Rural Development Policy: A Coordination Challenge

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Rural Development Policy A Coordination
Challenge

• presentation for
• Territorial Aspects of Enterprise Development in
  Remote Rural Areas (TERA) 18-19 October, 2007
• Camera di Commercio di Ferrara, Italy

by Maureen Kilkenny Department of Resource
Economics University of Nevada, Reno, USA
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Early Sunday Morning by Edward Hopper (1930)
Oil on canvas35 x 60 in. Whitney Museum of
American Art, New York
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• TERA questions
• what do we know? (U.S.)
• sector-based policies
• people-based policies
• place-based policies
• how do we know?
• spatial rationalization
• a coordination challenge
• backward forward inter-sectoral linkages
• summary

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TERA Project Q1) What determines the creation
and survival of enterprises in European
peripheral rural areas?

• ? focus on territorial economic factors
• labour pooling
• backward and forward linkages
• infrastructure
• human capital and technical knowledge

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TERA Project Q2) To what extent do EU, national
and regional development policies, programmes and
projects take account of these territorial
factors?

• ? focus on parallel support policies
• CAP direct payments
• national social welfare support systems

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What do we know in the U.S. about sector-,
people-, and place-based policies?

• direct payments for farmersincome safety nets
  (welfare) for familiesincentives for rural
  businesses

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What we know about sector-based policies in the
U.S.
?providing direct payments to farmers leads
tofewer, wealthier farmersno positive effect
on non-farm rural businessout-migration from
rural communities
?terminating direct payments to farmers may lead
tofewer, more prosperous farmersno negative
effect on non-farm rural businessout-migration
from rural communities
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direct farm payments support fewer, wealthier
farmers
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The farm sector is not a long-run economic base
of the rural economy. Dramatic declines in the
number of farmers has not caused any change in
the size of the rural non- farm economy.
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http//www.ers.usda.gov/AmberWaves/June07/Features
/FarmProgram.htm
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Population Change Across U.S. Counties from 1990
to 2000 Data Source U.S. Bureau of the Census,
mapped by author.
In sum sector-based (farm) policies have not
stemmed out-migration from rural America.
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How do we know? Data (above) analyses

• SAM and CGE models
• Kilkenny, M (1993) Rural vs. Urban Effects of
  Terminating Farm Subsidies, American Journal of
  Agricultural Economics
• Kilkenny, M (1991) CGE Modeling of U.S.
  Agricultural Policies The 30-Sector FPGE GAMS
  model of the United States, ERS/USDA.
• Kilkenny, M (1991) A SAM for Farm Policy
  Analysis IMPLAN Proceedings.
• Robinson S, M Kilkenny and K Hanson (1990) The
  USDA/ERS Computable General Equilibrium Model of
  the United States ERS/USDA
• Econometric/statistical analyses
• Barkely A (1990) The Determinants of Migration
  of Labor out of Agriculture in the United States,
  19401985. American Journal of Agricultural
  Economics.
• Dranbenstott M (2005) Do Farm Payments Promote
  Rural Economic Growth? The Main Street Economist
  Kansas City Fed
• Goetz S and D Debertin (1996) Rural Population
  Decline in the 1980s Impacts of Farm Structure
  and Federal Farm Programs. American Journal of
  Agricultural Economics.
• Kilkenny M and S Johnson (2007) "Rural
  Development Policy Agricultural Policy for 2007
  Farm Bill and Beyond AEI, Wash. D.C.
• Moss C and A Schmitz (2003) Government Policy and
  Farmland Markets The Maintenance of Farmer
  Wealth. ISU Press.
• New Economic Geography Models
• Kilkenny (1998) Transport Costs, The New
  Economic Geography, and Rural Development Growth
  and Change
• Kilkenny (1998) Transport Costs and Rural
  Development Journal of Regional Science
• Kilkenny (1999) Explicitly Spatial Rural-Urban
  Computable General Equilibrium American Journal
  of Agricultural Economics
• Daniel K and M Kilkenny (2002) Découplage des
  aides directes à lagriculture et localisation
  des activités Economie Internationale

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What about people-based (welfare) policy in the
U.S.?
1) nominal poverty is higher in rural counties2)
but real poverty is lower in rural
counties because the rural cost-of-living is
lower3) rural households depend less on welfare
as predicted by rural household
demographics (married, spouse present,... )4)
rural out-migration is higher
Kilkenny M and S Huffman (2003) Rural/Urban
Welfare Program and Labor Force Participation
American J of Agricultural Economics Huffman S
and M Kilkenny (2007) Regional Welfare Program
Labor Force Participation Papers in Regional
Science
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Data Source U.S. Bureau of the Census SF3 2000,
analysis by author.
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Rural Americans vote with their feet migrate
out of remote rural communities
Annual Net Domestic Migration rates by US County
type. The horizontal line at 0.1 indicates the
nationwide average net in-migration rate.
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• In sum people-based policies such as
• welfare no household with dependent children
  should live below the poverty line
• or
• education every child everywhere should have a
  school within 30 minutes by bus,
• may help mobilize people out of low-income, low
  vitality rural areas
• but in doing so,
• they push those rural communities further below
  critical mass.

