Rural Wealth Creation: Concepts,
Strategies, and Measures
John Pender, Alexander Marré and Richard Reeder
USDA Economic Research Service*
NCRCRD Webinar, May 1, 2012
* The views expressed are those of the authors and should not be attributed to USDA or the Economic Research Service.
Introduction
• Sustainable rural prosperity is a top priority for USDA
• Growing recognition that sustainable prosperity requires
wealth creation – broadly defined
• Scholars have long studied aspects of wealth, but efforts
to conceptualize and measure rural wealth are limited
• This study addresses the following questions:
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What is meant by “wealth”?
Why is wealth creation important?
How can wealth be created in rural areas?
Why should and how can wealth creation be measured?
What is Wealth? (1)
Income
Wealth
Expenses
What is Wealth? (2)
• Wealth is the stock of assets, net of liabilities,
that can contribute to people’s well-being
– Is different from flows such as income or consumption
– Can be accumulated or depleted over time
– Includes many types of assets:
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Physical – plant, equipment, infrastructure
Financial – money, stocks, bonds
Natural – renewable and non-renewable resources, amenities
Human – education, skills, health
Intellectual – knowledge and innovation
Social – social networks, norms, trust
Political – relationships of political power
Cultural – values, traditions, arts, ways of understanding
Why is Wealth Creation Important?
• Increasing wealth is necessary to sustainably increase
well-being
• Wealth contributes to well-being in many ways – income,
opportunities, aspirations, resilience, status & power
• Long term solutions to poverty require increases in the
wealth of the poor
• Focusing only on near-term jobs or income may lead to
poor policy targeting, ineffective policies
• Distribution of wealth more skewed than income
• Little known about geographic distribution of wealth
How can Rural Wealth be Created?
• Rural wealth creation requires socially profitable investments
in a diverse portfolio of assets by various rural actors
• An effective wealth creation strategy depends on the
opportunities in diverse local contexts, outcomes & feedbacks
• We present a conceptual framework of wealth creation and
illustrate it using ethanol development
Conceptual Framework for Rural Wealth Creation
Economic/Institutional/Policy Context
 Markets and technologies
 Laws and regulations
 Policies and programs
 Natural phenomena
 Conflict/war
Local Wealth
 Physical capital
 Financial capital
 Natural capital
 Human capital
 Intellectual capital
 Social capital
 Cultural capital
 Political capital
Local actors
 Individuals & hhds
 Businesses
 Civil society orgs.
 Local governments
Actors’ decisions
 Livelihood strategies
 Investments
 Production
 Consumption
Outcomes
 Economic
 Social
 Environmental
An Example: Ethanol Production (1)
• Contextual factors affecting ethanol production
– Federal and State policies
– Prices of inputs (especially corn) and outputs  profit margins (figure)
– Technological changes – improved energy efficiency, increased
yield/bushel of corn, increased scale
– Proximity to markets and transport infrastructure – railroads, highways
– Rainfall for feedstock production
• Key local assets for ethanol production
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Productive farmland to produce feedstock
Water – irrigation in some places for feedstock, water for processing
Access to financial capital
Human capital – entrepreneurs and skilled labor to operate plants
(especially for locally-owned plants)
– Social capital to ensure sufficient local support
Estimated Ethanol Revenues, Costs and Profits
Typical Iowa Plant
$4.00
$3.50
$3.00
$/gallon
$2.50
$2.00
$1.50
$1.00
$0.50
Revenue per gallon
Source: Estimates from Hofstrand (2011)
Profit per gallon
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Oct-08
Total cost per gallon
Jan-09
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
$(0.50)
Jan-05
$-
An Example: Ethanol Production (2)
• Local actors and their roles and decisions
– Farmer cooperatives, other local investors – very important investors
during 2002 – 2006
– External corporate investors increasingly dominant since 2006, due in
part to increasing scale of plants
– Support by local governments - tax increment financing, land
donations, tax-funded land improvements, tax abatements, zoning and
other permits, provision of water and other services
– Support or opposition of local community organizations
An Example: Ethanol Production (3)
• Local outcomes
– Economic
• Increased local employment: 35-40 jobs (direct), 65-211 jobs indirect &
induced (Low & Isserman 2009); other studies similar (except Urbanchuk)
• Increased sales, value-added and income (L&I 2009; others)
• Local corn price premiuim: $0.05 – $0.19/bu near plant; effects felt up to
68 miles away (McNew & Griffith 2005)
• Property values: increased farmland values (Henderson and Gloy 2009),
uncertain impact on residential property values
• Property and other local tax revenues increase according to a few studies
• Greater impacts in larger, more diverse communities (L&I 2009), and
where ownership is local due to greater local expenditures and dividend
payments to local investors (Urbanchuk 2006; Bain 2011)
An Example: Ethanol Production (4)
• Local outcomes (continued)
– Environmental
• Air pollution – especially ethanol vapor, aldehydes (EPA 2010)
• Water pollution – mainly from cleaning salts from cooling towers and boilers,
increased N & P loading from feeding distillers grains (EPA 2010)
• Increased demand for fresh water, comparable to water demand for a town
of 5,000 (NRC 2008)
– Social
• Few studies of social impacts of ethanol production in rural U.S.
