Local Government's Role in Retaining Capital for Community Economic Development
by Hazel Dayton Gunn

Community Development Reports
Research Briefs & Case Studies
Cornell Community and Rural Development Institute

Executive Summary

Retaining locally produced capital and increasing recirculation of money in the local economy are two key economic development strategies. Local government officials can support the establishment of alternative institutions that act as centers for capital retention and plug leakages in the local economy. Whether as facilitator or public entrepreneur, local government can encourage broad-based citizen participation to ensure economic development benefits the entire community.

1. Today's Economic Climate

Today national and state governments are stepping up the process of shifting financial responsibility to the local level. The additional burden requires local officials to fine-tune their analytical skills in order to better understand their economy.

Knowledge gained from local economic analysis will help communities to control growth and development in ways that benefit their social, political and economic welfare. A sophisticated approach to planning will give more knowledgeable communities an edge in the effort to maintain an adequate standard of living and quality of life for their citizens.

2. Value Added Key to Development

Supporting responsible local businesses is imperative. Local firms circulate money in the community. The multiplier effective cumulative impact of money at work in the community-is a well-known phenomenon. In addition, local firms are embedded in the social fabric of the community and are not apt to leave the area for lower-wage parts of the country, or world.

However, the public sector can do more than support local businesses to retain the value added produced in a community. In addition to its role as facilitator, local govemment can act directly to establish and support institutions that serve as centers for capital accumulation.

In response to the need for a more critical conceptual framework to guide analysis of local and regional economies, we go beyond value added to the surplus product we call "social surplus." Absentee owners, unproductive activity, and distant govemment drain social surplus from communities rather than contribute to community development. Our approach promotes an expansion of public planning and grassroots initiatives to reinvest this surplus locally.

3. Social Surplus and the Community

Local economic analysis helps communities channel growth and development in ways that benefit their social, political and economic welfare.

Social surplus is that amount left over from productive activity after inputs, machinery, and labor are paid for. Profits are part of social surplus, but it is more than that. It is "social" because its creation, appropriation, and distribution are shaped by our social system.

What happens to social surplus? The answer is not obvious. Some goes to advertising; some is reinvested in business assets such as machinery and equipment; some flows to local, state, and national governments to pay for services and infrastructure. Given the nature of our global economy, much of the surplus is reinvested elsewhere and not captured to stimulate further economic development at the local level.

In order to demonstrate what happens to social surplus at the level of the firm, we analyzed a typical McDonald's fast-food restaurant. Twenty-five percent, or $378,150 of the average $1.5 million in annual sales (in 1987), was social surplus, including rent, interest, profit, taxes, insurance, and advertising. As much as 77 percent of the surplus was drawn out of the community to corporate franchise owners and for services located elsewhere. If local communities can plug these leakages and encourage more recirculation of surplus locally, community economic development will be enhanced.

4. Retaining Capital

Communities can create institutions which retain and recirculate capital to promote local economic development.

Local government can help retain capital produced locally by actively supporting what we call "alternative institutions of accumulation." They are "alternative" in the sense that they are locally-based democratically-controlled centers of accumulation. They encourage people's involvement because they provide resources with which to build a future.

Community Development Credit Unions

Credit unions are not-for-profit, tax exempt institutions run by boards of directors elected by depositors. Community development credit unions (CDCUS) are designed to serve a community's specific needs, such as development of housing or minority-owned businesses. Approximately 140 now operate in the United States.

CDCUS, unlike many conventional banks, keep savings in the community and under local control. They allow a part of savings to be put back to work at a more modest interest rate than a loan company would impose, and they pay interest out to members who reside in the community. Their increasing ability to service new businesses and nonprofit organizations makes them valuable additions to local development financial institutions.

Community Development Loan Funds

Community development loan funds (CDLFS) are not-for-profit, tax-exempt corporations that borrow money and lend it at moderate rates of interest to low-income, unemployed, and otherwise economically disenfranchised people. Making loans at several percentage points below standard market rates makes a broader range of community-based projects possible.

Local government can encourage investors to contribute to CDLFS. Lenders retain claim on their assets but earn less than they could through other forms of investment. The difference in earnings amounts to a charitable contribution to the loan fund's borrowers.

>From the vantage point of poorer communities, CDLFs can help stabilize or revitalize a community. Social surplus remains in the private sector, but it can fuel community development in target areas.

Development Banks

Development banks are typically not-for-profit corporations that accept federally insured deposits to service depressed areas or nontraditional borrowers. In addition to lending money, they provide technical assistance and management training. They act as a bridge between private-sector capital and expertise and public-sector development programs.

