Leakage Analysis

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Description

By Michael H. Shuman & Doug Hoffer:

1.

"A growing body of evidence suggests that the best way to strengthen a community economy is by expanding locally owned businesses serving local markets. By studying leaks of dollars – that is, goods and services being imported that could be produced locally – a community can identify the most promising markets for new or expanded local businesses, and the best private initiatives and public policies to support this kind of economic development." (https://mvcommission.org/sites/default/files/docs/leakagestudy.pdf)


2. Multiplier vs leakage:

"Every purchase triggers purchases by others within a community. For instance, a dollar spent on rent might be spent again by the property owners at the local grocer, who in turn pays an employee, who then buys a movie ticket. This phenomenon is what economists call “the multiplier.” The more times a dollar circulates within a defined geographic area and the faster it circulates without leaving that area, the more income, wealth, and jobs it creates. This basic concept in community economics highlights the importance of maximizing the numbers of dollars being spent locally and minimizing their “leakage.”


Typology

Three Types of Leakage Analysis

By Michael H. Shuman & Doug Hoffer:

"There are three kinds of leakage analysis we undertake:

• One is to compare actual business activity undertaken by the permanent residents with expected activity (for a self-reliant economy) and to measure the “gaps.” These gaps suggest the full universe of sectors where import substitution can occur.

• A second is to take a broader view, based on discussions with experts on the island, to discern “gaps” that otherwise might be obscured by the data and to narrow the universe of possible import substitution to the most plausible.

• The third step is to show the economic benefits of these plausible shifts of expenditure to local business."

(https://mvcommission.org/sites/default/files/docs/leakagestudy.pdf)

Discussion

The importance of import-substitution for local prosperity

"Import substitution matters for economic prosperity as well. Every time a community imports a good or service that it could cost-effectively produce for itself, it “leaks” dollars and loses the critically important economic multipliers associated with them. Unnecessary imports – of foreign oil, for example – also subject a community to risks of major price hikes and disruptions outside local control. And they deny a community a diversified base of businesses and skills that are needed to take advantage of unknown (and unknowable) future opportunities in the global economy.

“Localization” turns out to be an important strategy for promoting the expansion of highwage, “high road” jobs. More traditional strategies for attracting these jobs from nonlocal enterprises have had disappointing results, because many of the promised jobs do not materialize or turn out to be temporary. Moreover, because nonlocal businesses spent less money locally than local businesses, they have lower multipliers and fail to raise wages in other sectors of the local economy. A recent study in San Francisco found, for example, that a 10 percent shift of residential spending on retail from nonlocal business would add to the city’s economy nearly 1,300 more jobs, $72 million more in wages, and $192 million more in annual output.

(A similar shift in spending the other way, from local to chain, would eliminate 1,300 jobs, shrink wages by $72 million, and reduce output by $192 million.)


Two clarifications about LOIS are important:

First, import-substitution does not mean cutting off a community from the global economy. To the contrary, as the late Jane Jacobs argued, an economic strategy of promoting import-substituting businesses turns out to be an effective way to develop export-oriented businesses. But instead of putting all of the community’s eggs in one export-oriented basket, this strategy aims to develop myriad small businesses, all grounded (initially at least) in local markets with many then becoming exporters.

Second, this perspective does not carry a moral judgment about non-LOIS businesses being bad or unproductive. To the contrary, many global, export-led companies are terrific at creating wealth and jobs. But dollar for dollar of sales, the typical LOIS business produces more benefits for a given region than the typical non-LOIS business, in part because local ownership anchors the business to the community and in part because of the multiplier effects.

LOIS businesses actually constitute the majority of the U.S. economy. According to the Small Business Administration, about half of the private sector’s output and jobs comes from small business. Add nonprofits and governmental sectors, and the “place-based economy” accounts for 58% of gross domestic product (GDP). This number is significantly higher in rural communities. The businesses in the place-based sectors, moreover, produce far more jobs, patents, and innovation than equivalent sized nonlocal businesses.

The main doubt economists express about LOIS concerns competitiveness. Are we not in an era when bigger businesses can better achieve economies of scale? In fact, in all but seven of the thousand-plus sectors of the North American Industrial Classification System (NAICS), there are more examples of competitive small-scale enterprise in each sector than large-scale enterprise. Put another way, the U.S. economy is full of models of small-scale success that can inform entrepreneurship activities in even very small communities. What’s missing is an economic-development strategy that these communities can use to identify, create, and nurture theses enterprises. Enter leakage analysis."

The Role of Leakage Analysis

"One way to discern LOIS business opportunities is to measure local leaks. By leakage, we mean the outflow of dollars on outside goods and services that could cost-effectively be produced locally. Plugging leaks, particularly if done through locally owned businesses, provides an excellent opportunity for bringing strong new catalysts for economic multipliers into the economy.


Among the valuable results of leakage analysis are:

• Policymakers have a clearer vision of how to allocate scarce public resources for economic development.

