Rural Wealth Creation: Concepts, Strategies, and Measures

1. Rural Wealth Creation: Concepts, Strategies, and Measures John Pender, Alexander Marré and Richard Reeder USDA Economic Research Service* NCRCRD Webinar, May 1, 2012 * The views expressed are those of the authors and should not be attributed to USDA or the Economic Research Service.

2. Introduction • Sustainable rural prosperity is a top priority for USDA • Growing recognition that sustainable prosperity requires wealth creation – broadly defined • Scholars have long studied aspects of wealth, but efforts to conceptualize and measure rural wealth are limited • This study addresses the following questions: • What is meant by “wealth”? • Why is wealth creation important? • How can wealth be created in rural areas? • Why should and how can wealth creation be measured?

3. What is Wealth? (1) Income Wealth Expenses

4. What is Wealth? (2) • Wealth is the stock of assets, net of liabilities, that can contribute to people’s well-being • Is different from flows such as income or consumption • Can be accumulated or depleted over time • Includes many types of assets: • Physical – plant, equipment, infrastructure • Financial – money, stocks, bonds • Natural – renewable and non-renewable resources, amenities • Human – education, skills, health • Intellectual – knowledge and innovation • Social – social networks, norms, trust • Political – relationships of political power • Cultural – values, traditions, arts, ways of understanding

5. Why is Wealth Creation Important? • Increasing wealth is necessary to sustainably increase well-being • Wealth contributes to well-being in many ways – income, opportunities, aspirations, resilience, status & power • Long term solutions to poverty require increases in the wealth of the poor • Focusing only on near-term jobs or income may lead to poor policy targeting, ineffective policies • Distribution of wealth more skewed than income • Little known about geographic distribution of wealth

6. How can Rural Wealth be Created? • Rural wealth creation requires socially profitable investments in a diverse portfolio of assets by various rural actors • An effective wealth creation strategy depends on the opportunities in diverse local contexts, outcomes & feedbacks • We present a conceptual framework of wealth creation and illustrate it using ethanol development

7. Conceptual Framework for Rural Wealth Creation • Economic/Institutional/Policy Context • Markets and technologies • Laws and regulations • Policies and programs • Natural phenomena • Conflict/war • Local actors • Individuals & hhds • Businesses • Civil society orgs. • Local governments • Local Wealth • Physical capital • Financial capital • Natural capital • Human capital • Intellectual capital • Social capital • Cultural capital • Political capital • Outcomes • Economic • Social • Environmental • Actors’ decisions • Livelihood strategies • Investments • Production • Consumption

8. An Example: Ethanol Production (1) • Contextual factors affecting ethanol production • Federal and State policies • Prices of inputs (especially corn) and outputs  profit margins (figure) • Technological changes – improved energy efficiency, increased yield/bushel of corn, increased scale • Proximity to markets and transport infrastructure – railroads, highways • Rainfall for feedstock production • Key local assets for ethanol production • Productive farmland to produce feedstock • Water – irrigation in some places for feedstock, water for processing • Access to financial capital • Human capital – entrepreneurs and skilled labor to operate plants (especially for locally-owned plants) • Social capital to ensure sufficient local support

9. Estimated Ethanol Revenues, Costs and Profits Typical Iowa Plant Source: Estimates from Hofstrand (2011)

10. An Example: Ethanol Production (2) • Local actors and their roles and decisions • Farmer cooperatives, other local investors – very important investors during 2002 – 2006 • External corporate investors increasingly dominant since 2006, due in part to increasing scale of plants • Support by local governments - tax increment financing, land donations, tax-funded land improvements, tax abatements, zoning and other permits, provision of water and other services • Support or opposition of local community organizations

11. An Example: Ethanol Production (3) • Local outcomes • Economic • Increased local employment: 35-40 jobs (direct), 65-211 jobs indirect & induced (Low & Isserman 2009); other studies similar (except Urbanchuk) • Increased sales, value-added and income (L&I 2009; others) • Local corn price premiuim: $0.05 – $0.19/bu near plant; effects felt up to 68 miles away (McNew & Griffith 2005) • Property values: increased farmland values (Henderson and Gloy 2009), uncertain impact on residential property values • Property and other local tax revenues increase according to a few studies • Greater impacts in larger, more diverse communities (L&I 2009), and where ownership is local due to greater local expenditures and dividend payments to local investors (Urbanchuk 2006; Bain 2011)

