NE162: Rural Economic Development: Alternatives in the New Competitive Environment
(Multistate Research Project)
Status: Inactive/Terminating
NE162: Rural Economic Development: Alternatives in the New Competitive Environment
Duration: 10/01/1997 to 09/30/2002
Administrative Advisor(s):
NIFA Reps:
Non-Technical Summary
Statement of Issues and Justification
The rapid changes occurring throughout the national and world economies are forcing rural communities to make many choices that may have profound impacts on the welfare of the people within these communities. In many cases the viability of the communities themselves is at stake. There is thus a critical need for a better understanding of how changes are affecting rural communities.
Related, Current and Previous Work
The nation's industrial structure continues to change, leading to further changes in the sources of employment and income for rural residents. Examples are: 1) the movement of jobs to the service sector and away from traditional manufacturing jobs: 2) changes in manufacturing organization; such as, just-in-time inventory; 3) the role of high technology; and 4) the role of traditional rural resource based industries; i.e., agricultural, wood products, and mining. Accompanying the new industrial structure is the change in federal. state. and local government relationships and responsibilities or what is called "devolution0. The 1996 Farm Bill also will cause change in the viability and stability of the rural agricultural industry from the substantive changes in agricultural price supports and other agricultural commodity programs. In addition Fund for Rural America will encourage mufti-disciplinary and outcome oriented research. Finally, the structure of international trade has changed through NAFTA and GATT. Rural areas which are dependent upon the agricultural and manufacturing sectors will be sensitive to new international trade agreements. The impacts to these rural economies will be both positive and negative. The emergence of many of these changes in rural industrial structure was identified and examined under NE-162, the previous project (Henry et al. 1986, 1987; Drabenstott et al. 1987; Henry and Drabenstott 1996).
Changes in types and organization of manufacturing will lead to demands for different occupational skills and create new demands upon local governments. This will put some communities in more advantageous positions, and others in less. Knowledge about these changes and their impacts on employment and income is necessary if local policies. especially given devolution, are to be developed to help rural people. rural communities, and states to respond to problems more effectively and efficiently.
The previous regional project approached this issue by examining the growth potential of traditional rural industries. primarily manufacturing (Goole and Hastings 1988. 1989). Major findings were that transportation facilities and the complexity of the service and trade sector are important factors in industrial location. while the development of industrial sites was no more influential than other factors which communities can control. An industrial targeting model was developed out of this research to help elected officials and leaders of rural and small metropolitan communities identify their potential to attract new manufacturing employees (Goole and Hastings 1988).
Initial investigation of the location, employment. and entrepreneurial aspects of high-tech manufacturing were initiated under the previous project (Barkley 1988: Smith and Barkley 1988; Barkley et al. 1988; Barkley and Smith 1991). Given the expansion of international manufacturing investment in rural America. the past project estimated factors which entice foreign manufacturers to rural areas and their impacts on rural businesses. labor market and economy. (Barkley and McNamara 1992 and 1994).
Since the late 1940's, the proportionate share of total employment in the service sector has been increasing. The service industry has become a primary source of employment in nonmetropolitan areas. providing up to two-thirds of all jobs. and this sector has generated all net new employment in recent years (Miller and Bluestone 1988: Porterfield 1990: Smith 1993). The previous project investigated the role of the service sector in rural areas (Smith 1984, 1990 and 1993: Hushak 1992). Also the previous project identified factors for rural commercial sector development and the influence that dependency among commercial sectors has on the probability of rural commercial sector development ( Shonkwiler and Harris 1992; Harris and Shonkwiler 199.4 and 1996; Harris et al. 1996; Deller and Harris 1993). Additional research on the location requirements of the rural commercial sector is needed.
Prior research on business retention and expansion (BR & E) outreach programs focused on the perceptions of volunteer local leaders (Morse, 1990; Smith. Morse. and Labao. 1992: and Loveridge and Smith, 1992). Neither the effectiveness of the BR & E program in building social capital nor the impacts on individual businesses have been examined in prior work.
