Extension Communications
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11/8/99
Contacts:
Mark Edelman, Extension Economics, (515) 294-3000, x1edelma@exnet.iastate.edu
Del Marks, Extension Communication Systems, (515) 294-9807,
dkmarks@iastate.edu
PLAIN ECONOMIC SENSE
For release Nov. 8, 1999
Column 388
What Makes Rural Communities Grow?
By Mark A. Edelman
Extension Public Policy Economist
Iowa State University Extension to Communities
A recent USDA analysis reviewed 35 academic studies that identified 24 factors that may affect rural economic growth. Each of the factors represents a partial story about the process of economic growth and development. Knowing the role of these factors might potentially help community leaders gauge whether the current is running with or against them. To consistently evaluate the various factors, USDA economists used a sophisticated regression analysis to determine whether relationships existed between the earnings growth for nation's 2,346 nonmetro counties on data from 1979 to 1989. Here is what they found.
Positive Factors of Rural County Growth include retirement destinations, right to work laws, high school attainment in workforce, education spending per pupil, interstate interchanges in the county, commercial airport within 50 miles, climate quality, and certain industry structure.
Consumer demand and amenities associated with retirement destination counties caused 4.5 percent more earnings in these counties compared to other counties.
Economic growth was greater in counties with a more-educated population. A difference of 10 percent in high school completion rates among adults was associated with a difference of 3.3 percent in total earnings growth.
Greater public education expenditures were conducive to higher earnings growth. An additional $1,000 per pupil per year in expenditures was associated with an additional 3.8 percent in county earnings growth.
Counties that had an airport with scheduled passenger service within 50 miles experienced 3.4 percent more earnings growth.
Access to interstate highway interchanges contributed to earnings growth in rural areas. Each such interchange was associated with 0.42 percent in additional growth.
Industry structure was an important factor in county earnings growth. Counties experienced greater earnings growth if they had higher concentrations of employment in transport services, real estate, hotels, miscellaneous business services , educational services, or state and local government.
Negative Factors of Growth in Rural Counties included higher wage bases and transfer payments.
Earnings growth rates were significantly lower in areas with higher wage levels. A 10 percent difference in earnings per job was associated with a 2.3 percent difference in total earnings growth over ten years. This simply means that there is less opportunity for more rapid wage increases percentage wise if the county is at a higher wage scale than at a lower wage scale. In addition, the higher wage scale acts as a deterrent to new businesses coming in.
Somewhat unexpected by the analysts was a negative relationship between transfer payments and earnings growth. An additional $100 in transfer payments per capita was associated with a 1.6 percentage reduction in cumulative earnings growth. Perhaps this unexpected impact was due in part to the farm crisis of the 1980s because those counties with higher transfer payments would likely be associated with counties having a high proportion of senior citizens, welfare recipients and farmers.
Also unexpected was a negative relationship between earnings growth for counties with small businesses as the primary source of goods-producing businesses. Earnings growth was lower in counties where a higher percentage of the goods-producing businesses were small (fewer than 20 employees) and independent. A county could expect a reduction of 1.1 percent in earnings growth over the decade if 80 percent instead of 70 percent of the goods-producing businesses were small independent businesses.
Variables with No Impact on Growth in Rural Counties included size of urban population in the county or size of population of a nearby metro counties, presence of an airport in the county, labor force participation, population aged 25 to 64, college completion rate, high school dropout rate, local tax level, liberal branch banking laws, and topography.
Perhaps most surprising in this category was the level of local taxes. Basically the study concludes that higher tax counties are equally able to attract earnings growth as counties with lower local taxes. Perhaps as many firms are looking for access to quality services, sound infrastructure and bond financing options as there are firms looking for low tax rates to the exclusion of local services.
Also surprising to me was the lack urban and metro population sizes. Perhaps a different variable like distance to a metro county would have shown a positive relationship similar to the presence of a commercial airport within 50 miles.
Finally, it is important to note that all the variables analyzed explained about 40 percent of the variation in earnings growth across the nonmetro counties. This means that specific local strategies, strengths, leadership, and timing as well as less factors and chance account for most of the earnings growth in rural communities. Having favorable circumstances does not necessarily ensure strong economic growth.
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