The local economies of cities, towns, rural districts and villages: James Robertson

A chapter from James Robertson’s book, ‘Future Wealth’ 

James Robertson: a British-born political and economic thinker and activist, became an independent writer and speaker in 1974 after an early career as a British civil servant. After serving on British Prime Minister Harold Macmillan’s staff during his “Wind of Change” tour of Africa in 1960, Robertson spent three years in the Cabinet Office. Following that he became Director of the Inter-Bank Research Organisation for the big British banks.

How can local economies be enabled to become more self-reliant, less dependent on the national and international economy, and therefore less vulnerable to decisions and events outside their control? How can they become more conserving?

Everyone participates to a greater or lesser degree in a local economy, just as everyone participates to a greater or lesser degree in a household economy. But, until very recently, the role of local economies, like the role of household economies, has been largely ignored by the prevailing economic orthodoxy.

Economic policy-makers and theoreticians have relegated localities, like households and families, to the realms of social and environmental policy and theory.

Just as people and households have become economically dependent on outside employers, suppliers, financial institutions and welfare agencies, so have places.

Local economies throughout the industrialized world have become largely dependent on outside employers to organize their work, on outside suppliers to supply their needs (for food, energy, clothing, shelter, entertainment, and so forth), on outside banks, insurance companies and other financial institutions to meet their financial needs, and on outside social service agencies to provide for their health and welfare.

Meanwhile, the conventional path of top-down, trickle-down development in the Third World has had the same effect.

For the quarter of a century of sustained economic growth and full employment after the Second World War this may not have seemed to matter very much, at least in a material sense. But in the 1980s the economic vulnerability of many formerly flourishing cities and regions in the industrialized countries became all too apparent. So did the collapse of rural local economies in many Third World countries, leading to famine, or a massive influx of poor people into the cities, or both.

A revival of more self-reliant local economies must be a key feature of the 21st-century world economy.

Although this chapter draws mainly on recent experience in industrialized countries, the conclusions apply equally to local development in Third World countries. The material, social and cultural conditions in those countries are very different, and the problems of absolute physical poverty are much more acute and widespread. But the principle of more self-reliant local development, and many practical applications of that principle, are equally valid for people in rich and poor countries alike.

To turn any economy which creates local dependency into one that enables self-reliant local development to become the norm, calls for similar changes in psycho-social outlook, economic and financial organization, and political and social power structures. Although (see Chapter 2) the terms “locality” and “local economy” cannot be at all precisely defined in population size or in geographical area, this need not rule out more self-reliant local development. The same is true of the terms “nation” and “national economy”.

Iceland and Seychelles are very different from the USA and the Soviet Union. Yet all are nations with national economies. The local economy of a large conurbation will be different in many ways from that of a remote rural area. A local economy will often correspond to a local government administrative unit, such as a city. But smaller areas like villages or neighbourhoods may also be local economies in their own right, if local people think of them as such.

As the importance of enabling and self-reliance as a two-sided principle of economic development becomes established, together with an understanding of the world economy as a multi-level system ranging from the world economy itself to the billions of individual people of whose economic activities it consists, it may be found helpful to think broadly in terms of a hierarchy of local economies (like Chinese boxes within one another)— consisting very roughly of, say, 2,000,000, 200,000, 20,000, 2,000, 200, and 20 households. Any one, or more, of these different levels of subnational economies may, depending on particular circumstances, have some potential for greater self-reliance.

For the next few years the practical priority will be to enable more self-reliant local development to proceed in places where it is most clearly needed and where a sense of local identity is strongest. These priority areas will particularly include deprived urban and rural localities where today’s economic order has created crisis conditions.

Encouraging Homegrown Local Economies

Until quite recently city governments and other local government authorities, in most industrialized countries with the exception of the USA, had no responsibility for local employment or the local economy; the tasks of local government were primarily social (e.g. education, social services, housing) and environmental (e.g. planning, waste disposal). But in the last few years in most of these countries, with the active encouragement of international bodies like the EEC and OECD, local involvement in local economic policymaking has been developing step by step in response to the problem of local unemployment.

