Three Papers on Rural · PDF fileThree Papers on Rural Development ... urban and rural areas. ... Given their small population, even small flows out of the rural counties would have

Three Paperson Rural Development

David Freshwater

November 2000Staff Paper 00-14

About the Author

David Freshwater is a Professor in the Department of Agricultural Economics and in the Martin Schoolof Public Administration and Public Policy at the University of Kentucky. Dr. Freshwater is also

Program Manager for the TVA Rural Studies Program at the University of Kentucky.

Staff papers are distributed by TVA Rural Studies as part of its effort to improve the informationavailable to rural decision makers. Each staff paper reflects the research and opinions of the authors.

Research papers are published without going through a formal review process and TVA Rural Studiesneither endorses nor disavows any opinions in these papers.

All staff and contractor papers are working papers and can be found on the TVA Rural Studies websitehttp://www.rural.org/publications/reports.html.

Three Papers on Rural Development

PrefaceThe three papers assembled in this

publication were written for three differentinternational conferences held in the month ofJune 2000. At each event, I was invited toprovide a North American perspective on ruraldevelopment to a primarily Europeanconference audience. While there is someoverlap in the papers, for the most part theyapproach the problem of rural developmentfrom different perspectives. The first paper,presented in Potsdam, Germany, is mainlyfocused on employment prospects in ruralareas; the second, presented in Sophia,Bulgaria, provides more of an historical reviewof rural policy, and looks at what can beexpected from policy in the future. The thirdpaper, presented at a conference in Aberdeen,Scotland, looks at how the new economy haschanged production opportunities for ruralareas and, in the process, made much oftraditional rural policy obsolete. Together, theyprovide a context for thinking aboutdevelopment prospects for rural places in theindustrialized world, and the role ofgovernmental development policy.

At each conference, a number of keyissues either surfaced or lay just beneath thediscussions. The first was the changing role ofagriculture in the rural economy. Just as inNorth America, Europeans are facing thereality that farming can no longer provideemployment for the numbers of people it didin the past. In those regions of Europe wheresmall farms still predominate, this is causingimportant local adjustment problems. As aresult, the role of agriculture in society and theeconomy is receiving considerable attention. Asecond issue is the dilemma of uneven growthwithin Europe, especially between Westernand Central/Eastern Europe. The main policydilemma is the difficulty of absorbing a largelow-skill pool of labor that is concentrated onfarms in the rural areas of Eastern Europe.Only two options seem possible—either jobswill have to be created where these people

currently reside, or ways to accommodate largescale migration will have to be developed. Thisis not a problem unlike that faced by theUnited States in the 1950s. Historically, largemigratory flows from the rural South to theurban North were accommodated byexpanding manufacturing employment in bothurban and rural areas. At the time, the UnitedStates and global markets for manufacturedgoods were able to absorb these workers. Now,however, urban manufacturing, both in Europeand North America, has little absorptivecapacity because production technology haschanged in ways that reduce the need forunskilled labor. Similarly, rural manufacturingis facing increased competitive pressures fromfirms in developing nations where labor costsare an order of magnitude lower. And so, bothcontinents must also develop a new solutionfor rural areas with an excess supply of low-skill labor.

In Europe, all of these issues arecomplicated by the fact that the various nationstates are still the way people view thecontinent. Differences in language, culture,and values make adjustment much harder than,say, within the United States. But as NorthAmerica moves to a continental trading andproduction structure, some of the sameproblems of labor force rigidities and flows areappearing. On both continents, a centralquestion is how do national governmentsrespond to these changes in ways that protectthe interests of the various members of society.

While no solutions appeared from thediscussions at these conferences, at least inEurope, the problem has been recognized asbeing serious, both within the academiccommunity and by different levels ofgovernment. By contrast, in North America,the most widely held belief is that marketforces will bring about a new equilibriumwithout any significant role for public policy.For rural areas, this is an important topicbecause the availability of employmentopportunities is necessary if they are to survive.


TVA Rural Studies Program / Staff Paper 00-14 David Freshwater, November 20002

Paper One:The Promotion of Employment and Economic Development1

1 Prepared for Rural21. Potsdam, Germany. June 4-8, 2000.

Sustainable development is generallydiscussed in terms of environmentalconsiderations, but from a rural communityperspective, sustainable development mustaddress how the people of the communitygenerate the income to maintain their rurallifestyle. In those instances where employmentis considered as part of sustainabilitydiscussions, it is too often thought of in staticterms—jobs that will last. But the reality ofboth modern rural and urban life is thateconomic conditions rapidly change, and so adiscussion of sustainable employment has to beconducted in a dynamic context wheredifferent types of employment evolve aseconomic conditions change. While marketsignals alone can, in principle, provide theinformation and the conditions for this type ofdynamic process, the argument of the paper isthat the nature of rural areas makes it unlikelyfor markets alone to allow sustainableemployment; so there is an important role forgovernment policy to help define adevelopment path for rural places that willallow the residents to contribute to the largersociety, and to do so while remaining in ruralareas.

The Failure of ConvergenceSince the mid-1990s, economists in the

developed nations of the world have spentconsiderable time trying to determine whysome countries have experienced lower rates ofunemployment than others (Andriessen;Commission of the European Communities).These differences in unemployment rates havepersisted (Figure 1) despite greater degrees ofglobal integration through more open tradepolicies and the creation of a much more open

global capital market. Macroeconomists andtrade theorists are hard pressed to explain thepersistence of unemployment rate differentialsin this environment because it seems to violatesome basic assumptions of economicsconcerning efficient market behavior and the"law of one price." Given enhanced factormobility the convergence of unemploymentrates among economies at similar levels ofdevelopment would seem to be an inevitableoutcome.

However, convergence of unemploymentrates does not seem to be taking place at a veryfast pace. To date, the main explanation thathas been advanced for the slow movement tomore uniform unemployment levels has beendifferences in government policy (OECD,1994a, 1994b, 1995a). Those countries withlower unemployment rates are thought to havemore flexible labor markets where wages canfluctuate, employers have greater ability tomodify the size of their work force without anymajor penalty, and there are fewer hidden costsfor employers in the form of payroll taxes andother restrictions on staffing.

There is, however, another explanationthat may be equally useful in understandingwhat has happened to employment numbers.It is the recognition that, for most people,labor markets are not international or nationalin scope, but are local. This is an unpleasantproposition for macroeconomists and tradetheorists because it means that one of the keyfactors of production is far less mobile thantheir models require if they are to behaveproperly. Limited worker mobility means thatlabor markets can be tight in some regions,and have an excess supply in others.



Figure 1: National Unemployment Rates

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First Quarter, 2000 unemployment rate



We see in Figure 2 that the state averageunemployment rate for Kentucky tracks withthe national average rate over the ten yearinterval, suggesting that variability in locallabor markets continues to be masked at thestate level. However if sub-state data are used adifferent picture is seen (Figure 3). Fayettecounty, a relatively large metropolitan countythat contains the city of Lexington, has anunemployment rate that is significantly lowerthan is found in the four smaller rural counties

that are also shown. These counties are allwithin a two hour drive of Fayette county andone, Lincoln, is close enough that some peoplealready commute to the Lexingtonmetropolitan area. In this environment of closeproximity, it is puzzling that we do not seemore labor flows and evidence of convergence.Given their small population, even small flowsout of the rural counties would have anoticeable effect on their unemployment rates.

Figure 2: U.S. and Kentucky Unemployment Rates

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A potential explanation is that the skillcomposition of many of those who areunemployed in the rural areas is low enough ordifferent enough from what is demanded inother areas that either commuting or movingwould not increase their income enough tomake it a rational decision. Rural low-skillindividuals who would earn the minimumwage may determine that commuting costs to

Lexington are too high, while higher costs forhousing and other living expenses inLexington eliminate any benefits from moving.The implication is that, while the relevantlabor market may well be national or global inscope for some individuals with high valueskills, for most low-skill people their labormarket is not much larger than the communitythey reside in.

Figure 3: Selected County Unemployment Rates

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Consequently, national unemploymentrates mask considerable variability inemployment prospects for people withdifferent skills and who are located in differentplaces. We know that where information costsand transaction costs are high, relative to themarket value of the commodity, trade isrestricted. For example, unskilled workers in asmall town in Kentucky may lack the resourcesto identify jobs in another part of the state, andeven if a job was recognized, they wouldcertainly have a hard time assembling thefunds to allow relocation. Beyond thesignificant direct financial outlays, there arealso the very real costs of leaving one’sbirthplace, family and friends, and assimilatinginto a different environment. Although wemay observe what are clearly large outflows ofpeople from high unemployment areas, theseadjustments are rarely enough to equilibrateunemployment rates.Immobility beyond the local labor market isclearly the case for most people in rural areas.There are, however, significant exceptions tothis rule. In many rural parts of the UnitedStates, there has been a large influx ofHispanic workers from Mexico and CentralAmerica in the last decade. These workershave lower formal skills than much of theindigenous labor force, yet they have almostalways found work, often in occupations thatthe local population found undesirable. Thishas led to a phenomenon of high levels ofunemployment among the domesticpopulation of low-skill workers, and high ratesof employment among low-skill immigrantworkers who have traveled thousands of milesto take jobs that pay low wages. If nothingelse, the existence of this situation makes itclear that labor markets do not equilibrate aseasily or quickly as economists typicallyassume, and that local labor markets areconnected to the larger economy.

An obvious explanation is that theeconomies of the United States and the LatinAmerican countries are at such differentdevelopment and income levels that thesituations of the two groups of workers are notcomparable. For the immigrants, low wages inthe United States provide far more opportunityfor income and advancement than are availablein their home country, so it is rational for thesepeople to travel large distances to takeadvantage of them. At the same time, for rural

Americans, the change in well-beingassociated with moving to take a low wage jobis small compared to the costs of relocation, sothey remain unemployed. The majordifferences in opportunity cost between twogroups who superficially appear to be in thesame position can explain an otherwiseperverse situation.

Nevertheless, the notion that for mostpeople labor markets are subnational in natureis important for both understanding currentconditions in different areas and for designingpublic policy. It suggests that a part of ourrural development effort should focus on eitherimproving the workings of local labor marketsby improving information, enhancingemployment opportunities, or by providingpeople with the resources to relocate fromareas of limited employment potential to placeswhere work is plentiful.

Employment and Rural DevelopmentEnhancing employment opportunity in

rural areas is a necessary condition foreconomic development to occur (OECD,1995b). While economic development involvesmore than job creation, it is clear that, in theabsence of employment opportunity,sustainable economic development is notpossible. Communities may be able to improvethe degree of social cohesion, they may be ableto improve the appearance of the localenvironment, and they may be able to developboth their physical infrastructure and the levelof human capital, but if jobs do not exist, it isunlikely that the community will survive. Inthe short-term, government transfer paymentsmay provide an infusion of income that allowsa local economy to exist, but without a strongeconomic base that generates earnings fromoutside the community, the chances of long-term development are minimal.

In industrialized nations where localeconomies are integrated components of thenational economy and national policies reachcitizens in all parts of the nation, it isreasonable to ask whether specific attentionshould be paid to rural areas, rather thansimply relying upon national programs. Whilethe problems of rural people and places are ingeneral the same as those in urban areas, thereare important differences that justify a specificgeographic focus.



Rural areas differ from national areas in anumber of ways. Rural areas have lowerlabor force participation rates, which issymptomatic of their smaller degree ofintegration into the broader economy.Residents of rural areas also tend to be lesswell protected by the social safety net andless subject to employment protection thantheir urban counterparts. Rural labormarkets tend to be thin, with a limitednumber of employers, and in many remoteareas the potential supply of workers is farin excess of feasible demand. Because ruralworkers are predominantly engaged in theproduction of low wage, low-skill tradablecommodities they are highly exposed tothe effects of globalization. But, becausethey have low-skill and education levelsrelative to urban workers, and there arefewer employment opportunities in ruralareas, many face a particularly severetransition to the global economy. (OECD,1995b, p.35)

Thus, a central issue in rural developmentpolicy for all levels of government—national,state, and local—is how can the chances toenhance employment be improved?Historically, rural development policy bynational governments has not had a strongdirect focus on enhancing employment.Instead, rural policy has tended to be definedin terms of either sector-based policy or interms of place-based policy. In the first case,governments provided support to some specificrural industries, most commonly agriculture, inthe expectation that enhancing the income ofthe sector would in turn create direct andindirect employment effects that would benefitthe rural populace. In addition to agriculture,the most common sectors for this type ofsupport were the other primary industries,forestry, fishing, and mining. To the extentthat these sectors were either only found, ormainly found, in rural areas, their supportimplicitly defined rural policy. For the secondtype of policy, governments identified specificplaces and provided resources to those placesto enhance their development in the belief thatby improving the infrastructure of thecommunity, or by providing tax concessions tofirms locating there, the level of economicactivity would increase and once againemployment opportunities would result. This

assistance could be justified in terms of effortsto stimulate "growth poles" or for social equityreasons, in the case of providing assistance tospecific communities that had fallen belowsome performance threshold, such as averagefamily income level or level of unemployment.

Industrial sector-based approaches have asignificant record of past success, but alsonotable failures (Bartik). However, they areless likely to be effective in the future.Traditional rural sectors, like agriculture andthe other resource-based industries, areshedding jobs and replacing labor with capital.In the process, they not only create less directemployment, but they also provide less indirectemployment because their industrializationreplaces linkages to the local rural economywith linkages to the larger regional or nationaleconomy as a source of inputs and markets.Similarly, low-skill manufacturing, which hasbecome a major source of rural employment inthe last fifty years, now faces competition fromfirms with even lower labor costs in developingcountries. As a result, place-based efforts toattract new business now face lower successrates, as firms increasingly consider foreign aswell as domestic sites. Even when attractionefforts are successful, they often lead to peoplefrom outside the community receiving a largeshare of the new jobs, because local workerslack the necessary skills, so the social oreconomic indicator that triggered therecruitment initiative is not affected.

