Four Principles of Economic Renewal

Think, for a moment, about the economy of your community. What makes it work? In many ways a local economy is like a bucket that the community would like to keep full. However, economic buckets invariably have holes in them. Every time someone buys something from outside the community, dollars leak out.

To balance the dollar drain, money must flow in from outside the local economy. Money comes in when people in other places buy products or services created by local people. Extracted raw materials, harvested crops, or manufactured goods are “exported”; many communities also earn income from tourists and other visitors. However they do it, communities must bring in at least as much money as they spend or they will wither and die. When income falls short of outgoings, communities typically react by trying to recruit outside businesses–a risky and expensive strategy. Even if its accounts balance, a local economy that’s heavily reliant on only one or two industries may be vulnerable to swings in the national or global economy. To achieve greater diversity, the usual response, again, is business recruitment.

Recruitment is an attempt to find new ways to pour more money into the community’s economic bucket. Though it can be useful in many circumstances, this strategy rests on the often unquestioned assumption that new business from outside the community offers the best–or the only–solution to local economic problems.

Economic Renewal focuses on easier, cheaper, and less risky means to achieve the same end. And while this approach may lack the fanfare and ribbon-cuttings of a business-recruitment campaign, it typically fosters a deeper kind of community spirit and self-reliance that comes from solving problems locally instead of waiting for salvation to come from outside.

The Economic Renewal path to sustainable development is based on four principles. Although they’re described separately here for clarity, in practice they’re interrelated and often overlap. For instance, many things done in a community to pursue the first principle (plug the leaks) will assist in the second (support existing business). A smart community integrates all four, but it takes them in order, since the earlier strategies, as a rule, give more bang for the buck than the later ones. Going for the surer bets first gives a community momentum and puts it in a stronger position to reap the benefits of the subsequent strategies.

Plug the Leaks

The lively interchange of commerce is an important part of community vitality. Your days may begin with coffee grown in Africa, Latin America, or Hawaii. You may drive to work in a car bought from Detroit, Japan, or Europe, made from metals mined in dozens of countries. Television brings you news, culture, and sports events from different continents. Almost no part of your life stands alone without commerce from outside your community.

These products of international trade enrich our lives. However, many other imports–notably such necessities as energy, food, water, health care, and housing–can often be supplied locally at no extra cost, and sometimes at a saving. In our analogy of the community bucket, these expenditures are leaks; before trying to pour more money into a leaky bucket, a town should simply plug some of its leaks. Economists call this strategy “import substitution,” but it’s little more than practicing the old adage, “a penny saved is a penny earned,” at the community level.

Leak-plugging is an important, but all too often overlooked, economic opportunity. When a community plugs an unnecessary leak, it puts money back into the local economy just as surely as if it had earned it through new industry. Likewise, as individual residents spend and respend the money they’ve saved, the local economic benefit multiplies in the same way it does with new income: more money in circulation creates more value, pays more wages, finances more investments, and ultimately creates more jobs. Unlike income, however, savings are inflation-proof–once you’ve cut out an expense, you no longer need to worry about its price going up. Further, money spent on local goods and services often goes to small businesses, the backbone of most local economies.

In every community, many goods and services that are purchased from out of town are, or could be, produced or marketed locally. Food, for instance. A study by students and faculty of Hendrix College in Fox, Arkansas revealed that the college was buying most of its food from distant suppliers, even though the majority of those food items were, or could be, produced locally. In 1987 the college changed its purchasing policy and is now committed to buying locally, and area farmers have learned how to produce for the college’s specific food needs.

Leak-plugging can turn a town’s whole attitude around. For instance, in the early ’90s the future looked bleak to many residents of Tropic, Utah. The timber mill had closed and ranching was part-time for most. But some made a living serving tourists visiting nearby Bryce Canyon National Park, and high school students in an entrepreneurship class noticed that tourists were buying a lot of bottled water. In 1995, with the help of their teacher, Kaylyn Neilson, they started producing and selling Bryce Canyon Mist, local spring water bottled with an attractive label depicting the national park’s red and yellow cliffs rising out of the morning fog. The new product hasn’t single-handedly saved the town, but it has demonstrated to residents that they can improve their local economy by replacing imports with local products. By late 1995, there was talk of Bryce Canyon beef jerky (using local beef), lollipops, and crafts.

