Economists, using growth models, have traditionally explained output and economic growth by the amount of capital and labour employed and the level of technology engaged. Policies to promote economic growth have consequently emphasized investment and savings, mobility of capital and labour and the level of technology. These models have been less than satisfactory since large unexplained residuals normally remain. (Regional growth models are variations of the macroeconomic models with location taken into account to explain differences in growth rates between regions. Policy prescriptions for regional development focus on ameliorating spatial disadvantage through infrastructure improvements.) Local development can help explain the residuals which remain unexplained in the macroeconomic growth models.
Local development is a process of economic growth and structural change that results in an improvement of local standards of living. There are at least two dimensions to the local development process: (a) Economic, in which the local entrepreneurs, using their capacity for organizing local resources, achieve a sufficient productivity level to be competitive in the markets; and (b) Socio-cultural, in which local values and institutions drive the development process. Ideally, improvement stems from the actions of local firms, entrepreneurs, individual using local inputs (although it can also involve inward investment to the locality by external actors) and the use of some non-local inputs. Even if a local development does not contribute to overall economic growth, but to a redistribution of economic activity, it is justified: (a) on the basis of equity; and (b) because it raises confidence and morale and reduces the feeling of dependency in local communities. Where conditions place an acceptably high burden of risk on the private individual, the role of local socio-economic institutions and local governments are important.