Where does the money to finance rural development come from Rural Growth and the Rural Capital Accou

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Where does the money to finance rural development
come from?Rural Growth and the Rural Capital
Account

• by Maureen Kilkenny (U Nevada)
• and Mark Partridge (Ohio State)
• for NC-1014 Annual Technical Meeting
• Creve Coeur, MO, October 4-5, 2007

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• the basic sector, which trades outside its
  boundaries, produces dollar flows into the local
  economy, which provides impetus for consequent
  economic development.
• (Harris, Shonkwiler and Ebai, 1999 p 115).

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• If a regions earnings from exports exceed its
  outlays for imports, on net there is an exodus of
  productive resources from the region (as embodied
  in goods and services traded). In this sense the
  region is loaning its resources to other areas,
  the region is a net investor, or exporter of
  capital.
• By the same token, if imports exceed exports, the
  region is receiving a net inflow of capital from
  outside.
• It is patently absurd to argue that the way to
  make a region grow is to invest the regions
  savings somewhere else, and that an influx of
  investment from outside is inimical to growth.
• If anything, it would seem more plausible to
  infer that a regions growth is enhanced if its
  capital stock is augmented by investment from
  outsidewhich means that the regions imports
  should exceed its exports. (Hoover and
  Giarratani, 1984 http//www.rri.wvu.edu/WebBook/G
  iarratani/chaptereleven.htm)

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• briefly formalize alternative hypotheses about
  the contributions of export sector activity and
  the banking sectors process of multiple deposit
  creation to growth
• present stylized facts
• describe the data
• present estimated models
• discuss alternatives and conclusions

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Model 1 Exports cause Growth

• Y ? C I G X M
• Y ? 1/(1 - c - t m)(X I)
• ?Y/?I ?Y/?X 1/(1 - c - t m) gt 0

Tiebout, 1956 JPE
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alternativecrowding out

• Y ? C? I G X? M

Leven (2000), McVittie and Swales (1999),
McGregor, et al (2000), Goodman (2003)
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Model 2 Exports undermine Investment and Growth

• balance of payments identity
• SX - SM ? X - M

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Cash outflows
Cash inflows
Current account

• Import purchases
• in-commuters pay

• Export sales
• Out-commuters earnings
• Net unilateral transfers

Capital account

• Investment by outsiders
• Loans to rural borrowers
• Purchases of rural property
• Rural company equity issues

• Outflows of local savings
• Loans to trade partners
• Purchases of urban assets
• Purchases of equities

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Model 3 Employment multipliers

• T ? E L
• L A ßT
• T 1/(1- ß)(E A)

ß 1 - (E/T) (A/T) rural counties average E/T
32 assume A 10 ß 0.4 ? employment
multiplier 2.5
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Model 4 Local Bank Money Multiplier

• M1 ? mMB
• M1 ? C D
• MB ? CR ? C rDD ER
• 9) m ? (CD)/(C rDD ER)

?the US money multiplier is between 2 and 3
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About 85 of businesses use a bank located
within 10 miles
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• in sum The BEA data on earnings
• and BLS data on spending
• suggest that on average U.S. rural counties
• may be net exporters
• and have net capital account deficits.

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Figure 3. Net Domestic Migration rates by County
Type Note the horizontal line at 0.1 indicates
the nationwide average net in-migration rate.
Source CO-EST2000-1-2-3-4-5 population
estimates, U.S. Bureau of the Census analysis by
the authors.
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Figure 4. Population Change Across U.S.
Counties, 2000-1990 Data Source U.S. Bureau of
the Census mapped by the authors.
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Figure 5. Urban, Farm, and Rural Non-farm Shares,
18201990 Data Source http//www.census.gov/popu
lation/www/documentation/twps0029/tab18.htm,
analyzed by the authors.
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summary of findings subsequent rural deposits
depend positively on prior rural mining sector
activity. But rural employment growth is
significantly negatively correlated with the
initial export intensity. subsequent rural per
capita income is also negatively correlated with
initial export intensity. ?rural capital account
deficits, crowding out, or Product Cycle
explanations are more likely than export
base/current account surplus
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