Economic base analysis

Economic base analysis was developed by Robert Murray Haig in his work on the Regional Plan of New York in 1928. Briefly, it posits that activities in an area divide into two categories: basic and nonbasic. Basic industries are those exporting from the region and bringing wealth from outside, while nonbasic (or service) industries support basic industries. Because of data problems, it is not practical to study industry output and trade flows to and from a region. As an alternative, the concepts of basic and nonbasic are operationalized using employment data.

The basic industries of a region are identified by comparing employment in the region to national norms. If the national norm for employment in, for example, Egyptian woodwind manufacturing is 5 percent and the region's employment is 8 percent, then 3 percent of the region's woodwind employment is basic. Once basic employment is identified, the outlook for basic employment is investigated sector by sector and projections made sector by sector. In turn, this permits the projection of total employment in the region. Typically the basic/nonbasic employment ratio is about 1:1. Extending by manipulation of data and comparisons, conjectures may be made about population and income. This is a rough, serviceable procedure, and it remains in use today. It has the advantage of being readily operationalized, fiddled with, and understandable.

The formula for computing location quotients can be written as:

$LQ = \frac{e_i/e}{E_i/E}$

Where:

$e_i =$ Local employment in industry i

$e =$ Total local employment

$E_i =$ Reference area employment in industry i

$E =$ Total reference area employment

It is assumed that the base year is identical in all of the above variables.

The figure showing location quotients uses data from Compare Minnesota: Profiles of Minnesota’s Economy and Population, 2002–2003. It uses the term location quotient, a number derived by comparing the percentage of employment in a place (Minnesota) with the percentage of employment nationwide. Minnesota has about the same percentage of high-technology employment as does the nation. It has more medical devices employment than the national average (due to companies such as Medtronic).

Economic base ideas are easy to understand, as are measures made of employment. For instance, it is well known that the economy of Seattle, Washington is tied to aircraft manufacturing, that of Detroit, Michigan, to automobiles, and that of Silicon Valley to high-tech manufacturing. When newspapers discuss the closing of military bases, they may say something like: "5,000 jobs at the base will be lost. That's going to hit the economy hard because it means a loss of 10,000 jobs in the community."

To forecast, the main procedure is to compare the region with the nation and national trends. If the economic base of a region is in industries that are declining nationwide, then the region faces a problem. If its economic base is concentrated in sectors that are growing, then it is in good shape.

Methodologically, economic base analysis views the region as if it were a small nation and uses notions of relative and comparative advantage from international trade theory (Charles Tiebout 1963). In a sense, the activity is macroeconomics "written small", and it has not been of much interest to urban economists in recent years because it does not get at within-city relationships. The analysis usually takes US growth patterns as a given. The fates of regions are determined by trends in the national economy.

Critique of the economic base concept

The economic base concept emerged in the 1920s, when economics focused on different industrial strengths and economic techniques were not as nuanced. The exporting (basic) activities were manufacturing and trade activities, and they could be readily identified in the data series. One could think of changes in those activities as causing growth or decline.

Today, export activities purchase many services, and the comparative advantage of an area may well lie in the services it produces. Peter Drucker (1986) imagines a world dominated by trade in ideas and designs. There is little merchandise trade because technology permits small-scale manufacturing. Such a world would change our ideas of what is considered basic.

The concept is that of a trading region, but in practice, economic base concepts are often applied to areas that fit the concept. The Minnesota study cited above compared Minnesota to the US. One can speak of the economic base of Saint Paul, Minneapolis, or Duluth, but to go on and compare such areas using economic base techniques is not very meaningful.

Forecasting is a precursor to actions, and there is no explicit way to get from the economic base to the kinds of actions most communities are interested in. That is, the economic base study does not say what to do. Leaders say they want desirable economic activities like high-tech ones. Indeed, we have seen studies of the transport needs of high-tech industries, studies done prior to investments to attract such industries (e.g., in Pennsylvania).

Even if one could make what-to-do linkages, the calculus of "desirable" is not simple. We suppose that high pay, little environmental damage, upward mobility for workers, and stability or growth are among the attributes desired of new activities. The table below gives information on the pay attribute. Clearly, that attribute must be traded off against other attributes.

Table: Average weekly earnings of production or non-supervisory workers on private non-farm payrolls by major industry, in current dollars

Industry	Average weekly earnings (April 2003)
Mining:	774.58
Construction:	721.58
Manufacturing:	629.43
Transportation and public utilities:	670.32
Wholesale trade:	627.13
Retail trade:	296.80
Finance, insurance, and real estate:	611.90
Services:	507.43
Total private:	511.39

Assumptions

As H. Craig Davis points out, there are a number of assumptions on which economic base analysis is conducted. These include (1) that exports are the sole source of economic growth (investment, government spending, and household consumption are ignored); (2) that the export industry is homogeneous (i.e., that an increase or decrease of one export does not affect another); (3) the constancy of the export/service ratio; (4) that there is no inter-regional feedback; and (5) that there is a pool of underutilized resources.

References

Quintero, James. 2007. Regional Economic Development: An Economic Base Study and Shift and Shares Analysis of Hays County, Texas. Applied Research Project. Texas State University. http://ecommons.txstate.edu/arp/259/