Urban economic development denotes either a local government policy field or the level of economic activity in the city. As a public policy field, it is an important component of local government activity in developed—and increasingly also in developing—countries. The main purpose of an urban economic development policy is to build the conditions for local economic growth (e.g., to improve the business climate or increase productivity and competitiveness); to create jobs; and to adapt the urban economy to the regional, national, and global economic dynamics. Local governments get involved in this policy field for a variety of reasons, usually one or more of the following: the tax base of the local government is dependent on the city economic activity; the local government is under pressure from citizens and private enterprises to protect jobs; or the local government is forced to create more attractive conditions for private investors, especially when the city is confronted with the disinvestment strategy of private corporations, be they national or multinational.
The involvement of local governments in the urban economy until World War II (1939–1945) was rather limited due to the prevailing political ideology, which was not in favor of public aid to private enterprises. However, after the war the economic recovery forced local governments to engage in economic development initiatives. In addition, the recessions that cyclically affected the developed economies during the last century also favored the adoption of urban policy measures in support of the local economy. In this process, local governments expanded their portfolio of policy measures and less traditional policy tools were introduced and implemented in the decades following the end of the war. These measures varied from country to country and between cities in the same country. Therefore, the contemporary field of urban economic development policy encompasses different types of policy measures. Some of them have worked well in certain places and periods, while others have not. Policy measures in this field generally fall into one of four main groups: land and infrastructures, tax and financial aid, institutional capacity building, and broad external conditions.
The first group of policy tools for the promotion of urban economic development is associated with the provision of serviced urban land and other infrastructures (e.g., enterprise parks, business incubators, or nurseries) at a reasonable price or rent for the location and relocation of economic activities. It also includes the running of public transport networks to serve the new locations. Traditionally, these measures were implemented to support commercial and industrial activities and to attract new private investors from outside the city, but increasingly they have also been used to reinforce other activities, including tourism, leisure, cultural activities, housing, and urban renewal since these are also key dimensions in an urban competitive economy.
The second group includes tax and financial incentives and has been widely used in urban economic development policies, especially for those activities not attractive for private capital. This form of support includes, for example, tax reductions or tax exemptions during a certain period, interest rate reduction, loan guarantees, and seed capital for talented entrepreneurs that show potential. Tax incentives and financial subsidies are frequently provided according to the number of jobs created and usually give preference to private investments in low-income and distressed neighborhoods or for those that meet certain environmental criteria.
A third category of urban economic development measures normally intends to build local institutional capacity and social capital. This includes, for example, creating special agencies to work closely with all those benefiting from public support, giving them technical assistance in new projects and strategic guidance, or the implementation of partnerships among different levels of government and between public and private entities. Part of these efforts to create institutional capacity in the local economy also include participation in risk capital funds and other financial tools to stimulate investment in the local economy, and the creation of public municipal enterprises to invest in activities important for the local economy. Market research and marketing campaigns, support for the participation in fairs and exhibitions, and professional training for the development of the workforce are other examples of these types of policy measures.
More often than not, a fourth group of indirect measures is associated with less obvious issues that are also vital for urban economic success, such as social services for families, health care, education, security, and public transport. Finally, a local political leadership committed to economic development has also proved to be a key factor for urban economic development, encouraging other public and private stakeholders to become involved.
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