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Weekly UpdatesThere is good news and bad news for the rural economy. Over the past couple of years, fortunes have turned up as the rural economy has outpaced the metro economy. Looking deeper, though, reveals long-term structural shifts which underscore ongoing concerns whether rural regions will be able to compete as effectively in the 21st century. These shifts also raise fresh questions whether rural development policy crafted for an earlier era offers the greatest promise in helping rural regions in their new economic quest.
Recent Trends in the Rural Economy
The rural economy has enjoyed a strong upturn since 2003. Growth in income and jobs has been stronger in rural America than in metro areas (Chart 1). (1) In '04 and '05, rural incomes grew 2.8 percent a year (vs. 2.5 percent in metro jobs). Jobs were added at a 1.3 percent annual pace (1.2 percent in metro areas).
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The rural growth appears broad-based, though clearly paced by growth in high-skill jobs and new activity in recreational areas. Rural service jobs have been growing briskly, especially in high-skill and recreation related categories. For instance, finance, professional, and business service jobs grew 3.2 percent annually over the past two years. These gains are especially welcome in rural areas since they represent top paying jobs and help retain highly trained professionals in rural communities. Meanwhile, job growth in recreational industries rose 2.7 percent.
The rural upturn has also been supported by a leveling out in rural manufacturing. The most recent recession spawned a significant blood-letting of rural factory jobs, but that appears to have been staunched more recently. Rural factory closures are now about half what they were in '01 and '02. (2) And rural factory jobs have edged up 0.7 percent a year in '04 and '05, after contracting nearly a fifth from 2000 through 2003.
The recent upswing has been helped along by record farm incomes. On the strength of big crops and strong livestock profits, farm incomes were at an all-time high in '04 and second best in '05. (3)
Recent rural economic gains are certainly welcome, but they can mask persistent long-term economic challenges. Historically, rural America has depended heavily on commodity agriculture, natural resource extraction, and labor-intensive manufacturing. Globalization challenges all--three forcing U.S. producers to slash costs to stay competitive. Thus a pattern of consolidation is the norm throughout the countryside. Farms get bigger and fewer. Coal mines in Wyoming's Powder River Basin produce more coal with bigger shovels and trucks, but fewer workers. Taken together, these shifts mean fewer and fewer rural communities can tie their economic future to the economic engines of the past.
Building new economic engines is not easy, however. A longer term perspective suggests that rural areas are struggling more than metro areas in meeting this challenge. Since 1993, employment gains in rural areas have lagged behind those in metro areas (Map 1). This suggests metro areas have been more successful in shifting to leading edge industries. A look at the leading edge of growth raises even more concerns about rural areas. There are about 3,100 counties in the United States. The top 10 percent of those counties have contributed nearly three-fourths of the nation's new jobs since 1993. And only 8 of those 310 counties are in rural America.
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While the challenge to innovate confronts all corners of the rural economy, farming regions may face the biggest challenge. U.S. agriculture is far from homogeneous in terms of output, but bulk commodities still account for a big share of both output and exports. With any commodity, globalization creates inexorable pressures to cut costs, making consolidation a powerful force, even during good times. Thus, even though farm income was at all-time highs in 2004 and 2005, farm-dependent counties barely added any new jobs (averaging job gains of just 0.1 percent annually compared with 1.1 percent growth for the rest of rural America). (4)
Rural America's Development Challenge
As the economic trends of the past decade show, globalization has transformed the rural development landscape. The swift currents of global markets mean that rural areas can no longer rely on old economic engines to fuel future growth. When commodities are the game, and the competitors. are many and strong, consolidation will leave many rural communities searching for new engines.
Economists generally believe that globalization has ushered in a new era for economic development. (5) The central challenge facing rural regions is the same for all regions in America, indeed in the entire world: the vigorous pursuit of a competitive edge in rapidly changing global markets. Building and maintaining that edge will involve three steps: to understand the region's distinct economic assets, to identify the best market opportunities for the region, and to craft a strategy that exploits one to seize the other. This approach yields a unique development strategy for each region. In other words, the new era amounts to the end of the "one-size-fits-all" development policy.