Even when a commodity can’t be produced locally, it can often be used more efficiently to achieve the same net result. Indeed, this is probably the most reliable economic development strategy of all. Energy is a case in point. According to energy analyst Amory Lovins, a typical community spends more than 20 percent of its gross income on energy–and 80 percent of those dollars immediately leave the local area. Plugging this leak through efficiency is typically much easier (and cheaper, as it turns out) than trying to produce more energy locally. For example, the University of Northern Iowa spent $7,000 once in 1994 to install efficient showerheads, and is now saving $67,000 each year on water heating. Osage, Iowa (population 3,800) plowed $7.8 million back into its local economy between 1974 and 1991, thanks to a series of weatherization and energy-efficiency projects that continue today through the efforts of the local utility and service groups. As a result of efficiency, 1995 electric rates were 50 percent lower than the state average. Much of the saved money is respent locally.

The untapped economic potential of energy efficiency is enormous. It has been calculated that the United States could save $200 billion worth of energy annually–and create millions of jobs in the process–simply by being as efficient as Western Europe or Japan. Since those countries aren’t as energy-efficient as they could be either, the savings potential is probably much greater still. It’s as if every town in America had an invisible, clean-burning, maintenance-free power plant just waiting to be hooked up to the grid.

To promote a spirit of leak-plugging, some communities have encouraged residents to buy locally by creating their own currency. “Ithaca Hours” are a currency that “entitles bearer to receive one hour labor or its negotiated value in goods or services.” In Ithaca, New York, that’s equivalent to about $10 an hour, the average local wage. Twelve hundred local individuals and businesses of all kinds accept Ithaca Hours, approximately 4,600 of which are in circulation.

Of course it doesn’t necessarily take an official program to plug a leak. Most towns have some sort of barter, or “informal,” economy that enables local goods and services to replace imports. While the informal economy is virtually ignored by economic-development experts, its importance was quantified by Shanna Ratner of Yellowood Associates of Vermont, who estimated its economic value in Crown Point, New York to be equal to approximately 100 jobs. In a town of less than 2,000, that’s a lot of jobs.

Leak-plugging–through import substitution, resource efficiency, buy-local programs, and a stronger informal economy–is an important step toward greater self-reliance, and a crucial aspect of any community’s development strategy in an increasingly globalized and unpredictable economy. The more efficiently resources can be used, and the more local purchases (especially necessities) can be produced locally at reasonable prices, the more resilient the local economy will be, and the more able it will be to withstand externally created shocks and changes.

Support Existing Businesses

The economic heart of a community is its small businesses. Many development experts are convinced that the fastest way to increase jobs and strengthen a community’s economy is to encourage existing businesses to become more efficient and successful. A 1991 report by the National Conference of State Legislatures notes that smaller businesses–those that are most likely to start up in your community–“while not providing the windfall of jobs promised by a Saturn plant…are the largest source of new job creation and tend to be less mobile and more committed and loyal to the…community over time and more willing to endure economic hard times.” Yet, caught up in the dream of high-tech industrial recruitment, many communities overlook local opportunities.

The Ithaca and Osage examples demonstrate that one way to support existing businesses is to plug the leaks. Ithaca Hours are a substantial incentive to patronize local small businesses. And, though Osage residents started their energy-saving effort to save money, they also found that lower electric rates strengthened local businesses. Fox River Mills, a major employer in Osage, was able to cut its production costs by 29 percent thanks to lower electric rates and more efficient electric motors, making possible a plant expansion that nearly tripled jobs.

Though these and other innovative ideas can be powerful ways to support local business, any community’s development effort must deal with the two most important causes of failure: inexperienced management and inadequate financing. Federally supported small business development centers (SBDCs) are often a big help, offering classes in such basic business skills as management and accounting. Central to many communities’ development efforts, SBDCs are easily accessed in colleges throughout the United States.

Community development corporations (CDCs), which lend to businesses, develop commercial and industrial space, and create housing, are also crucial to many towns. Nationally, there are more than 2,000 of these community-owned corporations, usually targeting services to lower-income people. An excellent example is the Mountain Association for Community Economic Development: operating statewide from Berea, Kentucky, it works on issues of forest products, micro-enterprise, displaced workers, affordable housing, water quality, and access to local government.

A CDC in Eugene, Oregon was the birthplace for a simple but extraordinary idea in the early ’80s. One of its board members, Alana Probst, asked ten local businesses each to list forty items purchased out of state. She then called other local businesses that might be interested in bidding on items from the list of 400. In its first year, “Oregon Marketplace” created 100 new jobs and $2.5 million in new contracts. In 1987, this simple program blossomed into a statewide computer-based service that now matches all interested purchasers with Oregon suppliers. The concept works both at the local and state levels.