Leones, Schluter and Goldman (1994) examined earlier studies of the dependency of an economy on a given sector. The economic importance of the poultry industry has been examined in North Carolina (Vakina and Roka. 1995) as well as the nursery industry in Arizona (Cox et al., 1995) and agriculture in Delaware (Tanjuakio et al., 1996).
The literature on infrastructure and economic development can be divided into theoretical and empirical issues. A number of authors have discussed the theoretical dimensions of this relationship (Deller 1991; Eberts 1990; Johnson 1990a; 1990b). Economic theory suggests that infrastructure is an input in aggregate economic development: yet the precise relationship between infrastructure and economic development may take numerous forms. Doeksen and Allen (1990) summarized conclusions of the empirical work as follows: "Many studies have attempted to document the linkages between infrastructure and economic growth. Research exhibits a high positive correlation but has not firmly established causation due to statistical and empirical problems.' Previous research by Johnson (1990a); Madden (1985); Diewert (1986); Kriesel et al. (1988) and Goole and Hastings (1988) have employed alternative procedures to measure the impacts of infrastructure on economic development.
With devolution and the potential for reduced federal funding or rural infrastructure. there is a demand for higher efficiency in our public services. In the past regional project. Bhattacharyya et al. (1995a and 1995b) and Deller and Halstead (1994) have investigated factors to increase rural infrastructure efficiency for rural water systems and roads. As devolution becomes more prevalent. efficiency studies of rural infrastructure systems will be in more demand.
Improving rural education has continued to be a critical issue for analysis and research. Estimating the relationships between educational production inputs and outputs has been the focus of several studies. Most of the studies (Coleman 1966: Burkhead 1967: Hanushek 1972: Katzman 1971) have used a production function framework to identify the influences of various school inputs on educational output. Stallmann et al. (1990) have investigated the influence of occupational structure in the community on dropout incentives. Further research is required to investigate the productive efficiency of rural schools and to improve their output.
During the 1980's. there was divergence in metropolitan and nonmetropolitan incomes. It has seemed to some that the linkage between metropolitan and non-metropolitan counties was little or negligible. Holland et al. (1996) and Harris et al. (1996) developed interregional interindustry models to derive economic linkages between these two economies. Barkley. Henry. and Bao (1995) tested for urban-rural linkages using spatial statistical analysis and Geographic Information System (GIS) techniques. Stenberg and Maki (1996) investigated urban and rural linkages among technology intensive industry clusters. In these studies. linkages between metropolitan and nonmetropolitan counties were found. Given devolution and more power to state governments where one-man. one-vote elects both houses of the legislature and results in urban control of the legislature, identification of metropolitan and nonmetropolitan economic linkages is even more critical.
With devolution of federal relationships and responsibilities to state government and possibly to lower local levels, local self-development strategies may be more important than ever to mobilize local resources and generate locally controlled growth. Local self-development projects include the involvement of local resources and local ownership and control of enterprises or activities (Reid 1987). Therefore more quantitative work is needed to estimate benefits and costs associated with these approaches.
In order to aid quantitative analysis at the state and local level. more complex modeling such as dynamic Computable General Equilibrium (CGE) models may be developed. CGE models advance the fixed-price models of the past in that the inclusion of relative prices which reflect economic scarcity of all commodities and factors are modeled. In the past project. state and local CGE models were developed and applied to alternative problems (Kraybill 1993; Waters et al. 1996; and Harris et al. 1995).
With the inclusion of investment. migration, and growth components in static CGE models, dynamic CGE models have been developed to estimate a time trend of growth for state and local economies. Upadhyaya and Holland (1995) investigated the economic impact of reductions of state business and occupational taxes on the State of Washington's economy and fiscal accounts. Seung (1996) developed a dynamic CGE model for the state of Ohio which included public goods in the household production function. Seung derived impacts of a Business tax cut on public capital stock anti the interaction of reduced public capital on private capital productivity. Berck et al. (19961 developed a dynamic CGE model for the state of California which will be employed by the California state government for "dynamic scoring" of alternative assembly legislation and expenditure bills. Further development of dynamic CGE models. at the state and local level. is needed in order to derive potential impacts of devolution. the 1996 Farm Bill. reallocation of natural resources and new international trade agreements.