• Concerns raised about impacts on noise, traffic congestion, economic and
env. outcomes in a few studies (Karetnikov, et al. 2008; Selfa, et al. 2011)
• Impacts on incomes and wealth of the poor likely limited
An Example: Ethanol Production (5)
• Feedback effects (examples)
– Effects on local assets
• Increased local tax revenues may contribute to investments in improved
schools, roads, other public services; possibly attracting new residents
• Negative environmental or social impacts may reduce ability to attract or
retain residents, reducing local wealth
– Effects on contextual factors
• Aggregation of increased ethanol production has increased corn prices and
reduced the profitability of ethanol processing
• Positive or negative experience with ethanol production may affect voters’
and interest groups’ attitudes, and lead to changes in policies
Implications of Framework
• Rural wealth creation is highly context-dependent
• Interactions among types and sources of capital important
• The dynamic sequence of investments can create new
opportunities or undermine future prospects
• Wealth creation involves risky investments, and asset
diversification may help reduce risks
• Local ownership of investments can lead to greater local
economic impacts, but entails risks
• Important to consider impacts of wealth creation on
multiple outcomes
Strategies for Wealth Creation
Rural Economic Development Strategies
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Natural resource-based industries – agriculture, forestry, mining
Recruitment of “footloose industries” – e.g., manufacturing
Regional centers of commerce/government
Bedroom communities – close to metro areas
Amenity-based development – e.g., tourism, retirement
Entrepreneurship, innovation and cluster strategies – e.g., wine
industry, local biofuels and other renewable energy
• Import substitution strategies - e.g., local foods
• Strategies work best when they reflect local contexts
• Strategic planning and research-based industrial targeting
approaches can help identify suitable strategies
Why Measure Wealth Indicators?
Specific reasons to measure wealth indicators
• Assess outcomes not measured by flow measures
• Attribution problem
Reasons not to measure wealth indicators
• Feasibility and cost
• Concepts better reflected by other measures
How can Wealth Creation be Measured?
How to measure wealth depends on the specific purpose
Identification, diagnosis and targeting interventions
• Some recent efforts seek to measure comprehensive value
of wealth and wealth creation at a national scale
• Although useful, these approaches rely on strong
assumptions and difficult data to obtain for rural areas
• More realistic approach – develop a set of indicators of
different types of wealth using available data sources
• The report includes a list of indicators of each type of
wealth and publicly available data sources
How can Wealth Creation be Measured? (2)
Improving design and monitoring interventions
• Indicators can be derived by specifying the program logic
model/impact pathways (hypotheses about how inputs lead to
outputs & outputs lead to outcomes and impacts)
Inputs  Activities  Outputs  Immediate outcomes 
Impacts
• Wealth indicators can be derived
• Example: construction of a hospital (next slide)
How can Wealth Creation be Measured? (3)
Assessing impacts of interventions
• Challenge of attribution – assessing the counterfactual
• Wealth indicators can help identify suitable counterfactual
• Example: DRA impacts study – used indicators of some types
of capital (physical, human, financial) to select comparison
counties
Conclusions
• The idea of investing in a broad portfolio of assets to
achieve economic development is not new
• Efforts to broadly conceptualize and measure the wealth
impacts of rural development approaches would be new
• This review highlights the need for applied research on
– “What works where and why (or why not)” in promoting
rural wealth creation
– How to measure wealth in rural areas