Two ingredients are critical for carrying out this strategy. The first is the twin force of innovation and entrepreneurs. Innovation is the new fuel in creating regional competitiveness. (6) In a global market, where the cost of producing basic products is often several times lower in other corners of the world, the key is to find the next new product, not compete on the old one. Innovation is the fuel to creating the new products.
Entrepreneurs bring the new products to market. As old products reach a mature phase and competition for them intensifies, regions need more than the fuel of new technologies and fresh ideas. They also need entrepreneurial engines to take new ideas to the marketplace. Not all of these engines will keep on running, but those that do will define a region's competitive edge in the marketplace.
While innovation is difficult to measure, entrepreneurs are easier to track. Since business starts also reflect the current stock of ideas moving to market, measures of entrepreneurial activity essentially provide a useful proxy for both ingredients.
Recent research points to a strong link between entrepreneurial activity and economic growth. For some time now, economists have shown that nations that grow more entrepreneurs tend to experience faster economic growth rates. (7) The same link has been explored across the 50 states, with the same result (Chart 2). What is more, the economic impact appears to go up as entrepreneurial activity increases. In other words, there is a clear bonus to places that are good at fostering entrepreneurs.
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Such evidence underscores the importance of regions that innovate and have entrepreneurs that move those new ideas to market. The dilemma for many rural regions is that they appear to be lagging well behind in this process. As further shown in Chart 2, states where agricultural subsidies are especially important to farm income are all clustered on the left side of the chart. That is, they have low levels of entrepreneurial activity, and economic growth is correspondingly low. The one exception is Texas, which falls toward the other end of the spectrum. An argument can be made that Texas is actually many states--with the agricultural panhandle a very different place than the high-tech mecca of Austin.
The second key ingredient is critical mass. A growing body of research shows that the fastest growing regions have sufficient human, financial, and social capital that important synergies develop. These synergies involve a whole host of things, including technology transfer, workforce skills, entrepreneurial networks, and the mere lifestyle amenities that knowledge workers increasingly expect. Economists lump all these synergies into a concept they call "agglomeration."
Research increasingly shows that locations with more agglomeration appear to be growing faster in the 21st century economy. The earlier data on the fastest growing 310 counties is one piece of evidence, but there are many others. Economic innovations (as measured by patents) occur at a faster rate in metro areas, and faster still in the biggest metro areas. (8) While entrepreneurial activity is spread across the U.S. landscape, entrepreneurs that add greater economic value tend to cluster in metropolitan areas. (9) Economists continue to explore the reasons behind these findings, but in general they conclude that places with a lot of agglomeration, like metro areas, can lower the cost of finding and obtaining specialized labor and inputs and provide a more fertile climate for knowledge to be shared across entrepreneurs, workers, and financiers. Such places also have a large supply of leaders that can help create a vision to guide the region's public and private investments.
Be that as it may, agglomeration poses a real dilemma for rural areas. By definition, rural areas are small and remote. Agglomeration is an abstract notion, not a natural feature.
Does that mean rural areas are doomed in the new economy? No, there are ways around this dilemma. Experts now believe that rural communities can create many of the benefits of agglomeration by partnering across city limits and county lines laid down generations ago for a very different economy. The overall purpose of such partnering is to create a development climate where ideas flourish and entrepreneurs grow. While economists may never be able to determine how much critical mass is enough, suffice it to say that most rural communities cannot get there alone.
In sum, the new paradigm for economic development is powerful, but it also challenges rural regions. The shift to an innovative, entrepreneurial economy will not be easy in rural America. Most rural areas have put their development eggs squarely in the basket of business recruiting, putting little if any focus on growing entrepreneurs in their own backyard. (10) To gain critical mass, rural communities will have to partner across jurisdictional lines. Yet rural communities are not accustomed to reaching across those lines--Friday night football dies hard in rural America. Finally, crafting a competitiveness strategy--a region's road map to its economic future--requires leadership capacity. Such capacity is not spread evenly across the countryside, posing yet another challenge to rural areas.
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