Analytical Techniques for Community Economic Development

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Amelia Hancock
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1 Analytical Techniques for Community Economic Development Economic development planning requires information and a detailed analytical understanding about the community. Community Involvement Community is likely involved in providing the data and may be involved in analysing and interpreting the data. Data sources a. Local planning or service agencies b. Statistics Canada Methods: 1. Comparisons Compare economic state of the community to the larger region What are the relevant economic and socio-economic variables? 2. Techniques and Tools for Analysis Several tools need to be simultaneously used for a comprehensive analysis 1

Data sources a. Local planning or service agencies b. Statistics Canada Methods: 1.

2 Analytical Tools 1. Scalogram/Hierarchy Communities can be organized into a hierarchy - from the smallest centres to higher-level towns Lower hierarchical level: economic activities cater to immediate needs of the population Higher hierarchical level: more diverse retail economic activities and social and recreational activities. As a community grows level of specialization rises How to develop a scalogram: Data is collected on similar classes of activity in areas being compared. areas: economic activity, social services, etc. Objective: find out if there is a hierarchical structure and place a local community along the continuum. How is Hierarchical analysis useful for CED? Indicates structure of the local economy Identifies opportunities Outliers require more investigation 2

population Higher hierarchical level: more diverse retail economic activities and social and recreational activities.

3 2. Economic Base Analysis Economic base theory contends that a strong export sector is the key to developing and building wealth in a community. Accordingly, wealth generating firms should be targets for attraction to the community. a. Export base analysis Total economic output (Y) is a function of export activity (E). Y = (1 + k) E 1+k represents the multiplier which is greater than 1 (assuming some nonexport activity exists). k is the ratio of non-export activity to export activity. How to interpret the function: If export activity rises, then output rises by a large amount (=change in export activity x multiplier). b. Location Quotient Calculation of a location quotient is used to ascertain industrial concentration. A location quotient is the ratio of the percentage of employment in an industry to the percentage of employment in the same industry in the larger reference area. Location quotient (LQ) = local sec empl / local total empl ref sec empl/ref total empl Data requirements: 3

Y = (1 + k) E 1+k represents the multiplier which is greater than 1 (assuming some nonexport activity exists). k is the ratio of non-export activity to export activity.

4 employment (most common) payroll sales If LQ > 1, industry is concentrated in the local area. If LQ < 1, industry is under-represented in the local area. If LQ = 1, industry concentration is on par with the reference area. If we can assume that employment translates to output the local economy with an LQ>1 produces more than it consumes exports LQ<1 implies imports If LQ is high: Is the industry vulnerable to changing markets or technology Shocks can risk the entire community If LQ is low: Not necessarily a problem not all economies can be strong in all industries 4

If we can assume that employment translates to output the local economy with an LQ>1 produces more than it consumes exports LQ<1 implies

5 If LQ = 1: May indicate an opportunity for expansion Further analysis is required to determine whether industry should expand or contract 3. Dynamic analysis Why do dynamic analysis? 1. Public sector can preparation 2. Labour market preparation Data requirements: employment, payroll, sales, etc collected at two or more points in time. a. Shift-Share Analysis is a type of dynamic analysis Shift-share analysis disaggregates the growth of an industry into three contributing parts: 1. economic growth - Describes the overall effect on the entire economy, not just an industry (the share) 2. proportional shift 5

Labour market preparation Data requirements: employment, payroll, sales, etc collected at

6 - Relative change of a specific industry to the total of all industries. 3. differential shift - The difference in the rate of growth in a local industry relative to that for the industry nationally/provincially. Employment changes in local industry i = (ref08/ref98 1) + (emp08 i /emp98 - ref08 i /ref98) + (loc08 i /loc98 i - emp08 i /98 i) ref08 = 2008 employment in reference economy emp08 i = 2008 employment in industry i in the reference economy loc08 = 2008 employment in industry i in the local economy Interpretation: High differential shifts strength in the local economy growth may be due to competitiveness or due to population growth the industry may be declining, but not as quickly as at the national/provincial level. Low differential shifts May have potential to grow in the future if competitive advantage can be identified. b. Principles of Economic Projections 6

Employment changes in local industry i 1998-2008 = (ref08/ref98 1) + (emp08 i /emp98 - ref08 i /ref98) + (loc08 i /loc98 i - emp08 i /98 i) ref08 = 2008 employment in reference economy emp08 i = 2008

7 1. Long-wave strategies: If business cycles can be tracked, some local industries will grow or contract more than others 2. Demographic drivers: future demand is affected by national demographics. 3. Technology drivers: assess trends and look at consequences of technological advance. 4. Financial drivers: on the business side it involves the types and rates of investment in capital equipment. On the consumer side it involves access to consumer credit 5. Global drivers: global competition is the basis for long-run projections since there is a growing interdependence between local and global markets. 4. Prosperity Index A measure of the ratio of job growth to wage growth in an industry at a local level. If index >1, wages are growing faster than jobs. If index <1, wages are growing more slowly than jobs. How is the prosperity index used for CED? assists developers in balancing between the creation of jobs and the generation of earnings. 7

On the consumer side it involves access to consumer credit 5.

8 5. Input-Output Analysis (I-O) I-O analysis analyses how changes will multiply through the local economy. A community I-O model provides a still-life picture of the economy. It reveals the ways in which various sectors are interdependent and linked to the potential sources of final demand. I-O models involve constructing I-O tables using sales/expenditures data or employment data. The analysis generates three types of multipliers: 1. Direct (First order) transactions: what an industry must purchase to increase production by $1.00. The smallest multiplier. 2. Direct and Indirect transactions: considers the input-output relationships between economic agents. The size of the multiplier falls as more inputs are purchased from outside the community. 3. Accounts for the affect of increased demand on household wages and consumption expenditures. Each product a worker buys has its own cascade of production inputs. How is I-O analysis used for CED? Local level multipliers are quite small. They are rarely above 2 (they are around 2 is large metropolitan centres), and most likely in the range of 1.5 to They are smallest in rural areas. Small multipliers imply large leakages. Data is typically only available for larger regions. For community applications, survey data is typically required. I-O analysis and multipliers are a starting point for CED analysis. They need to be supported by interviews and other types of analysis. 8

I-O models involve constructing I-O tables using sales/expenditures data or employment data. The analysis generates three types of multipliers: 1.

Introduction. Introduction, Contd. Introduction, Contd.

Introduction. Introduction, Contd. Introduction, Contd. Anil Rupasingha, PhD and J. Michael Patrick, PhD Department of Agr. Economics and Agr. Business Corporative Extension Service Introduction Everyone involved in CED needs to understand how their economy