Transcript The Current Situation

Community & Capital
• Capital
– Any resource capable of producing other
resources. This definition forces us to
distinguish between consumption and
investment.
• Forms of Capital
–
–
–
–
Capital Goods
Land
Financial Capital
Human Capital
Human Capital
• Education and training of the workforce
plays a dominant role in explaining
different levels of output, according to
Schultz.
• Businesses invest in preventative health
care and education because they expect
both to make their employees more
productive.
• In completing our formal education, we
make an investment in ourselves and we
expect investments to pay off in the form
of increased income.
Public vs. Private Capital
• Private Capital
– Capital owned and controlled by
individuals or groups of individuals.
(i.e. education)
• Public Capital
– Capital owned and controlled by
governments or communities, such as
schools or bridges.
Mobility of Capital
• Land and many forms of capital goods,
such as buildings and roads, are not
mobile. Thus individuals and
communities have to figure out how to
make these forms of capital productive.
– By contrast, financial and human capital
are quite mobile. Money can move to
wherever it can earn the highest return.
• Financial capital has become
increasingly mobile.
Mobility of Capital
• Human capital has also become
increasingly mobile, and this factor has
raised concerns about public
investments in education.
• Communities are encouraged to invest
in schools because a well-educated
citizenry is fundamental to economic
growth.
– Rural Youth Dilemma
Sources of Capital
• Savings
– Represent major source of capital
– Savers tend to deposit their money in local
financial institutions
– Money is reinvested by these financial
institutions
• Interest
– A charge to the borrower for use of money
Sources of Capital
• Bonds
– When a large amount of capital is needed for a
long-term capital investment, loans can be
made in a formal contractual agreement called
bonds.
– Bonds pay interest and are issued by
governments or business corporations.
– Represent a promise to repay a designated
amount of money at the end of a period of 20 to
30 years.
– Bonds are an important mechanism by which
rural communities raise capital but retain local
control.
Sources of Capital
• Equity Capital
– Involves selling share in a company to the
general public through the stock market.
– Individuals invest money in shares of the
company
– These individuals receive a portion of the
company’s profits in the form of dividends
paid on their shares.
– Venture Capital: another form of equity.
Represents capital that comes from
investors who are willing to take risks and
be patient at they wait for a return.
The Changing Rules of Capital
• Deregulation
– Banking deregulation involves a decrease in
the degree to which the government limits
and oversees:
• The costs of credit and services
• The geographic location of financial institutions
• The variety of services offered by financial
institutions
• For rural areas, it has become increasingly
difficult to keep local capital invested
locally.
– The international market has increased the
outflow of capital from rural areas.
Strategies for Attracting and Retaining Capital
in Rural Communities
• 1. Keeping Capital Local -- Community
Reinvestment Act of 1977
– An effective tool for challenging the
lending practices of commercial banks and
forcing them to be more concerned with
issues of local economic development
– Was passed to prevent lenders from
“redlining” loans and services to
neighborhoods on the basis of race or
economic class of the population.
Strategies for Attracting and Retaining
Capital in Rural Communities
• 2. New Sources of Capital
– Federal Community Development Block
Grants: Uses an initial infusion of federal
funds that can be recirculated within a
community guided by local development
organizations with private status but local
government sanction.
– The loan repayment is recycled within the
community.
Strategies for Attracting and Retaining
Capital
• 3. Capital Retention Through Risk
Reduction
– Reduces risk to commercial banks on any given
loan by using secondary markets for rural
business loans.
– Secondary markets allow rural banks to package
together a number of business loans, which they
initiate and service. Investors bear the risk.
– Loan guarantees by the state and federal
government spread the risk of capital investment
in rural areas between the public and private
sector.
Strategies for Attracting and Retaining
Capital
• 4. Tax Concessions
– Tax abatements reduce taxes for investment
that are made in certain business ventures
deemed socially desirable.
– Other laws reduce the tax burden of those
who invest in specific geographic areas by
starting new businesses or expanding
existing firms.
Strategies for Attracting and Retaining
Capital
• 4. Tax Concessions
– Governments offer tax abatements in an effort
to attract industry.
– Within new industry/businesses comes the need
for public capital investment in the form of
schools, law enforcement, emergency services,
sewers, roads, etc.
– The reduction of taxation offered to new
enterprises erodes the tax base needed to
support these public capital investments.
Understanding Local Economies

Goals
 To
present export base theory
as a model of the way a local
economy works.
 To relate general export base
theory to your home state and
community.
 To use the export base model
to examine local economic
development alternatives.
Events That Have Impacted Local
Economies

Employment declines in agriculture,
manufacturing, and natural resourcebased industries.

