Handbook... Part I | Part II | Part III | Part IV

Handbook on Urban Economic Base Analysis

Part I

Introduction

Background of the Handbook on Urban Economic Base Analysis

In July 1997, the City of Vilnius in cooperation with the Canadian Urban Institute (CUI) proposed to the Fiscal Decentralization Initiative for Central and Eastern Europe (FDI) to undertake an action research and training program on urban economic base analysis. This program was proposed as an extension to, and within the framework of, the Canada-Baltic Municipal Cooperation Program (CBMCP). A brief description of the CBMCP and the specific objectives of the action research and training program follow.

Canada Baltic Municipal Cooperation Program

With funding from the Program of Cooperation with Central and Eastern Europe, CUI is managing the Canada-Baltic Municipal Cooperation Program: Phase II. This three-year technical cooperation program began in April 1996, and is scheduled to end in March 1999. The CBMCP is being undertaken in partnership with the cities of Vilnius, Riga, and Tallinn.

Since its beginning in February 1994, the main focus of this technical cooperation program's efforts has been to provide the municipal administrations of the Baltic capitals with an understanding of democratic planning approaches and to innovate the means by which the approaches can be applied in the prevailing municipal context. Strategic plans have been formulated as the first step in the creation of each capital's first official plan and land use plan to be prepared under democratic and market conditions. The fundamental goal of the second phase is:

To build on the achievements of the Canada-Baltic Municipal Cooperation Program in a manner that generates substantial benefits that are sustainable in the long term for Canada and the Baltic countries.

In order to accomplish this goal, four objectives (sets of activities) for the second phase are being followed:

1. To support the implementation and continuation of the municipal strategic planning processes in the Baltic capital regions. Activities include:

• Implementation of at least three demonstration projects in each capital. The demonstration projects will focus on (1) the development of project financing plans, (2) the creation of a quality management program, (3) the involvement of key stakeholder groups, and (4) the strengthening of the relevant official plan sections, and (5) dealing with regional cooperation issues.
• Establishment of performance measurement systems for the demonstration projects and each capital's strategic planning process.
• The initiation of a second cycle of the Baltic capitals' strategic planning processes.
• To support the development of educational materials and the provision of training programs related to municipal management. Activities include:
• Conduct of on-site seminars/workshops in support of the demonstration projects.
• Production of locally appropriate curriculum and educational materials.
• Delivery of formalized training modules.
• Undertaking of professional assignments in Canada and the Baltics.
• To support the dissemination of the CBMCP's experiences throughout the Baltic Region. Activities include:
• Conduct of six regional workshops.
• Involvement of local authorities from outside the Baltic capitals by:

1. participation in on-site workshops, structured training modules, and the regional workshops;
2. supporting the initiation of municipal economic strategy development processes in two local authorities outside of each of the capitals.
3. Production and dissemination of CBMCP-related information throughout the Baltic Region.
4. To facilitate trade and investment linkages between Baltic and Canadian organizations. Activities include:

• Establishment of a resource center in conjunction with each CUI-Baltic office.
• Production and dissemination of trade-related information to the Canadian Embassy in Riga and to selected Canadian organizations.

The action research and training program on urban economic base analysis was proposed as an extension of the second objective related to the provision of education and training programs, and within the context of local economic development suggested by the fourth objective on trade and investment linkages. The specific program agreed to by the FDI follows.

Objectives of the Action Research and Training Program on Urban Economic Base Analysis

The program approved by the FDI included the following objectives:

1. To conduct an analysis of the economic base of the cities of Vilnius, Riga, and Tallinn.
2. To prepare an economic profile for the cities of Vilnius, Riga, and Tallinn.
3. To conduct a training workshop that examines the Baltic capitals' economic base and examine methodologies and techniques for conducting an economic base analysis and preparing an economic profile document.
4. To prepare and distribute a "how to" guide on the conduct of an economic base analysis and the preparation of an economic profile document.

The training workshop was held in Vilnius on 9-10 October 1997. The economic profiles for the three Baltic capitals have been completed and are included as appendices to this document. The main purpose of this document is to serve as a "how to" guide on economic base analysis and preparation of economic profiles. The handbook also includes the economic base analyses conducted for the three Baltic capitals.

