Economic Development

Planned strategies used to enhance community residents’ lives, individually and corporately, through improved employment, service and housing opportunities. This article provides both an overview of and a rationale for economic development efforts in rural America. Changes in economic well-being are tied to fluctuations in the agricultural and rural manufacturing sectors. The article concludes with a description of various economic development strategies that have been employed in rural areas.

Introduction

Rural America’s economies are diverse and shaped by factors such as proximity to metropolitan areas, access to interstate highways, quality of other infrastructure, industry mix, size and skill of the labor force, ethnic and demographic characteristics of the population, natural resources, topography, climate, and natural and built amenities and disamenities. Strategies need to consider such factors.

The general purpose of economic development is to make people in a community or region better off. To be made better off is not limited to narrow economic considerations, but may include the provision of better public services, employment opportunities or housing choices.

Over the last quarter century, Rural America has faced significant demographic changes, but the changes have been very unevenly distributed. Production agriculture and manufacturing-dependent Midwestern and Northeastern counties experienced population decline, some of it very large. This is important for these rural economies because it is impossible to separate employment and job availability from population trends. Growing economies attract newcomers, while employment decline encourages outmigration, particularly of new labor market entrants.

The geographical pattern of decline resulted from a mixture of social, demographic and economic factors. One of the major factors was the decline of manufacturing. The Northeast and Upper Midwest with its union tradition have been losing manufacturing jobs for some time, but non-unionized rural areas, particularly in the South, could successfully compete for manufacturing jobs in the late stages of the product cycle through lower wages than those prevailing in urban areas (Mack and Schaeffer, 1995). However, global competition is making this difficult, as there are offshore sites with even lower wages. This relatively recent phenomenon is changing the industry mix of rural America, and service sector jobs account for a growing share of and most of the new employment opportunities. However, even in services there is growing global competition. Call centers, for example, can be located in rural America or overseas with labor costs often being the decisive factor.

Although rural America contributed to and benefited from the strong national economy of the 1990s and the recovery from the economic downturn in the early 2000s, there remain pockets of persistent rural poverty, particularly in Appalachia, the Mississippi Delta, and Indian reservations. Poor infrastructure and low educational attainment are among the causes.

The recent growth of the Hispanic population outside the Southwest, particularly in the Southeast, East, and the lower Midwest, reminds us of the mass migration of Southern Blacks in the early twentieth century to the industrialized North. In the 1990s, Hispanics contributed 25 percent to nonmetropolitan population growth, and almost one half of all nonmetropolitan Hispanics lives outside of Texas and the Southwest (Kandel and Cromartie, 2003). Thus, rural America is also becoming ethnically more diverse than it used to be.

The perception that rural America is almost identical with agricultural America persists but is incorrect. Most nonmetropolitan counties depend on non-farm jobs for most of their jobs, and 40 percent of farm operators, accounting for 42 percent of farm cash receipts, are located in metro counties. Even in the 420 (out of 2,040) nonmetropolitan counties that are farmdependent (at least 20 percent of the counties earned incomes is derived from farming), the non-farm sector provides close to 80 percent of the jobs (Ghelfi and McGranahan, 2004). Agricultural policy is not a substitute for a general rural economic development policy.

Rural Economic Development Strategies

Economic development strategies can be classified into sector, place and people policies, as well as into business- and people-oriented policies. The difference between a people- versus business-oriented policy can be illustrated in training policies. Business orientation means that the needs of one or more businesses are to be met by training the candidates most likely to succeed. These usually are already well-qualified persons who may need only some specific training that they have not obtained in the past, but that is needed by the business. By contrast, a people-oriented policy might focus on long-term unemployed individuals and provide them with training to increase their employment potential. Such a policy is more likely to be aimed at those not already well qualified.

Sector policies have a long history and dominated when rural communities used low wages to attract routine manufacturing jobs. Globalization has made possible the location of manufacturing in countries with even lower labor costs than U.S. rural regions. Today’s economic conditions require a greater number of development strategies. Industrial recruitment (sector policies, like “smoke stack chasing”) is an important development strategy. But other development strategies are also important, and can include entrepreneurial approaches (people policies, such as “grow your own” products), infrastructure investment (place policies that improve the base conditions for economic development), human capital investment (people policies that are business- or people-oriented), and capitalizing on and improving local and regional amenities (place policies that include business- and people-oriented strategies that enhance or market the area’s quality of life in an attempt to attract retirees, businesses and/or tourists). New ideas have also been developed and tried in the agricultural sector, such as direct sales from the farm, production of items for niche markets, and particularly organic products. Agritourism initiatives often include direct sales and niche products.

Industrial Recruitment. Although industrial recruitment is a popular economic development tool, practice has become more cautious after several highprofile failures. State and local governments have provided incentives that turned out to be poor investments, such as a Volkswagen plant in Pennsylvania that stayed open for only a few years. Recognition that competition for firms could lead to bidding wars between governments, with winners ending up giving away in incentives most of the benefits, the so-called “winner’s curse,” has had a similar effect.