The first reaction of most local authorities to rising local unemployment was to consider how they could attract new outside employers into their locality to replace firms that were withdrawing or closing down. That approach is still being pursued in many places. But, even to conventional economic thinkers, it is now apparent that “smokestack-chasing” and “chip-chasing” mean:

  • expensive inducements to incoming employers, who sometimes withdraw from the locality once they have reaped maximum benefit from the incentives they are given;
  • that the best of the new jobs thus created often go to incoming outsiders rather than local residents (as indeed does the best local housing);
  • that incoming firms often continue to use their existing subcontractors from other localities, thus creating little new local employment;
  • that this approach tends to perpetuate local vulnerability to economic decisions taken elsewhere
  • and that, even if it does succeed in creating some new jobs, bringing in new outside employers cannot create enough local jobs to solve the locality’s problem.

In the last few years, therefore, increasing numbers of localities have begun to encourage the creation of genuinely local initiatives to organize local work to meet local needs with local resources. Many local authorities throughout the industrialized countries have set up investment funds and loan funds, economic development units, and enterprise agencies for this purpose, and have introduced new purchasing policies that favour local enterprises.

A good example has been the Homegrown Economy project in the city of St Paul, Minnesota (David Morris, The New City-States, Institute For Local Self-Reliance). Under this project, as described by the Mayor’s office, “job creation remains an important goal, but the project broadens the focus by emphasizing the most efficient management of all local resources. Its goal is to extract the maximum value from the community’s human, natural and technological resources. Its aggregate results will be significant increases in local wealth, added employment, a more diverse and resilient economic base, increased citizen efficacy, and a self-reliant orientation among St Paul’s institutions.”

In supporting new enterprises, emphasis is given to local ownership, diversifying the local economy, direct benefit to the local community in terms of the products and services offered, and other criteria related to local economic self-reliance. A local fund to provide local venture capital at rates of return lower than the prevailing market rates has been supported by the investment portfolios of a group of local insurance companies—which recognize that they have a direct economic stake in their own economy—as has a revolving fund to provide loans to businesses that meet the Homegrown Economy criteria.

One aspect of 21st-century economic development must be a systematic approach to local economic development on “homegrown economy” lines. This will involve campaigns and constructive action by local people in all types of local areas—urban, rural, and mixed rural/urban. It will mean working out in each locality:

  • ways in which a greater proportion of local needs can be met by local work using local resources;
  • ways in which a greater proportion of local income can be encouraged to circulate locally (instead of leaking out of the local economy), in order to generate local work and local economic activity;
  • ways in which a greater proportion of local savings of all kinds can be channelled into local investments or loans, in order to contribute to local economic development. The financial aspects are further discussed later in this chapter and in Chapters 9 to 12. In non-financial terms
  • more self-reliant local economic development will involve many households and many neighbourhoods becoming places where goods and services are produced by the residents for themselves and one another; and
  • in most districts and cities, counties and regions, it will involve a degree of local import substitution, i.e. some replacement by locally produced goods and services of goods and services now coming in from outside.

This will affect the production and distribution of food and energy, patterns of industry and employment, the role of education in the local community, planning and housing, and many other aspects of economic life.

Take energy as an example. Increasing numbers of households and organizations will be able to limit and even reduce their dependency on external sources of heat, light and power by adopting modem conservation methods and by supplying some of their own energy needs themselves, e.g. by the use of heat pumps or solar panels.

Modern decentralizing energy technologies will enable cities and other local communities to do the same. Possibilities include combined heat and power (CHP); using urban waste as fuel; and—a North American example from a predominantly rural district— paying otherwise unemployed people to cut wood from otherwise unused local woodlots for use as fuel in a small local power station, so reducing both the outflow of local money spent on electricity from a nuclear power station in a neighbouring province, and the cost of paying benefits to unemployed local people.