Socially-concerned businesspeople can be encouraged to contribute equity as well as business know-how to a development bank. Their "socially conscious investment" can make capital available to poorer communities in the region rather than having it reinvested elsewhere. State legislatures can be called upon to provide loan reserves, thus leveraging public funds for the sake of economic development.

Foundations and Philanthropic Organizations

Americans give over $100 billion a year to foundations and philanthropic organizations. Many not-for-profit charitable organizations pass social surplus on to community-based activities and organizations.

For-profit corporations engage in philanthropic activity as well. Local officials can encourage local corporations to support community development projects. Contributions lower the firm's tax bill, while social surplus flows to local public uses.

Nonprofit Corporations

Nonprofit corporations can serve as vehicles for collective action for delivery of social services not provided by government. Care should be taken to assure that boards of directors represent the corporations' constituencies and function democratically.

Nonprofit corporations deliver essential services, are locally controlled, and create jobs within communities. They build capital locally with positive implications for community development.

Community Development Corporations

Poor communities exist because resources and income are largely absent. Community development corporations (CDCs), nonprofit parent organizations that can have for-profit subsidiaries, were intended to stimulate both economic and political development in poor urban neighborhoods. They provide such services as job training, neighborhood repair, and increased access to health care.

In addition to attracting grants, providing loans, and encouraging local investment in CDCS, local government can raise the possibility of business ownership) by CDCS. For example, a McDonald's franchise, operating as a for-profit CDC subsidiary, could provide a local service, jobs and job training, and channel any profits back into the community.

Community Land Trusts

Land trusts provide a mechanism to create affordable housing and reduce homelessness. Community land trusts, a form of nonprofit corporation, are designed to take land out of the speculative realm.

Land trusts typically buy housing, place the land in the trust, and renovate and sell the housing to low- or moderate-income households. City housing departments can provide low-cost loans to households that cannot afford a down payment. In conjunction with limited equity housing cooperatives and municipal and mutual housing, community land trusts create housing assets controlled by the community.

When community land trusts are created to preserve open land, they do so for public use, even though the land will be maintained by a community-based, non-governmental organization. This is an alterative strategy for communities whose limited public resources cannot be tapped to create a park or open space.

Workers' Cooperatives

Successful workers' cooperatives mean that more commercial activity takes place under local, democratic control. The workers of the firm are its "patrons." They use their own and borrowed funds to capitalize their business and then run it as equals. Other forms of co-ops include marketing co-ops for small producers, agricultural co-ops, and consumer co-ops.

Successful co-ops also have the ability to tax themselves in order to contribute to the development of their community by earmarking part of their earnings for projects that they wish to support.

Local government can encourage a healthy "third sector" by providing information on business opportunities, making loans, and supporting technical assistance and training in business skills.

5. Public Sector Initiatives

The goal is to have more economic activity take place under local, democratic control.

The term "public" has gained an image of big government, ineptitude, inefficiency, and interference with freedom. "Private" has more positive overtones of innovation, efficiency, and support for freedom. However, public and private organizations can share such problems as a stifling bureaucracy, unresponsiveness, and even corruption.

What gets lost as these images permeate our society is innovative thinking about alternatives such as public but locally organized and controlled initiatives. At the community level, need for goods and services often waits for a private entrepreneur to respond, or its provision is legally restricted to private intervention. The outcome is that surplus-generating opportunities are reserved for private profit and accumulation. Provision of goods and services that do not generate a profit becomes a public responsibility that is often starved for funding.

Controlling Growth, Planning Development

Local governments do have avenues open to them to become direct actors in their development process. Controlling growth is one such avenue. Few people have difficulty thinking of reasons why at least some forms of economic growth should be controlled in their community.

A distinction must be made between economic growth and economic development. Growth implies more of the same. Development implies changing relationships between people and their environment, changing institutions, and even changing the criteria for what is considered good or bad in life.

Communities must become more innovative about development at an earlier stage of growth. Zoning, greenbelts, and impact fees are all used by local governments to constrain growth. Grassroots initiatives, e.g. attempts to keep WalMart or a mall from locating in a community, are in the news weekly. The point is to be proactive, to plan for the future so that growth can be channeled to the greatest community benefit.

Dedicated Sales Taxes

The tax system funds routine expenditures of the public sector, but how does a community build new foundations for development? Some have managed to shift assets into the social and public domain in an era when privatization has been considered efficient and wise.

