• Analysis
  • December 11, 2018
  • 10 minutes
  • 0

Does bigger mean better? How to boost growth in small rural towns

As remote places fear being "left behind", experts search for ways to share growth

Small towns punch above their weight, as least as far as media coverage is concerned. Blamed for populist revolts from the US election result to Brexit, remote rural places are painted as “left behind” and full of discontent.

But helping small remote towns to keep pace with cities — which often win out on investment and jobs — isn’t straightforward, and economists and policy experts alike are divided on how best to boost rural economies. While some argue for a renewed focus on small towns, others argue better functioning, high-growth cities will share wealth with their hinterlands.

Is there another way to do business away from the bustle of the city, or are rural regions doomed to be second-rate economies? And if government invests money directly in small towns will it boost their performance, or is it a wasted investment?

The agglomeration benefit

Governments often look to support infrastructure and skills in cities to maximise the effect of the funding they give out. As economic activity concentrates in specific places, more businesses form, more innovative products and services are made and those places get richer. It’s this which leads cities to grow at a fast pace.

“A lot of work has shown that cities have a productivity advantage because they have these concentrations of educated workers, potential inventors, venture capitalists, customers and also input suppliers,” said Dr Peter Orazem, professor of economics at Iowa State University. “All of those things lower cost or increase the productivity of firms.”

For Dr Paul Cowie, a research fellow at Newcastle University’s Centre for Rural Economy, it’s about knowledge sharing, which makes running a business something like cooking a meal. Scientific knowledge, like a recipe, is accessible to businesses from anywhere: so long as a you can access that recipe, you can follow what it suggests.

On the other hand, tacit knowledge, or know-how, like knowing that your oven randomly drops heat, or a particular knife in your kitchen is the sharpest, is tied to place. It’s such factors as learning about new local contracts or hires before anyone else that businesses are more likely to miss out on the more remote they are.

Though population trends show that more and more people live in cities, many, particularly people with young families, are attracted to rural life and move to small towns to live and work. Businesses can and do form in such places.

“Usually governments care about every single rural town”

But do the benefits of the agglomeration effect in cities mean that businesses in rural areas are doomed to suffer economically?

In an analysis of the economies of Iowa and North Carolina, Orazem and his colleagues studied the number of new firms emerging across rural towns in two states to assess the impact of agglomeration. While there had been academic work on the benefits it brought to cities, few had analysed whether comparable benefits could be seen in rural environments.

By analysing the proximity of new firms to existing ones, they discovered that firms were more likely to locate in areas that already had companies of a similar type. Though jobs collect in hub towns, workers will commute from surrounding towns to reach them. Firms locate in places where others already are, and workers travel to reach them.

The availability of jobs in smaller towns means that Iowa is actually able to maintain a higher rural population than many other, more rural states. In Nebraska, for instance, with a landmass that is 99% rural, 73% of the population lives in urban areas. In Iowa, with a less rural landscape, the urban population is just 64% of the total.

The implications of this are significant. “Usually governments care about every single rural town, and work to help each of them grow,” said Dr Younjun Kim, assistant professor of economics at Southern Connecticut State University, who worked with Orazem on the research. “Our findings are somewhat different to what government thinks best.”

In the US, individual rural towns often compete for funding and investment. But the research shows that this isn’t necessary: by focusing policy and funding on key towns with an existing business presence and economic heft to attract more firms, government can increase the overall number of jobs more than if it supported each and every town in an area.

So long as transport links to these hubs are adequate, the hub will serve the periphery.

“What it [the research] says is that the most successful strategies are to look for the places that already have the benefits of agglomeration and to focus on those areas, said Orazem. “And not to try to spread jobs evenly across the entire space.”

Honeypots and hives

Elsewhere, governments have attempted to mimic this agglomeration effect by setting up business hubs in rural places.

Via its Rural Growth Network Program in the North East of England, the UK government’s Department of Environment, Food and Rural Affairs (DEFRA) has funded enterprise hubs to act as centres for businesses in remote rural towns and villages throughout the area.

These act as incubators, providing hubs with premises from which to run a business and the flexibility to grow and attract more staff if they need.

“Some of them are struggling, but the majority of them are full and actually have waiting lists, particularly in the remoter rural areas,” said Cowie, who, along with fellow experts, has been analysing their performance as part of the program.

“You need the entire infrastructure in order to support a business, not just the internet”

Their utility comes from the fact that they provide the opportunity for tacit knowledge to be shared. “You’re creating an agglomeration or a spillover through the hubs,” said Cowie.

Not all of these hubs are alike. Many are collections of customer facing businesses, cafes, galleries and small craft shops: “honeypots”, which bring in customers from outside the area to make money. The others, “hives”, are populated mainly by IT firms, dealing to businesses.

Telecommuting

The internet and superfast broadband have made it possible to work from anywhere. Public transit ridership in some places has decreased as a result of the large numbers of people who now work from home. Does this not negate the need for firms to concentrate in particular places?

For Orazem, the answer is no. While the internet does theoretically allow certain types of worker, in particular those in financial services or those who work entirely from their computers, to work in the most rural of places, in reality, it’s just one of the things businesses need to succeed.

“You need the entire infrastructure in order to support a standalone business, and not just the internet,” he said. “Internet access is extremely important if you’re in a suburban fringe of a metro area, but it doesn’t help as much if you’re in the remote counties that don’t have that customer base.”

It means that agglomeration matters as much in rural places as in urban ones. And governments, if they want to boost rural growth, should focus on building easily-accessible centres of wealth, rather than spread it too thinly to each and every small town. — Anoush Darabi

(Picture credit: Flickr/Jerry Huddleston)

 

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