The Third Pillar

by Raghuram Rajan

  An annual county craft fair started bringing in thousands of visitors, and in 2010 a Vision 2020 campaign began implementing new ideas for the future vitality of the town. Many Chicagoans now own second homes in Galena, and in 2011, TripAdvisor listed Galena among its top-ten “Charming Small Towns.” Even though a number of venerable downtown pharmacies and grocery stores have closed, Galena’s population has stabilized. Many residents now have jobs in the tourist industry.

  Galena’s example is worth noting because many examples of revival center around new technologies. Galena’s does not. Indeed, in every developing country I visit, some ministry is putting together a plan to make their country a power in artificial intelligence, robotics, and financial technologies like cryptocurrencies and blockchains. Yet, few have the research base or the human capital to make the plan a success just yet. Far better to figure out realistic strengths as well as gaps, and go about exploiting the strengths and filling in the gaps, much as Galena did.

  COMMON THEMES IN COMMUNITY REVIVAL

  There are many examples of communities that have revived, some after the loss of a dominant industry (think Pittsburgh and steel) and others a major employer (the region around Lund and Malmo in Sweden after the Kockums shipyard downsized and closed in the 1980s).9 There are also many failed attempts at revival that we hear very little of. The revival of declining communities resembles the development of nations in many ways, especially in that economists understand very little about either process. After a success, we can look back and see certain factors that seem to be associated with it, yet simply putting those factors together do not assure success again. Nevertheless, this is what we have to go on.

  The common themes in successful episodes of community revival seem to include the following: a small and enthusiastic team leading the effort; a coming together of different players in the community; the identification, utilization, and improvement of key assets in the community, including human capital; a focus on changing the image of the community by remedying critical weaknesses; and importantly, the engagement of the community as they see some signs of success and start taking pride in it.

  LEADERS

  Where do good leaders like Mayor Malini Gaud of Indore or Frank Einsweiler of Galena come from? This is probably one of the most important unanswered questions in the social sciences. We simply do not know. Case studies suggest successful community reform could be led by a local politician or administrator, by a businessperson or philanthropist, by a university president or academic, indeed by anyone who simply steps up in a failing environment to take charge.10 It helps if they have credentials and some explicit source of power, but these are neither necessary nor sufficient. For in the beginning, no one really has sufficient authority for broad reform.

  Typically, any would-be leader has to bring together a team of key players in the community, such as the bureaucracy, the political establishment, business leaders, union leaders, church leaders, respected individuals, and the leaders of voluntary organizations, and unite them with a vision for change. Any such vision has some constants, but the path to it is rarely clear or static. Good leaders continuously adjust their strategies to the facts on the ground, taking advantage of any opportunities that come their way.

  The vision often has to be sold hard because it is rarely self-evident—if the path to revival were so obvious, would the community not already have embarked on it? In a failing community, it is possible that the usual resistance to new ideas or change is weaker, and key players care less about preserving their own turf than about avoiding collective extinction. Yet, this is not a given, and any plan for revival benefits from early successes that reaffirm the leader’s vision and creates greater solidarity and trust in their team.

  IDENTIFYING, REVIVING, OR ATTRACTING ASSETS

  Strategies for revival are often built around identifying and uncovering valuable key assets. The old run-down houses on Main Street in Galena suddenly became historical, quaint, and valuable tourist assets. Many towns across the developed world have charming streets that, with a little sprucing up, become “olde towns” full of luxury shops and pricy restaurants selling a collective experience to tourists. Other communities have “hard” assets such as power stations producing cheap power without much demand, plentiful cheap land, old industrial buildings that can be repurposed as space for start-ups or loft residences, biking and hiking trails for the health-conscious, and so on.

  Sometimes the assets are human. The community may have rich entrepreneurs or philanthropists who might be looking for ways to give back to the community that made them. Underutilized well-educated or highly skilled workers might already exist, or might like to return to the community if they see opportunity. With the right vision, even young unskilled workers, capable of being trained and willing to start with moderate wages, are assets.

  Often the assets are organizations such as a government or defense establishment, a large locally headquartered firm, a hospital, good schools, a community college, or a university—after all, Daniel Patrick Moynihan once quipped “If you want to build a great city, create a great university and wait 200 years.”11 When strong organizations exist in the proximity of declining communities, they typically are shielded off from it—else the community would typically not be declining. One of the tasks for the team engaged in revival is to find ways to bring down the shields.