Several current projects have been identified that are related to this proposed research but none appear to duplicate the proposed project. In many cases. the proposed project will build upon the work undertaken as part of these projects.
A Northeast regional project. 'Tourism Impacts and Development Alternatives from the Local Government Perspective'', is evaluating the role of tourism industries in the economic development process. The project proposed here does not specifically consider tourism. A Southern regional project. "The Changing Structure of Local Labor Markets in Non Metropolitan Areas" e-acnines the changing nature of rural labor markets in the South. Information from that. project may be complementary to the proposed study. The new Western regional project "Rural Communities and Public Lands in the West: Impacts and Alternatives" is examining the impacts to rural western communities of alternative public lands policies. Information from that project will be useful to the proposed study.
Several state projects are examining employment changes and trends. Examples of these are: Employment and Income Trends. Growth and Potentials in Rural West Virginia' (West Virginia); ".-\n Economic Analysis of Financial Strategies and Programs for Improving Rural Economic Development" (University of Georgia); "Service-Producing Industries: A Base for Rural Economic Growth" (University of Idaho); "Impact of Economic Expansion and Recession in Nonmetropolitan Areas of Kentucky (University of Kentucky). All of these projects focus on rural arias within a state. and therefore applicability of results regionally, or nationally are limited The proposed project will expand upon these efforts by employing similar data and methodologies in different state to broaden the usefulness of these findings.
additionally. the continuation of NE-162 will help land grant institutions focus on proposed competitive grant programs of the Fund for Rural America. By organizing a regional research group whose past research has been very practical and beneficial for coral constituents, participants in the NE-162 project may have advantages in formulating and developing research programs for the Fund for Rural America.
Objectives
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Identify the implications of industrial and employment restructuring on nonmetropolitan communities.
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Identify and analyze the demographic and socioeconomic implications of economic restructuring in nonmetropolitan areas, with special emphasis on labor market implications and how various ethnic groups are affected by policy and market changes.
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Identify changing public policy initiatives and relationships and their impacts on rural economies and goverments and investigate the effectiveness of alternative policy instruments to affect rural economic and fiscal viability and structure.
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Methods
Objective 1Research on the implications of industrial restructuring on nonmetropolitan economies has four principal components. First. researchers from Delaware. Pennsylvania, New York, South Carolina. Wisconsin, and Utah will identify commonalities across the U.S. in changing industrial structures among nonmetropolitan communities. The focus of this research team is to develop a common database and research methodology that permits comparisons of restructuring trends across regions (e.g. Northeast versus the South) and states (e.g. New York versus Pennsylvania). Specific rural restructuring trends to be investigated are: (a) the growth in value-added agricultural processing industries: (b) the growth in service-related activities relative to manufacturing and production agriculture; and (c) the growth of small. specialized firms relative to traditional. large-scale plants. The researchers will use distributional. shift-share. and location quotients analyses to estimate and describe the specific industrial shifts of interest (a, b. or c above). The common database for this descriptive analysis will be developed from three data files: Enhanced County Business Patterns. ES 202. and BEA REIS.
Second, the effects of the changing industrial structures on rural economies will be investigated using two complementary research methodologies. Researchers from Pennsylvania. Delaware, Utah, Oregon and South Carolina will develop and estimate small-region econometric models. These models will have measures of nonmetro economic well-being (e.g., changes in income or employment) as the dependent variable. The explanatory variables will be measures of industry structure and structural change and other area characteristics relevant to local economic development (control variables). A complementary approach will be undertaken by Wisconsin. Oregon, and Missouri. This approach involves the use of IMPLAN input-output (I/O) models to provide a detailed analysis of current industrial structure in specific rural areas and a simulation of the impacts of structural changes on employment and income in specific sectors of the local economy. Following the econometric and input-output analyses. the researchers will attempt to formally link the two approaches by constructing county-level, conjoined I/O econometric models. Missouri. Nevada, and Wisconsin will assume the lead in developing the conjoined model. The model will be refined by researchers in Delaware. Pennsylvania, Utah and Oregon. and South Carolina to reflect institutions and fiscal structures unique to the specific states. The application of a common model in a number of states enables researchers to determine how different institutions influence the economic changes resulting from industrial restructuring.