12. An Example: Ethanol Production (4) • Local outcomes (continued) • Environmental • Air pollution – especially ethanol vapor, aldehydes (EPA 2010) • Water pollution – mainly from cleaning salts from cooling towers and boilers, increased N & P loading from feeding distillers grains (EPA 2010) • Increased demand for fresh water, comparable to water demand for a town of 5,000 (NRC 2008) • Social • Few studies of social impacts of ethanol production in rural U.S. • Concerns raised about impacts on noise, traffic congestion, economic and env. outcomes in a few studies (Karetnikov, et al. 2008; Selfa, et al. 2011) • Impacts on incomes and wealth of the poor likely limited

13. An Example: Ethanol Production (5) • Feedback effects (examples) • Effects on local assets • Increased local tax revenues may contribute to investments in improved schools, roads, other public services; possibly attracting new residents • Negative environmental or social impacts may reduce ability to attract or retain residents, reducing local wealth • Effects on contextual factors • Aggregation of increased ethanol production has increased corn prices and reduced the profitability of ethanol processing • Positive or negative experience with ethanol production may affect voters’ and interest groups’ attitudes, and lead to changes in policies

14. Implications of Framework • Rural wealth creation is highly context-dependent • Interactions among types and sources of capital important • The dynamic sequence of investments can create new opportunities or undermine future prospects • Wealth creation involves risky investments, and asset diversification may help reduce risks • Local ownership of investments can lead to greater local economic impacts, but entails risks • Important to consider impacts of wealth creation on multiple outcomes

15. Strategies for Wealth Creation Rural Economic Development Strategies • Natural resource-based industries – agriculture, forestry, mining • Recruitment of “footloose industries” – e.g., manufacturing • Regional centers of commerce/government • Bedroom communities – close to metro areas • Amenity-based development – e.g., tourism, retirement • Entrepreneurship, innovation and cluster strategies – e.g., wine industry, local biofuels and other renewable energy • Import substitution strategies - e.g., local foods • Strategies work best when they reflect local contexts • Strategic planning and research-based industrial targeting approaches can help identify suitable strategies

16. Why Measure Wealth Indicators? Specific reasons to measure wealth indicators • Assess outcomes not measured by flow measures • Attribution problem Reasons not to measure wealth indicators • Feasibility and cost • Concepts better reflected by other measures

17. How can Wealth Creation be Measured? How to measure wealth depends on the specific purpose Identification, diagnosis and targeting interventions • Some recent efforts seek to measure comprehensive value of wealth and wealth creation at a national scale • Although useful, these approaches rely on strong assumptions and difficult data to obtain for rural areas • More realistic approach – develop a set of indicators of different types of wealth using available data sources • The report includes a list of indicators of each type of wealth and publicly available data sources

18. How can Wealth Creation be Measured? (2) Improving design and monitoring interventions • Indicators can be derived by specifying the program logic model/impact pathways (hypotheses about how inputs lead to outputs & outputs lead to outcomes and impacts) Inputs  Activities  Outputs  Immediate outcomes  Impacts • Wealth indicators can be derived • Example: construction of a hospital (next slide)

20. How can Wealth Creation be Measured? (3) Assessing impacts of interventions • Challenge of attribution – assessing the counterfactual • Wealth indicators can help identify suitable counterfactual • Example: DRA impacts study – used indicators of some types of capital (physical, human, financial) to select comparison counties

21. Conclusions • The idea of investing in a broad portfolio of assets to achieve economic development is not new • Efforts to broadly conceptualize and measure the wealth impacts of rural development approaches would be new • This review highlights the need for applied research on • “What works where and why (or why not)” in promoting rural wealth creation • How to measure wealth in rural areas