This suggests that, instead of ruraldevelopment policy being structured in termsof helping places and sectors, it should beorganized as a way to help rural people(Winters). By ensuring that people haveappropriate skills, you ensure that they havethe best chance to lead a productive life and,by doing so, they can contribute to a ruralplace if they choose to reside there. Or, if theydetermine that their future lies in anotherplace, they leave the rural community with theskills to be successful somewhere else. Giventhe rapid pace of change in our economy, thenecessary skills are more likely to be defined interms of general knowledge that will allow theacquisition of more specific functional skills asmarkets dictate, than narrow technicalcredentials.

This suggests that policy to enhanceemployment opportunity in rural areas shouldemphasize the accumulation of human capital.



The changes we are seeing in the industrializedeconomies make it clear that the set of skills aperson has is a major determinant of how wellthey will live (Eberts and Montgomery;Gittelman and Howell). In the United Stateswhere unemployment rates are at record, ornear record lows, in most states there are stilllarge pockets of high unemployment whereworker skills are limited, mainly in rural areasand urban cores. In a decade of recordprosperity, we find that the real income andwealth of the least skilled portion of society hasdeclined, because they are unable to effectivelyparticipate in the economy.

The desirability of thinking about ruralpolicy in terms of enhancing workforce skills ishardly a novel idea. In 1974, well before theeffects described above had brought aboutsignificant changes in rural labor markets, RayMarshall noted, "... that economicdevelopment depends heavily upon the qualityof human resource development" (Marshall,p.174). His ideas have been echoed by otherstudies over the subsequent decades. (Bollmanand Bryden; Galston and Baehler; MDC;Rowley and Freshwater). Given theconsistency of the policy recommendations, itis hard to understand why we have failed tomake much progress in implementing thesuggestions. One explanation is that the rapidpace of structural change over recent decadeshas made it harder to define appropriatepolicy.

Structural Change in Rural EconomiesThe important changes taking place in

the economy are well known, and their impacton rural places is clear. They include:globalization, falling transport costs, rapidtechnological change, the shift frommanufacturing to services as the leading sectorin the industrialized world, and the explosivegrowth of modern telecommunications(Drucker; Wood). While all parts of oursociety are affected by these changes, ruralareas have an especially high level of exposure.Because rural places have always producedtradable commodities, like agriculturalproducts and manufactured goods, they havealways had a high degree of exposure tointernational trade. This exposure hasincreased as a result of lower trade barriers andfalling transport costs. For those ruralindustries that are efficient, the effect has been

an expansion of markets, but for many ruralindustries the result has been unpleasant, aslower cost foreign competition has drivendown revenue and, in many cases, capturedmarkets.

Rapid technological change has had theeffect of reducing the useful life of capitalinvestments and forcing firms to continuouslymodernize their operations to remaincompetitive. In this environment, it is harderfor firms with lower sales volume, or that aredistant from the source of innovations, toremain competitive. If a firm cannot rapidlyrecover its investment by selling large volumesof output in a short period of time, it may notgenerate the resources to make the next roundof investments to modernize its technology.Similarly, firms that are late adopters of atechnology because they are far away from itsorigin, face the dilemma of an increasinglyshorter time period before their productionprocesses become obsolete. For each newinnovation, the late adopters face a reducedtime interval to recover their investment costsand are thus more likely to fall behind and fail.Rural firms are more likely to face thesecircumstances than are urban firms becausethey are often smaller and are not as wellconnected to sources of innovation.

Over time, the industrialized economieshave evolved from an economic structure thatwas based upon primary industries, to onedominated by manufacturing and now, to onethat is led by the service sector. The result hasbeen a steady erosion in the importance ofrural places and a parallel rise in theimportance of urban centers (Figure 4). Notsurprisingly, over time the population hasshifted from being primarily rural to primarilyurban. Although a large minority of thepopulation remains in rural places, the majorityis found in urban centers. While services arethe largest single sector in urban and ruralplaces, the mix of service industries variesconsiderably between the two types of place.Both rural and urban communities haveconsumer services, such as, retail banking,restaurants and other forms of stores; personalservices like barbers, lawyers, and insuranceagents; and medical and educational facilities.

However, urban centers also haveadvanced producer service sectors, such as,engineering firms, financial specialists, andsoftware development firms that are rarely



found in rural places. Even for industries likebanking and medical care, the mix of activitiesvaries greatly between rural and urban places.In urban centers, bankers engage in retaillending but also in corporate finance, whileurban medical care involves research, as well asthe standard medical function of caring forpatients. In the case of hospitals, certain typesof advanced care are not available in ruralplaces because the volume of demand is toosmall.

While differences among urban and ruralfunction existed during the era whenmanufacturing was dominant, the generalassumption was that over time manufacturingfirms in a given sector migrated from urban torural areas, with initial stages of the productcycle taking place in urban areas, and laterstages in rural places. This provided ruralworkers and places with a stream of jobopportunities as the next round of firms lefturban places to fill the void left when theprevious round of rural firms declined.However, there is little evidence that a similarprocess is happening with advanced producerservices because they seem to require a largecritical mass of close physical linkages both toother firms in their industry and to supportingfirms in related industries (Coffey). As a result,there is less chance of rural places experiencingtrickle down benefits from the shift to aservice-based economy.

The final and most recent factor is therapid growth of advanced telecommunicationsand computer usage over the last decade. Theessential feature of all forms oftelecommunications, including the Internet, isthat they are network industries. In a networkindustry, the value of being part of the networkincreases as the number of people thatparticipate in the network increases. Forexample, fax machines were of limited value solong as they were so expensive that very fewpeople had one. Once they became cheaperand more people had one, they became muchmore valuable to all users because they couldbe used to communicate with a much larger

segment of the population. Thus, the value ofe-mail increases as more of the people youwant to communicate with have access to thesystem. Similarly, e-commerce becomes moreattractive as a business medium when morepeople and firms are Internet users.

However, the converse of the benefits of anetwork industry also holds. As a greater shareof the total population makes use of thenetwork, the cost to those remaining outsidethe structure increases. Individuals who eitherlack access to modern telecommunicationstechnology, or who are unable to use it, nowface a significant penalty in terms of theirchoices as consumers and in theiropportunities for employment. Over time, thesize of this penalty is likely to grow. Ruralresidents make up a larger share of this groupthan their population share would suggest. Asmodern telecommunications continues toevolve and dominate the way the way businessis conducted, employment opportunities forrural residents will be increasingly influencedby their access to the systems.

While differences among urban and ruralfunction existed during the era whenmanufacturing was dominant, the generalassumption was that over time manufacturingfirms in a given sector migrated from urban torural areas, with initial stages of the productcycle taking place in urban areas, and laterstages in rural places. This provided ruralworkers and places with a stream of jobopportunities as the next round of firms lefturban places to fill the void left when theprevious round of rural firms declined.However, there is little evidence that a similarprocess is happening with advanced producerservices because they seem to require a largecritical mass of close physical linkages both toother firms in their industry and to supportingfirms in related industries (Coffey). As a result,there is less chance of rural places experiencingtrickle down benefits from the shift to aservice-based economy.



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Figure 4: Changes In The Farm, Non-Farm Ruraland Urban Populations In Canada and The United States



The final and most recent factor is therapid growth of advanced telecommunicationsand computer usage over the last decade. Theessential feature of all forms oftelecommunications, including the Internet, isthat they are network industries. In a networkindustry, the value of being part of the networkincreases as the number of people thatparticipate in the network increases. Forexample, fax machines were of limited value solong as they were so expensive that very fewpeople had one. Once they became cheaperand more people had one, they became muchmore valuable to all users because they couldbe used to communicate with a much largersegment of the population. Thus, the value ofe-mail increases as more of the people youwant to communicate with have access to thesystem. Similarly, e-commerce becomes moreattractive as a business medium when morepeople and firms are Internet users.

However, the converse of the benefits of anetwork industry also holds. As a greater shareof the total population makes use of thenetwork, the cost to those remaining outsidethe structure increases. Individuals who eitherlack access to modern telecommunicationstechnology, or who are unable to use it, nowface a significant penalty in terms of theirchoices as consumers and in theiropportunities for employment. Over time, thesize of this penalty is likely to grow. Ruralresidents make up a larger share of this groupthan their population share would suggest. Asmodern telecommunications continues toevolve and dominate the way the way businessis conducted, employment opportunities forrural residents will be increasingly influencedby their access to the systems.

In particular, e-commerce will play a largerole in the future development of rural areas.The government of New Zealand has recentlycharacterized e-commerce as havingpotentially the same impact on the economy ofNew Zealand as the introduction of the freezership did in the nineteenth century. The freezership completely transformed New Zealand byproviding the opportunity for a remote ruralnation to ship its principal product—lamb—tothe rest of the world. In the same way, theadoption of the Internet is seen as providing atime and distance eliminating link that canallow companies in New Zealand to have

access to markets anywhere in the world(Ministry of Commerce).

The same effect holds for other ruralplaces. The advantages of e-commerce are thatsmall companies can be present in as manymarkets as large companies, without having tohave a physical presence; small companies canproduce efficiently even though each marketabsorbs only a few units of production; and theInternet provides a source of new ideas andinformation that may not be availableotherwise. However e-commerce is also athreat because it provides rural customers witha new set of suppliers who may be able toprovide a wider range of products, lower prices,and even faster delivery than traditional ruralbusinesses.

The critical question is how wellpositioned rural places, businesses, and peopleare to make use of the Internet. Access to theInternet requires, first, that the community hasan adequate telecommunications infrastructureand access to an Internet service provider. Inmany rural places, the local telephone switchmay not be capable of hosting fast Internetaccess, and local access may not be available.As the speed and complexity of Internetcommerce increases in the future, more ruralareas are likely to experience degradation intheir access because the physical limitations ofthe local telephone network will restrict thetypes of services they can obtain.

Secondly, access depends upon having acomputer and the skills to operate it, as well asthe financial means to pay for connectioncharges. While these costs are falling, they stillrepresent a major barrier for many ruralresidents, particularly the necessary level ofskill required for their use. For example, asrecently as 1996, fewer than one third ofresidents in rural areas of the southeasternUnited States knew how to operate a computerfor basic functions like word-processing, dataentry, or e-mail (Ilvento and Rupasingha).

The rapid evolution of the computersector provides a clear example of theimportance of learning basic skills that can beapplied in a variety of situations, rather thanreceiving narrow technical instruction.Computer skills that were in demand ten yearsago, such as computer operators and data andtext entry functions no longer exist, and thosetrained in these narrow areas are once againlooking for employment.



Differences In Rural ConditionsA major problem for all forms of rural

policy is the diversity of rural conditions.While it is accurate to describe rural places asgenerally lagging behind urban places in termsof indicators like levels of income, employmentrates, or education and skill levels, there arehuge variations among rural places, and somerural places perform better than do their urbancounterparts. In a very real sense, there isgreater homogeneity within the set of largeurban places in terms of the composition of thelocal economy and the characteristics of thepopulation. Small places, by contrast, differ asmuch from each other as they do from largeurban places.

In terms of income and skill levels ofworkers, there are also large regionalvariations. For example, in the United States,concentrations of workers with very low-skilllevels and correspondingly high rates ofpoverty and unemployment are now found in arelatively small number of specific parts of thecountry, compared to the extent they werethirty years ago. Over time, the number ofthese pockets has declined substantially, sothat all the places that remain are the mostintractable cases. This creates a painful policydilemma. As we would expect, earlierdevelopment policy appears to have had someimpact on those places that were in the bestrelative condition. But while this indicatesthere may in fact be a benefit from policyinterventions, the magnitude of the problemhas been reduced. Consequently, the perceivedburden on society at large from having under-utilized rural workers is smaller, so there is lesssupport from the general public for policyinterventions. Yet at a time when interest iswaning, those places that remain in povertywill require major infusions of assistancebecause their problems are so severe. Inaddition, because the number of rural poor isnow relatively smaller, they constitute a lesspowerful political force and their concerns canbe more easily ignored.

Employment OpportunitiesIn a society where computer skills are

increasingly a determining factor inemployment opportunities and earnings levels,the lack of computer knowledge and othertechnical skills is a critical barrier to economic

development (Wood; Wren). Historically,rural residents have been able to be productiveparts of society even when they had lowerlevels of formal education and fewer skills.Informal artisan skills were often morevaluable than formal education in primaryindustries and in many types of manufacturing.Piore and Sabel argued over a decade ago thattechnology has changed manufacturing in oneof two distinct ways: Either production hasbeen reorganized so that unskilled labor canperform most functions, making developingcountries candidates for production sites, orthe underlying technology has become sosophisticated that it can only be mastered bythose with strong formal education and asignificant amount of technical training.

These changes have limited employmentopportunities for much of the rural labor force.Other changes have also decreasedopportunities for those in rural areas withlimited qualifications. In the past,outmigration to urban areas was a potentialsolution. Historically, rural areas have been amajor source of labor for urban centersespecially as agriculture shed workers. Now,however, the lack of jobs for the unskilled inrural areas is matched by a similar shortage inurban places. Further, many of the lower skillurban jobs are now being filled by immigrantsfrom developing countries who are prepared towork for lower wages than are domesticworkers. As noted earlier, this is also becomingthe case in rural areas. Finally, mostopportunities for emigration to othercountries, which historically allowed asignificant outflow of rural workers, havedisappeared. Now immigration policies invirtually all countries allow only skilledapplicants to receive visas.

Another important factor is the changingnature of the employment relationship.Twenty years ago in North America, peoplestill believed that if they found a good first jobthere was a high probability they would remainwith that employer for the balance of theirwork life. Even if they experienced periods ofunemployment, they could still expect to berecalled to work when economic conditionsimproved. Currently there are few expectationsof lifelong employment in North America.Schools now counsel children to expect towork for at least six employers and in a diverserange of occupations during their time in the



labor force. To be successful in thisenvironment, labor market participants requirea strong formal education that prepares themfor continuous learning (Texeira).

Many rural workers do not have theseskills. This, and the combination of a thin localdemand for labor, only having job-specificskills that are either unwanted or in amplesupply, and an inability to effectively retoolbecause of a deficient general education, leavesworkers who lose their jobs in a position wherethey have limited prospects for reemployment.While this is a considerable problem forworkers of all ages, the plight of middle-agedworkers is particularly severe. Older workersmay be able to retire early and the young havethe possibility of learning additional skills thatcan lead to employment, but the middle-agedare less able to rely on either option.