Third, researchers at Kentucky and Indiana will lead the analysis of the determinants of food manufacturing location decisions in the United States. All NE-162 participants will assist in the development of a national database from state and commercial sources. Analysis of this data will focus on understanding factors influencing the location selection among states and the selection among communities (e.g. metro versus nonmetro). This research will enable local and state Governments to better assess their potential for attracting food manufacturers and target recruitment and small business development activities at specific food manufacturing sectors.
Fourth, the policy implications for rural regions experiencing restructuring are diverse and must be tailored to the specific circumstances of the regional economies. However. trends identified in the above analyses will provide common strategies for assisting rural areas in their adaptations to changes in the national and global economies. Potential strategies to be examined include industry clusters. industry targeting (e.g., wood products and food processing), industry retention and expansion. labor training, and retail market potential analysis. All researchers assigned to Objective 1 (Delaware. Pennsylvania. New York. Utah. Oregon. South Carolina. Indiana, Kentucky. Wisconsin. Missouri. Oregon. and USDA-ERS) will be involved in investigating the efficacy of alternative rural industrialization strategies. Analysis of common strategies across states permits the estimation of the role of institutions and location in space and on the effectiveness of these industrial development strategies.
Objective 2:
Research on changing employment conditions. as well as socioeconomic and demographic trends has three principal components. The first approach will complement the studies incorporated in Objective 1 which look at the implications of industrial restructuring. Researchers from California. Pennsylvania. Missouri. Washington and Utah will lead the national analysis of direct and indirect nonmetropolitan labor market impacts from policy and market driven restructuring. Beyond measures of economic growth, researchers will analyze the effects such changes have had on income levels and distributions, employment cycles and human capital demands. Descriptive statistics and spatial data analysis will be used to compare rural labor availability with employment opportunities. Although ES202 data are available in each state, there will be an effort to obtain a common set of socioeconomic, education and unemployment data from all states and regions involved through the Census and state agencies.
Second, the demographic effects of rural economic development and labor market trends will be studied. There is great uncertainty about the flows and magnitudes of migration to and from nonmetropolitan areas--an issue which is exacerbated by the changing face of rural migrants. Although many states have had an historic presence of ethnic enclaves to supply lowskill, low-wage labor (Rochin. Western states: Rochin and Castillo. California. numerous other states are relatively new choices for significant ethnic settlements (Thilmany). Multiple case studies have documented the dramatic effects of Latino population growth on the economic condition of places, and the character of community life. However, the pattern of this changing ethnicity throughout rural America. and the implications for community development and public policy are generally unknown. Researchers from Michigan, Missouri, Pennsylvania, Washington and Utah will focus on recent migration and settlement patterns, and ultimately, their impact on the general socioeconomic health of rural communities. Of special interest is the relationship between the changing rural labor market, migration, demographic changes and rural poverty.
The method of analysis for this section of the objective entails the following steps; First, a regional database of places and counties in nine Midwestern states will be constructed with data from the 1990 STF 3 census files, the 1990-1995 County Business Patterns Data, and 19901995 data on school district enrollment from state departments of education. This database will be used to discern trends in immigration and changing ethnicity throughout the region, including such correlates as employment. unemployment, poverty and educational attainment. Procedures developed in Michigan will be incorporated in Georgia, Utah and other interested states to
investigate adequacy of transferability. Changes because of a shift to geographic location of analysis will be noted and analyzed. Additionally. procedures and analysis employed to investigate the impacts of the Latino population on rural areas of the nation can likewise be transferred to analyze other immigrant group impacts. (Rochin. Michigan: Kriesel. Georgia; Findeis. Pennsylvania: Holland. Washington: Thilmany. Utah).