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pitfalls of place-based policies

• generate rents for the owners (potentially
  absentee) of property in targeted places
• retain (trap) or even attract poor people in poor
  areas
• distort business as well as human migration
  decisions
• enable the postponement of necessary adjustments
• create dependencies
• are subject to abuse by place-based politicians
• Kilkenny Kraybill (2003) Economic Rationales
  For and Against Place-Based Policy Rural
  Sociological Society

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pitfalls of pan-territorial policies

• spatial heterogeneity? different outcomes
  Kilkenny Huffman 03
• cost heterogeneity ? expensive to provide every
  person everywhere with the same level of public
  goods
• scale economies because needs and tastes differ
  ? equal spending/capita ? equal social
  benefit/capita
• Kilkenny Melkonyan (2002) Local Fiscal
  Strategy to Retain Heterogeneous Firms J
  Regional Science

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• Spatial Rationalization
• U.S. cities are growing bigger at the fastest
  rates.
• Non-metro towns adjacent to metro areas also grow
  at positive rates.
• Both types of places are growing the expense of
  smaller or rural towns that are not adjacent to
  cities.

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The challenge
rural development policies and programs that do
not exacerbate rural decline
? co-operation
? co-ordination
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Why co-ordinate? Because unilateral actions
undermine rural development.
Prisoners Dilemma individuals acting
autonomously (non-cooperatively) fail to choose
the socially optimal outcome.
negative dynamic feedback the smaller a
community gets, the faster it shrinks and the
higher the costs of everything per capita.
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local firm (upstream)
expand
do nothing
-100
0
supply ? no chng demand? P?
do nothing
better to net 0 than lose 100
-100
120
input supply ? P?? costs ? NOTE spatial market
power does not exist in urban markets (urban
region payoff would be 0)
regional firm (downstream)
120 100
0 100
expand
coordination is needed to get a better
region-wide outcome
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In sum unilateral vs co-ordinated

• if one rural enterprise expands unilaterally
• will input supply also expand, or will costs
  (gross of transport costs) rise?
• will output demand also increase, or will mill
  prices (net of transport costs) fall?
• But when up- and downstream enterprises expand
  together, the joint benefits are larger.

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examples of upstream downstream enterprises

• farms

• food processors

• any enterprise

• farms

• banks

• any enterprise

• any enterprise

• any enterprise

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every enterprise is within 2 steps of every other
enterprise
farm sectors
direct link (1) 1sector (2) between 2
sectors (3) between
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In the U.S., commercial banks are the main source
(63) of short-term credit for rural
establishments
Data Source 1998 National Survey of Small
Business Finance, Federal Reserve analysis by
author
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banks also play key roles in community networks
banks
non-profit, volunteer organizations
Private Enterprises
government public sector
government public sector
Kilkenny Nalbarte (2000) Keystone Sector
Identification A Graph Theory-Social Network
Analysis Approach http//www.rri.wvu.edu/regscweb.
htm
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furthermore, the money supply is a local
phenomenon

• stagflation (low wages high prices) is a
  spatial phenomenon (Jacobs, 1984)

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80 of deposits within 120 miles
Kilkenny M The Geography of Rural Financial
Intermediation NRI - Integrated Research Project
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80 of loans within 60 miles
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implications for economies without planning
authorities (like the USA)but with ubiquitous
banks

• banks have incentives to (implicitly) coordinate
  expansions because their market is local and
  their profits are highest when enterprises
  co-operate
• banks are also key in the local money supply
  process
• to avoid undermining rural banks or the local
  rural money supply, government should not provide
  outright grants or direct loans for unilateral
  rural enterprise expansion
• government should leverage the effectiveness of
  rural banks by providing loan guarantees

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implications for economies with planning
authorities, but few rural bank offices

• use Input-Output or SAM models to identify linked
  sectors
• inform local enterprises about upstream and
  downstream alternatives within affordable
  distances
• help rural enterprises avoid the negative
  consequences of spatial market power by promoting
  co-odinated expansions

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more implications (harder, large payoffs)

• estimate the spatial market area for each type of
  rural industry
• use geo-referenced Input-Output, CGE, or SAM-type
  models to identify the linked sectors within
  spatial market areas
• encourage co-ordinated expansions region-wide
• Note internalization and local self-sufficiency
  are not recommended it would exacerbate spatial
  market power problems and intensify local rural
  sensitivity to external changes

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summary

1. TERA territorial factors ? policy
2. U.S. experience sector-, people-, and
   place-based policies havent worked
3. spatial rationalization in the U.S., rural
   people and citizens continue to vote with their
   feet
4. rural enterprise expansion is a game of chicken
5. coordinated outcomes are best region-wide

Thank you for your attention. Questions?