Other significant factors in the nature ofwork are the increased use of contract ortemporary employees instead of permanentworkers, and the flattening of the managementhierarchy which eliminated many low levelmanagement positions. Both of these reducethe opportunity for direct employment in afirm, and the latter has the important effect oflimiting mobility within the firm. In the past, a"jobs ladder" existed where people began inentry level positions and over time acquired theexperience to move up the company hierarchy.Not only did this provide an individual withthe prospect of an improved standard of living,but it also allowed people to regularly enter thefirm at the lower levels. Now, there is a greatertendency to hire people for a given task andkeep them there, rather than to use "on the jobtraining" to facilitate promotion. An obviousconsequence is a reduction in the amount ofinformal job training carried out by firms.

This is especially significant in rural areasbecause there may be no other prospects forjob training beyond those provided by theemployer. In small and remote places,prospects for formal job training are limited.While the Internet may address some of theseproblems, there are many skills that requiremore direct contact during the training period.Over time, if workers with specific skillscannot be replaced, the health of the localeconomy is threatened because their servicesare no longer available to businesses, andfuture production may be limited.

Balancing Recruitment andEntrepreneurial Strategies in LocalDevelopment

Many rural development strategiesemphasize the recruitment of branch plants asa way to create jobs in a community. Varioustypes of assistance are provided to the companyas a means to attract it to the region. Critics ofthis process argue that it transfers public fundsto private companies and has little effect uponactual location decisions. Despite thesecriticisms, the practice remains widespreadbecause it results in a company coming to thecommunity with an existing set of markets,expertise in a specific production technology,and a large body of resources. For manycommunities, the potential opportunitiesprovided through recruitment are seen asexceeding the costs.

However, for recruitment to be aneffective development strategy, there should belong-term benefits to the local labor force interms of skill enhancement. Initially, a numberof the jobs may have to be filled by non-residents of the community rather than localpeople, but this may be necessary if these skillsare not available. Over time, the companyshould be willing to provide training for localworkers so they can fill the various positions.Similarly, recruited firms should be encouragedto develop local labor supply chains to the fullextent possible because this allows thecommunity to expand the range of benefitsfrom the firm.

Communities must be realistic in theirrecruitment actions. The nature of the productcycle is that firms become obsolete or locationsbecome unprofitable. This means thatrecruitment is an ongoing process. It is thisphenomenon that makes the effort to improvelabor force qualifications important. When arecruited firm leaves the community, if thehuman capital of the community has beenimproved during its tenure, then the chancesof finding a replacement enterprise or startinglocally owned businesses are improved.

The creation and expansion of locallybased businesses is the main alternative to therecruitment of firms from other areas. Locallybased businesses have the advantage of beingwithin the community, so the expense anduncertainty of recruitment is not required.They are also more likely to have developedlocal supply and marketing relationships, so



local linkages may be relatively more importantthan in the case of a recruited firm. It is alsowidely held that local businesses are less likelyto leave the community for another location.

However most locally based businessesare small, and very few can be expected togrow significantly. This limits theiremployment effect. In addition, few locallybased businesses add significant amounts ofnew human skills or new knowledge to thecommunity. Indeed, a major problem of alocally based development strategy is that ittends to be inward looking rather thanexternally focused. Locally based businesseshave to make major efforts to gain informationabout the larger economy, and the cost of suchefforts is often more than they can afford.

This suggests that a balance ofrecruitment and locally based development isimportant if employment opportunities are tobe expanded. Recruitment, when managedproperly, can provide access to new skills,technologies, and markets. Even if it entails aninflow of new residents, the communitybenefits from having a broader set of availableskills. By contrast, an indigenous businessapproach can help to stimulate linkages, andencourages residents to think aboutentrepreneurship as a potential career ratherthan seeing employment solely in terms ofworking for someone else.

Enhancing the Capacity of the LocalLabor Market

Incomplete information and hightransaction costs impede the functions of anymarket. In rural labor markets, these are majorproblems. Many small firms do not advertiseemployment opportunities widely and relyupon word of mouth to obtain workers. Whilethis is a low cost strategy, it may not providethe best match between employer requirementsand worker skills. The low population densityof rural places makes it less likely that workerswill happen upon a job without some moreformal means of communication. However,governments tend to provide less of a labormarket intermediation function in rural placesbecause the costs per worker are high due tolower population densities.

In a recent paper, it has been argued thatone of the reasons the U.S labor market hasperformed so well is the growth of thetemporary help industry (Katz and Kreuger).

These companies provide a number of services.The first is an obvious matching of workersand jobs. This reduces search costs for bothemployer and employee. Employment agenciescan also provide an efficient way for bothemployer and employee to screen each otherbefore entering a more permanent relationship.In addition, they can allow workers who wantpart time jobs to share work with otherindividuals who want part time jobs, whileproviding the employer with a full timeequivalent. Conversely, they can allow aworker who wants a full time job to work formultiple employers who each only require apart time employee. This can be especiallyimportant in a rural area where no employercan justify the full time employment of anindividual with a particular skill, but a numberof employers require someone with that skillfor efficient operation. Finally, employmentagencies facilitate the creation of a tieredemployment structure where core employeesobtain higher levels of wages and benefits andtemporary employees receive lower rates ofcompensation. This may be a significant wayto allow individuals with limited skills to gainaccess to employment that they wouldotherwise be excluded from.

Employment programs are too oftennarrowly conceived in terms of jobs, or wagelabor. Entrepreneurship or self-employmentinitiatives must be an important part of anyemployment oriented development strategy.While we know little about how one canmotivate a person to start and operate abusiness, it is clear that small business is a vitalpart of our economies and it may be moreimportant in rural areas as opportunities forrecruitment diminish. Agriculture, inparticular, provides an ideal training for othertypes of small business. Farmers are used tooperating their own firm, have higher thanaverage levels of wealth in most cases andpossess a broad range of applied skills. Thusareas with a large population of farmproprietors are particularly suitable for effortsto encourage entrepreneurship. By contrast,rural areas where the traditional industriesinvolved low-wage, low-skill labor, theinherent potential for entrepreneurship is morelimited.

Finally, an obvious way to enhance thefunctioning of rural labor markets is toimprove mobility. This can be as simple a



function as making information available aboutjob opportunities in other places, or it caninclude skill development programs andrelocation assistance to enable people to moveto another community and begin work. Inmany rural places, this type of assistance willbe necessary for markets to clear. Otherwise,excess labor will overhang the market,depressing earnings levels for all workers. Alow-level equilibrium is enforced because toomany people lack the information andresources to move. Only if local conditionsdecline to a point that the opportunity cost ofremaining in place is similar to that facingthose individuals in Mexico who move to therural United States, will unassisted mobilitytake place. However, waiting for this tohappen would imply a major decline in thelevel of development of the rural environment.A second obvious way to improve mobility isto ensure that people have the skills to beemployed elsewhere. This means that, at aminimum, they must have a strong basiceducation that will prepare them to learn thespecific skills appropriate to a new location.

ConclusionAt a national level in North America,

there is increased pressure to consolidateprograms in the name of efficiency ofadministration and a concern that havingmultiple programs leads to conflictingobjectives and strategies. There is also a beliefthat policies not universally available lead todistortions in market signals that hampereconomic development. While there is stillsome support for counter-cyclicalmacroeconomic policy, region- or territory-specific policy has little support.

Yet even unsophisticated data analysisshows that there are persistent differences inlevels of income and employment at thesubstate level that are similar in magnitude tothe differences that are causing concern at theinternational level. If the OECD is concernedthat liberalization and greater integration hasnot reduced differences in unemployment ratesamong nations where macroeconomic policydifferences are seen as explaining much of thedifferentials, should we not be concerned thatsimilar differences occur within nations wheremacroeconomic policies are by definitionconstant?

While national employment policiesprovide the basis for any rural employmentinitiatives, it is important that both nationalgovernments and lower level governmentsthink about specific types of rural policyinterventions. National policies by nature arebroad-brush approaches that cannot focus onthe specific needs of smaller rural places. Thismeans that a more focused approach isrequired. In particular, local governments canplay an important role in creating anenvironment in which national policies canwork more efficiently. This need not requirelarge resource commitments, as much as anunderstanding of what activities the nationalpolicies will support and the needs of thecommunity.

If it is accepted that, for a large portion ofthe local labor force, the relevant labor marketis small in size, then it makes sense to thinkabout local efforts to enhance both the way thelocal labor market functions, and to look forways to improve the types of employmentopportunities that are available to participants.Sustainable development in rural areas requiresthat we identify ways to improve the incomeprospects of rural residents, or there will surelybe continued outmigration.

The key challenge in designingemployment policy for rural areas is to developprograms that deal effectively with smallnumbers of people that seek employment in alabor market that is both thin andgeographically large. As one moves from placesin close proximity to an urban center to moreremote areas, this problem becomes larger.The search for policies must focus on ways toovercome this challenge. In this environment,increasing the flexibility of both the labor forceand of employment opportunities is a criticalconcern.

In addition, it is important that ruralemployment impacts be considered whenmaking other types of rural policy. While ruralresidents are the most directly concerned withwhat happens to the physical environment thatsurrounds them, they are increasingly subjectto national decisions on what constitutesacceptable levels of development. Thesedecisions are increasingly driven by an urbandesire to preserve both traditional rural cultureand a "natural" environment. In making thesedecisions, the impacts upon local ruraleconomies are typically not a central factor. If



rural people operated in a national labormarket, this might not be much of a problembecause their short-term losses might be easilyovercome through relocation. But as we haveseen, many rural people do not find relocationa low cost option, and so reductions in localemployment opportunities have a particularlyharsh effect.

Further, there is at times an inherentcontradiction between the effort to preservetraditional rural lifestyles that are based uponthe extraction of natural resources and thedesire to keep the natural environment intact.It is difficult to maintain logging and miningcommunities with cutting trees or extractingore as anything but museums. In this sense,the economic development options of ruralplaces are limited to protect national interestsin exactly the same way they are limited bydecisions to liberalize trade. In each case, thenational interest may be advanced, but itshould be recognized that some parts of thenation, often among the poorest, are bearing adisproportionate cost.

In an ever-evolving global economy,governments are not likely to be able toidentify specific growth poles, growthindustries, or skill gaps at a fine enoughgeographic scale to play an active role inmanaging labor markets. Instead, they maywant to focus on improving the functioning oflabor markets by improving information flowsabout jobs, supporting employer-based skilldevelopment programs, increasing the capacityof the educational system to foster life-longlearning skills by assuring that all students havea strong general education, and trying toensure that those with limited skills have anopportunity to earn an income. This will beparticularly important if current trends insocial welfare policy continue to distinguishbetween the deserving poor—those who havejobs—and the undeserving poor. For manyrural areas, this type of segmentation could beparticularly brutal, given the current limitedopportunities available to much of the ruralpopulace.



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Paper Two:The Evolution of Rural Policy and Agricultural Policy in North America2

2 Prepared for the World Bank conference on The Challenge of Rural Development in the EU AccessionProcess. Sofia, Bulgaria. June, 2000.

IntroductionThe broad objective of this paper is to

review the development of federal policyaffecting rural areas in Canada and the UnitedStates, and to assess its effects on ruralresidents. In doing this, the focus goes beyondpolicies that are explicitly rural in nature.Today, broader social policies are the majorfederal influence on rural areas in both nations.In part, this reflects the simple fact that theseprograms are where the vast bulk of federaloutlays occur, but it is also the case that theavailability of a set of basic social welfareprograms is a vital building block in the ruraldevelopment process.

Having set out the objective, it isimportant to recognize that in the federalsystems of government of Canada and theUnited States, the national level is only part ofthe picture, and that states and provinces areincreasingly playing a larger role in ruraldevelopment policy. Finally, it cannot beoveremphasized that successful ruraldevelopment is almost always a fundamentallylocal phenomenon. Ultimately, successful ruraldevelopment depends on local initiatives.

The salient geographic feature affectingearly forms of rural policy in North America isscale. The size of the landmass, and thecorresponding low population density andreliance on resource-based activities, imposeddevelopment problems distinct from those ofmost of Europe. The distance factor in land-extensive systems resulted in a differentdivision of labor between country and city thanwas the case in more land-intensive systems.Even today, communities in the hinterland ofurban areas face different problems from thosein frontier areas. Canada and the United Statesare similar countries in many respects. Both arelarge landmasses, with large portions of eachcountry having low population densities. Inboth nations, the vast majority of the

population is urban and the degree ofpopulation concentration in the largestmetropolitan areas is increasing. Similarly, anincreasing share of national economic activityis also taking place in urban areas.

The Economic Structure of Rural AreasVirtually every academic model of the

economic development process of nationssuggests a reduced role for agriculture in GDPas a primary indicator of economicdevelopment. While the absolute value ofagricultural production may continue toincrease, as might the value and volume ofagricultural exports, the significance ofagriculture as a source of employment and as apercentage of the national economy declines.In Canada and the United States this processhas occurred steadily over the twentiethcentury (Figure 1).

The development process in NorthAmerica has essentially been one ofurbanization and more recently,suburbanization. In this process, populationand economic activity have moved to urbancenters. However, what is striking aboutFigure 1 is the fact that the aggregate ruralpopulation has stayed fairly constant in bothcountries. Net population growth has been inurban places, while in rural areas the decline inthe farm population has been offset by anincrease in rural people who are not engaged inagriculture. The shift in rural populationreflects the growth of nonfarm employmentopportunities in manufacturing, the servicesector (trade, tourism, and various supportfunctions), and government and education.

As a result, the occupational compositionof rural North America, on average, does notlook that much different from the distributionof occupations found in urban North America.Although there is a somewhat bigger share ofthe labor force employed in the primary sector



(agriculture, forestry, fishing, etc.), the bulk ofemployment in both the urban and the ruralcase is in the tertiary sector (services andgovernment) and in the secondary sector(manufacturing). Thus, from a nationalperspective the path of economic developmentseems to occur as a single process that has hada uniform impact on urban and rural space

However, while from the national level,development appears to entail a simple declinein the relative role of agriculture and a parallelset of transformations of both rural and urbaneconomies, the nature of development is morecomplex when examined at the regional andlocal level. While the economic structure ofrural areas may, in aggregate, look like urbanareas, it is clear that no specific rural area looksanything like any urban area. Further, whileagriculture plays a steadily declining role in thenational economy, it remains the majoreconomic engine in a fairly large part of ruralNorth America. A band of rural territorystretching from the prairie provinces ofCanada (Manitoba, Saskatchewan andAlberta) down through the central portion ofthe United States into Texas and Oklahomastill depends upon agriculture as its majorsource of economic activity (Figure 2). Thisregion roughly corresponds to the area namedby Joel Garreau as the "Empty Quarter," todescribe the low population density, thedisproportionately small number of large urbancenters, and the relative scarcity of economicactivity (Garreau).