For instance, dedicated sales taxes have been used to purchase local land for green space and city parks, for downtown revitalization. and to promote tourism. This form of tax could also be earmarked for essential services.

Public-Private Partnerships

Innovative public-private partnerships can enhance private development in tune with community values. The key element of many development projects has been the sale of public land to private developers. However, expanding public entrepreneurship in the form of public-private partnerships can yield new public funds. These development corporations can implement public goals under the oversight of publicly constituted boards of directors.

Shopping mall development is an example. A community can assemble a parcel of land and use it to assure not only a voice but also rights to a percentage of the net cash flow generated by mall merchants' rental payments. Communities can locate malls where they want them, rather than fighting unwelcome private initiatives.

Publicly Owned Utilities

Municipalities get into the business of basic services in order to maintain uninterrupted delivery and to reduce prices to citizens. Private corporations can exploit monopoly positions and drive up the price of water, sewer, or electric generation and transmission. Publicly owned utilities can cut the cost of a basic need and increase local control over the conditions of its provision.

6. Taxes and Local Public Assets

Public funds are critical to building public assets and providing essential services. However, local taxes have risen, in real terms, faster than growth in income . Increasing tax pressure at the local level makes retention of value added even more crucial.

7. Public Participation

Broad based public participation is key to effective, sustainable local economic development.

Decisions that affect people's lives take place at all levels of government, but at the local level most citizens have the greatest opportunity for economic involvement. There they have the greatest access to elected and appointed officials, to public records and information, and to other citizens concerned with the process and its outcomes.

Planning for change, public stewardship, and management of real resources engage people. Local government can foster the creation of alternative institutions of accumulation detailed above. Government also can encourage broad based citizen involvement in envisioning and designing the community's economic future.

Potential positive outcomes of increased citizen participation include encouraging diverse and innovative approaches to solving problems and creating new opportunities. As a broader range of citizens become engaged in local issues, political discourse may widen to include the concerns and aspirations of all segments of the community.

Attempts to plan at the local level, and to sustain community economic development, can educate concerned citizens about the powers they must confront. By looking beneath the surface of the development process, it will be possible to identify the role of local and external power holders and their impact on the local economy. Insights gained can help communities anticipate and respond to macro economic and political forces. How do national and international forces-free trade, environmental regulations, labor conditions in other countries-affect the local economic present and future?

Knowledge of the flows of funds into and out of the community allows more critical analysis of public support for attraction, retention and expansion of firms. What percent of value added generated by the firm will stay in the community? What will the multiplier effect be? Will public sector support be justified by the firm's economic impact?

Community-based activity teaches the skills necessary to become leaders, coordinators, and analysts. Skills learned in one area of activity, such as organizing a community land trust, can be transferred to other areas such as developing new businesses or alternative financial institutions.

Community-based development brings together diverse interests across gender, race, and class. A broader, shared vision is the glue that is essential for cooperation among business, labor, consumers, and government as communities seek to gain control over their economic futures.

8. Conclusion

Local government can encourage greater citizen participation in local economic development. Understanding the flow of funds into and out of the local economy can help communities identify strategies to plug leakages and increase local control. The necessary expenditure of time and resources to accomplish these goals holds the promise of a more stable, enriched local economy.

* Acknowledgements

This report is based on the book co-authored by Christopher Gunn and Hazel Dayton Gunn: Reclaiming Capital. Democratic Initiatives and Community Development (Ithaca, NY: Cornell University Press), 1991. Thanks to Christopher Gunn for his thoughtful contributions.

* About the Author

Hazel Dayton Gunn received her Master of Regional Planning degree from Cornell University in 1994. She is currently a Research Assistant with the Family Life Development Center at Cornell. Email: hg18@cornell.edu

Cornell's Community and Rural Development Institute (CaRDI) provides research, education and policy analysis on critical community and rural development issues. CaRDI links professionals and elected officials who share a concern for community development and policymaking, especially in rural communities. They bring together Cornell University departments and programs, local governments and community organizations to cultivate creative collaborations that bridge traditional institutional boundaries. CaRDI coordinates Cornell research, extension and teaching in five broad areas: Community Development; Economic Development; Environmental Management; Human Services; and Local Governance & Leadership.

The Community and Rural Development Institute Cornell University 48 Warren Hall, Ithaca, NY 14853 Phone: (607) 255-9510 E-mail: cardi@cornell.edu

Web Site: www.cals.cornell.edu/dept/cardi/index.html