Community and Economic Development

The generation of jobs, income and wealth to improve the quality of life of community residents. This article describes the social, political and economic forces facing rural communities, examines why localities have become the primary site for community and economic development activities, evaluates the effectiveness of various strategies and tactics, and reviews some of the innovative rural, community-based efforts.

The Context

Rural America has become much less dependent on agriculture as a source of income and jobs. Efforts to promote economic development now include tourism, small business development, downtown revitalization, business retention and expansion programs, and the creation of loan funds for microenterprises. Although the federal and state governments are involved actively in economic development, many rural communities are taking the initiative to create jobs and generate income.

Over the past two decades, political and economic changes transformed the context for community and economic development in rural America. The shift from a manufacturing to a service economy restructured the economic base of most communities. Economic restructuring contributed to greater inequality and poverty. The loss of manufacturing jobs may have a greater impact on rural than on urban areas because most rural communities do not have a strong enough service sector to support their local economy.

A decline in the number of farms over the past 50 years has contributed to population loss and the demise of many key institutions that anchor rural communities. With fewer farms in the community, many of the retail and service establishments do not have a large enough market to support their businesses. Similarly, substitution of capital for labor in coal mines and timber mills reduced employment and supporting businesses in resource-dependent communities.

Globalization of the economy placed additional stress on businesses in rural areas. Rural areas were the beneficiaries of capital mobility in the 1960s as manufacturing plants moved their branches to low-cost rural areas. Compared to urban areas, wages are lower in rural areas. Businesses continued the process of seeking low-cost areas of production in the 1980s by moving to areas in the world economy that have even lower wages. As a result, many rural communities began to experience deindustrialization that had taken place in the urban centers of the Rustbelt in the previous decade. Many small firms in rural areas have not been able to take advantage of globalization because of transportation and communication barriers and difficulty in gaining access to credit and information about international markets.

Deregulation of several key industries, such as transportation and banking, also placed rural areas at a disadvantage relative to urban areas. The loss of transportation links left many small towns isolated. Banking deregulation contributed to the capital shortage in many rural areas.

Rural communities face major obstacles in their effort to promote economic development. First, most rural communities depend on only a few industries. Thus, they are more vulnerable to bust and boom. Second, the size or scale of rural communities makes it costly to provide public services and an infrastructure supportive of economic development. Many new businesses require business services and other forms of assistance that most likely will not be available in small towns. Third, distance often places rural communities at a competitive disadvantage. Because of the high cost of transportation in some industries, many rural communities are not considered as possible sites for businesses.

The Community as the Site for Local Economic Development Activities

Local economic development became a central issue for rural communities in the 1990s. Many analysts would contend that it has become the policy issue facing local governments throughout the U.S. Local government involvement in economic development activities is a relatively new phenomenon. Historically, economic development has been the responsibility of the federal and state governments. The federal government has a long history of contributing to local and regional development. Beginning in the 1950s, the federal government became involved in regional development by building the interstate highway system and by investing in the physical infrastructure. During the 1960s the federal government increased its role in economic development by stepping up federal aid to state and local governments through grants to localities.

Though the federal government’s role changed in the late 1970s, the most radical change came in 1981. With the adoption of its New Federalism approach, the Reagan administration redirected the federal government’s policy toward economic development. Rather than providing funds for local projects and physical infrastructure, federal policies under the Reagan administration emphasized national economic growth. The administration assumed that localities would be the ultimate beneficiaries of these policies.

New Federalism led to a substantial loss in federal aid to local communities. Communities no longer can count on the state or the federal government to raise revenue for them. At the same time, the federal and state governments mandate that local governments provide services that once were funded at higher levels. Consequently, local governments are asked to do more with less. For most local governments, attracting businesses to their community is seen as the best way to replace the lost revenue. Local governments adopted a wide variety of tax incentives and financial tools to encourage businesses to locate in their community on the assumption that any revenue lost through these practices would be made up through economic growth.

Rural communities have been relatively slow to enter the competition for jobs. In the past, economic development was seen by many leaders in rural communities as minimum maintenance at minimal cost. Responsibility for economic development was assigned to an individual, to the vagaries of the market, or in many cases, to larger governmental units at the state or federal levels. In recent years rural governments became much more active in their effort to promote growth. Rural governments, however, often are hampered by their limited pool of expertise and access to key resources.