Firms value upfront incentives most highly and discount those obtained at a later time relatively heavily, so that providing incentives only after demonstrated performance is not an option. Taking back incentives when expectations are not fully met may also be difficult if governments want to maintain a cooperative relationship with the firm. Because the return on the public’s investment depends on the firm’s success, potential industrial recruits should be screened before committing public resources and abate taxes. However, the quality of such an assessment depends on firms’ willingness to share operations and cost information. If firms worry that information will be leaked, their willingness to share it is likely to be low.

The nature of incentives can contribute to longterm success or failure after attracting a firm. Particularly, buildings provided at nominal cost are attractive to businesses, but make them more “footloose.” With low fixed costs, when new technology or production processes can be better implemented in a different facility, the firm may start soliciting bids for a new plant. Providing new or improved infrastructure and training are often better long-term investments because they improve a location’s competitiveness for other businesses as well.

Entrepreneurial Approaches. Rapid economic change, as we are currently experiencing, creates uncertainty for existing as well as opportunities for new products and businesses. In this environment entrepreneurial skills are critical to the ability to adapt in the private sector, as well as the public and private volunteer sectors. Entrepreneurial approaches include a growing number of public-private cooperative projects that involve joint investment and risk sharing. An example is the nonprofit Oregon Rural Fiber Network, which provides broadband Internet access to west-central Oregon. Public-private collaboration has also been suggested for other programs and services, to encourage the establishment and retention of supermarkets in underserved areas, for workforce training, and the management of rural water resources.

The U.S. Small Business Administration (SBA) supports local and regional entrepreneurs through training, grants, loans and consulting. While the SBA does not geographically target its programs, the U.S. Department of Agriculture (USDA) specifically supports rural businesses through loans and grants. Local strategies include incubators for new businesses that provide basic business support services, advice and consulting.

A problem of some entrepreneurial initiatives is their diffuse impact. The addition of a large new employer is highly visible. Acquiring knowledge, making contacts and establishing networks through participation in training programs may result in new jobs or contribute to job retention. However, the overall impact on the community may be indirect. Most successes of the entrepreneurial approach occur in small firms and gradually; public awareness tends to be low. To win and maintain public support, it is important to keep track of impacts and regularly disseminate news stories.

Infrastructure Improvements. Infrastructure is critical to economic success. Water and sewage treatment are basic services; without them most manufacturing industries cannot locate. The best infrastructure is of limited value, however, if the location is poorly accessible from other places. Hence, access to Interstate highways, railroad, airline or shipping services bestows location advantages on a place. Access to the regional and national transportation network also helps attract and retain residents because it enables them to commute elsewhere for work, shopping, health care or entertainment, thus increasing choices and opportunities.

A good communications infrastructure, including the Internet, contributes to a location’s competitive position. Communities that offer broadband access have an advantage over those that do not. Although broadband access has been spreading through rural America, availability still decreases with distance from larger urbanized areas. Cell phone coverage is not yet as universal in rural as it is in urban places.

Human Capital Investment. The reputation of public schools is particularly important in small rural towns, where private alternatives are rarely available. Poor schools can be a hindrance in the recruitment and retention of firms, professionals and residents.

A community’s schools prepare students for entry into the labor force or additional study and training. Rural towns send a smaller percentage of their youths to college than do metropolitan towns. This trend may occur because of fewer employment opportunities requiring a college education in rural compared to urban labor markets. A concern that youths will not come back home after college may also have a discouraging effect. The location of colleges and technical schools in rural areas is therefore a community asset. It not only makes a rural location college more accessible, but faculty and staff possess skills that might otherwise not be available. Community colleges provide the first two years of college education, technical training and continuing education. They may also be called upon to provide special training to prepare applicants for employment in a newly located firm.

In considering a strategy, the community, region or state should match the potential made possible by the infrastructure to the quality and quantity of available human capital, and vice versa. Investing only in human capital without also creating economic opportunities for a more highly skilled population would likely result in individuals leaving for jobs elsewhere upon completion of their training.

Community Assets: Local and Regional Amenities. A growing retiree population of the United States, and a strong highway system and communications network have created households that can choose where they want to live based on personal preferences rather than the availability of jobs. The number of “footloose” entrepreneurs who can work almost anywhere as long as they have broadband Internet and access to the national transportation network is also growing. These trends favor regions with amenities, such as climate, bodies of water, beautiful scenery, parks or well-preserved historic towns. Many rural towns and regions with such assets have grown over the last decade. The South and the Mountain West, northern Minnesota, the Michigan Upper Peninsula, and northern Wisconsin were among the regions that attracted newcomers.

