Rural Development Policy: A Coordination Challenge

1. Rural Development Policy: A Coordination Challenge by Maureen Kilkenny Department of Resource Economics University of Nevada, Reno, USA presentation for “Territorial Aspects of Enterprise Development in Remote Rural Areas” (TERA)18-19 October, 2007 Camera di Commercio di Ferrara, Italy

2. “Early Sunday Morning” by Edward Hopper (1930) Oil on canvas35 x 60 in. Whitney Museum of American Art, New York

3. 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

4. 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

5. 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

6. 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

7. What we know about sector-based policies in the U.S. : ●providing direct payments to farmers leads to:fewer, wealthier farmersno positive effect on non-farm rural businessout-migration from rural communities ●terminating direct payments to farmers may lead to:fewer, more prosperous farmersno negative effect on non-farm rural businessout-migration from rural communities

8. direct farm payments support fewer, wealthier farmers:

9. 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.

10. http://www.ers.usda.gov/AmberWaves/June07/Features/FarmProgram.htmhttp://www.ers.usda.gov/AmberWaves/June07/Features/FarmProgram.htm

11. 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.

12. 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, 1940–1985.” 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 l’agriculture et localisation des activités”Economie Internationale How do we know? Data (above) & analyses:

13. What about people-based (welfare) policy in the U.S.? 1) nominal poverty is higher in rural counties2) but realpoverty 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

14. Data Source: U.S. Bureau of the Census SF3 2000, analysis by author.

15. 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.

16. 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.

17. 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

18. pitfalls of pan-territorialpolicies • spatial heterogeneitydifferent outcomesKilkenny & 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 ≠ equalsocial benefit/capita • Kilkenny & Melkonyan (2002) “Local Fiscal Strategy to Retain Heterogeneous Firms” J Regional Science

19. 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.

20. The challenge: rural development policies and programs that do not exacerbate rural decline  co-operation  co-ordination

21. 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.

22. local firm (upstream) do nothing expand -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

23. 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.

24. farms food processors examples of upstream & downstream enterprises • farms • any enterprise • banks • any enterprise • any enterprise • any enterprise

25. every enterpriseis within 2 steps of every other enterprise farm sectors direct link (1) 1sector (2) between 2 sectors (3) between

26. 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

27. 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

28. furthermore, the money supply is a local phenomenon stagflation (low wages & high prices) is a spatial phenomenon (Jacobs, 1984)

29. 80% of deposits within 120 miles Kilkenny M The Geography of Rural Financial Intermediation NRI - Integrated Research Project

30. 80% of loans within 60 miles

31. 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

32. 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

33. 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

34. summary • TERA: territorial factors ↔ policy • U.S. experience: sector-, people-, and place-based policies haven’t worked • spatial rationalization: in the U.S., rural people and citizens continue to ‘vote with their feet’ • rural enterprise expansion is a ‘game of chicken’ • coordinated outcomes are best region-wide Thank you for your attention. Questions?