Debate exists as to whether communities are the appropriate level for economic development activities. Some argue that encouraging local activities creates hyper- competition that only benefits businesses and results in a net loss for communities. In addition, the competition does not create new jobs but merely shifts them from one region or community to another. Others argue that economic development activities could more efficiently take place at the regional level, administered through regional development organizations or through the actions of multi-community collaboration efforts. Yet an equitable system to distribute the costs and benefits across communities in regions does not exist. The case for community-based efforts is built on the premise that local people need to take ownership and control of the economic forces affecting their well-being. Community- based development efforts focus on initiatives that make use of local resources to generate jobs and income.

Strategies, Policies, Outcomes and Impacts

The literature on local economic development focuses on three broad issues: adoption of policies and strategies, organization of activities, and the effectiveness of policies and strategies on outcomes and impacts. Adoption of policies and development efforts are influenced strongly by local economic conditions. Economically distressed communities are most likely to invest in efforts to generate jobs and income. Many economic development policies and tactics, however, require experience, expertise and resources that may not be available in small towns.

The organizational structure for economic development influences adoption and effort. Centralizing the efforts in the local government facilitates the economic development process. Decentralizing these activities across several agencies or departments can lead to duplicative efforts. Increasingly, small communities are recognizing the regional nature of economic development and collaborating with other municipalities to create jobs and income.

There is considerable debate in the literature regarding the effectiveness of locally based economic development activities. Research on this issue used case studies of business relocations, surveys of firms, and secondary data to examine the relationship between policy adoption and job, population and income growth. Recent evidence suggests that some incentives such as tax policies do have an effect on growth. These local policies influence location decisions once a firm decides the region in which it is going to locate, and then considers the advantages and disadvantages of several localities.

There has been much less research examining the effects of various policies on community impacts, such as unemployment, poverty or inequality. Summers et al. (1976) found that attracting branch plants to rural areas had a negligible effect on unemployment or poverty rates. One reason why industrial recruitment does not reduce unemployment or poverty is that the vast majority (approximately 80 percent) of the new jobs created is taken by in-migrants. Local residents may not have the skills or experience to take advantage of the new jobs created in their community, often referred to as a skills mismatch. Racial and gender discrimination and the lack of available transportation and childcare may serve as obstacles to the poor and underemployed in some rural communities.

Community-based Economic Development

A growing number of rural communities are chasing after a declining number of firms willing to relocate. Many policy makers, researchers and practitioners have shifted their focus to the use and control of local resources to promote development. Community-based economic efforts are increasing in frequency in the U.S., particularly in distressed regions. Many accounts of these activities interpret them as a response to the economic restructuring that took place since the mid- 1970s. Although an economic crisis or structural change in the local economy may be a precondition for grassroots efforts, it is not a sufficient condition.

A central characteristic of community-based economic development is that it relies primarily on local resources to stimulate demand. Grassroots efforts seek to minimize dependence on external organizations and institutions by promoting local ownership and control of resources (land, labor and capital). Some refer to these grassroots efforts as economic development by the “bootstraps.” This label implies, however, that communities use only local resources and become entirely self-sufficient from external organizations and resources. Few communities can implement such a strategy today.

Grassroots economic development strategies stand in stark contrast to traditional strategies that attempt to enhance the structural ties between communities and the larger society. Some argue that the increasing integration of communities into the national and international economy and society is inevitable, and efforts to reduce this dependency and integration will undermine the local economy. Grassroots economic development strategies are based on the assumption that these links with the larger society can be managed so as to increase benefits to the community.

Community-based development simultaneously contracts and expands ties with the larger society. Contraction means that the community attempts to become self-reliant by reducing domination by outside corporations. The primary goal of contraction is to reduce external control over local resources. For example, land trusts, worker- and community-owned firms, and community development banks are tools to enhance local control of resources. By taking control of these resources, communities may be able to reduce their vulnerability to sudden shifts in the economy or to decisions by non-local organizations and institutions. Expansion means that the community extends its economic activities to national and international markets. Trade, however, is conducted with decentralized firms based on principles of social responsibility. Many grassroots economic development efforts attempt to increase the demand for the goods produced and services provided locally. That is, community-based economic development efforts create a demand that produces local benefits and returns the created surplus to the local community.