Oregon Marketplace not only boosted local businesses, in some cases it even created whole new markets. For example, an airline meal company had imported processed chickens all the way from Arkansas, despite a host of chicken growers just outside its home base in Eugene. Oregon Marketplace secured a commitment from the airline meal company so that a local bank would lend the growers enough money to build a processing facility.

Some might suggest that Oregon Marketplace is an attempt to isolate the area from the national economy; on the contrary, equipment for the facility, unavailable in Oregon, came from a Chicago firm that in turn bought its steel from an Indiana company. Therefore, buying locally made Eugene a stronger trading partner in the national economy, supporting jobs in Eugene, Chicago, and Indiana.

Other successful efforts to strengthen local enterprises have focused on business networks. A bright light in the troubled wood-products industry of Washington state is WoodNet, a loose-knit network of small- to medium-sized wood-products manufacturers that helps members help each other. It finds markets, connects suppliers with buyers, encourages the use of waste products, pursues joint manufacturing and purchasing opportunities, creates forums for sharing business ideas, and seeks to stretch the region’s dwindling wood supply. In an otherwise fiercely competitive industry, WoodNet members routinely communicate with each other, tour each other’s shops, and enter into flexible business relationships. Acting together, members reduce costs for materials, professional services, and marketing. They gain access to larger markets by jointly manufacturing products no small firm could supply alone.

The business relationships nurtured by Oregon Marketplace and WoodNet can evolve into practical “flexible manufacturing networks.” In Eugene, a group of cottage manufacturers joined together to secure a contract to make band uniforms for a local school. Similarly, small businesses within WoodNet partner to bid on wood products contracts.

Farms are businesses, too. A way to support farms that’s spreading rapidly throughout the country is community-supported agriculture (CSA), which generates up-front capital for farmers and secures markets for their products. Farmers sell “shares” of their crops in the fall and winter, when farm income is typically lowest. For their investment, customers are assured a supply of fresh fruits and vegetables. Everyone benefits: the farmers get winter cash, consumers get summer discounts, and the community strengthens its local food supply and agricultural economy. In addition, members share in the satisfaction, as well as the risks, of agriculture. Rural Action, an Ohio-based nonprofit organization, found that ranchers participating in this approach to agriculture made at least $1,000 more per animal by processing and selling their livestock themselves.

Another source of support for family farming is community land trusts. Communities use CLTs to preserve the availability and affordability of land to low-income residents, farmers, and others to whom rising property values can mean dislocation or bankruptcy. One example is the Wisconsin Farmland Trust, which helps farmers withstand development pressures, encourages stewardship of the land, invigorates local agriculture activity, and stimulates farmer-to-farmer cooperation.

City-dwellers are also taking action to support existing business. According to the publication ZPG Reporter, residents of Washington, DC’s Marshall Heights neighborhood decided in the early 1980s to do something to stem the exodus of neighborhood businesses. They conducted a study that showed retailers how much pent-up purchasing power existed in the area, then persuaded the DC government to pave their unpaved and gravel streets. They established the Marshall Heights Community Development Organization, which now provides a 90,000-square-foot space for start-up businesses and co-manages a shopping center that it bought and renovated. Which brings us to the third principle of Economic Renewal…

Encourage New Local Enterprise

In any dynamic economy, businesses are constantly folding and being created. In most communities this process goes largely unnoticed unless business failures outnumber start-ups. However, your community can do a lot to tip the balance toward success by encouraging new local enterprise. Pursuing the previous two steps will lay a firm foundation for this effort. They create an exciting business climate: a town that’s plugging leaks and supporting existing businesses is a great place to start a new one. And plugging leaks will often lead automatically to opportunities for creating new businesses–such as the water-bottling plant in Tropic, Utah, mentioned earlier.

Many communities whose industries are based on limited resources can create new businesses and jobs by adding more value to the products they export. A classic example is the logging town with its own timber mill: by shipping milled lumber instead of raw logs, the town creates more jobs per trees cut down than a town without a mill. Some troubled logging communities are taking this concept a step further by processing milled lumber further into furniture or other finished goods, thus supporting even more jobs with a limited resource base.

Whether the resource is timber, grain, cattle, or coal, adding value is a powerful strategy for stimulating a local economy. A group of organic farmers in Saskatchewan has harnessed this principle both to support their own businesses and create a new one. In 1995, in a project that grew out of their participation in Economic Renewal, they built a facility to process their grain products instead of shipping them unprocessed. Similarly, corn farmers in Marshall, Minnesota, formed a co-op in the 1980s that built a plant to process local grain into syrups, oils, and meal.

