ASAM: Economic sector contribution

Summary

ASAM is an Excel Application that facilitates the analysis of an economic sector contribution to a region. It does this by taking data from a source like IMPLAN (not included) and then calculating base economic output, employment, wages and value added. The code (written in Visual Basic) driving the application is Open Source, licensed GNU GENERAL PUBLIC LICENSE v3.0. The complete application can be downloaded from GitHub.

Page content

• Introduction
• Illustration
• The Why…
• How did it come about…
• Strength & Limitations
• Download and Installation
• The Code
• Problem Solving & Frequently Asked…
• References

Illustration

The following case study illustrates how a contribution study using Economic Base analysis provides insight in a local economy using standard output from the ASAM application.
This analysis is of a region where its county seat also happens to be home to the state’s largest college. When asked, many of the county’s residents would answer that agriculture is by far the most important sector for the county’s economy. The analysis shows a significantly different picture. The first pie chart shows that, if we account for the cascading effect of a sector’s economic output (the Base output), the agriculture sector ranks only 5th, with the following three sectors make up 50+% of the regions economic output:

• the government sector (most of it is, in this case, accounted for by the education sector, i.e. the university)
• a sector that is usually only talked about, but never shown: households. This sector represents new money that households bring into the local region – investment income, unemployment fees, social security etc. Since households are always an indirect economic output, it does not show up in the traditional output analysis (chart 2, Gross Output).
• the 3d sector is construction (again, much of it driven by the university).

Chart 2 shows how we traditionally depict an economy by showing only the Gross Output. The College, again, shows up as the primary driver, but, in only looking at gross output, we would not realize how much of the region’s economy relies on the university.

The bar charts that the application generates show the same story in a different manner. Charts 3 and 4 show Output and Wages respectively. Since the college wages are generous compared to wages paid in the other sectors it again shows the influence of the college on the local economy.

Why ASAM

Economic contribution studies can be quite self-serving; as Watson et al phrase it: “Criticism of [economic contribution] studies focuses on the perverse incentive for publicity and advocacy purposes to double count the contribution of a given sector by making its direct, indirect, or induced effects appear responsible for a larger share of the economy than the observed data can support”^[3]Watson et al, 2015.
An accepted solution is to track all economic contributions in a (social accounting) matrix with sector spending entered in rows such that the columns summarize sector receipts. The row total of a sector’s aggregate spending then automatically equals the aggregate receipts in the sector’s column. This type of “square “calculation makes double counting impossible. If, for example, we say that consumption from households is the biggest contributor in a regional economy, we can verify the statement by splitting the claimed household spending over the different sectors and compare it to the total receipts from households in those sectors.

Even though this is a fairly foolproof solution (contingent to reliable data), you may have picked up on the downside: it amounts to an enormous amount of work!!

• firstly: we need the regional receipts and payments by sector and region
• secondly: we need to determine the multiplier effect of a sector in order to give it its fair weight. A sector’s economic contribution translates into not only “direct” contribution, but also into “indirect” economic activity (services and supplies that feed the sector and increase or decrease with the sector’s success) and “induced” activity (employee and owner household spending). This type of “credit” is called the **base** economic contribution, giving credit for the cascading effect of a sector, as opposed to the **gross** economic contribution which only looks at face-value.

There are good sources to provide us with reliable source data. Sector data is available from the Bureau of Economic Analysis as well as from companies like MIG, inc.: a company that grew from a University of Minnesota project and provides regional data by sector, which is commonly used in economic impact studies.

Creating the base output by sector, accounting for the direct, indirect and induced output, is less simple. Companies like EMSI collect SAM data and solve the second problem by doing the calculations for us. They do so in a proprietary manner, however, whereas academic studies prefer a more transparent method. Researchers often use MS Excel’s pivot tables to do the calculations, but doing so is very time consuming. Aggregating the data slightly differently, or comparing historic data sets requires running the matrix calculations again and multiplies the amount of work. The ASAM project was born to cut that time from days into hours…

How did it come about…

I took a graduate class in economic modelling from University of Idaho’s Phil Watson, a young energetic professor well versed in economic contribution analysis. Is UI good at this stuff? Remember EMSI, the consulting firm that provides contribution analysis nation-wide? That company is located in Moscow, a tiny town in the Idaho’s panhandle. Moscow happens to be home to Idaho’s Land Grant university, and to prove its agricultural teaching worthy of investment, UI became an expert in regional economic contribution analysis. EMSI is simply a spin-off from that know-how, staffed with UI economists going private.

Phil Watson makes his students go through all of the calculations of base economic analysis by manipulating IMPLAN data pasted into excel. I was intrigued by the different insights a base economic analysis gave of an economy (see charts), and wanted to do historical and regional comparisons. The amount of work was staggering. So I automated the work. Then I shared the work with Phil, who shared it with Abelardo Rodriguez – a professor in UI’s extension organization. Abelardo pushed to make it into a stand-alone application that could be used by local extension educators, keen on showing the nuts and bolts of local economies to community and business leaders in a region (Rodriguez et al, 2011), and provided a download location for the ASAM application on UI’s website. Abelardo left UI in 2009, however, and the webpage is no longer maintained with that ASAM revision frozen in time.

I still get questions from individuals that use the original application or report bugs. So I created a GitHub repository for those that want to use the work, and/or build on it (‘fork’ it)…

Strengths and Limitations of Economic Base Analysis

Strengths: Before I did Watson’s course on Economic Base analysis I had managed factories & companies in Europe and the US, and was in the ideological camp of many of my business peers: local economic growth was simply the aggregate of the success of its local businesses. Understanding the cascading effect of economic sectors, both private and public, made me realize that this was a gross oversimplification. Economic Base analysis, for which ASAM is an enabling tool, helps to visualize that cascading effect. It made me realize that regions become sustainably prosperous only when collaboration and interaction builds from both private and public initiative.

Limitations: There are two that stand out. The first weakness is in the use of standard reported IMPLAN or BEA data – they do not always reflect reality. It is very worthwhile to sit down with local stakeholders and screen the data for obvious discrepancies.
The second limitation is the method’s narrow focus on export (“new” money brought in by companies or tourism). This focus tempts many economists and consultants to promote export over other means of economic growth. Sure, export dollars are important, especially in rural regions dependent on natural resources. Rather than concentrating on more of the same (Chambers of Commerce calling for ever-more visitation), however, a region should also focus on wealth creation (“growth from within”) and create a deeper local economy by substituting imports.