In most other rural parts of the twocountries, agriculture still remains the primaryland use. Indeed, there was at least as muchland in crops in the year 2000 as there was in1900, but only a small percentage of thepopulation and local income is farm related.Yet these non-agricultural rural places are alsodifferent in important ways from urbancenters. The most striking economic differenceis the degree of specialization. A necessarycharacteristic for the economic viability of ruralplaces is a high degree of specialization.Because the local population is small, the onlyway to reach minimum efficient scale in almostany activity in rural areas is by dedicating alarge share of the local labor force to one ortwo industries. As a result, rural places arehighly dependent upon trade, because theyproduce a relatively small proportion of thegoods and services they consume. While it is

tempting to think of rural residents as beingrelatively self-sufficient, this is far from thecase. In reality, any rural place is less self-sufficient than a large urban center, in that asmaller proportion of the items and services itutilizes are produced locally. Consequently,rural places are at least as dependent uponstable trade flows as are urban centers.

In both Canada and the United States,rural development policy has historically beenformulated as agricultural policy. Up throughapproximately the first half of the twentiethcentury, this was an effective developmentapproach. A large portion of the ruralpopulation was either directly engaged inagriculture or was found in small communitiesthat supported agriculture. Within largegeographic regions, farms were fairly uniformin size and in the mix of products theyproduced, had strong links to the localcommunity. This meant that developmentprograms, focusing on agricultural research,enhancing rural transportation systems,stabilizing the prices of a few key commodities,and providing credit to farmers, had a prettypositive and uniform impact, both directly onfarmers and indirectly on the balance of therural residents.

An important consequence of these earlieragricultural development efforts has been amajor change in the structure of agriculture.New technologies have encouraged the growthof farm size and specialization. Creditprograms and improved transportationfacilitated these adjustments. As a result, thenumber of people involved in agriculture hasdeclined, links to local communities haveweakened, specialization has taken place and,in some regions of the country, less productivefarmland has been abandoned. At the sametime, manufacturing expanded into rural areas,providing rural people with alternativeemployment opportunity. The result is thattraditional farm-based development programsno longer have any meaningful effect on mostrural areas and to a considerable degree havelittle real impact on a large share of theremaining farms. As a result, agriculturaldevelopment policy is no longer an effectiverural development policy.

An Overview of Rural PolicyThere are many notions of what rural

development involves. Among those that are



commonly articulated are a prosperousagricultural sector, stronger integration of ruralplaces with urban centers, the preservation oftraditional rural culture and protection of thenatural environment, and equal access for ruralresidents to the goods and services enjoyed byurban residents. Each of these notions hasbeen an integral part of rural developmentconcepts in North America, yet none of themindividually offers an adequate definition ofrural development. Yet, in some sense, each isan important part of a complete definition ofrural development.

Early Experience with Rural PolicyPrior to the beginning of the twentieth

century, the majority of North Americans livedin rural places, so almost all developmentpolicy was really rural policy. Now, the vastmajority of North Americans live in urbancenters and very little national developmentpolicy has an explicitly rural orientation. Thischange took place over an extended period oftime in both countries. Four distinct phasescan be traced in the evolution of NorthAmerican rural policy (Figure 3). Although allfour policy regimes have been experienced inCanada and the United States, they did nottake place at exactly the same time in eachcountry, nor did each regime last the samelength of time.

In each country, the first period of ruralpolicy consisted of land settlement and theexpansion of natural resource exports toEurope. In both countries, this interval startedat the time of initial European settlement andoccupied the first phase of nation-building.The most important characteristic of thisphase was the effort to settle the land, that is,to ensure that no other group or nation wouldbe able to claim part of the territory for itself.This involved policies that provided farms toimmigrants and required the development ofcanals, railroads, and roads to improvetransportation systems. From the start, thedevelopment of rural North America washighly export oriented. This phase of policycontinued until roughly the late nineteenthcentury in the United States, and the earlytwentieth century in Canada.

A second stage, which can be described asthe era of scientific agriculture, began with theclosing of the open frontier, when the majorityof the potentially arable land had been brought

into production. At this time, there was arecognition that any further increases inagricultural output would have to come frommore intensive use of land, rather thanexpanding the land base. This led to thecreation of government supported researchcenters to enhance agricultural productivity,the creation of agricultural colleges anduniversities, and the development of anagricultural extension service to disseminatenew scientific methods to farmers. In theUnited States, this interest in scientificagriculture began after the Civil War with thecreation of the Land Grant Universities andexpanded funding for agricultural research. InCanada, the process started somewhat later,but it was well in place by 1900. As in the firststage of rural policy, agriculture was still thecentral focus because farmers still made up thedominant share of the rural population. Butthe form of rural policy had significantlychanged. Rather than agriculture being themain means for financing the development ofthe rest of the nation, it was now a sector thatrequired external investment to allow it toincrease its productivity. During this secondphase, rural areas were displaced by urban areasas places where most economic activity tookplace, and, subsequently, where the bulk of thepopulation lived.

The second period can be thought of aslosing its dominant status with the onset of theGreat Depression in the 1930s. The collapse ofthe farm sector in both countries made it clearthat rural development could no longer relysolely upon agriculture. This led to a search forways to diversify rural places. The chosenmeans was to introduce manufacturing intorural economies that had previously reliedsolely upon agriculture. The first coherenteffort in this respect took place in Mississippithrough the Balance Agriculture with Industryprogram that began in the mid-1930s. Thestate government made a concerted effort torecruit manufacturing firms from the northernpart of the United States to relocate in ruralMississippi. The advantages they promisedwere cheap land, cheap labor, financialassistance and limited government regulation.The intent was to provide rural communitieswith alternative sources of income thatsupplemented earnings from agriculture. Soonother parts of the southern United States, and



then other rural areas throughout thecontinent, followed Mississippi's lead.

A second important feature of the thirdstage of development policy was theintroduction of broad social welfare programs.For the first time, the federal governmentprovided pensions and other forms ofassistance to the general populace. This safetynet provided greater security to all residents ofthe country, irrespective of where they lived. Itcan be seen as a major shift in policy approachbecause the programs are not driven bygeography or economic sector, but by thestatus of people. Over time, both the types ofassistance and the level of support increased,reducing the necessity of depending uponfamily support and improving the quality oflife of urban and rural residents. However, theimpact in rural areas was arguably greaterbecause few rural residents were able to receivethe types of employer paid benefits that wereprovided to workers in large urban firms.

During the first two policy stages,agriculture had been the dominant economicsector and more importantly agricultureprovided a mechanism for the modernizationof the country at large. Following theDepression and World War II, themodernization process took place andagriculture became a fairly minor factor interms of total national production. This thirdstage lasted through the 1970s and carried intothe early 1980s. It was marked by majoroutmigration from agriculture, and increaseddependence upon manufacturing as a majorsource of rural income and employment.

After 1950, the economies of rural areasbecame increasingly diverse. Not only did theeconomic base of rural places change frombeing mainly driven by agriculture, but thenature agriculture also changed. In particular,farmers became more specialized, so theinterests of farmers diverged. However, themain change was that the local economy ofmost rural places became dependent uponsomething other than agriculture. By the1970s, important sectors in rural NorthAmerica included agriculture, manufacturing,tourism, government installations, retirementdestination places, and mining and timbercommunities. This led to a fragmentation ofrural interests. As the diversity of rural areasincreased, it became increasingly difficult todevelop a coherent national rural policy.

At the same time, the urban interest inrural places became a more significant policyfactor. Urban residents increasingly saw whatwent on in rural areas as having an impactupon them. They became increasinglyconcerned with the quality of the ruralenvironment. This growing concern has led tothe fourth phase of rural policy (Swanson andFreshwater). Rural policy now is mainly drivenby urban considerations, not rural ones. Oneimportant consequence has been an increase inthe role of government in rural places. In thepast, government acted to enhance theeconomic development of rural areas, now, inmany ways, it constrains economicdevelopment to meet urban objectives.

By the late 1960s, agriculture had beendisplaced by manufacturing as the dominanteconomic sector in rural areas. However, in the1970s, manufacturing began to face increasedcompetitive pressures from foreign firms. Inaddition, increased income and wealth inurban areas and an enhanced ability to spendleisure time in rural places have led to a greaterconcern with the quality of the ruralenvironment. Urban people began to valuerural places not for the production they couldprovide, but more importantly for theiresthetics. This led to a new type of rural policythat was not concerned with what went on inrural areas in terms of maximizing production,but rather was interested in the characteristicsof rural places. In the last few years, the notionof development has taken on new meaning. Itis becoming a richer concept embracing bothenvironmental and economic values.Preservation of the environment, both naturaland cultural, has become an essential aspect ofdevelopment. Where a focus on jobs was oncethe primary criterion by which developmentprojects were considered, now a broader set ofobjectives is taken into account.

An important aspect of the evolution ofrural policy has been a steadily increasing rolefor government. In the first phase, rural areasare seen as the main source of funds fordevelopment activity. In this era, governmentpolicy was designed to maximize revenue fromthe use of rural resources by facilitatingexports. In the second phase, governmentbegins to make significant investments inincreasing the productivity of rural areas,particularly farming. In the third phrase, policyexpands to introduce new types of economic



activity in rural areas and to provide ruralpeople with access to a greater set of socialservices. The final phase has seen governmenttake on an even larger role in the ruraleconomy, where it now establishes a muchmore complex set of rules under whichdevelopment can take place. Governmentintervention has been an inherent force in theemergence of the post-1945 rural economicdiversity. Public attention has been focused onthe degree of government involvement inagricultural production and trade, butagriculture is fairly typical in terms of theinfluence of policy on rural economic activity.

One of the more obvious aspects ofgovernment influence is through the types ofinfrastructure that are available. Thegovernment has had a long involvement withtransportation facilities, but it also influencesthe location of power lines, oil and gas lines,and sets standards for water and air quality. Inboth countries, the development of a federallyfunded highway system clearly helped thosecommunities it passed by, while harming thosethat were not served. But even those placesthat have access to an interstate highwayexperienced disruption, as economic activityabandoned downtowns for more desirablelocations near interstate ramps.

The most recent example of the influenceof public policy on the modern rural economyis the development of telecommunicationsregulation. Access to the Internet is now anecessary feature for modern life andcommerce. To date, many smaller places havebeen able to keep up in the race to adopt newertechnologies, but a lot have not. Astelecommunications technology evolves, itbecomes increasingly unlikely that most ruralareas will be able to afford to keep up. Highspeed access is predicated on proximity tophysical infrastructure that is expensive toinstall and maintain, whether it is a centralswitch, a cable system head-end, or a highcapacity wireless tower. Low density places,especially, poorer places, are inherentlyunattractive places to make investments thathave short useful half lives. A deregulatedtelecommunications system also has littleincentive to make investments for the socialgood, if it harms profit margins. Thus, federalgovernment decisions to abandon principles ofuniversal service have clear implications forwho has access to telecommunications.

Further, efforts in the United States by stategovernments to ensure that hospitals, schools,and libraries in rural regions have access to theInternet have often had an unintendedunfortunate effect on business access.Typically, the state has negotiated low costaccess for these institutions, but with theprovision that no "for-profit" firms will be ableto use the infrastructure. As a result, demandfor advanced services has been fragmented, andthe cost of establishing a parallel network tocarry commercial traffic is often more than thelocal private sector can afford.

Refocusing Rural Policy in the Twenty-first Century

The process of rural structural change hasled to the fundamental question of what, ifanything, do you do for the people who resideoutside the growing urban areas? Historically,rural development policy has been of nationalinterest in Canada and the United Statesbecause rural people were, if not a majority, alarge minority of the population. Moreimportantly, as long as agriculture was thedominant rural industry, there was at least theappearance of a common bond among therural populace that created an obvious vehiclefor delivering policy. Now however, in manyparts of each country, the rural population is aminor share of state or provincial populationsand the nature of rural economies at the locallevel is so fragmented that the old policymechanisms are not effective.

This has led to an argument that inindustrialized nations, where local economiesare integrated components of the nationaleconomy, and national policies reach citizensin all parts of the nation, there is no longer anyreason to have specific programs for rural areasbecause national programs can adequately serveall the legitimate needs of the population,whether they are rural or urban residents.However, while the problems of rural peopleand places are in general the same as those inurban areas, there are important differencesthat justify a specific focus.

Rural areas differ from national areas in anumber of ways. Rural areas have lowerlabor force participation rates which issymptomatic of their smaller degree ofintegration into the broader economy.Residents of rural areas also tend to be



less well protected by the social safety netand less subject to employment protectionthan their urban counterparts. Rural labormarkets tend to be thin with a limitednumber of employers and in many remoteareas the potential supply of workers is farin excess of feasible demand. Becauserural workers are predominantly engagedin the production of low wage, low-skilltradable commodities, they are highlyexposed to the effects of globalization.But, because they have low-skill andeducation levels relative to urban workers,and there are fewer employmentopportunities in rural areas, many face aparticularly severe transition to the globaleconomy. (OECD, p.35)

This quote suggests that a central issue inrural development policy for all levels ofgovernment, national, state, and local is—howcan the chances to enhance employment beimproved? Historically, rural developmentpolicy by national governments has not had astrong direct focus on enhancing employment.Instead, rural policy in North America hastended to be defined in terms of either sector-based policy or in terms of place-based policy.In the first case, governments provided supportto some specific rural industries, mostcommonly agriculture, in the expectation thatenhancing the sector would in turn createdirect and indirect employment effects thatwould benefit the rural populace. In additionto agriculture, the most common sectors forthis type of support were forestry, fishing, andmining. To the extent that these sectors wereeither only found, or mainly found, in ruralareas, their support implicitly became ruralpolicy.