The Importance of Household Assets. The recognition that assets help absorb economic shocks has resulted in greater attention being paid to household assets. Michael Sherraden (1991) has been particularly influential in promoting asset-based anti-poverty strategies, and the idea has been incorporated into policy in the federal “Assets for Independence Act” (Public Law 105-285, October 27, 1998). The asset-based approach is articulated in the Annie E. Casey Foundation motto: Earn it, keep it, grow it (http://www.aecf.org). This still new approach has caused some states to increase the asset limit for eligibility for welfare. This was the case in West Virginia, where a welfare-to-entrepreneur program could not have succeeded without raising the limit.

Summary and Conclusion

Rural America is diverse. Federal policies should be designed flexibly enough to meet needs that often differ from region to region. Some issues can most effectively be addressed at either the federal, state, regional (multiple communities or counties) or local (county, community, special district) level. However, diversity provides an argument for making funds available to local governments where they may better account for differences in needs and opportunities. In addition to the various entities that govern rural America, other institutions also have an interest in economic development. They include nonprofit organizations, churches, businesses, land owners and the owners of natural resources. Promoting rural development often requires cooperation among such actors.

The choice of the appropriate economic development strategy depends on the problem. In many instances the solution requires a combination of approaches and tools. Most communities and regions are better served by a strategy that relies on a variety of approaches rather than a single approach. One reason for this is interrelated issues. For example, health care, amenities and business development are connected to each other. An attractive rural community finds it easier to attract and retain health care professionals, and businesses, tourists and retirees are more interested in visiting or moving to a place where medical services are available. Recreational infrastructure, such as trails and walkable communities contributes to the health of the population.

Research shows that what happens in one county affects neighboring counties, creating a ripple effect through the region. Such ripple effects suggest that cooperation among jurisdictions could increase economic opportunities (e.g., U.S. Department of Agriculture 2006). Several towns in a region could each be an excellent location for a new industrial plant. If they were to work together, they could improve their chances of attracting the plant, and at the same time, prevent costly competition among each other (the costs incurred by the community where the plant is constructed are called the “winner’s curse”). Communities working together to attract the new industrial plant would allow them to share in the plant’s benefit. An example of such an arrangement is the case of Bloomington-Normal, Illinois, where the two cities and the State of Illinois worked together to attract an automobile plant to their region.

Finally, economic development strategy must be based on the assessment of strength and weaknesses, and opportunities and threat (SWOT analysis), and on location theory. Failure to do so can result in error, such as the one made by a state in the Mountain West region that mobilized to compete for an automobile plant. Cursory location analysis would have revealed that the chances of attracting the plant were poor given its remoteness from suppliers and major markets. The skills and time of economic development professionals and volunteers could have profoundly assisted the results of their efforts.

— Peter V. Schaeffer

See also

• Community Capitals; Development, Asset-based; Development, Community and Economic; Sustainable Development

References

• Castle, Emery H., ed. The Changing American Countryside: Rural People and Places. Lawrence, KS: University Press of Kansas, 1995.
• Drabenstott, Mark, guest editor. Special Issue: Rural America. International Regional Science Review 24, no. 1 (2001).
• Ghelfi, Linda and David McGranahan. “One in Five Rural Counties Depends on Farming.” Amber Waves 2 (June 2004): 11. Available at http://www.ers.usda.gov/Amber- Waves/AllIssues.
• Kandel, William and John Cromartie. “Hispanics Find a Home in Rural America.” Amber Waves 1 (February 2003): 11. Available at http://www.ers.usda.gov/Amber- Waves/AllIssues.
• Mack, Richard S. and Peter V. Schaeffer. “Nonmetropolitan Manufacturing in the United States and Product Cycle Theory: A Review of the Literature.” Journal of Planning Literature 8 no. 2 (1993): 124-139.
• Schaeffer, Peter V. and Scott Loveridge, eds. Small Town and Rural Economic Development: A Case Studies Approach. Westport, CT: Praeger, 2000.
• Sherraden, Michael. Assets and the Poor: The New American Welfare Policy. Armonk, NY: M.E. Sharpe, 1991.
• Stauber, Karl N. “Why Invest in Rural America–and How? A Critical Public Policy Question for the 21st Century.” Economic Review (second quarter 2004): 33-63. Available at http://www.nwaf.org/Content%5CFiles% 5CRC01Stau.pdf.
• U.S. Department of Agriculture. 2007 Farm Bill Theme Papers: Rural Development. Washington, DC: U.S. Department of Agriculture, 2006. Available at http://www. usda.gov/documents/Farmbill07ruraldevelopment.pdf.
• Whitener, Leslie and Tim Parker. Special Issue: Policy Options for a Changing Rural America. Amber Waves vol. 5 (May 2007): 58-65. Available at http://www.ers.usda. gov/AmberWaves/May07SpecialIssue/PDF/Policy.pdf.