Posted on March 13, 2009

At a time when daily headlines bring worse and worse news about the plight of rural economies, it's worth reminding ourselves that success is possible.

Last autumn, Marian Burros of the New York Times wrote a piece about how the 3000-person community of Hardwick, Vermont, has prospered by creating a new "economic cluster" around local food. Cutting-edge restaurants, artisan cheese makers, and organic orchardists turning fruit into exquisite pies are just some of the new businesses that have added an estimated 75-100 jobs to the area in recent years. A new Vermont Food Venture Center hopes to accelerate this creation of enterprises.

Fifteen years ago, Güssing was a dying rural community of 4,000 in Austria. Its old industries of logging and farming had been demolished by global competition. Many of today's economic developers would have given up and encouraged the residents to move elsewhere. But the mayor of Güssing decided that the key to prosperity was to plug energy "leaks." He built a small district heating system, fueled with local wood. The local money saved by importing less energy was then reinvested in expanding the district heating system and in new energy business. Since then, 50 new firms have opened, creating 1,000 new jobs. And most remarkably, the town estimates that this economic expansion actually will result in a reduction of its carbon footprint by 90 percent.

These two case examples cast doubt on one of the principal prescriptions for rural communities given by economic developers – that rural communities should focus on expanding existing clusters of export-oriented business. Under this formula, much of rural America is destined to destitution, because the powerful forces of globalization are eclipsing their existing natural resource industries like farming, ranching, forestry, mining, and fishing. This, in a nutshell, is why rural communities should tell economic developers to take a nice long vacation while they do exactly the opposite: create new, import-substituting clusters.

Rural 'Clusteritis'
Ever since Michael Porter wrote The Competitive Advantage of Nations in 1990, economic developers have had a debilitating case of clusteritis. Here’s the basic idea: Inventory the businesses in your economy, identify concentrations of similar ones (like fishing, if you're a typical coastal town), figure out your global competitive advantage (maybe salmon or crab), and focus your development efforts on expanding those clusters (perhaps a frozen crab-cake manufacturer). The reason for building clusters, Porter argued, is that a critical mass of similar industry people tends to spur healthy competition, fire up innovation, and spawn new businesses within the cluster.

In a diversified city or regional economy, this theory is helpful. But it's overused. And unless combined with other small-mart ideas, such as maximizing local ownership and reinvesting cluster-produced wealth in the weaker sectors in the economy, it can wind up providing the public sector a convenient excuse to subsidize the richest (and least worthy) businesses in town. But in principle, it is still a useful tool.

In the rural context, however, clusteritis can be deadly. One of the central problems of a typical rural economy is the absence of diversification. So trying to sharpen a small town's one competitive advantage sets it up for a huge bust when that one global market contracts, shifts, or disappears. Every paper-company town knows that when the big mill shuts down (or moves to Siberia), no matter how many other businesses were created in that cluster, the local economy plunges into a death spiral.

A rural community actually needs to avoid focusing on existing clusters. It needs to develop multiple new business sectors that expand the local skill base, increase entrepreneurship, and reduce the town’s vulnerability to those inevitable ups and downs in global markets. It needs, in short, to develop new clusters.

The Importance of New Rural Clusters
Both the Hardwick and Güssing examples demonstrate that substituting homegrown business for imports does not mean delinking from the global economy. In fact, it's just the opposite. By focusing first and foremost on local demands for food and energy, and by creating cutting-edge businesses to meet these demands, both communities were naturally able to grow new, powerful export-oriented industries. As Jane Jacobs argued in Cities and the Wealth of Nations, import-replacement is, paradoxically, the key to a community competing effectively in the global economy.

In both the Hardwick and Güssing examples, the leadership for the import-substitution effort came from a smart core of public employees. In fact, even a single, visionary business can take the lead. Take Zingerman's in Ann Arbor, Michigan.

On its first day of business in a college town known globally more for its radicalism than for its food, Zingerman's Deli sold about $100 worth of sandwiches. That was 1982. It has since grown into a community of businesses, each independent but linked through overlapping partnerships that collectively employ 525 people and achieve annual sales of over $27 million. One way of thinking about this story is that the proprietors conscientiously built a food cluster from scratch. They carefully assessed the items going into the deli – bread, coffee, cheeses – and saw profitable opportunities for creating a bakery, a coffee roaster, and a creamery. They looked at the products being sold at the deli – fabulous coffee cakes and high-quality meats – and built new, value-adding businesses with these products, including a mail-order company and a restaurant called the Roadhouse. They are now creating a brewery, a publishing company, and a hotel. Their model has been so successful they created a consulting firm to meet the demand for advice and technical assistance from entrepreneurs and communities worldwide.

What each of these examples underscores is that there are plenty of cost-effective opportunities for growing business, based initially on local sales. Forget about high tech, biotech, nanotech. If you’re a smart rural community, start with what your residents are already spending their money on.

