By Eric Scorsone, Dawn Thilmony, and Stephan Weiler(*)
From Foresight, Vol. 9, No.1
published 2002
The last ten years have witnessed both improvements and declines in the rural-urban wage, income, and employment gaps. As Table 1 shows, rural Kentucky has managed to keep pace with rural America in terms of job creation and wage measures, even outpacing rural America’s overall per capita income change. At the state level, Kentucky has been closing the income gap between itself and the rest of the nation.(1) But rural Kentucky continues to fall behind both urban Kentucky and the United States as a whole with regard to job growth, wages, and overall income. This earnings gap dropped between 1970 and 1985 but then began to climb again during the last decade, perhaps partly because the so-called “new economy” industries largely bypassed rural Kentucky. While the current technology slump reveals the potential dangers of relying on these industries, current short-term weakness does not accurately measure long-term potential. But regardless of its causes, the growing gap between per capita personal income in rural Kentucky and urban America would have been even greater had it not been for the rapid increase in retirement income and residence-adjusted wages.
Table 1: Basic Economic Trends for Rural Kentucky, 1990-1999
During the 1990s—a time largely acknowledged as the longest period of economic expansion in the nation’s history—the rural South experienced a 16.5 percent growth in its number of jobs, nearly matching the nation’s 17.5 percent growth. However, the earnings differential between the rural South and the rest of the nation—now at its highest rate since 1969—grew from $5,893 in 1978 to $10,900 in 1998.(2) The number of jobs in rural Kentucky may have grown, but job quality and rural-urban per capita income disparities have continued to worsen.
Figure 1 depicts the expansion of this gap between average wages in Kentucky’s metro and nonmetro counties over a 30-year span, from 1969 to 1999. For a time, increases in nonmetro wages more or less kept pace with wage increases in metro areas, though consistently lagging behind. Then, in the early 1980s, nonmetro wages began to fall farther and farther behind, exacerbating the wage gap. Figure 2 offers a more nuanced representation of this trend during the same span of time, using Beale Codes to contrast wages in urban areas with those in “somewhat rural” areas and with wages in “very rural” areas. Again we see that urban wages continually outstrip wages available elsewhere, but “very rural” areas suffer from this disparity to an even greater extent than do “somewhat rural” areas. Clearly, rural Kentucky is in trouble.
Figure 1: Wages Are Increasing Faster in Kentucky's Metro Counties
Figure 2: Kentucky's Geographic Wage Gap
Rural Kentucky, along with much of rural America, faces serious questions concerning its prospects for economic performance in the future; and future economic opportunities in rural Kentucky will partly be determined by current comparative advantage. Traditionally, rural Kentucky’s economy has been based on agriculture and coal, but these industries have suffered declines in recent years due to international competition and declining demand. Exacerbating rural Kentucky’s woes, the disparity between rural and urban economic opportunities has helped precipitate a drain on the rural workforce as an increasing number of people commute or migrate in pursuit of higher-quality, better-paying jobs.(3) The resulting loss of young people—the workforce of the future—portends further economic decline and marginalization for Kentucky’s rural areas.
Recent discourse on rural economic development has included demands from economists for an integrated approach to economic development, neglecting to emphasize the need to delineate a framework for the policies themselves.(4),(5) However, to maximize efficacy, any effort to develop an integrated approach should begin with an examination of the basic development strategies, the logic behind them, their strengths and weaknesses, and the ways in which they interact with one another.
The discussion that follows breaks into three broad categories the various approaches to rural economic development, taking care to address the issues listed above. In the end, we hope to provide a starting point from which policymakers, civic groups, and entrepreneurs can conceive and execute the most effective development plans possible.
The most commonly employed approach to building rural economies involves investments in public infrastructure and the development of tax incentives, with the goal of making the location as attractive as possible to potential employers. This strategy springs from the logic that a given firm’s choice of location depends primarily on the expected profitability of a region, given its financial climate and physical infrastructure. Tax credits and quality roads, for example, serve to lure businesses with the promise of low operating expenses and high accessibility. But if the goal of a community is to provide an economic advantage to firms, competition between communities to provide the greatest advantage becomes virtually inescapable.