One need, then, is for in-depth studies of the economics of local decentralization. In the case just mentioned, nuclear engineers and their economists can produce calculations, based on their assumptions of relevance and their criteria of efficiency, to show that local energy production is “uneconomic”. But, from the perspective of the local people, using criteria which relate to the efficiency of the local economy considered as a whole, it can equally convincingly be shown that local dependence on external energy sources is uneconomic. It all depends on the perspective. In the 21st-century economy the local perspective must be preferred, or at least given equal weight.

Another need is to identify existing obstacles, prohibitions and discriminations against greater local economic self-reliance, and campaign for their removal. Examples will include planning procedures, and subsidies and incentives of many kinds, which now favour large nationally based organizations against small local enterprises—for example hypermarkets against small local shops.

Investing in Local Self-Reliance

Local economic development requires investment in the locality. Is this to come from outside or from within the locality itself? An integrated approach, involving a combination of the two, is desirable. But each presents a serious problem, which leaves a dilemma to be resolved. Reliance on outside commercial investment to stimulate local development has an inevitable consequence. The outside investment has to earn a return, in the form of money paid out in future years from the locality to the outside world. This means that regular flows of new money have to be brought into the locality to match the money being paid out, and this requires an increase in exports out of the locality in order to generate the new outside earnings. So new external investment inevitably makes a locality more dependent than it was before on earnings from products and services exported to the outside world—as well as usually increasing its dependence on employment created and controlled from outside. And this is precisely not what self-reliant development is about.

To avoid this problem, outside investment in local economic development must be made in a form which requires no new export earnings to service it or pay it back—in other words, external investment must be made either as a gift or grant to the local economy, or as “immigrant” investment in the sense that neither the investment itself nor the earnings from it will subsequently be taken out of the local economy but will be spent and reinvested within it.

The nature of the problem can be seen more clearly if we look at external investment in a Third World country’s development. In this case, external loans and investments have to be serviced and repaid in foreign exchange. By their nature, therefore, they cannot be used to reduce the recipient country’s dependence on foreign exchange earnings. They have at least to generate the extra foreign exchange needed to service and repay them. The imposition of a necessity of that kind is the reverse of self-reliant development.

Self-reliant development involves producing homegrown substitutes for imports, which reduces the need to earn foreign exchange. In the case of a locality, foreign exchange is not involved. So what is happening is not quite so obvious. But the principle is exactly the same. External commercial investment cannot be used to enable a locality to achieve a significant degree of economic delinking from the larger national economy of which it is part. And that is what more self-reliant local development is about. However, there is also a problem about a strictly self-reliant approach to local economic development. That would mean relying wholly on locally generated capital for the investment in local productive capacity that is needed to make import substitution possible. But the very places where this approach is most necessary are likely to be those where local capital is least available and where local investment facilities are least developed. The local mobilization of local savings on the required scale may be difficult without outside help.

So there seems to be a dilemma—either investment in dependency-generating development based on export-dependent growth, or no investment in local development at all. How is this to be resolved? It can only be resolved by one form or another of socially directed investment.

Socially directed investment in local self-reliance is investment in the capacities of local people, to enable them to do more for themselves and one another. In other words, it is investment to create local social wealth. Conventional economic investment aims to create a direct financial return for the investor. In socially directed investment, the investor is concerned primarily with non-financial objectives rather than with maximum financial return. The need for new opportunities for people to direct their savings into socially benign enterprises and projects was discussed in Chapter 4. Investment in self-reliant local development is one example of socially valuable investment into which people and organizations might wish to direct their funds, if given the opportunity.

Some of the potential sources of socially directed investment in local economic self-reliance are outside the local economy. Others are within it. Potential external sources include agencies of national government. An example might be a national health department mounting a programme of expenditure on local public health and health promotion that will genuinely enable a locality to become less dependent on nationally supported health services in future years.