Identifying and Addressing Common Rural 'Leaks'
Over the past decade, I've done "leakage studies" for a half dozen communities, most of them rural. The purpose is to identify all those sectors in the economy where a community is unnecessarily importing goods and services. Every unnecessary import represents a loss of dollars and a loss of the "multiplier" impacts those dollars could have locally. It also represents a loss of other documented benefits local business brings, like knowledge, skills, tax payments, charitable giving, revitalized downtowns, tourists, stronger civil society, and more political participation.

What’s striking is how many of the same "leakages" appear over and over again in rural communities. More work is needed to generalize this case with academic "rigor," but allow me to share some of the obvious clusters, beyond food and energy, where reduction of leakage is a no-brainer:

• Finance – We have long known that local banks and credit unions have lower overheads, lower default rates, higher interest rates on savings, and lower fees on checking. Now we can add that these institutions also appear to be much less likely to engage in predatory lending and global securitization, and therefore are much less prone to the spectacular collapses we've seen in recent months. Finance, of course, is closely tied with two of the largest expenditures rural residents make – shelter and transportation. Put another way, localize your finance and this allows you to localize your spending on housing (typically the largest item in a family budget) and localize about half your car spending.
• Services – Two-thirds of the budget in every U.S. household involves some kind of service, whether health care, education, lawn clipping, auto repair, or accounting. Most services are inherently local and can be competitively delivered by professionals working out of their homes (the real and largely unappreciated "industrial development parks" in rural areas). Rural communities have all kinds of service gaps that lead residents to travel elsewhere. A great strategy for rural development is to identify these gaps, encourage existing service providers to expand into these areas, and target entrepreneurship efforts on creating these kinds of professionals.
• Entertainment – One of the biggest gaps in rural communities is, frankly, fun. Yet there is no reason why a rural community, or a network of proximate communities, cannot design a year-round calendar of festivals, sporting events, concerts, plays, etc. that display and nurture local art, music, and culture. This is essential for convincing young people, especially the best and brightest, to stick around.
• Charity – A typical rural household donates more than $1,000 per year. These donations can and should be given locally.
• Investment – No one will say anymore, at least with a straight face, that investing in Fortune 500 companies rather than local small businesses is the best strategy for getting a high rate of return. Outdated securities laws, however, prevent the development of local investment instruments and local stock exchanges. If these laws are overhauled, which will cost states nothing except legislative time, much of our pension and insurance money can begin to stay local.
• Healthy Lifestyles – Many of the remaining expenditures on outside goods and services can end with things we could be encouraging locally. If more rural residents walk or bicycle (and more rural governments rethink their zoning to encourage smart, walkable communities), they will drive their nonlocal cars less. Kicking the nonlocal tobacco habit means less need for nonlocal respirators or nonlocal cancer treatments. Eating healthier, local, unprocessed food means less obesity and diabetes, thus fewer visits to nonlocal hospitals and surgery clinics.
• Green Markets – Rural Americans are experts at the environmental adage that all waste should be food. That is, organic waste should become compost, paper and metal waste should be recycled, old vehicles should be harvested for their parts, broken electronics should be refurbished. To be sure, the current economic downturn has wrecked many of these markets for the moment, but they’ll be back. In the meantime…
• Personal Frugality – In hard times we need to be mindful of everything we buy. Rural economic developers ought to be encouraging residents to buy second-hand clothes, used cars, or rebuilt computers, since these local purchases inject more money into the economy than buying these items new through global dealers and chain stores.

Moving Toward Greater Rural Prosperity
But what about that new laptop I need? What about efficient light bulbs? What about that rare book from Amazon (or even Powell’s)? What about that great Russian vodka? I appreciate that there will always be many products, and perhaps a few services, that will be nonlocal.

The point is this: rural households spend much less on those things than we believe. In the typical U.S. community, about 58 percent of all spending is on local business, nonprofits, or government agencies. In a rural community, that number is substantially higher, often 70 to 75 percent. Deploying the leak-plugging strategies above could nudge that number in, say, a coastal Oregon community from 75 to 85 percent. Over the next year or two, that might mean the difference between depression-level unemployment and the real economic growth seen in Hardwick and Güssing.

None of these strategies are cheap or easy for a cash-strapped rural community. It takes time and resources to perform leakage analysis, to identify the most promising new clusters, to refocus entrepreneurship and business development programs on these new clusters, and to realign local consumers, investors, and policymakers with these ideas. But it's cheaper and easier to do this rather than to continue the massive subsidies and giveaways associated with traditional clusteritis.

As new stimulus funds come into the hands of rural decision makers, they will have a once-in-a-generation opportunity to spend them on the right things. Only by guiding their town to build new clusters of self-reliance, not only in food and energy but in finance, services, health care, even light manufacturing, can they possibly transform the current crisis into renewal and prosperity.

By Michael H. Shuman

Editor's Note: This piece was written for the 2009 Regards to Rural Conference in Salem, Oregon.