A Regional Economic Development Plan

A Regional Economic Development Plan

by Thomas Greco

Throughout the world today, local communities are struggling to main­tain their economic vitality and quality of life. The reasons for this are both economic and political, and are largely the result of external forces that are driven by outside agencies like central governments, central banks, and large transnational corporations. In brief, decisions made by others outside of the community are having enormous impacts on life within the community. Be that as it may, it is possible for communities to regain a large measure of control over their own welfare and to ameliorate the effects of those exter­nal forces by employing peaceful approaches that encourage human solidarity and are based on private, voluntary initiative and creativity.

I often use the analogy of the small boat harbor to convey the general idea of how local communities can protect their small enterprises while remaining open to the global economy. The process of globalization, while having many positive aspects, has thus far been carried out in such a way as to be destruc­tive to small businesses, local economies, and democratic governance. It is as if there were a policy to remove the breakwaters from every small boat harbor in the world, the effect of which is to expose small boats to the turbulence of the open sea. As I put it in one of my lecture presentations — a rising tide may lift all boats, but the tidal wave of globalization smashes all but the biggest.

But a healthy global economy and a peaceful world require healthy commu­nities. Is there still a place for small businesses? Must every advantage be given to the corporate megaliths at the expense of small enterprises? The ancient economic debate that poses “free trade” against “protection” is too limiting and outmoded. Healthy economies require both free trade and protection, each confined within its appropriate bounds. Communities must create the equivalent of breakwaters to protect their small enterprises and workers, while at the same time remaining open to the national and world economies.

It is encouraging to note that there has been a recent major awakening about the mega-crisis that is developing worldwide, and a plethora of creative responses to it. Sustainability, relocalization, human scale, and the devolution of power are the current buzz. The big question, of course, is how are they to be achieved in the face of the tremendous forces that are driving us toward the precipice?

Approaches to Community Economic Development

Sadly, the orthodox approach to community economic development over the past several decades has centered upon efforts to recruit some large corpora­tion to come and set up operations in the local region — with the expecta­tion that they will provide additional jobs for local people, stimulate business for peripheral industries and the service sector, and ultimately add to local tax revenues. The consequent competition among cities and states in pursu­ing that strategy has resulted in corporations wresting enormous concessions from host communities in such forms as tax abatements and infrastructure provided at taxpayer expense. But capital is notoriously fickle and recent devel­opments have given it unprecedented mobility. Quite often the experience has been for companies to leave town as soon as the “free lunch” has expired, only to play the same game again somewhere else.

It is widely acknowledged that, in comparison to large corporations, small and medium enterprises (SMEs) contribute proportionately more to the economy in jobs, productivity, and innovation. According to the Organization for Economic Cooperation and Development (OECD), “SMEs play a major role in economic growth in the OECD area, providing the source for most new jobs. Over 95% of OECD enterprises are SMEs, which account for 60%-70% of employment in most countries. As larger firms downsize and outsource more functions, the weight of SMEs in the economy is increasing. In addi­tion, productivity growth — and consequently economic growth — is strongly influenced by the competition inherent in the birth and death, entry and exit of smaller firms.” The same pattern would seem to hold in other parts of the world, including America.

Doesn’t it therefore make more sense to nurture the businesses that are already part of the local economy? Doesn’t it make sense to support those companies that are locally owned or managed and have a stake in the prosper­ity and quality of life in their home communities? Communities that have a high quality of life, an able workforce, and a clean and pleasant environment do not need to offer bribes to outsiders. Relocalization efforts cannot get very far without the creation of metasystems that support buying locally, selling locally, investing locally, and saving locally. Conventional political forms of money, and huge banking companies that are owned and managed by remote entities, by their very nature militate against relocalization. There is no need for antagonistic opposition to those entities; they can be made less relevant and less destructive by implementing creative methods that localize control over both exchange and finance.

I propose that groups and organizations that seek to promote healthy, sustain­able local economies should make it a priority to organize regional mutual credit clearing associations as the centerpiece of a comprehensive program. As these associations develop and grow, they will provide their regions with an increasing measure of independence from the outside forces that control conventional money and banking, enabling communities to rise above “the race to the bottom” that has resulted from the kind of globalization that has been architected and forced upon the world by the World Trade Organization, the International Monetary Fund, and the World Bank. The credit clearing exchange is the key element that enables a community to develop a sustainable economy under local control and to maintain a high standard of living and qual­ity of life.