For the second type of policy,governments identified specific places andprovided resources to those places to enhancetheir development, in the belief that byimproving the infrastructure of thecommunity, or by providing tax concessions,there would be a resulting increase ineconomic activity, and once again employmentopportunities would result. This could bejustified in terms of efforts to stimulate"growth poles," or for social equity reasons inthe case of providing assistance to specificcommunities that had fallen below some

performance threshold, such as average familyincome level or level of unemployment.

Industrial sector-based approaches have asignificant record of past success, but alsonotable failures. However, they are less likelyto be effective in the future. Traditional ruralsectors, like agriculture and the other resource-based industries, are shedding jobs andreplacing labor with capital. In the process,they not only create less direct employment butthey also provide less indirect employmentbecause their industrialization replaces linkagesto the local rural economy with linkages to thelarger regional or national economy as a sourceof inputs and markets. In a paralleldevelopment, place-based efforts to attract newbusiness now face lower success rates as firmsincreasingly consider foreign as well asdomestic sites (Glasmeier and Conway). Now,even when attraction efforts are successful,they often lead to people from outside thecommunity receiving a large share of the newjobs because local workers lack the necessaryskills, so the social or economic indicator thattriggered the policy initiative is not affected.

An alternative approach is that instead ofrural development policy being structured interms of helping places and sectors, it shouldbe organized as a way to help rural people(Winters). By ensuring that people haveappropriate skills, you ensure that they havethe best chance to lead a productive life and bydoing so, they can contribute to a rural place, ifthey choose to reside there. Or, if theydetermine that their future lies in anotherplace, they leave the rural community with theskills to be successful somewhere else.

This suggests that policy to enhanceemployment opportunity in rural areas shouldemphasize the accumulation of human capital.The changes we are seeing in the industrializedeconomies make it clear that the set of skills aperson has are major determinants of how wellthey will live (MDC, Winter). In the UnitedStates, where unemployment rates are atrecord or near record lows in most states, thereare large pockets of unemployment, mainly inrural areas and urban cores, where worker skillsare limited. In a decade of record prosperity,we find that the real income and wealth of theleast skilled portion of society has declined,because they are unable to effectivelyparticipate in the economy.



While it is clear that past policyapproaches no longer fit current conditions inmost rural places, identifying new rural policieshas not been an easy task. The diversity ofrural conditions, combined with largegeographic area and low population density inrural areas requires that each place have analmost independent approach. But this type ofcomplex approach is not possible to implementas a national policy. In practice, only a smallnumber of programs can be effectivelymanaged by any government agency, so thechallenge is to design a limited set of programsthat can be combined in a number of ways toaddress rural development needs in differentplaces.

Issues In Implementing Rural PoliciesDespite the great similarities and the

increasing degree of economic integrationbetween the two nations, striking differencesremain. These are most obvious in cultural andpolitical institutions. In particular, theirapproaches to rural development have differedconsiderably. In a rhetorical sense, if we askwhich country has the most rural policy, theanswer is simple—the United States. Canadahas rarely had any explicit rural policies, whilethe United States has a considerable body oflegislation that is explicitly rural. But how doyou measure rural policy? Is it by the amountof legislation on the books, whether or not it isimplemented? Is it by the amount of federaldollars spent in rural areas? Is it by the vitalityof rural areas, assuming that federal influencehas a bearing on vitality? Is it by the level ofoutmigration?

All of these measures provide someevidence, but none are adequate. Ultimately,we are not interested in whether a country hasmore or less policy, but in the quality of life ofrural residents, both in an absolute sense andrelative to urban residents. To address thisissue, we must look beyond just countingexplicitly rural policies and examine broaderpolicy questions, such as:

• How do general economic policies affectrural areas? What is the effect of monetarypolicy, banking regulations, minimum wagelaws and other policies on rural regions?

• Is the set of general economic and socialprograms adequately meeting the place-specific needs of rural areas? Do broad socialprograms meet rural needs? For example,Canada's health policy guarantees universalaccess to health care in the sense that anindividual’s income and wealth does not affectthe level of service they receive. But place does,as there is no requirement that services beextended to particular areas.

• If place-specific policies are desirable, is itinstitutionally possible to develop effectiveplace-specific rural programs? Even if wewould like to provide additional support torural areas, do we know how to do it?

Three OECD Policy RegimesApproaches to political economy, among

OECD countries have been clustered in threebroad groupings, or "policy regimes," termedneoclassical, corporatist, and social democratic,respectively. This classification follows GostaEpsing-Andersen's comparative analysis ofsocial policy systems in the OECD (Epsing-Andersen, 1990). This analysis is extended toinclude strategies of intervention ornonintervention in market economies.

Neoclassical regimes emphasize theprimacy of social choice through unhinderedmarket mechanisms in the realm of both socialpolicy and the economy. A citizen's rights tosocial and economic well-being in neoclassicalregimes are very closely tied to the sale of hisor her labor as a commodity. Social programbenefits are either tied to past labor marketperformance (e.g., U.S. social securitypayments) or emphasize needs tests for accessto program benefits. Benefits for the "neediest"tend towards minimal payments for restrictedperiods of time. Compared to other OECDcountries, the neoclassical regimes restrain thecoordinating and innovating role ofgovernment in the general economy. There isan instinct that unfettered markets are theoptimal vehicle for optimizing collectiveeconomic performance and well-being. Theneoclassical regimes include the United States,Canada, Australia, New Zealand, and theUnited Kingdom.

Corporatist policy regimes emphasize aclose integration of economy and society.Citizens' access to a minimum of social and



economic well-being are a matter of rightsrather than being conditional ondemonstrating severe need. Benefits are moregenerous, cover a wider range of activities, andare available for longer intervals of time.Beyond minimum benefits, there aregradations in benefits that are linked to anindividual's rank in the occupational hierarchy.Benefits also tend to be calculated in terms ofthe perceived rights of family units rather thanto individual rights.

Epsing-Andersen attributes much of thecorporatist approach to a preindustrialconservative political heritage. Society isviewed as a hierarchy of different groupsintegrated into the social organism. Theconverse of hierarchy is a sense of noblesseoblige. Salient examples of corporatistapproaches to political economy are Germany,France, and Japan. The corporatist approachextends beyond individual social welfare rightsto a sense of the obligation and rationality ofgovernments as a means to coordinate thenational economy and promote nationalcomparative advantage. It can also involves amore cooperative relation between labor andmanagement than is the case in laissez-fairesystems.

Social democratic regimes predicate socialpolicy on an egalitarian system of rights ofhigh levels to social benefits that areindependent of market performance. Incontrast to corporatist systems, benefits tend tobe allocated to individuals rather than families:child support systems, for example, will bedirected towards high day care payments thatencourage women's participation in the laborforce and whose levels are not linked to thespouse's earnings. As Epsing-Anderson pointsout, high levels of social program benefitsimply a high degree of governmentintervention intended to maintain highemployment rates. State-owned enterprisesplay an important role in the economy. Thesocial democratic regimes include Sweden,Norway, Finland, Holland, and Austria.

Comparative Fiscal FederalismThe political systems of OECD countries

adopt a wide variety of arrangements fordividing political power between national,regional, and local levels of society. Systems ofdivision of power do not coincide with, andcannot be subsumed under, the type of

economic policy regime. For example, twocorporatist policy regimes, Germany andFrance, stand at opposite poles of thedecentralization versus centralizationcontinuum. The neoclassical regime in theUnited Kingdom is highly centralist while itsmajor offspring, the United States, Canada,and Australia, have all adopted federalistpolitical institutions.

In parallel, the distinction betweenunitary and federalist political systems does notcoincide with, and cannot be subsumed under,the distinction between land-intensive andland-extensive rural resource systems. Longdistances do not necessarily result in adecentralization of authority via federalism,nor is a compact scale necessarily associatedwith a unitary system. Sweden and Norwayhave unitary political systems while Germanyand Switzerland have adopted federal systemswith a highly decentralized federal division ofpowers.

The baseline measure of the distributionof power between different levels ofgovernment is the relative amounts of moneyspent at national, regional, and local levelsrespectively. An initial estimate of thesedistribution patterns in OECD countries ispresented in Ehrensaft and Freshwater (1991).The ratios of national level to total civiliangovernment expenditures demonstrate both 1)a clustering of federal systems at lower levels ofnational to total expenditures than is seen forunitary states; and 2) within federal systems, agreater degree of national centralization in theUnited States and Australia compared toGermany, Canada, and Switzerland.

Another layer of complexity is imposedon the analysis by the fact that there is also notan overlapping of division of powers between1) legislative, executive, and judiciary powerswithin national and state/provincialgovernments, and 2) the distribution of federalpowers between national, state, and localgovernments. The Swiss federation follows theU.S. model of dividing legislative andexecutive authority, but is on the opposite endof the spectrum, in terms of centralizationversus decentralization, from the UnitedStates. The parliamentary systems of Canadaand Australia, which follow the Britishprecedent of combining legislative, executive,and judiciary power in a prime minister andcollectively responsible cabinet, also stand at



opposite ends of division of powers betweennational, provincial, and local governments.

With respect to rural development issues,it is relatively easier to address rural issues incorporatist and social democratic regimes thanin neoclassical ones. The corporatist and socialdemocratic regimes attach as much importanceto groups as to individuals in the interfacebetween markets and society. A system thatspecifies group rights by occupation or bysocial class is more readily inclined to assigngroup rights by place than is a market-orientedregime.

The political culture in neoclassicalsystems, with its emphasis on individual rightsand welfare, has a more difficult time dealingwith issues of place. The European notion thatrural society constitutes a "cultural landscape"that is a highly valued part of a nation'sheritage, and therefore, deserves a high degreeof policy support, is a hard sell in NorthAmerica. The North American reaction is tolament the decline of rural areas but to view itas an inexorable result of market forces.

Many policy-makers and analysts considerprograms that facilitate out-migration by ruralindividuals towards higher standards of livingas legitimate and principal strands of ruraldevelopment policy. This is the perspective, forexample, expressed in Luther Tweeten andGeorge Brinkman's important book,Micropolitan Development: rural developmentinvolves improving the well-being of ruralpeople, wherever they eventually reside(Tweeten and Brinkman, 1976:4). For somerural communities, there are few prospects forviability and outmigration may be the bestavailable option. In this case, we should labelthis accurately and honestly as closing downcommunities, not "rural development."

Short of a fundamental shift in the NorthAmerican political economy regime, a keyissue in rural development is how toaccomplish the difficult but necessary task ofassigning a higher degree of legitimacy toplaces within a neoclassical system. The mostviable route for addressing place issues inNorth America is on the basis of equal accessto opportunities. Almost three out of tenNorth American citizens reside in rural andsmall town areas where they have less access toopportunities because of the poor access ofrural communities to the programs andfacilities that foster economic development.

Redress in the form of rural developmentpolicy is necessary to ensure that this thirty percent of the population can fully participate inthe national economy and make the greatestcontribution to national productivity.

A second proposition is that support fromurban-based environmental movements islikely to emerge as an important component ofNorth American political coalitions thattransform rural needs into place-oriented ruralpolicies (Swanson and Freshwater). The otherside of the coin of a market-oriented,individualistic political culture is a highpropensity to form social movements andpressure groups to advance perceivedindividual rights. It is likely that in the future,one strand in the creation of North Americanrural development policy will further developfrom the urban movements which demandedthe conservation of forest land as national andstate/provincial parks. As urbanization andincome levels increase, more people feel a needand a right to enjoy the amenities of nature.

In summary, Canada and the UnitedStates exhibit modest but significant policydifferences in their approaches to public policy.While both are clearly market-oriented, orneoclassical regimes, Canada has a larger rolefor the state and is a more typical federalsystem when compared to other OECDnations. Despite these differences there aregreater similarities than differences.

Social Programs and RuralDevelopment

All policies are not created equal. Thedegree of importance which governmentsattach to competing issues can be measuredalong three dimensions. The first is rhetoric orthe extent to which government talks about anissue, including speeches by politicians,resolutions, legislative proposals and programdevelopments. The second measure is outlayswhich show how the government spends itsscarce resources indicating true priorities. Thisincludes both direct outlays and taxexpenditures or foregone tax receipts. The finalmeasure is the extent of mandates by thefederal government which compel other partiesto assist rural areas. In a sense, they are a formof indirect expenditure where the governmentrequires others to act on its behalf.

All three measures are useful indicators ofthe importance of rural issues. The first is a



measure of moral suasion and indicatesawareness of rural issues by politicians. It isgenerally a leading indicator of the degree ofrural concern, since politicians typically test thewater for support before allocating funds.Because rhetoric is inexpensive and politicalissues appear and vanish continuously, it is nota very strong indicator, nor is it one thatnecessarily reflects longer term reality.

The importance of rhetoric in rural policydiscussions is best seen through the power ofthe perceived link between agricultural andrural policy beginning in the 1970s. For morethan two decades the Rural DevelopmentDivision of the Economic Research Service ofthe USDA, along with the majority of theuniversity community, engaged in ruraldevelopment research in Canada and theUnited States and argued that farm policy wasno longer an adequate rural developmentpolicy. At the end of the 1980s, it appearedthat continuous repetition had made animpact. The 1990 Farm Bill contained a titlethat included far more rural policy than hadbeen seen since the 1970s and members ofCongress actually appeared to have becomecomfortable talking about the need for a ruralpolicy that was something other than farmpolicy. Similarly, in the early 1990s theCanadian government created a RuralSecretariat within Agriculture Canada that wasto coordinate the activities of all ministrieswhere they influenced rural people and places,and the speech from the throne in 1992explicitly identified rural development as asignificant issue for the government. It trulyappeared that perhaps inertia had finally beenovercome and there was a brighter future forrural areas and rural policy.

By the end of the 1990s, despite clearevidence to the contrary, farm policy was onceagain being described as rural developmentpolicy (Stauber), a new farm crisis hadreturned agriculture to the politicians’attention, and the desire to help a favoredconstituency led to a revision of policy.Members of Congress once again rely uponthe metaphor of agriculture when they speak ofrural, the initiatives of the Rural Secretariathave been greatly diminished, and the RuralDevelopment Division of the EconomicResearch Service has been eliminated. Yetrural policy issues are at least as pressing asbefore, and changes in public policy including

reductions in social safety nets and greatertrade liberalization are exposing rural residentsin Canada and the United States to far morepressures than are commonly acknowledged.

