Economic Development

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  Charles Marohn

  • July 06, 2021 20:13
  • Official comment

  These are two good questions, but let me focus on the statement "there are significant limitations" first because it creates an important context.

  I don't think it is reasonable, or even desirable, for a city to try and be completely self-sufficient. Trade is good for a community and I don't reject Ricardo's idea of comparative advantage. Like any good insight, though, it can be taken too far -- to the point where the French import wine from grapes grown in the American desert (at great subsidy and damage to the environment) because it is cheaper (aka: more competitive) than grapes grown in France. Or North Sea cod are processed in China and then shipped to the US because labor in China is cheap and transportation costs are low, at least for the producer. 

  If wine and cod don't keep you up at night, think prescription drugs and microchips. We never want to give up all of our capacity (see the chapter on Henderson in Jared Diamond's book Collapse). To the extent that I cited "limitations" to import replacement it is an acknowledgement that I'm not fanatical about replacing all imports -- this strategy needs to be pursued, but it must be paired with other strategies. Standing alone, it's not a real economic development strategy.

  So, what is a reasonable expectation and how do you measure success? I think that will vary based on community size and composition, but ultimately success needs to include the growth of related support industries. 

  If we follow the wine/grapes analogy, it would look like industries and services related to the growing of grapes and the production of wine becoming viable locally. That may mean repair or construction of equipment used in farming grapes to destination hotels or B&B's relating to wine tasting. When related industries start to pop up, that capital retained in an import replacement strategy is starting to matter.

  Ideally, the next stage then is to turn those related industries into import replacement enterprises themselves, and to make them part of an economic gardening program. If your grape equipment producer is really successful locally serving that need, they can start exporting their equipment outside the community to others. That's an acceleration strategy.

  Jane Jacobs in The Economy of Cities wrote about import replacement. Highly recommended (my favorite of her books). Here is an excerpt from a summary blog piece on Jane Jacobs' contribution to economics:

  There are five major processes at work in a growing city economy: (1) A nascent city finds a market in older cities for its initial export work and builds up a collection of numerous local businesses to supply producers’ goods and services to the initial export work; (2) Some local suppliers of producers’ goods and services start exporting their own work. New local businesses begin to supply various goods and services for this new export work, and some of them eventually begin to export their own work. In the process, the city imports a growing volume and diversity of goods and services; (3) Many of these imports are replaced by locally produced goods and services through “import replacement”, which is not the same process as the “import substitution” policies adopted by the leaders of various developing economies in the 1960s and 1970s. For one thing, import replacement must take place in logical stages, beginning with the parts or inputs most in demand, and must be selfsustaining. For example, Japanese imports of bicycles from the West gave an incentive to local entrepreneurs and mechanics to open repair workshops, to begin manufacturing the most sought after bicycle parts, and eventually to assemble and later export bicycles entirely made of local components. For economic and practical reasons, successful import replacing can only be a city process. Import replacement creates a powerful multiplier effect and, as result, cities built their diverse economic foundations in “boom” phases. After an import-replacement boom, a local economy contains rooms for goods and services that were formerly neither imported nor locally produced, including unprecedented goods and services; (4) The city’s greatly enlarged and diversified local economy becomes a potential source of numerous and diversified exports. The city’s exporting organizations arise by a) adding the export work to other people’s local work; b) adding the export work to different local work of their own; c) exporting their own local work. The city earns more imports by generating new exports, but many of the new exports merely compensate for declining lost work through obsolescence of older exports, transplants of some organizations into the rural world and replacement of exports by goods now produced in former customer cities; and, (5) The city continues to generate new exports and earn imports, replaces imports with local production, and so on.

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  Stephen Jaques

  • July 06, 2021 23:46

  Thank you Chuck! Your response really helps me fully grasp the idea! My only exposure to this idea was the widely panned import substitution experiments that Jacobs references, so I needed a bit more explanation.

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  John Pattison

  • August 30, 2021 23:35

  Not sure if you saw, Stephen Jaques, but Chuck talked about your question on today's episode of the Strong Towns podcast: https://www.strongtowns.org/journal/2021/8/30/chuck-marohn-answers-your-questions

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  Stephen Jaques

  • September 02, 2021 02:34

  Thanks for the heads up. I did listen to the podcast and appreciated the discussion!

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