Strategies for economic development that rely on physical capital tend to drive communities to compete—rather than cooperate—with one another. The challenge becomes one of seeing who can provide the biggest tax breaks or who can invest the most in public infrastructure, as competing areas take extra risks and offer bigger incentives in hopes of being the “winner.” Though all regions involved would be better off working together towards a mutually beneficial outcome, often a contest emerges to see who can bend over backwards the farthest.(6)
Under such circumstances, all parties stand to lose, to one degree or another. For starters, the “losers”—the vying regions that fail to land the hypothetical firm—miss out on the benefits of housing a source of employment and commerce. That much seems obvious. However, they might not be the only ones missing out on financial benefits. In an effort to present the juiciest incentives package, the “winning” region may put itself at a considerable disadvantage in order to offer the biggest advantage to the firm in question. Other than an influx of jobs, then, the firm comes out as the biggest winner. The region essentially gives it a place to operate. The public sector of the region also stands to encounter problems if its leaders myopically focus on “the prize” at the expense of other community needs. Finally, the firm itself stands to be harmed by the bidding war scenario, believe it or not. If the choice of where a firm locates depends too heavily upon which region offers the biggest monetary incentives, the firm could conceivably select a location that does not foster the most efficient business operations, not yielding, in the long run, the greatest financial benefits.
Given the prevalence of incentives packages, one might expect them to be one of the primary determinants of where firms choose to set up shop. Not so. In fact, empirical findings demonstrate that the elasticity of firm location decisions with respect to incentive packages tends to be very small, often indistinguishable from zero. Taxes often are significantly negatively related to firms’ choice of location, but prove to be only minimally important in firms’ decisions between potential market areas. Only when a general location has been determined do tax policies have a major effect on decisions between intraregional locations. As considerable anecdotal evidence shows bidding wars to be the rule rather than the exception, firms have come to expect them and generally force matching packages between regions. Therefore, the actual size of any one location’s incentive package will likely have only minor effects on a firm’s choice of location, explaining the low elasticity of firm responses to such incentives.
Despite these criticisms, some analysts have argued that a “targeted” approach to financial incentives might be effective. Under targeting, policies could be designed to operate only in regions suffering from particularly high unemployment or poverty, working from the premise that unemployed or underemployed workers have a lower opportunity cost and the returns to public investments would be higher. As Timothy Bartik claimed, “Because the unemployed are more desperate in higher unemployment areas, even more expensive subsidies may have benefits exceeding costs.”(7)
None of this, however, is meant to present investment in physical capital as a fruitless or misguided approach to rural economic development. Indeed, the considerable potential returns for becoming a new, core site for manufacturing or a major service center can pay great dividends on a region’s investments, provided the investments have been made carefully and wisely. In other words, there’s a reason this type of strategy has become so popular and prevalent.
Offering tax incentives for firms locating or expanding in Kentucky certainly stands to attract employers, who in turn can boost the economy with the jobs they supply. And in contrast to our earlier discussion of “winners” and “losers,” investments in physical capital have the potential to produce win-win situations in which the firm and the region reap equal rewards. A manufacturing center, for example, yields a product of value-added character, bringing export earnings into the region that cycle through the local economy, spilling over into the service and retail sectors. The promise of such benefits to the region largely motivates officials’ willingness to extend public funds to attract firms,(8) even though such spending is sometimes done at the expense of other community services.
In an effort to foster investments in physical capital, state government has established several programs that provide tax incentives for firms locating in Kentucky. The Kentucky Rural Development Act, for example, offers high-powered incentives for rural areas, providing even higher tax credits for firms in counties where unemployment has been higher than the state average for the last five years. The Kentucky Industrial Act and the Kentucky Jobs Development Act, meanwhile, recruit larger employers, with minimum investment criteria of $500,000 or 15 new full-time jobs. However, questions still remain as to the effectiveness of these programs as well as the types of firms attracted by such efforts, particularly in rural areas of the state.