Outlays are traditionally seen as the primeexpression of government interest. If ruralprograms receive increases in their spendingauthority, then the government has clearlydetermined that there are needs that must beaddressed. Outlays per se, however, say nothingabout the effectiveness of the support. Anotherproblem with simply looking at aggregateoutlays is the possibility of considerable year-to-year, or regional, variability in what themoney is spent on and who receives it. If theopportunities for funding are fleeting and varyby category, then communities are unlikely todevelop coherent development strategies.Instead, they will simply take whatever moneyis available, even if it doesn’t really fit theirneeds, simply because that is what is availableat the time.

Finally, governments can influence theactions and outlays of other parties. This isbecoming a more important feature as claimson the government increase, and asdiscretionary revenues decline. Governmentscan require that particular actions be takenthrough mandates or by linking assistance inone program area to behavior in other areas. Ina balance sheet sense, for a particular group orregion, government funds can be thought of asreceipts, while government mandates arerequired expenditures. Either approach canfoster economic development.

A full assessment of the supply of ruralpolicies requires looking at how these threeforces have evolved over time in the context ofchanging rural conditions and differingallocations of responsibility. When one movesbeyond the analysis of rhetoric to the analysisof action, direct outlay data is the dimensionwhich is relatively easiest to investigate. Atpresent the United States, but not Canada,maintains a comprehensive set of data at thecounty level. These data are the basis for allsub-state analysis. However even in the UnitedStates, the national interest in collecting dataat this level is shrinking. For most nationalpurposes, data only has to be accurate at thestate or provincial scale, which can be achievedwith far smaller samples. Erosion of this database will make it impossible to continue to



examine differences in the performance ofsmall areas, especially rural ones.

Social programs are by far the largestexpenditure category in the national budgets ofboth the United States and Canada. Whenexpenditures by all levels of government areconsidered, Canada spends an estimated 13per cent of its GNP on social programs,including education, compared to 11 per centfor the United States (Brooks, 1989). Theamount of social program money flowing intorural areas in both countries is far greater thanfrom any other single source.

In terms of the analytic framework, socialpolicy would qualify as a "maintenance" policy,as compared to a development policy. Theexistence of these programs, however, can alsobe viewed as valuable social infrastructureexpenditure that increases the willingness andability of people to stay in rural areas and worktowards their transformation. From a strictneoclassical perspective, of course, thesepolicies can also be viewed as an impedimentto the free flow of people to areas where jobsare available.

National Differences in Social Programs Canada not only spends a modestlyhigher proportion of its national product onsocial programs than the United States, but italso allocates expenditures differently. It is notonly important to measure how much money isspent, but also how the money is spent. Oneexamination of how social program funds aretargeted in OECD countries suggests thatthere are modest differences between Canadaand the United States in the targeting of socialprograms that reinforces the differences inspending levels. (Epsing-Andersen, 1990)Epsing-Andersen assigns "decommodification"scores to the content of social policies. Bydecommodification, he means the degree towhich program benefits are unrelated to aperson's performance in the labor market. Fortwo major policy areas, pensions andunemployment insurance, there has been amodestly higher degree of decoupling frommarket criteria in Canada compared to theUnited States.

Epsing-Andersen's combined decouplingscore for major social programs indicates aclustering of countries into three groups (thehigher the score, the greater the degree thatsocial policies are decoupled from market

performance). The first group, consisting ofAustralia, the United States, New Zealand,Canada, Ireland, and the United Kingdom,impose the strongest links between laborperformance and benefits. Canada's scoreindicates that it has a somewhat moreprogressive policies regime than does theUnited States: Twenty-two for Canada versus14 for the United States. This compares withan average score of 27 for all OECD countries.Maximal decoupling is measured in the 31-39range for a group of countries composed of theScandinavian countries, the Netherlands, andAustria.

Both Canadian and U.S. studies showthat federal social expenditures are some-whatskewed in favor of nonmetro counties. Thegeographic distribution of social programpayments in favor of rural areas in Canada andthe United States has little to do with ruralpressures or the existence of policies intendedto direct more resources towards rural areas.Pressures for program development cameprimarily from the urban majority.Demographic characteristics of the ruralpopulation relative to the urban population,such as a higher proportion of old people, haveresulted in the skewed distribution of resourcestowards rural North America.

Canadians often pride themselves onhaving a more generous set of social policiesthan their southern neighbor. More accurately,Canada can be described as having socialpolicies which resemble the United States farmore than those in most other OECDmember nations. Modest differences in socialpolicy make rural Canada a modestly moreattractive place to live than the rural UnitedStates. Canada's system of public medical careand regional equalization of educational fundswithin provinces reinforce these modestdifferences. These differences, however, arenot the result of an explicit attempt to improverural conditions.

In sum, Canada spends a modestly largershare of its resources on social programs thandoes the United States and program paymentsthat are uncoupled from labor marketperformance to a modestly greater degree thanthose of the United States. As in the UnitedStates, program benefits are skewed in favor ofrural regions for reasons that have much to dowith demography and little to do with ruralpolitical demands.



Explaining Differences in Rural PolicyDifferent current approaches to rural

development are a logical extension of pastdifferences. In both nations, policy formationis typically an incremental process relying onmarginal change. In Canada there was aregional focus, but defined in terms ofprovincial units, while in the United States amore explicit rural policy was developed. Inboth cases, the focus is not on income transfersbut on improving economic conditions.

Beyond their common focus onagricultural development activities, the U.S.policy emphasis remains on providinginfrastructure and business finance, whileCanada stresses planning and human capital.These differences reflect the legacy of pastpolicies and the influence of interest groupsthat make it easier to refine and extendexisting programs rather than create new ones.In the United States, the USDA is the onlyfederal agency with a strong presence in ruralareas, so administratively, it makes sense tobuild policies around it. Within Canada, nofederal agency has a strong network of localoffices, so there is far less ability to directlydeliver programs.

The different approaches reflect nationalattitudes, especially toward the role ofgovernment and the degree of responsibility ofindividuals for their welfare. Canadian policytends to be more interventionist in this sense,while U.S. policy is more geared to facilitatingindividual action. Canada has a much strongertradition of government intervention with anequalization mandate enshrined in theConstitution. Easterbrook (1990) suggests thatCanada never experienced anything analogousto the influence of Jefferson, and consequentlyfollowed a more centralized system ofdevelopment with less concern for individualrights and independence. Conversely, socialprograms are no longer an optional safety netpolicy in Canada, but have become more of astatus quo property right (Courchene, 1987,p.9).

Differences in the sphere of influence ofthe respective national governments are alsoimportant. Each government has differentstrengths. Although in general, the Canadianparliamentary system results in a strongercentral government with power concentratedin the prime-minister and the Cabinet, interms of rural policy the U.S. government is far

stronger. In Canada the federal government ischecked by the assignment of importantpowers in this area to the provinces while inthe United States the tradition of a strongfederal presence and weak state influence makerural policy a predominantly federal issue.

Different political institutions result invery different degrees of responsiveness ofelected officials to local concerns. This can becharacterized as a place vs. party orientation inthe United States and the converse in Canada.The Canadian electoral system results inridings that do not have an equal number ofvoters since seats are distributed amongprovinces on a formula basis. Moreimportantly the nature of the Canadian systemenforces strong party discipline with membersunder great pressure to adopt party positions.

By contrast, in the United States partydiscipline is weak and individual members areprimarily responsible for their own electoralfortune. In both the U.S. House ofRepresentatives and the Senate, members aremore likely to adopt positions that reflect theneeds of their particular district or state thantheir Canadian counterparts. This helpsexplain a more visible rural policy in theUnited States, where politicians from ruralareas have to show they are trying to supportlocal issues.

Canada is characterized by a strongersense of regional identification than exists inthe United States. The most obvious case ofthis is in Quebec. Canadian policy evolvesthrough a delicate adjustment of federal andprovincial powers (Simeon and Robinson,1990). Extensions of federal authority are hardto accomplish because popular support allowsprovinces to protect their authority. TheUnited States is characterized by a strongersense of commonality and collective identitythat facilitates national programs beingdeveloped. The U.S. Revolutionary War andthe constitutional process established a countrythat had a common set of principles. Bycontrast, the Canadian experience can becharacterized as an economic union of diverseentities that sought to keep their own identity.

A greater concentration of economic andsocial power exists in Canada, as compared tothe United States. Urban social and economicelites are able to make effective use of acentralized political process to maintain theirposition. Grassroots reform movements face a



harder struggle in Canada. Social classdistinctions are also more common in Canadathan the United States. This structure makes itmore difficult to advance a rural agenda.

Conclusion: The Future of Rural PolicyReturning to the earlier questions about

the need for explicit rural policy, what can beconcluded? In both countries there is a residualunderlying social contract that holds thatpeople have rights to equal opportunity. Oneof the strong trends in both societies isgrowing recognition of this right, both as aresult of new policies and as a result of judicialdecisions. While market forces remain thedominant means of allocating resources anddistributing wealth, they are not the solemeans of making decisions. Legal rulings haveextended these rights in both countries andwhile the rulings have not always been on thebasis of unequal opportunity for rural people,many of the decisions have clear implicationsfor differences in opportunity between centraland peripheral regions.

In many cases we know that general socialprograms or specific macroeconomic policiesmay have adverse consequences for particularregions. Rather than changing the programs, itmay be more appropriate to compensate thoseadversely affected by implementing otherprograms targeted to their needs. From apragmatic perspective it may be easier tointroduce place-specific amendments ratherthan restructure core macro policies.

Making programs address rural needs willrequire major redesign and implementationefforts. Many current economic developmentprograms tend to miss rural areas needs. Forexample, a major development interest in theUnited States, enterprise zones, is almostalways seen as an urban program although thelegislation authorizing these zones requiresthat one third be in rural areas.

Providing programs that treat all parts ofa nation, or all groups, equitably may requirethat the programs treat different the parts orgroups differently. We know that conditionsvary among different parts of each nation andconsequently, if we want to see equaloutcomes, we may need to provide differentresources on the basis of local needs. If there isgoing to be equality of opportunity, then thefederal government in each country will haveto play a major role, since it is the only level of

government concerned with nationalstandards. In the North American contextwhere functional regions cross borders,national governments have a role in ensuringthat policies are harmonized on aninternational basis to meet development needs.This may be one of the main advantages ofgreater continental integration.

National governments are also best placedto observe what is happening in other nationsand in facilitating an exchange of experiences.In the United States the growing interest ineducation and health care as critical factors inrural development suggests the desirability oflooking at the Canadian experience. InCanada, the limited success of regionaldevelopment programs defined on provincialboundaries suggest looking to the UnitedStares for information on specific ruralprograms. Beyond the two nations the mostlikely places directly relevant lessons are otherland extensive nations, Australia, New Zealandand the Nordic countries, since they sharecommon problems of scale, distance, andcapital intensity. However all nations have thepotential to provide innovative ideas.

It is clear that general economic and socialprograms, even if extended beyond theircurrent levels, will not be capable of dealingeffectively with the problems of distance, scale,and the loss of critical social mass in ruralareas. Only by grafting place-specific programsonto the set of core social programs will weallow equality of opportunity irrespective ofplace. While the traditional emphasis onimproving human capital to allowoutmigration is important and necessary, it toorequires place-specific approaches. Ignoringthe attachment of people to place weakens thelikelihood of success of any program since itresults in no sense of community and commonpurpose, and therefore must rely solely onindividual self-interest.

In the neoclassical policy environment ofNorth America, the most effective way tolegitimize rural policy is through appeals toincreased efficiency. In this context, enhancingemployment becomes the basis for ruraldevelopment. Arguments that are constructedaround efforts to reduce unemployment orunderemployment by bringing rural peopleinto the economy in more effective ways willbe more likely to gain support than argumentsbased upon equity considerations. Because



rural communities are open to both nationaland international trade influences, they areunder considerable pressure to adapt to theglobal economy. What they need are theresources to facilitate a speedy adjustment,otherwise they will place a significant burdenon the rest of the nation, whether the people inrural areas remain there, or if they move tourban centers only to find they lack the skillsto find employment.

Are there lessons from North Americathat are applicable for other nations? Perhapsthe most important is the difficulty ofuntangling agricultural policy from ruraldevelopment policy. Well after agriculture hasceased to be the dominant force in much ofrural North America, it continues to drive thepolicy process, to the harm of ruraldevelopment. A second lesson is that ruralplaces will evolve in very different ways oncethey progress beyond being farm dependent.This makes a national rural policy that doesnot have a strong role for local leaders unlikely

to be effective, especially in large nations likeCanada and the United States. A third lessonis that despite the wish that national programsalone have the potential to meet the needs ofall of the residents of a country, there is still aneed for territory-specific policies. Nationalpolicies may be the most important influenceon rural development, but they are too bluntan instrument to bring about uniform growthin all parts of a country. The final lesson is thatthe appropriate mix of rural policy is driven asmuch by social conventions as fiscal capacity.To be effective, rural policies have to fit withinthe nature of the social contract between thegovernment and the people of a country.Countries as similar as Canada and the UnitedStates have adopted very different developmentstrategies because their societies andinstitutions remain distinct. Pieces of theNorth American experience may be usefulelsewhere, but North America is not a goodmodel for anyone else.



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Swanson, L. and D. Freshwater. "From New Deal to No Deal." FORUM For Applied Research andPublic Policy 14: (1): 84-9 (1999).

Tweeten, L. and G. Brinkman. Micropolitan Development. Ames, IA: Iowa State University Press.1976.

Winters, W. F. "The Rural South: From Shadows to Sunshine." The Rural South: Preparing for theChallenges of the Millennium Series, No. 2. Southern Rural Development Center, Mississippi State,January 2000.



Paper Three:The "New" Open Economy: What Has Changed for Rural Areas?3

3 Plenary paper prepared for European Rural Policy At The Crossroads. University of Aberdeen, Scotland.June 29 - July 1, 2000.

