wages. In contrast, different regions within a country share a currency, and wages are often not sufficiently flexible to overcome the disadvantages of struggling regions. In this situation, comparative advantages cannot emerge, leaving undeveloped cities permanently unattractive to produce in (Duranton and Venables, 2018[30]). This explains why some local economies remain permanently depressed, while other local economies in the same country are booming.

For policy makers at the subnational level, this implies that local economic development policies should not rely exclusively on comparative advantages. It is important to identify absolute competitive advantages and use them as a basis for their economic development policies. While it is often easy to identify absolute advantages of booming cities (e.g. a highly skilled workforce), absolute advantages of struggling cities are less obvious, because they are usually not utilised. Such hidden absolute advantages are often characteristics that cannot be replicated easily by other cities in the same country. A strategic location on a major trade corridor might be an absolute advantage. Likewise, certain skills within the workforce can be hidden absolute advantages. For example, the population of a city might have language skills that facilitate trade with neighbouring countries and allow the city to serve as a gateway between the countries. The availability of specific infrastructure, such as a hydropower plant that generates a reliable supply of electricity, can be another source of absolute advantages. Likewise, proximity to some natural resources, such as perishable agricultural products, is an absolute advantage if it can serve as the basis for the development of a more advanced industry (e.g.  food processing). Unique attractions that can form the basis of a tourism industry are another common absolute advantage (Box 4.6).

Africa’s economies are highly reliant on extractive activities, which makes them vulnerable to external shocks and which limits the potential for value-added growth. In response, the African Union emphasises the importance of diversification in its strategic priorities for economic development (AUDA-NEPAD, 2021[36]). This policy is supported by evidence that shows that at low- and middle-income levels, countries with more diversified exports are more developed (Cadot, Carrère and Strauss-Kahn, 2012[37]).

By contrast, at the subnational level, empirical evidence suggests that local specialisation is associated with better economic performance (Kemeny and Storper, 2014[38]), (Hidalgo, 2021[39]). It is especially important for mid-sized cities that do not have the economic mass to support an adequate amount of economic activity in multiple economic clusters. Without any specialisation, these cities cannot realise the localisation economies that emerge from having a large number of firms in related activities in close proximity to each other. In contrast, large cities can more easily sustain multiple sectors of sufficient size and are therefore less reliant on specialisation.

However, not every form of local specialisation is beneficial. Cities that are specialised in a single economic activity, such as resource extraction, are subject to large shocks if the demand for the city’s specialisation declines. Moreover, they often struggle to develop economically, because the dominant economic activity crowds out all other economic activities. An extreme form of such specialisations are so-called monotowns, which rely on a single employer, such as a major mine.2

Regional development scholars generally advocate specialisation in a variety of economic activities that are related to each other. A city that is specialised in this sense would not only contain a single economic activity. It would contain economic activities that benefit from proximity to each other, without necessarily depending exclusively on each other. For example, a cluster of firms producing packaging for processed food might benefit from the proximity of a food-processing cluster within the same city, without relying exclusively on these firms as customers. Specialisation that includes several stages of the value-added chain allows a city to capture a larger share of the value-added from an industry than specialisation in a single activity. Moreover, the diversity of related activities makes it easier for a city to transform its economy in response to changing economic conditions.

It is important for cities to develop their own economic profiles. By focusing on the specific competitive advantages that make them distinct from other cities (see above), they can avoid competing with other cities in the same country. If different cities specialise in different activities, such local specialisation can contribute to national diversification. In fact, it is rare to find a diversified country that is uniformly diversified across its territory. Countries with diversified national economies are usually diversified because many of their cities have distinct specialisations.

Many modern local economic development policies, in China, the European Union and Mexico, for example, encourage the emergence of so-called “related varieties”. These economic activities require capabilities (in particular a similar knowledge base) similar to the existing economic activities in a region (Asheim, Boschma and Cooke, 2011[42]). Economic activity is much more likely to expand gradually into related activities than to emerge in areas completely unrelated to existing economic activity. If a new economic activity relies mostly on existing production methods and needs only a small innovation to become viable, it is relatively easy for businesses to enter the activity. In contrast, entering completely new fields of economic activity may require managers and workers to acquire new skills, a new network of suppliers and large capital investments. Businesses often struggle to make such major changes. Local economic development policies that encourage the emergence of related varieties of economic activity thus have a higher rate of success than policies that try to attract completely new economic sectors.

To identify related varieties that can be targets for public support, local administrations can use the economic self-discovery processes discussed above. In this process, public officials work with business representatives, academics and other stakeholders to identify potential avenues for economic development that build on existing economic structures. They also determine jointly the measures required of various public and private actors that would enable businesses to move into the production of such related varieties, and they target policies accordingly.

The focus on related varieties imposes an important restriction on local development policies. Cities and regions with low levels of development might have few related fields of economic activity into which their economy can grow. In order to develop quickly, such cities have to move into economic activities that are unrelated to their current activities. However, as this is more difficult to achieve, local governments rarely have the resources and capacity to manage such a transition on their own. This requires a concerted effort by national and local governments that involves a range of co-ordinated policy measures.

Besides businesses and governments, universities and other higher research institutions are the most important external actors in local economic development processes. They can play an outsized role in producing a skilled workforce and can be a major source of innovation for the local economy (Box 4.9). Neither of these roles come automatically, however, and the impact of universities on local economies varies widely. To have a positive impact on local economic development, universities must transfer skills that are useful for the local economy and connect their research to the activities of local businesses. This is especially important, given the strong evidence of a skill mismatch in sub-Saharan Africa, in particular among young workers. Bandara (2018[55]) finds that only 10% of youths are appropriately skilled for the job they do, with 55% are overeducated and 34% undereducated.

Valorising universities for local economic development is the objective of the so-called “triple helix” model that emerged in the mid-1990s (Etzkowitz and Leydesdorff, 1995[59]). Traditional innovation systems are linear, with universities responsible for basic research that is commercialised by businesses. In the traditional model, innovation systems are national, and interactions between universities and businesses are limited. In contrast, the triple helix model emphasises continuous interactions between universities and businesses at the subnational (i.e. the regional and local) level. Universities collaborate more closely with businesses and conduct research targeted to the needs of businesses. At the same time, they become more active in commercialising inventions and obtain additional financial resources from grants by local businesses.

Local and regional governments act as intermediaries between businesses and universities and enable closer collaboration between them. They provide incentives such as grants for joint research by universities and businesses, and they create positions at universities dedicated to technology transfer. They also build and operate infrastructure, such as business incubators attached to universities. Beyond creating an enabling environment, governments may also have to employ coercive measures to enforce co-operation. Such measures can include making funding contingent on co-operation between universities and businesses or providing permission for certain commercial activities only if they include a research component.

While the triple helix approach has made inroads in North Africa (see Box 4.9), it remains rare in sub-Saharan Africa. Saad and Zawdie (2011[60]) argue that the successful application of the triple helix model in sub-Saharan Africa is prevented by the general lack of interactions between actors. Governments are far removed from the research activities of universities, the role of universities in economic development is underappreciated, and businesses prefer to source technology and consultancy services from foreign actors instead of domestic universities. A paradigm shift is needed that recognises the value of such interactions. Moreover, governments, universities and businesses have to build institutional capacity that enables them to develop the strong ties necessary to engage in true collaborations.


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← 1. The term deconcentration describes the distribution of powers to local administrations that remain under the control of the central government rather than locally elected governments.

← 2. The term “monotown” originated in the centrally planned economies of the former Soviet Union, where cities were built around a single industrial complex.

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