Another well-tested method for encouraging new local enterprise is the business incubator. Developed by private businesses, local governments, and colleges and universities, these facilities vary widely from place to place, but generally provide affordable (sometimes subsidized) space, business services, and consulting under one roof. A typical incubator is a cluster of small offices or shops around central secretarial and computer services. Businesses are often required to move on to other conventional space after a specified period of time.

Encouraging new business activity often requires creative financing. For example, many local start-ups are so small or risky that conventional banks won’t lend to them. Based on the overwhelming success of “micro-enterprise” loan funds in developing countries, the Good Faith Community Loan Fund of Pine Bluff, Arkansas, was created by a public-spirited foundation to provide financing to very small local businesses. Because the mostly low-income borrowers stand little chance of getting conventional bank loans for their fledgling businesses, the nonprofit fund is putting needed money behind self-employment and new economic activity in depressed regions of rural Arkansas.

Some communities are developing their own creative ways to finance local enterprise. Residents of Oberlin, Kansas gathered risk capital from current and past residents at no more than $1,000 per person–very patient capital that no one expected to get back–and invested in a feedlot, which later went private. Ivanhoe, Virginia sells deeds to square feet of land in a town park to raise money for sustainable development projects. They have land owners from all over the world! The project creates community pride, develops community capacity, and raises money.

After establishing Oregon Marketplace, Alana Probst moved on to yet another groundbreaking idea, helping found the ShoreTrust Trading Group in 1995. The nonprofit organization offers business support, marketing assistance, and high-risk, non-bank credit to businesses in the lower Columbia River region that reduce waste, save energy, limit chemicals use, add value locally, or improve fishing, farming, and forestry practices.

Recruit Compatible New Business

Having pursued the first three steps, your town will be in a much better position to recruit new business. A community that’s plugging leaks, supporting existing business, and encouraging new local enterprises won’t be desperate for any economic activity, regardless of the harm it may cause. Businesses looking to relocate will be more attracted to a community with vibrant local enterprise and a high quality of life. Government agencies and foundations will also be more likely to direct their resources toward a community that’s working hard to improve itself.

Business recruitment can bring significant rewards, especially if undertaken in a sophisticated way. It can attract new enterprises to develop underutilized resources and meet needs unfulfilled by existing businesses. Incoming companies can bring fresh capital, new jobs, economies of scale, technical expertise, and participation in national or international networks. If these characteristics complement local resources, the new company can bring renewed vigor to your community.

However, business recruitment pursued without regard for community and environmental values can also create serious problems that outweigh benefits. Many communities have sought new industry at any cost, believing that any economic expansion is better than none. However, a community should add up whether a proposed new business will bring a net benefit. Will the advantages outweigh the costs? Will it be compatible with the community’s goals? Residents of sleepy Cripple Creek, Colorado, assumed nothing but benefits would accrue from the gambling casinos that moved into town in 1993. Many spent a lot of personal time and money to ensure success of a state ballot question to allow gambling in their town. Within two years, demands for new public services to the new industry had resulted in a 350-percent increase in property taxes, forcing many residents to leave their own community.

If you decide to offer incentives to entice a new business to relocate to your town, understand that they usually don’t work and often backfire. Incentives should play only a limited role within a larger development effort. They should be used very cautiously, only with strict safeguards in place, and only when there are solid guarantees of net new jobs.

A cautious approach is the most cost-effective way to attract new business. By choosing the most promising and compatible development for your community, you’ll be able to take your best shot at a range of possibilities, and make the best use of limited resources and time. Where industrial recruitment seems appropriate, make it work on your terms. A responsible company will be confident moving to a place where community values and goals are clearly stated, and local government and businesses collaborate to achieve those goals. It won’t mind firm local rules if they’re clearly stated and fairly enforced.

Taken together, these four principles offer an important message to every community: do better with what you have, instead of seeking “saviours” from outside the community such as footloose companies and government programs. It’s not unlike the advice you might offer a good friend who’s having problems at work or home. You might say, “Don’t expect them to change–work on yourself.” Similarly, a community that attempts to strengthen itself by knocking on government and corporate-boardroom doors would be well advised to acknowledge its weaknesses, work to change them, and build on its strengths. Whatever direction your community chooses, taking care of what you already have will give your economy the strength to multiply the benefits of any later economic development.

This is an update to my thinking and a revisit of those aspects of my life that fascinate me.  I recognise totally that this comes from The Rocky Mountain Institute, http://www.rmi.org/Communities and I had the privilege of use some of these ideas in Leonora in developing their five year strategic plan.

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