The possibilities inherent in such a plan should not be judged by past expe­rience with local currencies and other exchange alternatives. Just as a modern jet aircraft bears little resemblance to the Wright brothers’ first airplane, so too are the more optimized exchange structures proposed in my book unlike any community currency, LETS, or commercial “barter” exchange with which people might be familiar. Based on the principles we have outlined, it is now possible to engineer and build exchange systems to carry heavy economic loads within local bioregions and to operate them according to sound busi­ness principles. This is a multistage project that will proceed in the following sequence:

1. Institute measures that promote import substitution.

2. Provide an alternative payment medium, independent of any political currency and banking establishment.

3. Issue a supplemental regional currency.

4. Develop basic support structures that strengthen the local

economy and enhance the community’s quality of life.

5. Develop an independent value standard and unit of account.

Stage I: Mapping the Territory and Import Substitution

Jane Jacobs has argued that cities, not nation states, are the salient economic entities, and that city and regional economies develop through a process of import substitution. That being the case, it would seem reasonable that a regional economic development program should begin with actions that support that process.

The first stage of the development program might look rather conventional and similar to some “buy-local” programs of the past, but it will be more comprehensive in its social, economic, and political aspects. It begins by orga­nizing solidarity groups that include all sectors of the constituent commu­nities — particularly the locally owned and controlled businesses, municipal governments, the nonprofit sector, social entrepreneurs, and activists. By building bridges between these groups and identifying common objectives, it should be possible to achieve the commitment to do the hard work necessary to move together toward greater regional economic self-sufficiency.

The first major task is to launch a “buy-local” campaign in which the economic resources and business relationships within the region are clearly mapped. That database can then be used to assist businesses in finding local sources for the things they buy and local customers for the things they sell. The services of brokers can be employed to help match up supplies with wants and needs. Critical gaps are identified and local entrepreneurs can be encour­aged to find ways to fill them, perhaps with support from a local microlend­ing agency. As this process proceeds, the community becomes less dependent upon outside entities and more resilient and self-determining.

These measures alone, however, are far from sufficient. Given the fact that conventional money and banking are themselves externally controlled and act in ways that are parasitic upon the local economy, some way must be found to reclaim at least a portion of the “credit commons” and bring it under local control. So unlike conventional buy-local initiatives, this project moves quickly to implement the second stage.

Stage II: Mutual Credit Clearing Provides an Alternative Means of Payment

The second stage is the most important and unique stage of the project. It provides an alternative means of payment based on the community’s own credit through the process of direct credit clearing.

Working capital in the form of conventional money is always scarce and expensive for most businesses. Mutual credit clearing is an extension of the common business practice of selling on “open account,” but it is done on a more organized multilateral basis, which has the effect of sharing the risks and enabling a participant’s sales to pay for purchases without the use of any third-party credit instrument such as conventional money. As a member of a mutual credit clearing exchange, a business can have an interest-free line of credit, it will be able to acquire the things it needs without the use of cash, and (because it accepts payment in the form of exchange credit) will be a preferred source of supply for others who are members of the exchange.

The allocation of credit in a clearing exchange involves the granting of an “overdraft privilege,” which means that a member’s account may have a nega­tive balance up to some specified limit. In allocating lines of credit, it is impor­tant (especially in the beginning) to allocate the greatest share of credit to “trusted issuers” — i.e., those that are well established, financially sound, and whose products and services are in greatest demand within the local region. This is the key to maintaining a rapid circulation of credits through the system, avoiding defaults, and preventing the excessive accumulation of credits in the hands of businesses that cannot easily spend them. In brief, the businesses that you wish to have accept community credits in payment are the ones that should be issuing them in the first place. By beginning with “trusted issuers” the value and usefulness of the community credits is quickly demonstrated beyond any doubt. As the process gains credibility and general acceptance in the community, more businesses and individuals will want to join the credit clearing exchange and as each member develops a trading history they too can earn an overdraft privilege commensurate with their volume of sales within the system.

