Bootstrapping rural economies

Take two local economies with the same population, the same climate and natural resources, the same export industries (the ones that bring outside money into the community) – be it tourism, or a manufacturing plant selling to other regions. One is successful and vibrant, the other on the brink of collapse. Why is that; what’s makes the difference?!

The Leaking Economy

A community’s wealth is represented by the money it generates, and wealth goes where the money goes. Money stays in a local community only as long as it can find a supplier for goods or services. We don’t grow bananas in Washington State, so folks in Washington (or better: their supermarkets) buy them from a more sunny place; and so goes some of Washington’s wealth to that sunny place. Economists call it “leakage” when the money leaves the community to buy goods or services elsewhere. The word “leakage” stems from British professor Kenneth Boulding ^[1]Boulding, K. E. (1945). Economics of Peace. Prentice Hall. who, in 1945, used the analogy of a leaky bathtub to represent the wealth of a community. In this analogy, the wealth of the community can be increased by plugging the leaks (reduce imports) or adding new water (increase exports). Here is another trick to slow down the leakage, however: keep the dollar working in the same community as long as possible: a farmer who pays the local dentist who pays the local bakery who pays a local farmer until finally it “leaks out” to purchase “the banana” – goods or services from elsewhere.

From deep to shallow

Think of the TV series’ gold-mining town Deadwood as the ultimate “shallow” economy: a few dollars might stay in the local town spent at the bar or brothel, but most of the created wealth either leaves town or “leaks” to purchase food, tools and supplies from remote suppliers.We can think of rural communities in the 1800s being on the opposite side of the spectrum: with local farms, diaries, blacksmiths that were almost completely self-reliant. Most of their economy relied on bartering and barely needed money; but if they would have used dollars in stead of bartering, those dollars would have gone around and around, only “leaking” from the region when outside merchants would come through. Whereas in Deadwood dollars would have been spent once or twice before leaving town, the self-reliant region with a deep economy would see the same dollar go around for tens of times or more.

Most rural communities in the US gradually lost the ability to keep money in their local economy. Commodity pricing, business consolidation (sometimes through debatable food-safety regulations), drove the local dairies, meat processors and mills to sell-out or close shop. Downstream businesses in the value-chain, a local blacksmith, local machine shops, often followed suit with the loss of the local industry’s demand. Rural areas ended up with a shallow economy where dollars barely touch ground before they leave for goods or services provided by the nearby metropolitan area. Or by the internet.

Humpty Dumpty

Putting Humpty Dumpty back together is very difficult; “buy local” does not make much impact if the majority of added-value in goods or services are generated outside the region. What can really matter, however, is rebuilding value-chains: businesses that are linked with each other in the supply chain. The example I often use is the one of the local brewery that changes to using locally grown hop ^[2]Economist call changing to a local supply “import substitution”; or brings a local micro-maltery on board, using locally grown barley. Every additional beer sold now leverages the local economy by using more local hop, malt and barley. The success of one becomes the success of all. Less leakage, a deeper economy, and a good chance that the profits are invested back into the community — especially if operations are locally owned. Local ownership is therefore an important factor in an economy’s metabolism. Other examples written about are the grain chain ^[3]The Western Rural Development Center works with its public and private sector partners to promote excellence in research, education and Extension for the prosperity of western rural communities. They published an interesting article: Rebuilding the Grain Chain. and the timber chain ^[4]Generating wealth creation models in the Appalachian wood-products industry: Wealth creation through Sustainable Forestry

Growth from within

This “growth from within” is what new economic development methods such as Rural Wealth Creation^[5]the USDA issued an overview report on Rural Wealth Creation research and experience in 2012: link and Economic Gardening^[6]Woods, J., & Gibbons, C. (2010). Economic Gardening. Public Management (00333611), 92(9); see also link promote, and are a fresh departure from the classic economic development efforts based on business recruitment (smokestack chasing).

Maybe we should call it economic bootstrapping?