The expected impacts of this work are:

• increased understanding of each Baltic capital's economic base,
• formation of a basis for forecasting economic growth in each of the Baltic capitals, and
• creation of a methodology and practical techniques for conducting urban economic base analysis in former communist countries in Central and Eastern Europe.

How This Handbook Is Organized

Part I: Introduction explains the reasons why this handbook was developed. It provides an overview of the geopolitical context in which the need for the handbook arose. In order to be effective and successful in economic development, there is a need to thoroughly understand the local economy. This handbook will assist municipalities in the "how to's" of better understanding their cities in an economic sense.

Part II: Understanding Local Economic Development provides the necessary framework and context for a common cognizance of what municipalities want to achieve by engaging in economic development activities. The tools and techniques described later in the handbook cannot be appropriately applied without this context.

Part III: Economic Development Information and Publications describes the various but related information needs of economic development. Information has limited value unless it is shared, and this section reviews the methods of compiling and sharing economic development information. The most common economic development publications are described. Where these publications have been prepared in the Baltics, the problems encountered and their solutions are discussed. This section contains the how-to information related to one of the objectives of this handbook—preparing an economic profile.

Part IV: Analytical Tools and Techniques of Economic Base Analysis describes various methodologies that can be used to help a municipality describe and explain the local economy. This "how to" section reviews important considerations in undertaking an economic base analysis and explains how to select the right analytical tools and techniques. The application of the most appropriate tools for transition economies is also described in detail. Another objective of the handbook was the preparation of an economic base analysis for each of the Baltic capitals. The analyses are included as examples of how to apply and interpret the Location Quotient Method of economic base analysis. Finally, there is a brief review of alternative methods of explaining the local economy.

Copies of the various publications prepared and referred to in this handbook, including the three economic profiles, may be found in the appendices.

The New Geopolitical Situation in the Baltic States

The National and International Context

Before independence from the former Soviet Union in 1990-91, the Baltic countries, their regions, and their cities shared similar economic characteristics that were more or less common to all former Soviet Union republics:

• The economies of Estonia, Latvia, and Lithuania were fully integrated into the centrally planned economic system of the former Soviet Union.
• Due to the central government economic policies for the Baltic republics, their economies developed in a distorted, unbalanced way both on a country and a local level.
• The scope of local government authority and activity in the Baltic republics was quite limited, and its influence on economic development of the region/city was negligible.
• Not having had a market economy for 50 years, the Baltic countries and cities missed much of the economic restructuring and change that had been occurring in urban centers elsewhere in the world.

Since the early 1990s, the focus of the Baltic state governments has been on the following:

• separation from the former Soviet Union and restoration of the independent status of the states,
• creation of a new legal basis and state institutions,
• implementation of independent economic policy, and
• reintegration into the world economy.

The post-independence situation of the Baltic states—becoming subject to international law and international exchange, combined with the need to develop all aspects of a modern democratic society—drove the need to develop self-governance, to modernize the state governance system, and to undertake major economic reform. The main objectives of national economic reforms were:

• liberalization of prices;
• legalization of private ownership;
• privatization of state property;
• land reform and restitution;
• liberalization of foreign trade;
• monetary reform, including the introduction of national currencies; and
• simultaneously increasing the openness of the economies.

Implementation of these objectives resulted in:

• significant changes in each country's economic structure;
• significant changes in the balance of public and private ownership of economic activities and the growth of the private sector generally;
• expansion and diversification of international economic relations, and subsequent growth of each country's export sectors;
• significant shifts between economic sectors, most notably an increase in the importance of the service sector and a decline in the importance of the manufacturing, agriculture, and construction sectors; and
• restructuring of the manufacturing industry from the Soviet-inherited structure to one more befitting the opportunities now available in the national and international marketplace.

External economic relations of the Baltic countries have changed considerably as well. The Baltics aspire to:

• integrate into the European Union (EU),
• enter into European and global trade structures, and
• create a favorable environment for the attraction of foreign capital.

To achieve these aspirations required the liberalization of foreign trade regimes.

Efforts to improve external economic relations have had successful results so far.