Potential internal sources include local residents and local organizations, including local government agencies. There are many ways in which they might be prepared to invest some of their money to develop and improve their own locality if the facilities existed for doing so, rather than investing it in ways that mainly benefit other places. And experience shows that poor people, especially in Third World countries, are prepared to save—through credit unions or similar co-operative types of savings institutions—for investment in their own economic future, if they are given opportunities to do so.

An important task for the 1990s is to develop the concepts and practicalities of socially directed investment in local self-reliance, including:

  • new priorities for national government spending on local programmes, and
  • new financial facilities for channelling local savings into local investment.

The Third Sector

The importance of socially directed investment in local economic development is connected with the fact that the local economy is largely a socio-economy. A third, socio-economic, sector plays a vital part in the local economy, alongside the commercial (or “private”) sector and the government (or “public”) sector. This third sector consists of large numbers of small enterprises, many of which have mixed social, environmental and economic objectives. (Some people call this the informal sector, in contrast to a formal sector defined as consisting of large commercial and government enterprises and organizations. But it should not be confused with the unpaid activities of the informal economy more strictly defined as in Chapter 4, although it does interlock with them at many points.)

The socio-economic dimension of the local economy cuts across one of the assumptions underlying today’s conventional economic thinking—the assumption that there is a clear divide between the economic and social aspects of life. Economic policies and activities are supposed to be concerned with wealth creation, and social policies and activities are supposed to involve wealth consumption. From this it is argued that economic wealth-creating activities must be given priority over social welfare-creating but wealth-consuming activities. From this in turn it is argued that, if the needs of the poor are to be met, the demands of the rich—the “wealth-creators”— must be given priority over them.

An important conceptual task for the 1990s is to unravel the web of metaphysical confusion and mystification that business and financial interests have woven around the notions of wealth creation and wealth consumption. The fact is that the nearer one comes to the realities of actual people’s lives, the more artificial the distinction between the economic and social aspects becomes. It is obviously artificial within the household economy. But it is nearly as difficult to sustain it at the local level of the economy, especially in urban priority areas and other disadvantaged localities. As noted in Chapter 2, in such places the need for improved housing, health, education, job prospects, and incomes, and above all an improvement in the capacity and confidence of local people to do more for themselves, is clearly a single constellation of need. It is not a collection of distinct and separate needs to be met in distinct and separate ways, some of them economic and some social.

The practicalities of this comprehensive—or, as some would call it, “holistic”—approach to local economic development were explored at a New Economics Foundation conference on “Converging Local Initiatives” in July 1987. Among our conclusions were that it was becoming increasingly important:

  • to provide enabling, rather than dependency-reinforcing, forms of local support and incentives for family care and community initiatives;
  • to encourage community architecture, housing associations, health initiatives, information centres, education initiatives, and leisure initiatives—each for their own sake but also as possible starting points for a wider range of grass-roots community initiatives on which local communities can be built;
  • to encourage community initiatives in recycling, conservation, city farms, horticulture and energy saving, as steps towards developing more resourceful and conserving communities;
  • to enable policy-makers and professionals to help community groups with local projects that cut across sectoral boundaries (employment, health, housing, leisure, etc.);
  • to develop techniques of social accounting and social audit in order to measure the benefits produced and the costs saved by community businesses and other local community initiatives;
  • to evolve an effective financial and administrative framework for supporting community initiatives;
  • to shift the emphasis in public sector social spending from programmes that deliver dependency-reinforcing services to programmes which enable local communities to meet more of their own needs;
  • to adapt the structures and procedures of central and local government to their increasingly important functions as enablers of community enterprises and initiatives;
  • to expand the role of the voluntary sector, including churches and charities, in local regeneration;
  • to enable trades unions to play a positive role in community initiatives;
  • to develop management education for community enterprises and initiatives, recognizing the crucial role of social entrepreneurs whose enterprise is committed not to making money for themselves but to creating social wealth.