A less direct though potentially more effective approach to rural economic development entails investments in human and social capital, reasoning that community health fosters economic health.(9) Some researchers even argue that sustained economic growth not only benefits from human and social capital, but also depends upon them.(10) This development strategy presupposes that improving a population’s health, education, training, and access to technology, while supporting civic organization and community centers, encourages the creation of jobs within the community. Having an educated, skilled, happy, and healthy rural population also can increase the incidence of entrepreneurial behavior, leading to greater job opportunities and increased incomes. In short, grow the people and they’ll grow the economy.
A number of organizations currently work to bolster such entrepreneurship throughout the state. The Commonwealth Small Business Development Corporation provides a conduit for financing small business projects under $1,000,000.00, while the Kentucky Economic Development Finance Authority supplements private financing for small businesses. These capital access tools provide financing to help overcome capital market failures and encourage the development and expansion of small businesses in Kentucky. State government has also been actively involved in assisting small businesses and entrepreneurial activity. The Kentucky Small Business Development Center, for example, offers business-planning consultations with new and existing small businesses in the Commonwealth, raising the productivity and management skills of small firms in order to ensure their survival and productivity. The Rural Innovation Fund helps by providing up to $50,000 over two years for firms to work with regional universities and small business centers to produce new technology, and targets small firms in more remote rural regions in need of technology transfer assistance. These, of course, do not represent the totality of such efforts across the state, but serve to illustrate the kinds of assistance available to Kentucky’s small businesses and entrepreneurs.
Without a doubt, our state’s greatest investment in human capital has been its commitment to reforming primary and secondary education: investments in physical and social capital would bear little fruit without an educated populace. Likewise, as education improves, investments in physical and social capital stand to yield greater returns. Public schools, universities, community colleges, and technical schools together serve as the linchpin of our human capital and economic development: an ample supply of jobs will make little difference to the economy without qualified workers to fill them. Given the vital role of our education system, Kentucky cannot afford to grow complacent in its efforts to raise the quality and accessibility of our schools if we are truly committed to building and strengthening our rural economies.
The great disadvantage of relying on investments in human and social capital to develop rural economies stems from the amount of time it often takes to get results. We might be doing a commendable job of educating our children, for example, but it will be years before most of them enter the workforce. In the meantime, economic struggles continue. Complicating matters, our rural areas often don’t have quality jobs to provide to their educated, qualified citizens, prompting those people to move elsewhere in search of gainful employment. Going back to our previous example, not only must we wait for these educated children to enter the workforce, we must also have quality jobs waiting for them if we want to keep them in their communities.
The delay of returns to investments can be problematic for other types of human and social capital as well. Supporting entrepreneurs obviously stands to boost the economy, but how long will it take for that boost to be felt? Given the individualistic nature of entrepreneurship, one idea might begin to pay off within six months, while another might take six years. Such investments require patience and commitment, but in the long run will do nothing but improve the vitality of rural economies simply by providing opportunity.
While investing in physical capital can help attract employers, and investing in human capital yields an educated and potentially entrepreneurial workforce, quality of life and quality of place cannot be overlooked as drivers of rural economic development. Tax incentives certainly stand to attract businesses, but without a good quality of life, what will attract workers? Combining efforts to create new local amenities and complement existing natural amenities has the potential to draw people into a region, helping to ensure a stable supply of workers.(11)
While regions making physical capital investments seek to produce economic growth by attracting businesses, regions using amenity-based development strive to boost their economies by attracting people. Under this strategy, rural areas bring in workers, and thus jobs, by boosting their attractiveness as a place to visit, live, work, and retire. The source of a region’s attractiveness, however, varies from place to place, from topographic features and cultural opportunities, to climate, access to the arts, and a generally slower pace of life. Clearly, what works for one region will not necessarily work for another, but all such strategies strive to lure some combination of working professionals, tourists, and retirees.