Finally, the implications of the findings in objectives 1 and 3 will be integrated from the findings of this study's labor market. migration and demographic findings to analyze how economic trends and public policies have affected demands on nonmetropolitan communities and public services. Using the Census' Survey of Income and Program Participation. a baseline analysis of social and welfare program usage in the states included in this project will be conducted. It is important to understand how the changing environment in rural areas has affected those most in need of development. which are often included in such social programs. In addition to negative labor market shocks. it is likely that migration patterns and demographic changes will affect the dependency of the rural population on assistance programs.
Although there are some clear plans of research. the relatively recent evolution of issues in this objective require more exploratory data-gathering and methodology activities. A primary
' activity of this group of researchers in the initial years of ths project will be to develop rich.
complementary data sets across states and regions. Research coordination in this objective will
be vital because employment patterns in Pennsylvania. for example. will be impacted by the
state's programs plus the employment programs offered in neighboring states. Furthermore, in-
depth information on employment programs is typically available to scientists within particular
states. but harder for outsiders to obtain. Regression analysis and spatial data analysis (GIS,
spatial statistics) will be used to identify explanatory factors for and spatial trends in labor
demand, migration and public program usage.
Objective 3:
Rural areas are reacting to an environment of multiple changes: FAIR. NAFTA, WTO, devolution and deregulation. Although the policies are national. the impacts on rural areas will not be homogenous. Because of the differential impacts, each state will in turn respond with policies and programs to mitigate impacts and to enhance its ability to compete for businesses, jobs, incomes. and Federal dollars, leading to cross-state impacts.
For example, the impact of devolution will not be homogenous in rural areas because of differing economic bases (both within and across states) and differing local government structures across states. Thus, it becomes important to demonstrate to policy makers the rural impacts. intended and unintended, positive and negative, of policy initiatives. In addition, the impact of a policy will differ among socio-economic groups. Impacts on citizens, legal immigrants and illegal immigrants will be investigated. Impacts by income levels will also be investigated.
In order to show the differential impacts of changes in federal, state and local government relationships, policies and responsibilities on rural areas, socio-economic and fiscal impact models are required. However, use of these models requires investigation of the accuracy and applicability to local situations. The IMPLAN input-output model software and data base
Minnesota IMPLAN Group. 1997) acts as a primary programming and data source for local impact analysis.
However, the initial IMPLAN input-output or Social Accounting Matrix (SAM) accounts often require modification with survey data or data from agricultural enterprise budgets to develop more accurate and policy specific hybrid-type models for a given region or state Each state may identify important sectors that require survey based estimation depending on its particular circumstances. and often the agricultural, mining. and/or manufacturing sectors are selected. Also the IMPLAN model derives a state and local government sector which for region specific analysis may be too aggregated. Procedures to separate state and various local government entities for specific local government impact analysis is also needed.
In order to develop hybrid input-output and SAM models that function across states. standardized procedures are needed. These standardized procedures apply to data sources and survey data incorporation into an input-output or SAM model that is consistent and uniform. This regional project has served and will continue to serve as an ideal laboratory for such procedures to be tested and refined across states. The sharing of these data and techniques across states will hasten development of state and local models which more accurately reflect local conditions and markets (Holland. Washington: Kraybill. Ohio: Fletcher and Harris. Nevada: Stallman. Texas: Goldman. California: Keith. Utah: Howard and Tyrrel. Rhode Island).
Fiscal impact models will be used to derive impacts to local governments from devolution of the federal government, changes in international trading agreements and other exogenous changes to the local economy. Development of those fiscal impact models will begin from a common base; the fiscal impact models for Virginia (Johnson and Keeling) developed as part of a previous NE-162 project. The model consists of econometric equations and spreadsheets. The model must be updated to reflect new fiscal conditions. Updating would require specifying new econometric equations and updating databases. NE-162 participants will work together to specify the new equations. Collaborative work will ensure a common base in the models and theoretically and empirically well-specified equations. Each researcher will identify the state and local data needed for the model. The participants will agree on a common aggregation of the data for the equations 1 Harris, Nevada: Jansen. New Hampshire: Johnson. Missouri; Stallmann and Jones, Texas; Weber, Oregon: and Foster and Tyrrell. Rhode Island). The participants will also coordinate with the RUPRI (Rural Policy Research Institute) project that is developing models of representative rural communities.
