Saturday, October 25, 2014

Past Silos and Smokestacks: A Rural Development Proposal

04/14/2010

Editor's Note: Mark Drabenstott has been one of the most helpful economists in rural America for the past several decades, first at the Federal Reserve Bank of Kansas City and later at the Rural Policy Research Institute. Drabenstott has written a new report on rural development, entitled Past Silos and Smokestacks: Transforming the Rural Economy in the Midwest. A full copy (PDF) can be found here.  Below are excerpts from the report. 

Daily Yonder The economist and author Mark Drabenstott, speaking in Austin, Texas. Most people think of the rural Midwest, away from the great cities, as one big farm—solidly bucolic and dependent on agriculture for its living. Yet industry and manufacturing have always been a key part of the rural Midwest economy. 

In fact, today they dominate that economy. More smokestacks than silos dot the rural landscape. As farms consolidated and the farm population fell, factory jobs— often based on autos, food, and agricultural equipment—picked up the slack. Rural towns and counties depend on manufacturing even more than Midwestern cities, where service industries dominate. Put simply, as goes manufacturing, so goes the rural Midwest.

Today, that industry is going away, and much of the rural Midwest’s economic vitality is going with it. The current recession is only accelerating a decline that has its roots in a rapidly globalizing market for industrial products. Traditional manufacturing jobs are leaving the rural Midwest. And so are many of its best-educated and most talented young people.

The rural Midwest could have an economic future as bright as its vibrant past. But it is basing its twenty-first-century future on a twentieth-century playbook. This is not a recipe for success. Towns and counties compete with neighboring towns and counties for jobs and investments. Industrial recruitment—“smokestack chasing”—is the norm. Economic development agencies spend millions on infrastructure and tax breaks to lure companies from afar instead of creating new jobs at home. Boosters sell the rural Midwest as a cheap place to make things, ignoring the region’s many other economic assets—its natural resources, its hard-working people, its central location, its schools and universities, and its scientific base, among others —that could all be leveraged into a competitive new economy.

The path to stronger economies in the rural Midwest is plain. Partnering regionally to compete globally is what’s needed. This pathway will lead to scores of multicounty, self-defined regions across the Midwest. Only by combining their forces to create new businesses and good jobs at home will the towns and counties of the rural Midwest compete and thrive in a global economy where this sort of collaboration is fast becoming the norm.

Still Resilient and Creative

In truth, rural Midwesterners remain both resilient and creative. They approach the future with optimism, creativity, and determination. They take economic ups and downs in stride. They stay calm in the face of adversity. They know the value of taking the long view. Above all, they work hard. 

These virtues and many others will be critical in the period ahead because the rural Midwest faces its biggest economic test in decades. The global economic downturn has hit hard in the rural Midwest. The auto industry, one cornerstone of the rural economy, is undergoing its biggest restructuring ever. Many plants are shuttered; some will never reopen. Agriculture was in strong shape going into the global recession, but farm incomes are sliding now as food demand slumps around the world. And the pullback in housing and consumer spending is leading to job cuts across the board in literally thousands of factories through the Midwest countryside.

On top of the economic worries, a persistent exodus of youth and talent is a major concern to leaders throughout the rural Midwest. The economic downturn has, if anything, only exacerbated the exodus.  Mark Drabenstott Rural counties in the Midwest have continued to lose population. The rural communities here have had a "persistent exodus of youth and talent...."

It would be easy to blame the recent downturn in the rural Midwest on those responsible for the subprime meltdown. But the problem goes much deeper. The rural Midwest is still using a twentieth- century playbook to compete in a twenty-first-century economy. For more than half a century, the rural Midwest has followed one basic strategy to develop its economy: Recruit a factory to the edge of town, and give away the farm to get it. 

The End of the Factory and Farm Model

The Midwest was settled by farmers. Ever since the Great Depression, wave upon wave of innovation in agriculture (and the ensuing gains in productivity) allowed more and more of these farmers to pursue work off the farm. For most of the past fifty years, “former farmers” found work on the factory floor.

This strategy worked for a long time. The rural Midwest was a comparatively cheap location. It is centrally located to reach the whole U.S. market. The workforce has a legendary work ethic and excellent skills to apply to industrial tasks. And a generation of development officials honed the craft of cobbling together an enticing array of financial incentives to attract factories—from industrial parks to job training credits to tax increment financing. Communities and counties competed for companies the same way they did on the basketball court on Friday nights. Several communities inevitably lost when the company finally announced the winner. But there was always a new round of bidding over yet another company.