Like any network, a credit clearing system becomes more valuable and useful as it continues to expand and a greater variety of goods and services become available within the network. By way of example one may note that the first fax machine was very expensive — but useless. As more fax machines were deployed and connected in an expanding network, the fax became more valuable to all users — even as prices plummeted and quality improved. The same will happen with clearing networks, but it is essential that the network and each node in it be properly designed and operated from the very start.

Stage III: The Credit of “Trusted Issuers” Provides an Alternative Currency for Regional Circulation

The third stage of the program will be the joint issuance of credits into the general community by the members of the clearing association. This is accom­plished by the association members buying goods and services from nonmem­bers who are outside the credit clearing circle. They make these purchases by using some form of uniform credit instrument, like a voucher or certificate, which all association members are obliged to redeem — not for cash, but for the goods and services that are their normal stock in trade. That provides a sound regional currency based on the productive capacity of the region’s leading enterprises, a currency that can circulate among any and all as a supplemental medium of exchange. The availability of such a currency to supplement the flow of official money insulates but does not isolate the local economy. Just as a breakwater protects a small boat harbor from the turbulence of the open sea, a sound regional currency provides a measure of protection from the turbu­lence of the global economy and centralized banking and finance.

This externalization of credits from the clearing association into the general community can be achieved using any of several available forms and devices. Credits may take the form of paper notes, coupons, vouchers, or certificates; they might be placed on stored value cards like the gift cards that are commonly issued by major retailers and are so popular these days with consumers; or they could manifest as credits in accounts that reside on a central server that can be accessed by use of a debit card and point-of-sale card reader.

Stage IV: Support Structures for Localization-Saving, Investment, Finance, and Education

While the most fundamental need is for mechanisms that enable local control over the exchange function, the health and independence of local economies also requires the localization of savings and investments. In today’s world, locally owned and managed banks have become increasingly rare, most having been acquired or replaced by branches of huge bank holding companies that are owned and controlled by entities outside the region. Local savings depos­ited in those banks can and do get invested anywhere in the world, often in ways that are detrimental to the interests of the saver and the health of their local economy. They often leave homegrown enterprises starved for capital while funding megacorporations, weapons, war, and projects that are socially or environmentally destructive. Structures can be created that channel tempo­rary surpluses of both conventional money and exchange credits into enter­prises that enhance local production and quality of life.

Additional support structures are suggested by the experience of the Mondragon cooperatives in the Basque region of northern Spain. Over a period of more than fifty years, the Mondragon network has grown and thrived on the basis of cooperation and social solidarity. In addition to more than 250 industrial and service cooperatives and associated companies, it has developed structures to provide finance, education, and research in support of its regional cooperative economy. The Caja Laboral Popular (CLP, or Working People’s Bank), for example, is itself a cooperative that invests the savings of the local community and provides financing for the other cooperative enterprises.

Stage V and Beyond: Transition to an Objective Measure of Value and Accounting Unit

Eventually, it will become necessary to denominate local credits in some inde­pendent, objective, nonpolitical unit of account based on a concrete stan­dard of value. This will become especially important as political currencies continue to be inflated and their monetary units are debased, and as local clearing networks become interlinked regionally and across national bound­aries. Trade credit units originally defined as being equivalent to the domi­nant political currency unit (like dollars, pounds, euros, and yen) will shift over to a value unit that is objectively defined in terms of valuable, commonly traded commodities. Such a unit will facilitate trading across national borders by obviating the need for foreign exchange and eliminating the exchange rate risk, and will be immune to the inflationary and deflationary effects that beset national political currencies.

The remaining design details and implementation strategies can be settled upon as the program unfolds. For now, it is sufficient to say that all of the necessary monetary science is well established and all of the major system components are readily available. With a modest amount of funding or invest­ment, programs designed along these lines can be quickly launched and a credit clearing system can quickly reach critical mass. It is expected that the success of this model in one or two local regions will inspire others to imple­ment it, leading to a rapid proliferation of healthy and sustainable communi­ties that might associate to form a worldwide economic democracy.