• Existing small-business proprietors have a better sense of promising opportunities for expansion, and entrepreneurs see the most profitable markets for start ups.

• Local banks, lenders, and investors can better calibrate their allocations of commercial capital.

• Foundation, nonprofits, and grassroots groups have a clearer sense of who to mobilize for community action.

• Consumers can better appreciation of the potential payoffs of buying more goods and services locally.


Measuring leakages, however, turns out to be very challenging for small communities. Generally speaking, economic data in the United States are more accurate, detailed, and complete at the higher levels of aggregation. Measuring national leakages, for example, is relatively easy, since the government publishes measures of imports of goods, services, and capital. State measures are more difficult, county measurements more difficult still, and community measurements the most difficult of all.

The methodology we employ – like almost every methodology used by the economic development profession — is highly imperfect. Each of the federal, state, and private data sets we use was collected in a different way, contains sampling errors and uncertainties, and has been “adjusted” in special ways to compensate for these problems. Moreover, even various federal databases were not been designed to be used with one another. Our findings therefore, even when exact numbers appear, should only be used as broad guidance for appropriate public and private initiatives."


Localization Policies Directory

By Michael H. Shuman & Doug Hoffer:

An Action List for Localization, adapted from the book The Small-Mart Revolution

Tools for Consumers

(1) Directories of Local Business – Create lists of local businesses for Vineyard residents and businesses in print, on line, in newspaper ads, and on coffee cups.

(2) Directories of Local Products – Highlight, in print or on line, the many locally made goods or locally provided services that are available.

(3) Local Labels – Develop a local insignia of local ownership, so that consumers know if a store is locally owned or if a product is locally made.

(4) Buy Local Days – Designate official days, weeks, months, or seasons, all of which can provide the basis for a buy-local campaign.

(5) Local Currency – Mobilize the island to print its own “money,” like Ithaca Hours or BerkShares, that can only be used by local businesses and consumers.

(6) LETS – Create computerized trading systems, especially popular in Europe, that encourage locals to trade with one another without toughing mainstream money.

(7) Time Dollars – Set up a computerized system for tracking volunteer hours as a way of legitimizing and expanding such contributions for the community.


Tools for Investors

(1) Reduce the Use of Credit Cards – Remind island residents that nearly all credit card processing is nonlocal, and wasting precious local money on nonlocal high-interest payments.

(2) Expand Small Business Loan Funds – Mobilize local banks, philanthropists, foundations, and government agencies to expand the assets of revolving loan funds for small business.

(3) Create Micro Funds – Consider setting up additional small-business funds in partnership with the local banks. Several dozen depositors can pony up money, create a lending pool, and then team up with the bank to administer the loans to whomever you think is creditworthy.

(4) Invest Local – Encourage island investors, including part-time residents, to invest more of savings in local business as a cooperative member, as a program-related investor in a nonprofit, as a limited partner, or as a shareholder.

(5) Local Venture and Hedge Funds – Recruit local securities industry professionals (perhaps retirees) to help create local investment funds that specialize in highperforming local businesses.

(6) Technical Assistance for Small Stock Companies – Create a company that helps small-businesses to issue local stock (i.e., tradable only intrastate), and then to handle the ongoing reporting and due-diligence requirements.

(7) Local Underwriters – Set up a local investment company that helps successful local firms create local stock issues, and that then sells the securities intrastate for a fee.

(8) Local Stock Markets – Put together an electronic trading platform to help local business investors find and trade with one another.

(9) Local Investment Advisers – Set up a firm that specializes in helping investors evaluate the performance of local business.

(10) Pension Fund Advocacy – Pressure pension funds in the region, whether private or public, to invest in local real estate, local business, local venture and hedge funds, and local mutual funds.


Tools for Entrepreneurs

(1) BALLE Chapter – Create a local business network (best linked with the Business Alliance for Local Living Economies) so that you’re not alone. Use the alliance to promote local purchasing, fight chains, solve problems, secure credit, and learn skills.

(2) Producers Cooperatives – Join existing producers’ cooperatives or other kinds of industry-specific affinity groups that collectively purchase, advertise, and lobby for local members. Or start a new one.

(3) Bazaars – Help set up and participate in local business mini-malls, whether they are weekend farmers’ markets or dedicated shopping destinations.

(4) Direct Delivery – Create or join a direct delivery service affiliated exclusively or primarily with local businesses.

(5) Flexible Manufacturing – Form a network of local businesses that is ready and willing to seize manufacturing opportunities as they arise.

(6) Buyers’ Cards – Team up with other local businesses to create instruments that promote local purchasing, such as local credit cards, debit cards, loyalty cards, and gift cards.

(7) B2B Marketplace – Set up a business that links local businesses to one another, and takes a commission on each local “input” substitution.

(8) B2G Midwife – Create a business that aggregates small businesses into compelling bids for government contracts and handles the paperwork in exchange for a fee.