Globalization got in the way of this strategy. The advent of containerization and the spread of instant communication around the world rapidly made the market for manufactured goods truly global. The rural Midwest could no longer compete by simply having lower costs than New York, Los Angeles, or even Chicago. No, with globalization the rural Midwest had to beat out Monterrey, Mexico, and Guangzhou, China. The rural Midwest had always been a low-cost location, but not that low.

Moving Beyond Silos and Smokestacks

The rural Midwest must now move beyond silos and smokestacks. Globalization has fundamentally changed the field of play in economic development over the past two decades. It is not enough to compete on cost. The rural Midwest loses if cost alone is the criterion. Too many places around the world offer even lower costs. It is always possible to try to do old things better. But there is a limit to how far productivity can go. Increasingly, the rural Midwest must compete by doing newer and better things—in a word, innovating. ERS In the 1970s and '80s, manufacturing plants moved into rural counties, taking advantage of the region's low wages and ready workforce. Communities saw economic development as "smokestack chasing." Now the smokestacks are leaving, and rural America needs to find a new way to build an economy.

The field of play has shifted profoundly, but far too many places in the rural Midwest still cling to the old development playbook. A preponderant majority of leaders at the community, county, and state levels remain deeply wedded to industrial recruitment as their development strategy. Very little empirical research documents the full extent of this development inertia (in part because it is simply accepted as the way things are), but state development budgets lend important insight. A review of 2010 budgets for the twelve Midwestern states reveals that approximately 80 percent of total state spending on economic development is in categories often tied to recruitment incentives. A similar pattern is almost certainly at work at the local level. 

 Four Things the Midwest Must Do

The rural Midwest needs a new development strategy to transform its economy. The deep economic downturn makes this urgent; globalization makes it important. The new playbook must take into account the new imperatives of the global economy. It must build on the enduring strengths of the rural Midwest—among them its fertile countryside, its hardworking people, its livable communities, and its central location in the nation. Yet the new playbook must go much further. It must do four things: 

 • Help rural communities and counties think regionally to compete globally. Critical mass is essential to sustaining a competitive edge in global markets, and many of the best economic opportunities only emerge on a regional scale. “Regional scale” is hard to define, but for much of the rural Midwest, it probably means at least a dozen counties, more in more sparsely settled areas. An even greater challenge than any definition of region will be creating the conditions under which neighboring communities give up decades of competition and instead partner on a new economic future. 

 • Focus public investments on transforming economic opportunities. Each multicounty region in the rural Midwest has a unique competitive edge in global markets. The key to sustained economic prosperity is to focus scarce public dollars on projects that unlock a region’s unique economic potential while leveraging returns from private sector investments. Investments in transforming opportunities—those that connect the rural Midwest with big new markets—will be especially prized. 

 • Spur both innovation and entrepreneurship. Innovation and business starts are the new measures of economic success. The Midwestern countryside is dotted with some of the very best engines of innovation in the nation—a proud legacy of outstanding public universities. These engines are powerful, but not enough of that power is hitting the ground of the rural Midwest economy. Thus, new “transmissions” are needed to translate innovation into economic progress throughout the countryside. 

 • Change the business culture and recycle wealth. The business climate in the rural Midwest today is tilted toward business recruitment. The business climate of tomorrow must do much more to encourage homegrown companies. Entrepreneurship and risktaking must, therefore, become embedded not only in public policy, but also in schools and Main Street coffee shops. Capital will be a critical ingredient for these new companies. Fortunately, the rural Midwest has a lot of wealth. However, new mechanisms will be needed to recycle that wealth into new companies. 

 Three Steps to Regional Development

(T)here is strong consensus that the best way to foster regional development is to pursue three things simultaneously:

Encourage regional critical mass—act regionally to compete globally. Put another way, the era of single community/county development is over. Achieving a level of “agglomeration” is critical to success. This agglomeration describes a whole spectrum of beneficial economic synergies that emerge only at the level of a region rather than a single jurisdiction such as a village, county, or city. 

Prioritize investments in public goods and services to unlock a region’s economic potential. The key to growth is seizing each region’s unique competitive advantage in global markets. Critical public goods are often required to achieve this. In the wake of the financial crisis, well-targeted investments in public goods will pay especially strong fiscal dividends to states and federal governments wrestling with huge fiscal deficits. 

Spur innovation to transform a region’s economy. Innovation is essential to helping regions compete in today’s global economy— competing on cost alone is no longer enough. Moreover, innovation is a distinctly regional phenomenon, shaped by the unique institutional and business features of the region’s landscape, history, and culture. While “regional innovation” remains somewhat of an unknown, special efforts to foster it will almost certainly pay big dividends. 

