[MUSIC] Welcome. My name is Bert Helmsing. And I'm an emeritus professor of the International Institute of Social Studies of Erasmus University Rotterdam, where I work for more than 40 years on the topic of local and regional development. And my professional experiences as a teacher, adviser and researcher, stretch from the Indian countries of South America to countries of Southern and Eastern Africa. And I've also benefited from the interaction with students from all over the world. Let's begin by taking a look at the map of Mother Earth. What do you observe? Some areas are light up, strongly, indicating a concentration of economic activities. Other areas light up less, and large part of territories remain literally in the dark, little or no economic activity there. Now, take a look at your own country using Google Maps. You will observe considerable geographical variation in the concentration of economic activity as evidenced by roads and built up areas. This indicates that economic development and growth does not take place everywhere. This leads us to one question. Why does economic development take place in some areas and not in others? At the end of this video, you will be able to answer this question at the local level and be able to define local economic development. My view of local economic development has been strongly influenced by what I saw happening in many countries following structure adjustment in the early 1980s. International organizations like the World Bank and the IMF were willing to provide structure adjustment loans but on one condition, that governments would roll back their direct interventionist controls over markets and production. Their main message was less government and more market. Reforms focused on reducing government, and markets were expected to emerge spontaneously. However, for a long time, the private sector investment response to structure adjustment was not forthcoming, but, why? What delayed the investment response? Three fundamental issues were ignored. One is that markets rely on functioning economic institutions, which help to reduce the cost of doing business. These institutions regulate, spread information, reduce risk and, in general, contribute to reduce transaction cost. If these costs are very high, few people will be willing to start their enterprise or expand their business. This refers, not only to the rule of law and property rights, but also to practices, norms and standards that are specific to particular products, industries and occupations. And, certainly, at early stages of development of an industry, markets and market supporting institutions are insufficiently developed. These institutions need to be crafted and built up over time and often from scratch. Local action to build such institution is an important factor determining economic performance in an area. And the second issue that is that markets do not emerge automatically. Investment opportunities do not reveal themselves so easily. Information is hard to come by, and risks can be very high. More importantly, investment in one by one economic actor is dependent on the simultaneous and parallel investment by other actors. So, for example, a small entrepreneur or farmer who wants to innovate in a cash crop could spend a lot of time and efforts to grow a new crop, only to find out that there are a very few local buyers or that packaging, transport and finance are bottlenecks. In my example, complementary investments would be needed, in a packaging plant, in transport equipment, in roads, and all require effective responses by banks or traders. So success is critically dependent on simultaneous, complementary investments by other actors, including government. In order for complementary investments in private and public investments to emerge, collective and public action is needed. And this implies economic coordination, which constitutes a key ingredient of local economic development management. In other words, the opportunities and constraints for a local producer are embedded in the opportunities and constraints of an entire industry in an area. Particularly in situations where potential markets are small and networks between economic actors are poorly developed, a deadlock may result and keep an area in economic isolation. The third issue is that even if markets exist, they do not necessarily allocate resources efficiently. There can be effects on third parties that are not incorporated in prices of goods and services. There are different types of such market failures and some of them play a positive role in local economical development. So let me elaborate on four types of such market failures. First of all, there are important knowledge spillovers of existing economic activities. Information about the ins and outs of an industry are, as Alfred Marshall already said many years ago, are in the air. And all local producers can benefit from this pool of knowledge. This facilitates learning and lowers the cost for local firms but also makes the place attractive to new entrepreneurs and for other firms to locate in the same area. Much of this knowledge is in tacit form. So if many firms grow a new crop, they can learn from each other about how to combat disease merely by observing and interacting with each other. Second are network externalities. These facilitate information exchange and coordination between economic actors, just as interrelated and support services in the example I gave earlier. The farmer knows who can provide particular inputs and services. And these network externalities often require locational proximity, closeness. Their presence is also a powerful factor that attracts other firms to the area. Conversely, the paucity of these network externalities will deter funds and people to converge on an area. The third type of externality emerges from entrepreneurial failure. Entrepreneurial failure is a private loss, but many others can learn from this an avoid making the same mistakes. This raises the probability of success of their own startup or investment decisions. And, lastly, the converse is also true. The external effects arising from entrepreneurial success. As it is well known that successful entrepreneurial activity attracts other people to start their own firms, thanks to the presence of role models. But, furthermore, other economic actors, like banks, universities, and investors, have then also experienced in dealing with startups. And when all these factors come together in an area, they can give a powerful boost to economic performance of a particular area. And this helps to explain why certain areas light up on the Google Maps while others remain in the dark. But there is also a powerful non-economic factor. Many people have an emotional attachment to or interest in the place where they have been born or where their ancestors lived. This cannot be reduced to simply some cost of a house or a piece of land. It also refers to the social networks and to the local ties that bind, as well as to the norms, values, and local practices and customs that structure one's life. This attachment also provides a motivation to enhance the living conditions in an area for the benefit of future generations. Both these considerations emphasize that individual actors belong to a community and have community collective interests at heart. Overall, these five factors provide an overall rationale for local actors to come together and engage in local economic development management. We can now define local economic development as a process in which relationships between local governments, communities, and civic groups and organizations, and the private sector are established to manage existing resources to create jobs and stimulate the economy of a well defined area. This emphasizes local control using the potential of human, institutional, physical and natural resources of the area. It's initiatives mobilize actors and organizations and resources, develop new institutions and local support systems, and realize economic coordination through dialogue and strategic actions. In the next video sessions, we will examine why local economic development has become such an important issue today. So keep watching. [MUSIC]