Amenity investments currently tend to target recreation and tourism development schemes, with the intention of bolstering the local economy by attracting people seeking natural and cultural amenities. Tourism-based economies in turn boost their stature by improving amenities that increase the attractiveness of short-term and long-term visits to the area. Some rural areas with recreation and/or tourism potential have, in fact, experienced rapid growth by expanding the service sector, helping to boost the popularity of this approach.(12)
Besides growing economies by attracting tourists, some areas attempt growth by reaching out to retirees in search of a high quality of life in their leisure years. Here, retirement income provides a potentially stabilizing force for the local economy. High-wage sectors can then develop within such communities, driven by an increased demand for health care, financial, and other services. In turn, service workers may be drawn to the very amenities that first attracted retirees.
Recognizing the potential for amenity-based economic development, the state put into place the Kentucky Tourism Development Act, an effort to encourage cultural, historical, and recreational site development. In order to maximize the “draw” power of such sites, the Act excludes lodging and retail facilities unlikely to serve out-of-state visitors, and requires a minimum $1 million investment, effectively restricting the Act to larger entities and projects. Other examples of amenity-based development include the Kentucky Heritage Council and Renaissance Kentucky, which provide financial and technical support to encourage downtown development and redevelopment. Such support may take the form of Community Development Block grant money for façade and building redevelopment, or for assessments of current housing and commercial space. These programs focus resources on revitalizing the attractiveness and functionality of downtowns, creating new jobs, and reestablishing communities’ economic centers.
Amenity-based development holds pitfalls of its own, particularly if a region’s economy relies too heavily on tourism, since too much focus on tourism can have negative economic, social, and environmental effects on communities. As such, tourism and recreation are not universally accepted as development panaceas for rural areas and should comprise only a small part of an area’s economy. A dominance of trade and service sectors in rural economies likely will result in sector-based economic instability, which can happen regardless of the indirect effects these sectors have on general economic dynamics.(13) In addition, care must be taken that the very amenities that attract people do not lead to environmental degradation and land use pressures, nor create critical strains on local government resources.
A comparison of the relative strengths and weaknesses of these three classifications of rural economic strategies accentuates the fact that no single approach will achieve maximum sustainable growth without contributions from the other two. Figure 3 depicts the questions policymakers must answer as they consider these interdependencies and formulate development strategies for their regions. Will growth come from creating jobs to attract workers, or from attracting jobs by training workers? Will a region invest in physical capital to attract employers, or in amenities to attract workers? Will amenities be used to attract migrant workers, or will the community use its human and social capital to educate and train current residents? Though clearly interdependent, the entire pattern of causation between amenities, jobs, and people remains undiscovered and merits further exploration.(14)
Figure 3: Rural Development Policy Paradigm
In order to maximize effectiveness, policymakers must take stock of their regions’ resources, as their strategies and policies should complement the resources and nature of their communities. Obviously, different strategies will be required of different communities: not everyone can take the same road to the same destination. However, choosing one policy over another will always come at some cost, as the creation of certain opportunities precludes the creation of others. In addition, many factors affect the efficacy of a given policy. For example, a region remote from urban areas may not be able to exploit tourism-based development, but its low cost of living and natural amenities (climate, parks, and open spaces) may pose the opportunity to become a retirement community (such as Washington County, Utah). A region, therefore, must play to its strengths.
Given the global nature of the interaction between strategies, no single policy can address all three approaches adequately. Communities should recognize and account for their own virtues and shortcomings, striking a balance between strategies. An amenity-poor community, for example, will likely fail to strengthen its economy if its policy’s success relies too heavily on amenities: better to focus on physical, human, and social capital. Policymakers must also factor in the short-term and long-term effects of a given strategy, using short-term gains to lay the groundwork for long-term success. Communities struggling economically quite obviously need prompt results, but these immediate payoffs must accrue to long-term gains. Likewise, crafting a policy that will not reap benefits for the first 30 years fails to serve the populace in the interim, increasing the likelihood that residents will leave the region.