National shift toward a service and
information-based economy.

Development of new technology.

Internationalization of the U.S. economy.

Structural shifts within agriculture and
manufacturing.
Why an interest in economic
development?

Lack of local job opportunities for young
people.

Obsolescence of job skills among older
workers.

Over-dependence on agriculture or other
single industry.

Need for additional tax revenue at the
local level.

Concerns over the quality of life.

Loss of local control.
Challenges Facing Communities

Maintaining and enhancing the
competitiveness of local businesses.

Further diversifying the local economy.

Easing the transition for displaced
families.

Providing technical and educational
assistance for local units of government.

Identifying options for increasing jobs
and income.

Helping conserve and manage the area’s
natural resources.
Export Base Theory

Basic Industry—Consists of those local
firms that sell goods and services
outside the local areas.

Service Industry—Consists of those
firms that sell goods and services in
local markets. Includes inputs to basic
industries and goods and services to
local residents.
Figure 1. Economic Activities of a Community
Rest of the World
$
G&S
Good and Services
Export Firms
Labor
Services
$
$
G&S
Good and Services
Service Firms
(Input Suppliers)
$
Labor
Labor
Local Population
(Households)
$
$
Service Firms
(Local Population)
$
G&S
G&S
Imports
(Leakages
$
G&S
$
Figure 2.
The Local
Economy—
Leaking
Resources?
How Basic Industries Influence
Local Economic Development

Direct Impacts—sales, jobs, and income
generated directly by firms producing for
non-local markets.

Indirect Impacts—sales, jobs, and
income generated by firms selling goods
and services to basic industries.

Induced Impacts—sales, jobs, and
income generated by spending activities
of employees in direct and indirect firms.

Multiplier—sum of direct, indirect, and
induced impacts.
Defining Economic Development:
Some Perspectives

Growth measure in economic or
demographic terms.

A particular event in a community, such
as a new shopping facility or industrial
plant.

Programs to improve local services,
increase equality of opportunity, and
expand the economic based of the
community.
Defining Economic Development:
Some Perspectives (cont.)

What it is, however, is a system for
meeting the needs and wants of people
in a particular geographic area over time.
The capacity to meet these needs serves
as the focus of the the economic
development process over time.
Economic Development Alternatives
Economic development successes
are likely to be based on a mix of
activities . . .

Improve efficiency of existing firms.

Improve ability to capture dollars.

Attract new basic employers.

Encourage business formation.

Increase aid from broader government.
Improve Efficiency of Existing Firms

Start educational programs to improve
management skills.

Start a business-industry visitation
program.

Identify capital sources to encourage
business growth.

Provide educational programs to keep
local businesses aware of latest R&D.

Improve quality of the local labor force.

Provide local and regional services that
compete in price and quality.
Improve Ability to Capture Dollars





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Survey consumers to assess market
potentials.
Revitalize downtown shopping districts
or other retail areas.
Develop training programs for local retail
and service.
Encourage residents and businesses to
buy locally.
Seek to combine sales/service activities
with recreational events.
Organize the retail and business
community (I.e. Chamber of Commerce)
Attract New Basic Employers

Develop local industrial, office or
commercial sites; have public services
in place; provide information on local
labor supply.

Develop local and regional facilities
(such as transportation, recreation,
business services, communications)

Provide local tax incentives that reduce
location or operating costs of new or
expanding firms.
Attract New Basic Employers
(cont.)

Lobby for state and federal programs
and facilities that could be located in the
community.

Explore non-traditional sources of
employment—retirees, recreation
resources, trade centers, bedroom
community for nearby urban centers.
Encourage Business Formation

Form capital groups to invest private
funds locally.

Provide counseling and education
assistance to those wishing to start a
new business.

Study the market potential for new retail,
wholesale, service, and input-providing
businesses.
Encourage Business Formation
(cont.)

Be aware that adversity often stimulates
entrepreneurship.

Adopt an encouraging community
attitude toward new businesses.
Increase Aid Received from
Broader Government

Seek to ensure that assistance programs
for the elderly, handicapped, and others
are being fully tapped.

Obtain aid from state and federal
governments in the form of grants for
local projects (such as water and sewer
systems, streets, parks).