  The assets the leadership team identifies often need further investment to make them viable or accessible. As we saw in the last chapter, connectivity, such as a fast broadband network, or roads, railways, ports, airports, and power can help. Legacy assets may also hinder new activity. For instance, railway tracks or highways that separate parks or waterfronts from the community need to be rerouted, and vacant warehouses repurposed or demolished; as a town shifts from producing goods to producing ideas and services—its key concern is no longer cheap logistics but livability. When a city sets up a business park where it hopes to incubate new manufacturing firms, it can make the park more attractive if it has a workshop with state-of-the-art production facilities, like large 3D printers, so that start-ups can fabricate and test prototypes at low cost.

  As important, the assets will need to be coordinated with one another. A community college can add substantial value to students if it has state-of-the-art equipment on which to train them.12 Often, the leadership group finds a large local employer to contribute some of that equipment and train faculty as needed. In turn, the employer benefits from a more-skilled applicant pool. In a similar vein, the entrepreneurs in Chicago’s incubator for ICT start-ups (named “1871,” after the year of the Chicago fire that led to an earlier revitalization of the city) benefit from the city’s ability to get venture capitalists and other financiers to set up office on the same floors of Chicago’s huge Merchandise Mart, near the heart of downtown Chicago. It is easier to pitch your idea when you bump into a financier in the line for coffee than when you have to set up a formal appointment!

  More generally, distressed communities typically start with an important advantage because of their recent loss of economic activity: They have a number of underutilized assets, which are available cheaply. Furthermore, as the community’s leaders draw in more firms, they reduce their collective costs because they jointly enjoy scale economies—for example, logistic firms reduce what they charge for transport if there is sufficient volume emanating from the businesses in the community. Of course, if community revival is wildly successful, it starts experiencing congestion costs, as firms bid up the price of employees and real estate, while traffic jams and long commutes start eroding livability. Indeed, Janesville, the town that GM left, will soon start issuing parking tickets again to mark its revival. Most declining communities would love to have these problems, though!

  Some local and regional governments offer long tax holidays to attract foreign investment. These may sometimes be warranted if the investor is an initial anchor investor, who bears a
ll the risk of being a first mover and potentially seeing no one else follow. The first mover makes the community more attractive to others and “crowds-in” more economic activity. Often, though, such tax holidays leave the community strapped for resources. The community empowerment we discussed in the last chapter will allow community leaders to create infrastructure and regulations that make the community an easier place to do business. Communities should compete on the business environment they offer, which is often cheaper to make attractive, rather than waste future tax receipts that could be better devoted to funding schools, affordable housing, and topping up the safety net. One concern is that if communities compete for new investment by offering more business-friendly regulation, they could engage in the proverbial race to the regulatory bottom. However, communities have to live with the regulations they promulgate, so oversight by community members is a check on deregulating to the community’s detriment. As long as national environment, product, and worker safety standards are respected, communities ought to have enough leeway to compete.

  PEOPLE AS ASSETS

  Some communities will not have any valuable hard assets, but they will have people. Even if domestic firms from elsewhere in the country are not interested in relocating, a community may still parlay its location within a large or rich country to lure foreign firms. They could be enticed to set up facilities there, especially if the community can make it easier for the investor to do business. Community leaders could well learn from the Chinese local government officials we described earlier, who work hard to assemble attractive investment packages for foreign investors, requiring them to stop at only one window (the local party boss’s office) to collect all regulatory permissions.

  Some communities will need to attract skilled people if they do not have enough. The skilled foreigner may be easier to attract than citizens from elsewhere in the country, especially if a period of residency in the distressed community can mean an easier path to permanent residency. This may be an important way for a distressed community to attract talent when it has few other attractions. Perhaps, then, a portion of the immigrants a country plans to let in could be allotted to distressed communities. Communities could advertise their needs—engineers, doctors, computer technicians, teachers, coaches, and so on—while would-be immigrants would signal their interest. When there is a two-way match (online employment platforms offer a ready-made template for such immigration services), the immigrant would get a visa, renewable at the end of each year if the immigrant is still employed and staying in the community. As is the practice in Canada, a host family in the community could help ease the immigrant family’s transition and integration. After a reasonable number of years, the immigrant would get permanent residency and the freedom to stay and work anywhere in the country. A fair number might well put down roots in the community—at any rate, they would have served it and helped build its human capital. A small influx of capable immigrants may indeed demolish stereotypes about the ugly immigrant and thus enhance mutual understanding.

  Another underutilized human asset is the nation’s elderly, who will grow in number as the nation ages. Recently retired empty-nester professional couples often look for different challenges. Some could spend the early vigorous years of their retirement in needy communities, helping the revival. A retired accountant could serve as a mentor for a fledgling small-business owner, figuratively holding her hand as she acquires skills. Even if they are reluctant to move to the community, some could mentor online at a distance. In many countries today, healthy retirees want to have a meaningful retirement, not one spent entirely in travel or playing bingo. National governments, together with communities, could set up Mentorship Corps, programs whereby screened retirees and fledgling business owners could be brought together. Once again, platforms could help reduce the cost of search and two-way matching.