Each state will need specific equations to reflect specific state and local government structures, such as tax policy (income tax, no income tax. property tax, etc.) Researchers in states with similar structures will work together to specify local equations. For example, Texas and Nevada do not have a state income tax. Specific equations developed for each state will be evaluated by the collaborating researchers for theoretical soundness and consistency with the basic model.
Cross state comparisons of model results will provide information concerning the range of differential impacts of national policy. In addition, the comparison can yield evidence of differential response by states as they attempt to mitigate impacts and enhance their competitive position. The results of the state models can be used to demonstrate to policy makers and
differential impacts of national policies and can be used to make a series of consistent -.O;;cv recommendations.
As states experience the differential impacts of policy. they will respond to mitigate impacts and to enhance their competitive position vis-a-vis other states. Examples of such responses include the economic incentive wars that use incentives to lure businesses from one state to another. One research question is. "Does use of incentives result in a net economic gain for the state that gets the firm. or does the competition between states result in incentives being so high that there is no economic gain to the state? West Virginia and Ohio are preparing a joint method and evaluation of these location incentives (Kraybill. Ohio and Loveridge, West Virginia).
Other state responses that may be evaluated include business expansion and retention programs. The impacts of the business retention and expansion (BR & E) program on building a community's social capital for dealing with local economic development and the impacts on changes in individual business participants will be studied. In contrast to earlier studies, which used a single respondent per BR & E program. data will be collected via mail. telephone. and personal interviews from a wide variety of local leaders and business participants in each of fifteen communities. Morse. from Minnesota will collect retrospective data on six communities. interviewing 180 community leaders and 300 businesses during the first year. During the second and third years. Morse and Loveridge West Virginia) will develop a monitoring system to collect better data. McNamara (Indiana will provide guidance to the questionnaire design for the businesses.
A related issues is state tax policy. This is especially problematic in small states where citizens can easily work in one state and live in another (New Hampshire and Boston, Massachusetts). The issue also exists along the borders of larger states where it is possible for citizens to work in one town and cross the state border to shop or to live in order to avoid taxation. In addition, cross border issues on a larger scale at international borders where the number of variables that differ between the two jurisdictions is even greater than those between states. The differences lead to legal and illegal migration across borders. (Jansen. New Hampshire: Harris. Nevada: Goldman. California: Leones. Arizona).
Another example of a cross-state issue that requires collaboration involves natural resources that cross state lines - public lands, watersheds, etc. It is well recognized that for many rural areas the resource base and its management will affect the current and future trend of economic development. Public lands are an increasingly important policy issue in the West. Watersheds are a major issue in the Northeast where rivers often form state boundaries. Thus, the management of the watershed requires cross-state collaboration. (Harris. Nevada; Goldman, California: Weber, Oregon).
The above are a few of the many existing issues that can be addressed using fiscal impact modeling. In addition. as governments change their policies, there will be new and unforeseen issues during the life of this project. The fiscal impact models have the power to address future issues as they arise.
Measurement of Progress and Results
Outputs
- Examine specific policy issues by a national committee of policy analysts, to apply the best research currently available.
- Committee will provide timely analysis of current issues facing rural America.
- Standardization of social, economic and fiscal impact assessment tools for evaluating impacts of exogenous changes (such as industrial restructuring and devolution) on rural communities.
Outcomes or Projected Impacts
- Help mitigate negative impacts in rural areas from industrial and employment restructuring of nonmetropolitan communities.
- Assist public officials and policy makers in evaluating social, economic and fiscal impacts of exogenous changes on rural communities, states and regions.