Many residents of rural areas areconcerned by the rapid changes that are takingplace in their communities. Places and jobsthat were seen by generations of people asbeing permanent are either disappearing orbeing altered in major ways. The rapid changescontradict the conventional notion of a ruralplace, one that is pastoral, stable and plays animportant role as the repository of aconsiderable portion of national culture(Howarth). One consequence of the changeshas been a search for some form of sustainablerural development. Often embedded in thissearch is an effort to either slow or halt what istaking place in rural areas and to return thecommunity to a past that is seen as a bettertime. However, rural places are part of a largereconomic and social system, and this externalenvironment imposes limits on what ruralplaces can achieve.

However, while the values that underlie adesire for a sustainable form of ruraldevelopment are widely held, they are likely tobe no more successful now than they were inthe past. In reality, rural areas have alwaysexperienced change that has been thrust uponthem from the outside, and they have rarelybeen able to block the changes. Even when therural population was a much larger share of thenational total and political power wasconcentrated more narrowly in the hands ofrural landowners, all that could be done was toslow change. Now that urban interests areclearly dominant and no nation has the abilityto impede the global reach of capital and newtechnology, it is even harder to slow change.Given the inevitability of externally drivenchange in rural areas the appropriate course isto determine how to adapt to these pressuresin ways that promise the greatest benefit forrural people. At times this may involvechoosing a strategy that minimizes losses,rather than one that maximizes gains, but the

promise of an open economy has always beenthat the lives of more people will be improvedby trade than will be harmed, and that promiseremains (Krugman).

While there are aspects of the "new" openeconomy that are significantly different fromthe environment in which rural places operatedin the past, the differences are mainly ones ofdegree and not a reversal of another situation.While in any nation these changes have clearlymade some rural people considerably worse off,they have improved the welfare of other peoplein the nation, including some rural people. Forexample consider the effect of Wal-Mart onrural areas. Many rural residents see theconsequence of Wal-Mart’s domination ofrural retailing as the collapse of small retailestablishments and the decline of thedowntown commercial district. Yet, other ruralresidents point to a larger selection of goods,lower prices and greater convenience, andconsider the change a great improvement.

Trade and DevelopmentThe path of national economic

development is not well defined, but almostevery study suggests that it involves a processof change from a society that is predominantlyrural and agrarian, to one where the majorityof the population reside in urban places andare occupied in the service sector. The meansand speed at which this transformation takesplace are not constant but the process isrecognized in virtually all developmenttheories. The industrialized world has mostlycompleted the transformation, althoughincremental urbanization continues to occur,while other nations are in varying stages of theprocess. For the industrial nations aninteresting question is how far thetransformation will go—what is theequilibrium rural share of the population. And



how small will agriculture’s contribution tonational income be?

Many factors have been advanced toexplain the transformation, but economiststend to rely upon trade as the dominant forcefor urbanization. Trade among communities,regions or nations allows several importantthings to happen. The first is increasedspecialization, which has the effect ofincreasing efficiency and volume of output.The second is access to goods or services thatare not locally available. A third benefit isexposure to new ideas. Each of the outcomeshas an important impact upon the societiesinvolved. Specialization can increase thevolume of production and lower unit costsenabling higher standards of living and theability to save and invest more from currentoutput so future output grows quicker. Animportant induced effect of the process isfaster technological change because individualsand societies can afford to allocate more oftheir resources to research and development.The benefits of access to things that cannot beproduced locally are obvious; and while ideasare not traded commodities, an inevitableconsequence of trade is exposure to a differentsociety that can provide a new perspective onhow things can and should be done.

However, economic history makes it clearthat the benefits of trade are not universallyrecognized. Opposition to increased tradeflows has existed for as long as trade hasoccurred. In many instances, the oppositioncame from agricultural or rural interests whosaw that, while changes in the rules governingtrade had benefits for urban and commercialelements of society, they would have negativeconsequences for rural interests. In earlierstages of development when the rural elementof society still played a large role in thenational income and population, theiropposition was often able to impede thechange for a period of time, but eventuallyurban interests prevailed. The English CornLaws, ostensibly created to ensure foodsecurity during periods of war had the effect ofprotecting agrarian interests by keeping foodcosts higher than they would otherwise havebeen (Roll pp. 186-189). However despite theclear political advantage of the land-owningupper class at the time, the Laws wereeventually changed in 1846, whenmanufacturers finally had enough power to

overcome rural opposition. Similarly, the U.S.Civil War had much of its origin in a regionalconflict between an industrializing north thatwanted to restrict the agrarian economy of theSouth to manufactured products produced bythe North, instead of cheaper Europeanimports. A few decades later in Canada, thecentral provinces were able to impose hightariffs on imports and high railway chargesthat reduced the income of prairie farmers tofinance an infant manufacturing sector incentral Canada.

Even today similar trade conflicts exist,although they are no longer as obviouslybetween urban and rural interests, simplybecause the balance of power has swung so farto the urban side. Today’s agriculturalconflicts, whether over restrictions on bananaimports by Europe or U.S. sugar policy, arenow primarily about different corporateinterests, not about rural interests. Similarly,conflicts over the safety of genetically modifiedorganisms pit consumer concerns about healthand safety against potential profits for largemultinational corporations and an expandedsupply of food for poorer nations, and theimplications for rural areas are rarelymentioned.

The Rural Interest in TradeLiberalization

Rural places have a disproportionateinterest in trade issues for a number of reasons.First, rural places have always been highlyexposed to the effects of changes in tradepolicy or in the terms of trade. In the earlystages of national development, ruralindustries, particularly agriculture, are a majorsource of national income. Exports from ruralplaces provide much of the income to fundforeign imports and to make the investmentsthat result in national development. This isone of the reasons that many nations in theearly stages of development tax agriculture,while richer nations subsidize it. Over time,other sectors of the economy displace ruralactivities in importance, but while theimportance of rural areas to national incomedeclines, the sensitivity of rural places to tradedoes not. Even as the rural economy changesin terms of economic function from primaryindustries to manufacturing, it continues to beinvolved in the production of tradable goodsand services.



There is a simple reason for this. Almostby definition, rural places have small,specialized economies that only produce asmall fraction of the goods and services theirresidents want to consume. Small size meansyou can’t produce everything and therequirements of the market to produceefficiently mean that any rural place tends tobe pretty specialized in the things it is able toproduce and sell.

When the great Groucho Marx was askedhow he and his brothers survived before theyhit the big time in Hollywood, his answer was,"We made a modest living by taking in eachother’s laundry." Besides being funny, there’san important lesson here about how economieswork, and by extension, what economicdevelopment is. Even a little examination ofGroucho’s statement makes you realize thatwasn’t how he and his brothers survived. Theway people earn a living is by sellingsomething they have—knowledge, skills, orsomething they make or do—to someone whowants it. The buyer pays the seller. This bringsnew money into the seller’s pocket, making itpossible to purchase the things that personneeds in order to live, thus the phase "earninga living." A circular laundry economy doesn’tallow the participants to buy anything else, andwe know the Marx brothers would have had tobuy food, and eventually clothing, to replacethe shirts that were worn out throughlaundering. So in order to be successful, theywould have had to have, at a minimum, takenin laundry from someone outside the family toget the money to buy the necessities of life.

Communities earn a living exactly thesame way. The economy of a communitygrows when local businesses sell things of valueto buyers elsewhere and thus, bring newmoney into the community. In the language ofeconomists, businesses like these are said to bepart of the "economic base" or "traded sector"of the community (Shaffer). Not everybusiness in the community works this way,however. Some, the dry cleaner, the grocer, thecar repair shop, simply provide services insidethe community. These "local market"businesses are important, after all they employpeople, pay taxes, and provide many of theessential things that make life both possibleand pleasant. But they really only circulatemoney that already exists in the community;they don’t bring new money in from elsewhere

(except when they sell their services totourists). It’s like taking money out of onepocket and putting it back into another; themoney moves around, but you don’t get anyricher.

How does a community get richer? Byexpanding its economic base. What kinds ofbusinesses are in the economic base?Obviously, a manufacturing plant that shipsproducts elsewhere is, but many otherbusinesses are too. Professional servicecompanies (consultants, accountants, lawyers,architects, software designers and the like) arepart of the economic base when they sell theirservices to outsiders. Tourism, while it doesn’tsend anything elsewhere, brings people fromelsewhere to the community and with themtheir money, so it’s part of the economic basetoo. People who live in the community butcommute somewhere else can be part of theeconomic base to the extent that they spendtheir earnings in the community. In fact, evenpeople who don’t work at all, for example,retirees, are part of the economic base to theextent that they receive and locally spend theirincome from retirement investments, socialsecurity, food stamps, or even welfarepayments.

Thus, for rural places a critical questionis, how well are the portions of its localeconomy doing that generate external income?While the nature of export base industries maychange over time, rural places remain trappedbetween the necessity of specialization to becompetitive and the resulting exposure toexternal threats from changing terms of trade.By contrast, urban places supply a large portionof their goods and services from firms withinthe community, and many of these are notexposed to significant external competition, forexample, major hospital complexes, universitiesor military contractors.

Change and Rural DevelopmentDavid Barkley has argued that

communities’ perceptions of their futuredevelopment opportunities are conditioned bytheir past experience (Barkley, p.1252). Theeconomic function that a place once performedis typically the starting point for any discussionof its future function. Moreover, anyadjustment in its function is typically seen asinvolving marginal change from the currentposition. Thus, agriculturally dependent areas



typically believe their future will be inagriculture, or perhaps in food processing oragro-tourism, but not in manufacturing.Barkley also suggests that while this is asensible strategy in a stable economicenvironment, it is likely to be inappropriate ina economic environment that is changingrapidly.

It is clear that we live in a highly unstabletime. The list of significant changes impactingrural and urban places seems to keepexpanding. It includes globalization; rapidtechnological change in all sectors of theeconomy; changing organizational structureswithin firms and industries, falling transportcosts; more intense competition among placesfor growth; the influence of advancedtelecommunications and information systems,particularly the Internet; declining politicalinfluence of rural residents; and a reduceddemand for raw materials (Freshwater). Eachof these factors has a significant impact onrural economies, and their cumulative effectwill necessitate change in most rural places.

However, another inherent characteristicof rural places is a resistance to change.Howarth has argued that rural society istraditional, conservative, and detached fromthe sources of innovation. His perspective isconsistent with Barkley’s observation that ruralcommunities see their future in terms of thepast. Obviously there is a clear conflictbetween the social values and desires of ruralplaces and the changes taking place in theireconomic environment. Perhaps,unfortunately, it will have to be the socialvalues that will change. For rural communities,the crucial issue is finding the ways to changethat leave them best off.

What this suggests is the importance forrural places and people of adopting a type ofbehavior that is not conceptually new, but isnow more important than in the past. Itincludes an emphasis on education, especiallycontinuous learning; a recognition that theeconomic base of a community is likely tocontinually evolve so development efforts haveto be an ongoing task; adapting to pressures tomake investments in businesses, infrastructure,and people that promise high paybacks; andthe importance of developing a local strategyfor adapting to change.

Both the magnitude of the requiredchanges and the high degree of variability in

the nature of appropriate changes forindividual places suggest that nationalgovernments will not be able to provide a lot ofsupport in the process. While nationalgovernments now almost always speak in termsof the desirability of bottom-up developmentprocesses that involve the local definition ofdevelopment strategies, the reality of theirbehavior suggests they have not escaped a top-down mentality. Ultimately, governments fundspecific projects and programs, and at anypoint in time they only fund a specific set ofthings. If something in the current set meetsthe needs of a particular community, thennational support may be useful, but it is alsopossible that there may be little of value innational programs for particular places. In thissituation even if federal support appears to befree, accepting it may alter future developmentopportunities in a way that slows or reducesthe level of development.

In addition, it is also clear that manycommunities will not successfully complete atransition to a new function. The possiblesources of failure are numerous. They include areluctance to admit that change is required;choosing a strategy that has no hope ofsuccess; being unable to obtain the necessaryresources to carry out the strategy;implementing a strategy that is overcome bynew events, such as changes in tastes ortechnology; or choosing a strategy that toomany others have chosen, so the market issaturated. Realistically, we should only expectsome rural places to survive, but this situationis no different than the past, for there havealways been rural places that thrived and thendeclined as conditions changed.

Because rural places are small andresource constrained, any of the sources offailure may lead to the end of the community.Larger urban centers face similar adjustmentpressures, but their size (resource base) givesthem a degree of resilience that a smaller placedoes not have. Cities that seem aspathologically unable to define a new function,such as Detroit or Trenton, New Jersey,continue to have sufficient resources to try newapproaches, even though they have dissipatedmuch of their earlier wealth in series ofunsuccessful efforts. By contrast, a rural placethat makes an unsuccessful choice may find ithas no future. However, from a nationalperspective, the saving feature of rural places is



the vast number of communities involved inthe adjustment process. While the people whoresided in a particular place may mourn itsdemise, the rest of the world is unlikely tonotice its absence.

The Old and the New: The Rural PolicyEnvironment

Given the general structure facing ruralplaces described above, what can be said abouthow the new open economy differs from thatof the past? Figure 1 summarizes thediscussion in the balance of this section. Itsuggests those factors that are different nowand those that remain the same. In specificplaces, certain of the new factors are moreimportant than others, and it is also possiblethat in some places the old environment stillexists, even though in others it has littlerelevance.

The key feature that remains the same inboth environments is the dependence of ruralareas on external markets as the source of bothproducts and services that are not producedlocally, and as the destination for most localproduction. If anything, this dependence hasincreased because over time rural communitieshave tended to become more specialized intheir economic activities, and because therange of available goods and services thatconsumers have access to has also increasedover time.

A major difference for rural areas indeveloped nations is that in the past much oftheir economic structure was oriented aroundthe extraction and processing of naturalresources. This included renewable resourceslike agricultural land, forests and fisheries, aswell as nonrenewable resources, like energyand minerals. Indeed the primary sector wasoften the principle contribution that ruralplaces made to national economies. Becausethese resources are site-specific, there was littlepossibility of domestic competition in theirproduction so while rural places mightexperience variability in demand and incomedue to business cycles they could be fairlycertain that given time, an economic recoverywould occur. In the new environment theprimary sector plays a much smaller role, andprimary product markets are global in scope.As a result many rural areas in developedcountries find their resources are too expensiveto produce. Although there are still residual

hopes that this is just a cyclical phenomenon, itwould appear that for most rural places naturalresources promise little future income growth.