  Another source that can be tapped is the highly capable stay-at-home parent, who does not want to do a full-time job but can contribute for a few hours a day. Similarly, there are many who want to step off the career treadmill and do something that is more rewarding at their own pace. Once again, ICT technology allows their capabilities to be tapped, for it enables the community and the volunteer to make contact.

  FILLING GAPS

  Many communities will have critical gaps that need filling and they will need to undertake remedial measures before anything will work. This is why coordination across key players is important, since just one important deficiency in the business environment—the absence of a good school, for example—can derail other efforts.

  Some of these gaps have a chicken-and-egg character. For instance, crime and drug abuse will have to come down if a community is to be remotely attractive to business, but the availability of decent jobs is key to keeping people from drifting into crime and drug abuse. Similarly, schools will become better as they attract smart new kids, but smart kids will come only if there are good schools. As with any chicken-and-egg problem, a quick solution requires a big push and the favor of the gods. For instance, a large firm could miraculously move into town, employing some locals directly as well as catalyzing economic activity that indirectly employs others. With growing prosperity, crime and drug abuse would fall. The employees the firm brings in from outside would send their children to local schools, thus helping to improve their quality, and so on. . . .

  Absent such luck, though, the solution to such problems takes time, and requires virtuous circles. A concerted push against crime brings down the crime rate enough to attract a few bold businesspeople who create enough jobs and income that the crime rate falls a little further, drawing in developers who refurbish abandoned houses to rent them out, which reduces the crime rate still further. . . . Community revival is a long, drawn-out process in such cases, which is why it requires steadfast leadership and commitment.

  ENGAGING THE COMMUNITY

  Community revival has a much greater chance of success if the residents are stirred out of the apathy, cynicism, and despair that characterizes many distressed communities and start believing in their own prospects. When the residents of Indore started remonstrating with unthinking visitors who simply dropped their dirty plates on the ground, or when the residents of Galena started thinking of how they could generate income from the tourists who visited, was when the reforms gained a momentum that made them hard to reverse.

  Change is particularly visible and motivating if it happens around important public spaces where the community congregates, such as the public library or schools. Indeed, in their book, Our Towns: A 100,000-Mile Journey into the Heart of America, James Fallows and Deborah Fallows declare that in the library, they “could discover the spirit of a town, get a feel for the people’s needs and wants, and gauge their energy and mettle.”13 And later, “. . . we would ask what was the most distinctive school to visit at the K–12 level. The question served a similar function to asking who in town made things run. If four or five answers came quickly to mind, that was a good sign. If not, the reverse.”

  Therefore, an important task for the leadership group is to engage the community, so that they feel a part of the revival process. The crime prevention by residents of Pilsen, the actions by the residents of Indore to challenge those who still littered, and the attempts by the citizens of Galena to improve the tourist experience, all contributed to community pride and revival. Technology can help create a sense of engagement and participation, especially if the leadership group is comfortable with a certain amount of decentralized decision making, with residents taking ownership of some reforms and driving them in innovative directions.

  THE ROLE OF THE STATE

  Federal governments across the world are generally strapped for cash, and may have difficulty favoring specific communities, even if that were politically feasible. In the last chapter, we discussed the relative division of responsibilities, powers, and funding between federal and local government. Here we ask what else, if anything, the fe
deral government can do to encourage development in distressed communities through its tax and spending policies.

  There is a long history across the world of private enterprises being given tax incentives to locate in more remote or distressed areas. Many countries in Europe as well as in emerging markets follow such practices and the United States is attempting it again by designating certain areas as opportunity zones.14 When unaccompanied by a collective local effort to attract business and reduce the costs of doing business, such incentives typically do not offset the higher cost of doing business in remote or distressed areas. As a result, even if companies do locate in the distressed area, they often try to game such incentives by only placing a skeleton operation there. Even though they do much of the work elsewhere, they show through clever transfer pricing that the value is added in the distressed area, so that they can collect the incentives.

  Therefore, tax incentives are usually useful only as part of an overall package of measures that a community takes to improve its attractiveness to businesses. In practice, though, the federal government finds it hard to single out communities where a serious revival effort is under way. When it simply gives incentives to all firms that locate in distressed communities, the federal government ends up subsidizing bogus skeleton operations, firms that were going to invest there anyway, and firms whose investment does not add value, along with small quantities of genuine new useful investment. Most studies find the jobs created through location-based tax incentives come at a high cost to the taxpayer.15