To its credit, the Commonwealth of Kentucky has enacted statutes, formed agencies, and created funds along all three axes of the rural development policy paradigm, in addition to efforts by community groups, businesses, and entrepreneurs to strengthen the economic future of our rural areas. Just as the three basic strategies exist interdependently, so, too, do Kentuckians. We must continue in our efforts to grow our rural economies, investing in physical, social, and human capital, and improving natural and fiscal amenities; but we must also find ways to work together in the process to maximize our success. The task at hand requires reflection, vigilance, patience, and creativity as we determine our resources and devise the means to use them to our greatest advantage. In the end, success will depend on our vision, action, and cooperation, and on our ability to integrate each of the rural development strategies into our blueprints for the future.$
* Dr. Scorsone is an assistant extension professor of agricultural economics in the University of Kentucky’s Department of Agricultural Economics; Dr. Thilmany and Dr. Weiler are associate professors, respectively, in the Department of Agricultural and Resource Economics and the Department of Economics at Colorado State University. Return to text.
1. Mark Berger, “Kentucky’s Per Capita Income Catching Up with the Rest,” Kentucky Annual Economic Report (Lexington: University of Kentucky Center for Business and Economic Research, 1997). Return to text.
2. Fred Gale and David McGranahan, “Latest Trends in Nonmetro Jobs and Earnings: Nonmetro Areas Fall Behind in the New Economy,” Rural America 16.1 (2001). Return to text.
3. Paul Coomes and Michael Price, “The Recent Economic Performance of Regions in Kentucky,” Kentucky Economic Development Partnership and Kentucky Cabinet for Economic Development, May 2001. Return to text.
4. James Hite, “The Thunen Model and the New Economic Geography as a Paradigm for Rural Development Policy,” Review of Agricultural Economics 19.2 (1997). Return to text.
5. Glenn Nelson, “Elements of a Paradigm for Rural Development,” American Journal of Agricultural Economics 66.5 (1984): 700-704. Return to text.
6. Stephen Ellis and Cynthia Rogers, “Local economic development as a prisoner’s dilemma: The role of business climate.” Review of Regional Studies, 2001, forthcoming. Return to text.
7. Timothy Bartik, Who Benefits from State and Local Economic Development Policies? (Kalamazoo: W.E. Upjohn Institute, 1991). Return to text.
8. Stephan Weiler, Eric Thompson, and Terutomo Ozawa, “The Evolution of a New Industrial District: The Automobile Industry in the American Southeast,” Planning and Markets 4.1 (2001): 24-29. Return to text.
9. L. Beaulieu and D. Mulkey (eds.), Investing in People: The Human Capital Needs of Rural America (Boulder, CO: Westview, 1995). Return to text.
10. Robert D. Putnam, Bowling Alone (New York: Simon and Schuster, 2000). Return to text.
11. Steven C. Deller, Tsung-Hsiu Tsai, David W. Marcouiller, and Donald B. K. English. “The Role of Amenities and Quality of Life in Rural Economics Growth” American Journal of Agricultural Economies 83.2 (2001): 352-365. Return to text.
12. Amy Glasmier and Marie Howland. “Service-Led Rural Development: Definitions, Theories and Empirical Evidence.” International Regional Science Review 16.1,2 (1997): 197-229. Return to text.
13. Christopher Fawson, Dawn Thilmany, and John E. Keith, “Employment Stability and Sectoral Dominance,” American Journal of Agricultural Economics 80.3: 521-533. Return to text.
14. M.J. Greenwood, “Human Migration: Theory, Models, and Empirical Studies,” Journal of Regional Science 25 (1985): 521-544. Return to text.