(9) Super-Incubators – Take existing small-business incubators (or start new ones) and rededicate them exclusively to local business. Restructure them to operate on a self-financing, venture-capital model.


Tools for Policymakers

(1) Indicators – Prepare quantifiable measures of the community’s quality of life (economic, environmental, social, and political) and update them annually to hold economic development policies accountable. Conduct public hearings in which residents decide which indicators are most relevant, and then, put together an annual report on the best ones, distribute it widely, and place it on a web site.

(2) Assets Analysis – Gather data on assets in the region, especially un- or underused economic inputs like unemployed labor, deserted land, abandoned buildings, and idle machinery, all to clarify what’s available for new or expanded small business.

(3) Subsidy Inventory – Perform a full evaluation of all subsidies given in the last ten years to business (grants, loans, guarantees, tax abatements, capital improvements, TIFs, or bond issues), and catalogue which, if any, went to local businesses.

(4) State of the Region Report – Prepare an annual booklet with the latest assessments of indicators, assets, and imports, as well as other inventories noted below, all to strategically identify business opportunities with the greatest benefit for the community.

(5) Community Reinvestment Report – Study which local depository institutions – and, if any exist, which investment institutions – are reinvesting more than 90% of their savings/investments locally, especially in affordable local housing.

(6) Pension Fund Analysis – Identify which pension funds, whether public or private, specialized or mutual, might be capable of reinvesting locally.

(7) Good Communitykeeping Seals – Evaluate the performance of all businesses in the region, and award a special seal to any firm that is not only locally owned but also a good performer with workers, consumers, and the environment. This can now be done through the B-Corporation process (www.bcorporation.net).

(8) Entrepreneurship Programs – Revitalize entrepreneurship programs in public schools, community colleges, and local universities to emphasize local and small business. Allocate municipal funds to help other institutions like churches, civic groups, and small business associations set up entrepreneurship study groups.

(9) Mentorship Programs – Link established businesspeople (especially retirees with extra time) with young and aspiring entrepreneurs.

(10) Place-based Scholarships – To retain the best and brightest, create a scholarship fund that extends no interest loans to college-bound kids. (If they return to and settle in the community after graduation, they enjoy no- or lowinterest provisions; otherwise, interest rates kick up to market levels.)

(11) The Home-Grown Directory – Prepare a directory of local businesses organized by product or business type that could help residents buy local. This could then be distributed in hard copies and over the Internet to consumers.

(12) Regional Directory – Combine your home-grown directory with neighboring towns around a regional theme.

(13) Selective Public Contracting – Give a 5-10% bidding advantage to local businesses. Better still, demand that all bidders estimate anticipated multiplier benefits.

(14) Small Business Bidding Assistance – Set up an office that helps local business compete more effectively for public contracts.

(15) Broker B2B Deals – Consider replicating the model of the Oregon Marketplace, which in the 1980s and early 1990s helped local businesses buy cost-effective inputs from local suppliers.

(16) Local Currency – Support or create a local scrip, since only businesses and service providers committed to re-spending locally will be interested in accepting the currency. Pay bonuses or raises to public employees in the scrip, and accept scrip for partial payment of taxes, both of which Philadelphia did during the Great Depression.

(17) Invest Local – Begin moving municipal investment, including surplus revenues and pension funds, into local business either directly or indirectly through local-business venture, hedge, or mutual funds.

(18) Smart Growth – Revamp zoning to permit more kinds of businesses in more kinds of places, especially home-based businesses. More fully use developed land and buildings before grinding up green space or farms.

(19) Smart Schools – Refurbish older, smaller school buildings instead of building newer, bigger ones. Make it easy and safe for children to walk or bicycle to school.

(20) Smart Taxes – Phase out taxes on business, income, sales, and property, and phase in revenue-neutral taxes on energy, nonrenewable resources, pollution, and nuisances. If more revenue is ever needed, use Henry George property taxes (on land, not on improvements) to spur business.

(21) Smart Wages – Create a “living wage” to eliminate most working poverty in the community. Use savings in welfare programs to ease the transition for burdened small business. Don’t lament, but celebrate, how these scare away chain stores."

(https://mvcommission.org/sites/default/files/docs/leakagestudy.pdf)


More information

By Michael H. Shuman & Doug Hoffer:

"Locally owned, import-substituting (LOIS) businesses. Discerning opportunities for LOIS requires an analysis both of dollar leakages (that is, where residents are spending money outside the local economy) and of opportunities for plugging leaks." (https://mvcommission.org/sites/default/files/docs/leakagestudy.pdf)


* Report: By Michael H. Shuman & Doug Hoffer. Leakage Analysis of the Martha's Vineyard Economy: Increasing Prosperity through Greater Self-Reliance. Martha’s Vineyard Commission, August 2007

URL = https://mvcommission.org/sites/default/files/docs/leakagestudy.pdf