Each of these needs is a need for social investment, or—to put it another way—for investment in the local socio-economy.

The Economic Role of Local Government

In the 21st century the role of local government in the local economy should be comparable to that of national government in the national economy. This will contrast with today’s situation, where the national government has responsibility for all local economic matters and local government is responsible only for specific functions delegated to it. The economic role of local government must be to provide a context which will enable local economic activity to be more self-reliant and more conserving. As part of this enabling role, local government should foster more self-reliant household and neighbourhood economies. Just as individual consumers and savers (see Chapter 4) should have more opportunity to channel their money into support of causes they favour, so democratically elected local authorities should be expected to use the collective purchasing power of local people to foster the local economy.

It is wrong, as under the Thatcher government in Britain and as proposed for the European single market in 1992, for national and supranational authorities to prevent local authorities from acting thus in the local economic interest if they wish to do so. Indeed, local authorities should be positively encouraged to contract out to local community-based enterprises the delivery of its services to the communities concerned. “Community contracting” of this kind will often be preferable to commercialization (commonly miscalled “privatization”) as an alternative to the delivery of local authority services by public service employees.

As part of its local framework, the enabling and conserving economy of the 21st century will need an appropriately designed and coherent system of local taxation, expenditure, and finance. This is one of the topics discussed in Chapters 9 to 12, but the principles on which it should be based include the following:

  • local government should not depend heavily on grant-in-aid from the national (or, in the case of the European Community, supranational) government; functions should be distributed between national and local government so as to enable local government authorities on average to raise all the expenditure they need;
  • local government authorities should develop new methods of financing their expenditure, by local taxation, local borrowing and other forms of local financing based on new or existing financial institutions;
  • the national government should make some redistribution of the national income from richer to poorer localities;
  • built into these arrangements should be provisions which provide local economies with a degree of shelter from the full rigours of national (and international) competition and give some encouragement to the meeting of local needs by local work and the use of local resources.

In Chapter 7 I suggest that the third and fourth of these principles should be applied in the international economy too, as a basis for free and fair trading relationships, and for a redistribution of income, between different nations. Study is needed of the feasibility of doing this by levying a uniform international tax on imports and on exchanges of currency—thus discriminating uniformly against import/export transactions—and by distributing the proceeds of this tax to all countries on a per capita basis. But at the local level a uniform, nationally administered import tax—as a basis for free and fair trading relationships, and for redistributing income, between the constituent local economies of a national economy—would hardly be feasible in the absence of local customs barriers.

So what arrangements could provide local economies with a uniform degree of built-in protection against competition from outside, and of built-in discrimination in favour of locally produced goods and services? This is an important question for clarification during the 1990s. Local taxes, local public spending programmes, local banking and local investing agencies, and perhaps even local currencies or quasi-currencies—e.g. for use in local payments to and from the local government authority—may all contribute to the answer, as is suggested in Chapters 9 to 12.

Other Actors in the Local Economy

Meanwhile, there is much that other actors in the local economy can do:

  • Local workers can express a preference for local work.
  • Local consumers can press the companies and shops from whom they buy to employ local people, to prefer local suppliers and generally to make sure that they put as much money into circulation in the local economy as they take out.
  • Local companies and other organizations can voluntarily adopt employment and purchasing policies that have these results, and they can publish information about it.
  • Local savers can seek ways to invest locally.
  • Local volunteers in a whole variety of fields can work and campaign for local resources of all kinds to be used—and conserved—more effectively.

Throughout the local economy, social choice in favour of local workers and local products and local services can modify strict financial maximization as the main criterion for economic decisions. The developments outlined in Chapter 4 under the headings “purposeful consumers” and “purposeful savers” will make it easier for local individuals, and therefore also for local organizations, to express their local preferences in this way.