Worker- and community-owned firms are examples of community-based strategies that promote local ownership and control of businesses. In many instances, branch plants that are being closed in rural communities are profitable, but they can be run more profitably at another site. Worker- and communityownership provides a means to manage external linkages, but it is not based on a strategy to become autonomous. The economic decisions of the firm, however, are embedded in community needs as well as efficiency.

Finally, community development financial institutions improve access to credit for small businesses, minorities and women in rural areas. Most commercial financial institutions shift capital to the most profitable location or economic sector (taking risk into consideration), regardless of where the investors or savers are located. Rural communities generally do not lack capital, but capital belonging to community members is invested outside the community. Community development banks, however, limit their lending activities to ventures that benefit the locality. Investments are based on an evaluation of the social benefits and costs in the community. Community-oriented financial institutions may obtain a greater economic return by investing elsewhere, but it has long-term benefits by making social investments in the community.

Community land trusts have been developed in many urban and rural communities in response to land speculation and the need for low-income housing. If land is permitted to operate as a commodity, the exchange value of land takes precedence over use value. As a result, land markets may not serve community or social needs. In many rural areas, the high cost of land locked out beginning farmers and poor people who sought to buy homes. Land trusts remove land from local markets and place it in the hands of communities rather than individuals.

Overall, these strategies to garner greater control over key factors of production attempt to shape development activities that will provide benefits to local residents. Absentee ownership and control of these resources produce the type of underdevelopment that is characteristic of Third World economies. Communitybased development strategies offer localities an alternative path of development.

Conclusions

Can rural communities survive the structural forces working against the development of a viable local economy? Community-based development can have an impact on the margins; they probably cannot replace all of the jobs and income being lost to the restructuring process. It does, however, produce a more resilient economy that will be in a better position to develop in the future. Long-term development may be possible if communities learn how to capitalize on local resources and to expand the local social capital. For many communities, this will require a different approach to local economic development—one that is participatory and inclusive. Participation is learned, however, and there are few other local institutions that promote participation. Thus, community-based development will require a comprehensive approach to economic development that links the economy to social institutions in the community.

Community-based development strategies can be more effective if they are supported with national and state policies and programs that address the specific disadvantages that rural communities face. These policies and programs need to recognize the changing structure of rural economies, particularly the shift from a dependency on natural resources to other types of economic activity. Rural policies should be comprehensive, recognizing the linkage between economic development, environmental quality, housing, health care and other areas of the community.

— Gary P. Green

See also

Community; Community Celebrations; Cooperatives; Home-based Work; Impact Assessment; Infrastructure; Manufacturing Industry; Policy, Rural Development; Regional Planning; Trade Areas; Value-added Agriculture

References

Bartik, Timothy J. Who Benefits From State and Local Economic Development Policies? Kalamazoo, MI: W.E. Upjohn Institute, 1991.
Bruyn, Severyn T. and James Meehan. Beyond the Market and the State: New Directions in Community Development. Philadelphia, PA: Temple University Press, 1987.
Green, Gary P., Jan L. Flora, Cornelia B. Flora, and Frederick E. Schmidt. “Community-based Economic Development Projects Are Small but Valuable.” Rural Development Perspectives 8 (1993): 8-15.
Gunn, Christopher and Hazel Dayton Gunn. Reclaiming Capital: Democratic Initiatives and Community Development. Ithaca, NY: Cornell University Press, 1991.
Summers, Gene F. “Rural Community Development.” Annual Review of Sociology 12 (1986): 341-371.
Summers, Gene F., Sharon D. Evans, Frank Clemente, E. M. Beck, and Jon Minkoff. Industrial Invasion of Nonmetropolitan America: A Quarter Century of Experience. New York, NY: Praeger Publishers, 1976.
Wilkinson, Kenneth P. The Community in Rural America. New York, NY: Greenwood Press, 1991.