1. Foreign trade has grown and has diversified.
2. There has been growth in trade with Western countries, especially with the EU, so that in recent years the EU has become the main trading partner of the Baltics.
3. The extensive trade relations with Eastern (Commonwealth of Independent States) markets has been reestablished, especially with the most important market, Russia.
4. A significant increase has occurred in the volume of trade with foreign countries both in terms of exports and imports.
5. The underlying factor behind export growth has been the relatively high-skill, low-cost labor force in the Baltic countries, which helped producers penetrate markets of higher purchasing power and higher labor costs.
6. The growth of imports was driven not only by the need for raw materials that the Baltic countries lack (imported mainly from Eastern markets), but also by the increasing demand for modern technologies, imported mainly from Western countries.
7. There has been a growth in foreign capital (both direct and portfolio) investments, although there have been differences in foreign investment within the Baltic countries.

At the same time, each country, its regions, and its cities have had to face difficulties that have arisen due to the rapidity of restructuring, the increased international competition in an open economy, and a lack of experience in operating in a competitive marketplace. Some of these difficulties include:

• increasing unemployment, especially among unskilled people;
• the general lack of business know-how across the larger part of all economic activities;
• differences in technological capabilities between business enterprises and between economic sectors of a region or city;
• as a rule, a lack of business working capital, prohibiting the acquisition of modern technologies required for growth;
• in many cases, poor business management expertise;
• lack of marketing savvy to successfully market within a country, and especially to market internationally; and
• problems in penetrating foreign markets (especially Western markets) for several reasons, including nontariff barriers and the lack of experience and know-how in these markets.

The Local Government Context

The need to develop self-governance and to modernize the state governance system, along with the concurrent desire and need to decentralize state government authority, resulted in a legal framework for local governance being established. The new legal framework for local government, which was quite different from the old mandate of local government in the Soviet system, is based on the following:

• Local governments are entitled to the right of self-governance.
• The right to self-governance is implemented through locally elected municipal councils.
• Local governments are entitled to act freely and independently within the limits of their authorities as established by the constitution and relevant laws.

As a result, local governments have been eager to fulfill their new legally established functions and to make and carry out decisions independently. At the same time, local governments are also obliged to accept full responsibility and accountability for their decisions and for the execution of their responsibilities.

As noted, the national and local economies that resulted from the Soviet system were unbalanced and highly interdependent. These interdependencies were truncated with the independence of the Baltic states. Also, in contrast to the Soviet period, one of the current responsibilities of local governments is economic development. The priority of local economic development has therefore been to facilitate the transformation of local economies from being small parts of a large interdependent command economic system to being more self-sufficient, locally based market economies.

On the whole, the economic reform and restructuring described in the national and international contexts caused significant quantitative and qualitative changes in local economies; these have influenced the need for economic development in all municipalities.

The Need to Understand the Local Economy

The rapidly changing economic, social, and legal environments, combined with many changes not previously experienced, have resulted in all European transition economies facing a greater need than developed countries for:

• a deep understanding of their economy and its position in relation to the economies of other countries, especially those of their closest competitors;
• assessing the prospects for development of their economy; and
• raising awareness in other countries (including current and potential partners) about their economic situation, current development opportunities, and prospects for the future.

These needs take on greater importance at the local level because:

• economic changes at the local level are influenced by a wider and more complicated range of factors;
• the cities in former Soviet Union countries are in transition from being a small part of a large centrally planned economy to being a local economic hub in a new decentralized, but interrelated and interconnected, market system of urban economies; and
• as a general rule, statistical information on individual urban economies has not (in the past) been consistently collected and classified in former Soviet countries.

Considering the international, national, and local contexts of the new geopolitical situation in the Baltic countries, the following aspects of economic development appear to be most important for local city governments to be aware of:

• the state of the local economy and its economic development prospects in the context of both the national economy and the regional economy formed with neighboring countries;
• changes that have occurred and that are still occurring in the structure of the local economy;
• specific areas of specialization in the city's economy;
• the main resources a city possesses; and
• an understanding of the engines of growth in a local economy and the prospects of fueling these engines to encourage economic expansion.

This handbook is designed to assist local municipalities in addressing the aspects of economic development mentioned above. Before launching into how to use the tools available to address these issues and how to describe and analyze the economic base of a city, it is important to have a good understanding of local economic development. This will provide the context in which to understand the application of these tools and to interpret the results they provide.

Handbook... Part I | Part II | Part III | Part IV