What is Economic Development and Why is it Important?

November 2017

Jeff Paddock

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At the end of the day, the focus of the aid worker or the development expert is to assist the less fortunate in rising out of poverty, and one of the most effective methods of the 21st century is called economic development. Broadly speaking, economic development is the effort to improve someone’s economic well-being and quality of life. It’s why we use the common phrase ‘low-income’ when describing clients and beneficiaries. A massive portion of international development comes from the field of economics. This is not to be confused with development economics – a theoretical branch of academia – because it’s much more hands on than that; it’s a framework for how to see the world and how income inequality can be broken down, and eventually, overcome. 

 

Economic development takes a stab at poverty with a three-pronged approach that varies in scope. The goal is to assist developing nations to become developed, so naturally, on the global stage, there is a lot of large-scale policy work within governments. They want to distribute their resources effectively to have the most impact. The next prong is one step smaller and more detailed. The second is investment and growth, meaning infrastructure, education, and whatever other pillars of society you could throw money at to bring people better quality of life. However, the third prong is even smaller and yet more prolific. It involves person-to-person work inside the community; the essential nuts and bolts work that carries out the mission of the larger prongs. I will refer to it as grassroots economic development. 

 

Grassroots Development

 

Where the first two methods focus on targeted, top down approaches, the third way comes from the inside out. This method is what I’d like to address in our discussion of economic development, because it’s where we’ll get the most technical and nuanced insights into what makes grassroots projects work. It’s a hard topic to pin down, without a doubt. In the US, Community Economic Development (CED) became popular in the early 1990s just as many NGOs were figuring out the same things in Latin America. The resulting flourishing of tools and instruments have broadened the playfield and redefined the scope of development tools.

 

Grassroots economic development means community led participation in the economy. If we analyze all the different ways of doing this, we find things like access to healthcare, insurance schemes, and pension projects. However, the starting block is always financial literacy: a baseline concept that covers simple questions like what is a bank account? How much money do I spend in a week? These are personal finance questions crucial for handling income, especially for small businesses and entrepreneurs emerging in the vast informal markets of the developing world. Baseline financial literacy and job opportunities are the backbone of grassroots economic development and provide fertilizer for markets to grow.

 

The problem is that many low-income families are shut out of the formal markets where there’s more financial security (a problem called ‘financial inclusion’). Potential university students, for example, might not know how or where to get financial aid. An entrepreneur might not be eligible to get a loan because the bank considers them too poor. The community might be so rural that they simply can’t access the consumers who would buy their agricultural products. These are the challenges that economic development targets. Let’s look at a few different types of organizations working on these issues today.

 

Players in the Field

 

To put these tools and instruments to work, grassroots economic development specialists use their own industry to begin solving these problems. Here are some of the most common innovative organizations you’ll find involved in grassroots economic development:

 

• Economic Development Organizations (EDOs) focus on financial health of regional areas as big as townships or provinces. These are typically domestic and government agency groups that decide to take economic development upon themselves and better the quality of life for their own people.

 

• Non-bank Financial Institution (NBFIs) are companies that provide the same services as a bank, without actually being a bank. They range from retail companies to pay-day lenders. They make it easier for people to get a loan without going to a bank, although the regulations are much looser and therefore the cost to the borrower is much higher.

 

• Micro-finance Institutions (MFIs) are typically smaller than non-banking institutions and deal in bite-sized chunks of money like microloans, microsavings, and microinsurance. All of these products support small businesses and micro enterprises in low-income communities. They are the most common financial institutions involved in community development.

 

• Humanitarian Aid and Development Organizations* have caught on as well. Today it’s hard to find an organization interested in grassroots development that doesn’t take into consideration the financial well being of it’s beneficiaries. The International Federation of the Red Cross and Red Crescent, for example, has developed what’s called ‘cash transfer programming’ that brings aid to disaster areas in the form of small amounts of money.

 

Whether or not we ever run into one of these organizations, we should be convinced of the effective framework this brand of development provides us. I certainly am. I believe it permeates everything! From education, to healthcare, to humanitarian aid – I’ve witnessed the stress lines before and after someone builds financial security. In Honduras, where I work, neighbors do not discuss financial matters save for the development worker who helps them gain access to the market. One’s economic status affects how much food they have in the fridge, how often they can send their kid to class, and their psychological well-being; the very look on their face. Economic development is more than getting developing nations to become developed. It’s about the very fabric of community life, and it would do us well to explore its impact on our own work.

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About the Author

Jeff works on the ethical considerations of economic development and cash aid programs around the world. He currently works in Honduras, supporting local community projects through micro-finance and holds two degrees in Philosophy and International Affairs.