For more information on these topics, please visit the sponsor of Drabenstott's paper, the Global Midwest Initiative at the Chicago Council on Global Affairs

Comments

Rural Midwest

Mark Drabenstott is absolutely correct about the need for agglomeration to spur economic growth in the rural Midwest. Unfortunately, the rural Midwest was largely settled in the form of small towns of fewer than 2,500 people (often less than 1,000). For example, the minimum recommended size for a Main Street community is 5,000 residents. So, there needs to be a considerable amount of consolidation of settlements in order to achieve the kind of agglomeration that will thrive in a largely service economy.

And, no, ethanol is not a long-term solution.

How to agglomerate

Mark's article hits the main issue:

 • Change the business culture and recycle wealth. The business climate in the rural Midwest today is tilted toward business recruitment. The business climate of tomorrow must do much more to encourage homegrown companies. Entrepreneurship and risktaking must, therefore, become embedded not only in public policy, but also in schools and Main Street coffee shops. Capital will be a critical ingredient for these new companies. Fortunately, the rural Midwest has a lot of wealth. However, new mechanisms will be needed to recycle that wealth into new companies. [Emphasis added.] 

The solution is to create many, highly networked social benefit entrepreneurial enterprises (L3C) limited liability companies (SBEEies).  We must also create the means to fund the start-ups and grow-ups.  Currently, there is only a haphazard effort being made along this line.  The stawart ShoreBank has tried to fill the gap left by the banking industry and provide loans to deserving SBEEies.  The ShoreBank, http://en.wikipedia.org/wiki/Shorebank  faces a take-over by FDIC because of too low capital ratios.

What is lacking in the SBEE sector of the economy is liquidity of the debt and equity issues of SBEEies.  We need a responsible way of trading in these instruments.  To that end, I propose creating a virtual stock exchange.  Here's my pitch:

 

NEW BREAK-THROUGH FOR START-UP LOANS AND EQUITY INVESTMENTS revised 4-015-2010

 

A new form of company and a change in IRS regulations will likely open up funding for business start-ups and grow-ups. The type of legal entity is called a “L3C” which is a limited liability company or LLC. They are also called, “social benefit entrepreneurial enterprises” (SBEE). Thus far, Vermont and Michigan have adopted laws which permit the formation of the L3C and similar legislation is pending in several other states as bi-partisan measures. The key is that the L3C is formed for the purpose of social benefits – defined by 501.c.3 laws. Profit cannot be the main purpose, but the law does not prohibit profit distribution to the members of the LLC (which for tax purposes is usually treated as a business partnership).

 

The key result of achieving this status is that 501.c.3's are permitted to invest or loan funds to the L3Cs. The catch is that a prudent donor will want a “private letter” issued by the IRS which recognizes the LLC as a L3C entity. These letters are expensive and time consuming to get. However, there is legislation pending in Congress which changes the method of qualifying. A special unit of IRS will be set-up to deal with these types of qualifications (not the IRS attorneys). Generally a form, correctly filled in, will be submitted to the new unit which will basically rubber stamp its approval, putting the L3C in the proper slot to receive funds from 501.c.3s.

 

Private foundations are required to disburse five percent of their capital each year. Now those funds are simply given away. The new approach does give the foundations the ability to recoup the principal and earn some return on the principal. This change should generate considerable funding of SBEEs.

 

To find our more about SBEE L3Cs, please visit Wikipedia.org, at: http://en.wikipedia.org/wiki/Social_entrepreneurship, or Google “social benefit entrepreneurial enterprise”. See Social Velocity at: http://www.socialvelocity.net/2009/02/changing-nonprofit-finance-the-other-side-of-the-story/ A great talk on the subject by Mark Lane, a tax attorney, entitled, [Introducing L3C - Part 1] L3Cs: Social Enterprise's Powerful, New Capital Formation Tool, starts on Youtube at: http://www.youtube.com/watch?v=AZ9uQmVvtjA . Don't miss the question and answer parts.

 

Maryland has joined the states which now have approved L3C social benefit entrepreneurial enterprises: Maryland First State in Union to Pass Benefit Corporation Legislation, http://www.csrwire.com/press/press_release/29332-Maryland-First-State-in-Union-to-Pass-Benefit-Corporation-Legislation .

 

A certifying/branding organization has been formed to provide due dilegence and rating of L3C: Become a B Corporation,http://www.bcorporation.net/become

 

There are several financial institutions which have adopted the B corporation ethics: http://www.bcorporation.net/community/financial

 

Jim Miller

jimmiller5417@yahoo.com

 

 

Past Silos and Smokestacks....lie communities

What a pity that Mark Drabenstott makes no mention of the power of communities to help themselves; to cooperate through social enterprises and Development Trusts - whereby profits are ploughed back in to further local rural community development.

Have we not seen enough in the last year to know that self-help - rather than dependance on outside economic development - offers a safer, more resilient & sustainable way forward........