The rural labor force has always beencharacterized by a lower level of educationalattainment and formal skills than were to befound in urban areas. Historically, because ofthe spatial division of labor this was not amajor impediment to rural development. Theactivities that took place in rural areas tendedto offset lower formal skills with eitherlocation- or occupation-specific experiencethat came from informal training providedwithin the family or community. High rates ofoccupational succession reinforced this process,as did a more limited set of occupationalchoices. However, now many of theseemployment options are scarce and newopportunities require more formal training.

A second factor exacerbates theemployment problem of rural places. In thepast, urban areas provided an almost perfectlyelastic demand for rural labor. Rural residentscould leave the countryside and expect to findreasonable jobs in urban centers. Indeed, muchof the expansion of the urban manufacturingsector relied upon internal labor flows fromrural places to cities. Now however, the jobsfor the unskilled are scarce relative to thesupply in both rural and urban environments,so there is little scope for a nation to resolverural unemployment problems by encouragingoutmigration to its cities. However for ruralplaces outmigration may resolve some of theirlocal problems, albeit at a cost to urban places,as the United States learned during thesummer riots of the mid-1960s.

An important difference between the twotypes of environment has been the falling costof transport. Transport of all commodities isboth cheaper and far faster than was the casefifty years ago. The effect of cheaper and fastertransport has been a large expansion ofeffective market areas. Goods and services cannow be obtained from farther away at lowercosts. For some rural people, this has broughtbenefits in the form of more sales for theirproducts, or cheaper purchases of goods andservices. For other rural people, it has meantthe loss of employment and wealth if the firmthey owned or worked for was uncompetitiveand lost its market.

Paralleling the declining cost of transporthas been an increased efficiency of capital



markets. In earlier times, significant interestdifferentials could exist among places, andcapital mobility among countries wasconstrained by exchange controls. Now there isalmost a single global capital market and fundsflow to the highest returning investments.Rural investments must demonstrate the sameeffective rate of return as urban investmentsnow, and many of the traditional industries ofrural areas have a hard time meeting thisstandard. As a result capital leaves rural areasfor more profitable opportunities.Unfortunately, to the extent that capitalmarkets remain imperfect, they are oftenweakest in rural areas. This has had the effectof encouraging even greater outflows fromrural areas as financial intermediaries mop upsavings, while return flows for investments areless likely, due to imperfect knowledge andrelatively higher fixed costs.

Rapid communication through theInternet and other forms of telecommun-ications have for some people defined anentirely new era that is comparable to theIndustrial Revolution in its effects. While themagnitude of the changes the Internet isbringing is not yet known, it is clear that thechanges are substantial, and they providemixed blessings for rural places. For the firsttime, whatever information is available in amajor center like New York or London isequally available in any small communityaround the world. However, many of thechanges in the new information-basedeconomy are not likely to benefit rural placesbecause the labor force lacks many of the basicskills necessary to take advantage of them, andbecause it appears that there are still importantagglomeration effects in the new industries.

Faster communication has had the effectof allowing coordination over long distancesand this, combined with cheapertransportation and global capital flows, hasallowed new forms of business organization.Remote branch plants are now in constantcommunication with corporate centers and canadjust production and shipments to matchchanging conditions. New communicationssystems have allowed just-in-time productionmethods, flexible manufacturing systems, andglobal production mandates for specific plants.Rural areas in the industrialized countries haveobtained some of the resulting employmentopportunities, but they now must compete

with rural areas around the world for thesefacilities, instead of experiencing a steadystream of new firms as the old product cyclemoved production from urban to rurallocations.

Rural Change and the Role of RuralPolicy

Governments in the industrializednations have historically supported ruraldevelopment through policies that providedassistance to specific sectors, notablyagriculture, or assistance to specificcommunities to improve their physicalinfrastructure. Much of this assistance waseffective during the old environment becausethe economic activities of rural places tendedto be limited in number, stable, andgeographically specific; so government effortsto support incomes, reduce costs, or increaseefficiency often improved the developmentlevel of the intended communities. Each ofthese features made it relatively easy to identifypolicies over a period of time that werecompatible with the underlying structure ofthe rural economy.

While these features are the primaryfactors that lead to Barkley’s observation thatrural places tend to see their future in terms oftheir past (Barkley, p.1252), they also providean explanation of why governments tend tocontinue to rely on old policy approachesalthough the fundamental structure of ruraleconomies has changed.

Because the economic environment haschanged, neither the strategy of building uponthe past, nor the traditional forms ofgovernment support are appropriate.Traditional resource-based activities are lessimportant to national economies than in thepast, and rural areas now must compete withdeveloping nations for these markets.Similarly, support for resource sectors nowprovides little benefit to rural areas because adeclining share of the rural population isengaged in this type of work. Further, in anopen economy, small amounts of support maybe too little to alter terms of trade. Thisargument is as true for much of ruralmanufacturing. Aid to places is also lesssuccessful because assistance for infrastructuredevelopment has little long-term effect if thecommunity does not have an economicfunction.



Most importantly the new environmenthas shifted the critical element that defineseconomic function and success from land(natural resources) or place to people. In thepast, the rural population was able to prosperwithout having to make large investments inhuman capital because there were relativelynumerous employment opportunities that werespecific to rural areas. Now, however, virtuallyanything that can be done in a rural area in adeveloped country can be done in either anurban area or in a developing nation, often atlower cost. As a result, the rural population hasto compete in one of two directions. It has toeither up-skill sufficiently to make its laborattractive in higher wage, higher skill activitiesthat are growing in industrialized nations, or ithas to increase its productivity enough tocompete with lower wage foreign labor indeveloping nations. Either way rural places andpeople now have little or no geographicadvantages to rely upon, and must improvetheir human capital to be successful (Winters).

Although outmigration to urban centershas historically been an important response ofrural populations to economic stress, it is notlikely to prove as effective in the future.Indeed, much of current government policycan be thought of as an effort to limitmigration to urban areas because there are fewopportunities for the unskilled. This meansthat a solution to the economic developmentproblems of rural people is more likely to haveto take place in those rural areas and not relyupon exporting the population to urban areas.

Migration is even more important in ananother sense. One of the unforeseenconsequences of lower transportation costs andbetter communication has been significantmovement of people from less developednations to more developed ones. The result isthat rural development is now an internationalissue rather than a domestic one. If economicgrowth in the developing nations does not leadto greater income convergence with incomelevels in the developed world, it is hard to seehow large flows of illegal immigrants can bestopped. In North America, efforts to developa trade agreement that allows the free flow ofgoods and capital but not labor has not slowedthe flow of illegal Mexican migrants. InEurope, the question of European Unionenlargement is stuck, to a large degree becausethere is no obvious solution for employing the

rural population of the applicant countries. Inboth these regions, there are also increasingflows of people from Asia and Africa. Wadeargues that income differentials between thedeveloped and developing world must bereduced from 8:1 or more, to 3:1 or less formigration to cease. There are few nationswhere this will happen soon. Thus, for theforeseeable future, rural development in theindustrialized world has become fused with theproblems of the developing countries.

Because the economic environment haschanged, it may be useful to think of twodistinct types of policy. The first is a set oftransition policies that facilitate adjustment toa new economic structure, but are designed toterminate in a defined period of time, whetherthe adjustment is complete or not. Otherwise,there is an incentive to stretch out theadjustment to capture additional programbenefits. Adjustment policy could well includeextended income transfers for people whoseskills are either very limited or who are closeenough to retirement age to make retrainingan uneconomic proposition. It could alsoinclude specific training and relocationpackages for specific areas or sectors toencourage either outflows or inflows of peopleas may be required. Short-term programs ofthis nature have a better chance of fulfillingtheir objective than do longer term industrialtargeting exercises because they are dealing in atime frame when the economic structure isrelatively stable. However, there is a clear riskin establishing these programs that they will bedifficult to terminate once a client group isestablished.

Longer run programs must be less specificin the types of support they provide becauseour knowledge of the medium- to long-term isless certain. Support for enhanced education isclearly a candidate, as might be ensuring someminimal set of infrastructure is in place.Perhaps the most important factor could beensuring that policy decisions do not haveunintended negative consequences for ruralareas. Simply thinking about how rural placemight be affected by a policy that has urbanplaces as its primary focus could preventunnecessary damage to rural economies.

Effective long-term rural developmentpolicy will have to be supportive rather thanleading. The temptation for government is totry to manage the details of the development



process, despite the clear failure of past effortsto do so. In a rapidly changing environment,no level of government, national or local, hasan adequate understanding to plan theevolution of a local community. Whileplanning efforts may be useful, it will probablybe because the people and organizations in thecommunity have a better idea of what type ofplace they want to live in, rather than becausetheir plan can be integrated with other plans.In addition, top-down development strategiesincrease the chances that decisions will bedriven by external priorities. Rural areas haveto define development strategies that areappropriate for them, not be forced intoaccepting ones that have been defined by urbaninterests. External interests may constrainchoices, but they should not establish thechoices. If rural areas are to be exposed toexternally driven changes, most of whichprovide more benefits to urban areas than torural ones, then it seems reasonable that theybe given as much freedom as possible indetermining how they will react and adapt tothe changes.

National government can play anespecially important role in education and jobmarkets. Education is a clear area where thereare external benefits to the nation from allregions investing fully in the school system.Outmigrants from a community can bettercontribute to the national economy if they arewell educated, even though they take the localinvestment in education with them. Becauseinvestments in improved education are long-term in nature, it may be several generationsbefore the population of rural areas has skillsthat are comparable to those in urban

environments. In the intervening years, othermeasures may be required to provide short-term assistance to those workers whose skillsare no longer in demand and who are too oldto benefit from retraining programs, and tofacilitate the workings of local labor markets.

Governments can also play a better role inhelping sub-national job markets function. Asimple focus on national unemployment ratesmasks the fact that some regions have tightlabor markets while others have majorproblems. Sufficient flexibility in employmentpolicy should be developed to allow local labormarkets of various sizes to function moreefficiently. This could allow more employmentopportunities in rural areas, which couldreduce pressures to migrate in the short- tomedium-term while skills are upgraded.

An important question is how effectivegovernment can be in the new environment(Browne and Swanson; Swanson andFreshwater). Clearly, traditional rural policynow has little to offer. And while the ruralpopulace has shrunk in relative terms, it stillremains too large to be bought off by simpleincome transfers even if this was seen as adesirable option. While it is easy to argue forwhat should not be done it is much harder tosuggest what can be done. Because ruraldevelopment is a more complex issue now thanin the past it is harder to devise appropriatepolicy (Sweet). However, leaving rural areas totheir own devices is a potentially dangerousalternative, particularly if this results inaccelerated outmigration to urban areas, andconverts a rural development problem to aneven less tractable urban development one.



Figure 1: The Old and New Rural Economic Environment

The Old Rural Environment

External markets are important.

Natural resource-based industries are the focusof government development policy for ruralareas.

Place-specific natural resource endowments areimportant in the local and global economy anddictate economic function—arable land,mineral deposits, etc.

Individual rural places are somewhatspecialized, but many rural places are similar infunction and character.

Rural residents have lower levels of formaleducation and more limited employmentopportunities than urban residents.

Urban labor markets can readily absorb surpluslow-skill rural labor.

Transport costs are high, decreasing the size ofmarkets and limiting trade.

Capital markets are segmented, making ruralplaces reliant upon their internal pool ofcapital.

Communication is expensive and relativelyslow, limiting coordination.

The product/service cycle starts in urbancenters and diffuses to rural locations in thesame nation.

Rural areas within a nation compete amongsteach other.

The New Rural Environment

External markets are important.

Natural resource-based industries are the focusof government development policy for ruralareas.

Place-specific natural resource endowments arenot very important to the global economy,while knowledge and skills are the maindeterminants of success.

Individual rural places are specialized, withrelatively few rural places being very similar infunction or character.

Rural residents have lower levels of formaleducation and more limited employmentopportunities than urban residents.

Urban labor markets are unable to absorbsurplus low-skill rural labor.

Transport costs are low, allowing a single plantto serve continental or global markets andexpanding trade.

Capital markets are considerably lesssegmented, so rural areas have to competewithin a global pool of capital.

Communication is cheap and fast, makingcoordination easy.

The product/service cycle starts in urbancenters and may diffuse to rural locations, butit may jump across national boundaries to lessdeveloped places.

Rural areas within a nation compete amongsteach other and with rural areas in otherdeveloped nations and the less developedworld.



References

Barkley, D. (1995). "The Economics of Change In Rural America." American Journal of AgriculturalEconomics 77: (5): 1252-58 (1995).

Browne, W. and L. Swanson. Living With the Minimum: Rural Public Policy. In The ChangingAmerican Countryside: Rural People and Places, E.N. Castle (ed.). Lawrence, KS: University Press ofKansas. 1995.

Freshwater, D. "Rural America at the Turn of the Century: One Analyst’s Perspective." Rural America15: (3): 2-7 (September 2000).

Howarth, W. Land and Word. In The Changing American Countryside: Rural People and Places, E.N.Castle (ed.). Lawrence, KS: University Press of Kansas. 1995.

Krugman, P. Geography and Trade. Cambridge, MA: MIT Press. 1991.

Roll, E. A History of Economic Thought. London: Faber and Faber. 1973.

Shaffer, R. Community Economics. Ames, IA: Iowa State University Press. 1989.

Swanson L. and D. Freshwater. "From New Deal to No Deal." FORUM For Applied Research andPublic Policy 14: (1): 84-9 (1999).

Sweet, M. Regional Economic Development in the European Union and North America. Westport, CT:Praeger. 1999.

Wade, R. "The Choice Europe Faces On Immigration." Financial Times 28 June 2000, p.18.

Winters, W. F. "The Rural South: From Shadows to Sunshine." The Rural South: Preparing for theChallenges of the Millennium Series, No. 2. Southern Rural Development Center, Mississippi State,January 2000.

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Three Papers on Rural · PDF fileThree Papers on Rural Development ... urban and rural areas. ... Given their small population, even small flows out of the rural counties would have