Cities and Countryside

Finally, the accepted relationship between urban and rural economies and their development must be seriously questioned in the 1990s (see David Cadman and Geoffrey Payne (eds.): The Living City, Routledge, 1989, based on the proceedings of a conference organized by the New Economics Foundation).

Since cities first came into existence they have dominated the countryside and sucked wealth out of it. During the industrial age their economic, as well as political, predominance has grown. Following the industrialized world’s example, Third World countries have sought economic progress by favouring urban at the expense of rural development.

The resulting displacement of population has helped to create today’s urban and rural crises in the Third World, at the same time as the waning of the industrial mass-production economy has created today’s urban crisis in the West.

The conventional economic approach to city and countryside, to urban and rural development, will have to change. Paradoxical as it may seem, solutions to today’s urban problems may depend on a new, more positive approach to development in rural localities, in industrialized no less than Third World countries. In industrialized countries the economic, social and cultural conditions of “rural idiocy” to which Marx drew attention in the 19th century are now disappearing, as a result of modem technologies and better communication and access to information.

It is urban idiocy that is now becoming harder to endure, as cities become less pleasant and less economic places to live in and work in, and as city people become more conscious of their exile from the real world of earth and sky and seasons, and of soil and plants and living creatures, to which human beings belong. And yet financial resources—and therefore physical resources—continue to be channelled into economically unsustainable cities, especially capital cities, to keep the political, professional, managerial, financial and other white-collar elites working there, and to increase the already excessive property values and traffic congestion there.

The full economic and social costs of this badly need to be documented. Documenting them will help to open up a new prospect for the 21stcentury. This will be for a greening and villaging of the cities from which the old industrial jobs have gone, and a further shift of population out to country towns and rural areas. More self-reliant, more ecologically conserving, cities will then be able to evolve, accompanied by more diversified development of rural economies, based on manufacturing, services, information and leisure occupations, as well as food production.

For many Third World countries the need for a similar shift in development priorities and for a new urban/rural balance is even more pressing. A viable long-term future for many of today’s already over-crowded and rapidly growing Third World cities will largely depend on giving priority to effective rural development, and making it more attractive for people to live in rural areas instead of swamping the cities.

Notes and References

  1. My perceptions of what now needs to be done to establish local economies as economies in their own right have been influenced by, among other things:
  • working with David Cadman for the E.E.C. and O.E.C.D. in 1985 on finance for local employment initiatives;
  • organizing a conference for the New Economics Foundation in July 1987 on converging local initiatives (see New Economics, Winter 1988);
  • participating in the World Health Organization’s recent work on healthy public policies and in the first U.K. Healthy Cities conference in March 1988; and
  • chairing an international working group on rural and urban development at a conference organized by the World Futures Studies Federation and the Chinese government in Beijing in September 1988.

It would be possible to fill several books with notes and references on the various issues discussed in this chapter. So what follows is very selective.

  • For background, the chapter on “Local Economic Regeneration and Cooperation” in Paul Ekins (ed.) The Living Economy, RKP, 1986, and the relevant chapters in Guy Dauncey, After the Crash, Greenprint, 1988, are valuable.
  • Ward Morehouse (ed.). Building Sustainable Communities, Bootstrap, New York, 1989, deals with specific aspects of “third sector” development.
  • My paper on “The Economics of Local Recovery” for The Other Economic Summit in 1986 (obtainable from New Economics Foundation), my article on “How the Cities Can Finance New Enterprise” in Lloyds Bank Review, July 1986, and index references to “local economy” in Future Work are also relevant.
  1. David Morris, The New City-States, Institute for Local Self-Reliance, Washington, 1982, stimulated my own thinking at that time, has been playing a major role in the St Paul “homegrown economy” project.

3 David Cadman and Geoffrey Payne (eds.). The Living City, Routledge, 1989, based on the proceedings of a conference organized by the New Economics Foundation, is relevant.

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