The Product Cycle and Rural Development

1. The Product Cycle and Rural Development Maureen Kilkenny Economics, Iowa State University 2001 Southern Regional Science Association Annual Meetings, April 5-7, Austin, TX President’s Panel: “Product and Regional Cycles Revisited”

2. Product Cycle (PC): A place’s comparative advantage sector employs their relatively abundant factor relatively intensively (H-O-S). New products are skilled-entrepreneur, innovator-intensive (Vernon, 1966). Innovation is more likely in locations rich in diversity with flexible institutions (Jacobs, 1985; Norton, 1986).

3. PC Urban Cities are relatively abundant in a wide variety of skilled and entrepreneurial labor (Marshall, 1922). Dynamic Jane Jacobs economies of scale exist for high tech, but not for traditional manufacturing. (Henderson, Kuncoro, and Turner, 1995). Cities host start-up firms and growing high-tech businesses (Duranton and Puga 2000).

4. PC Rural Midwestern rural communities are relatively abundant in semi-skilled labor. Traditional manufacturing decentralizes from metro to non-metro (Norton & Rees, 1979). Plants leave domestic rural sites for foreign sites as new products displace domestic demand (MacLauchlan, 1992).

5. Claim: With their low density/variety of establishments per rural community, product cycle establishment attrition hurts rural relatively harder than urban communities.

6. Corollary: State-level data show that “permanent changes in the sectoral composition of employment lead totransitory fluctuations in the unemployment rate” (Neumann & Topel 1991) At the county level, permanent changes in the sectoral composition of employment may reflect permanent reductions in the level of employment in rural communities.

8. Tasks of a rural development economist: 1. Minimize the costs of adjustment arising from the continuous advance of farm productivity farm size consolidation, and the reduction in number of rural households engaged in farming.

9. Tasks of a rural development economist 2. Identify, and to determine how to relax, constraints to rural development. the shrinking of distance made possible by auto transport, larger service sector market area/size, and reduction in the number of viable lowest order places.

10. If fewer rural communities are viable: • Which ones should be allowed to wane? • Which set would maximize overall social welfare? • What public policies, regulations, or institutions interfere? • What public policies crowd out?

11. Lessons for rural development Jane Jacobs: • stagflation is a urban-rural spatial phenomenon • 5 forces cityrural region

12. 5 forces • city markets • sell higher-order services • buy rural exports • city jobs • replace imports • division of labor  gains from specialization • labor pooling  MAR-IRS • city-incubated or HQ’d businesses • city innovation • variety  JJ-IRS • city capital • IRS  tax revenues & profits to finance investment must be balanced

13. Negative rural consequences of each unilateralcity force • city market • displace rural retailers, rural penury • city jobs • rural depopulation, DRS • city businesses • no KRI; no diversification • city innovation • rural depopulation, import dependence • city capital • subjugation, degradation, atrophy

14. J.Vernon Henderson: policies promoting urban concentration • infant-industry protectionism • taxes on traditional exports • minimum wage = minimum city size policy • subsidized private capital • targeted public capital

15. policies promoting decentralization: • subsidized industrial dispersal • inefficient • distorts factor-intensity • unsustainable • weak currency (Norton; Jacobs) • decentralized government • geo-diversified, pooled revenue for safety nets • pan-territorial responsibility for pure public goods • minimum efficient scale in local PGP • coordination/harmonization • industrial recruiting ?

16. Industrial Recruiting claim: In the urban hierarchy context (Berry, 1967), the product cycle + transport cost reductions imply that competition for industry among rural communities (the most numerous in rank, at the bottom of the Central Place hierarchy) is most fierce.

17. Rural communities that have the human and social capital to repeatedly mobilize political and financial capital: • are more likely to attract/win the location of establishments as they relocate during the product cycle, • are more likely to thrive than rural communities who cannot/do not mobilize. • are the ones whose survival increases aggregate social welfare.