A tale of two analogies for local business organisations…
What’s the easiest, simplest and neatest way to fill a bath?
- Put a plug in the bath
- Turn the tap on
It seems obvious doesn’t it? It’s strange though, how we always become obsessed with force. ‘Bigger, stronger, harder…gets the job done’, seems to be the thinking.
In the world of economic development, some argue that you don’t need to use a plug at all to fill up a community’s wealth stocks. All you need to do is turn the taps on as hard as they will go. In fact, if the economic inflow coming via the tap isn’t enough, get a bigger pipe. Force as much inflow down as big a tube as you can possibly find.
This is of course theoretically correct given the parameters of the analogy. If the inflows are greater than the outflows then the bath (capital stocks in the economy) will fill up. And more so than just theory, it is perfectly accurate in the real world to argue that if the outflow is stopped but there is no inflow, you won’t see any action on volume levels (stocks) of water. You will have an empty bath (a dead economy).
But lets expand the parameters of the analogy a bit more to something more variable, something more like an economy. I’ve used the bathtub analogy mostly because it is simple but most bathtubs don’t spring leaks and outflows through a plughole are set at the limits the diameter the hole allows. Economies aren’t that simple.
I think a more accurate analogy may be that of a dam, made with a wall constructed by highly skittish and not very focused engineers.
Imagine your local economy is a dam. Just as with a dam that has inflows from rivers in the catchment area, supplied by rainfall, in a local economy you have inflows from export earnings, tourism, government spending and business investment. And, as in a dam where you have outflows from evaporation and people who use the water in the dam, in a local economy you have outflows when something is purchased by locals outside of their local economy or when the town imports goods it cannot manufacture itself etc.
But like our dam built by skittish and not very focused engineers, a local economy’s wall is also made by people who don’t make purchasing decisions necessarily based on where something comes from, if they can actually afford it or if even if they really need it.
So, imagine you have a huge rainstorm and the inflow to the dam is increased massively. The pressure on the dodgy wall constructed by our fickle engineers, who didn't foresee such an occurrence, means that cracks begin to appear and then water begins to leak out. It leaks out slowly at first but as the water rushes through the cracks it forces open larger cracks and creates a reinforcing feedback loop where the more water that gushes out, the bigger the cracks open up and the bigger the crack the more leaks out until eventually the whole wall gives way.
Likewise, imagine a local economy where suddenly money inflows increase rapidly, to the joy of all the residents, without any thought given to establishing leak plugging businesses. The problem is that none of this money stays in town because although the spending capacity of the townsfolk has increased, they have no way to capture the extra money. In other words, the leaks actually get bigger. Locals eager to spend their windfall leave town to shop in the city. Chain stores, who weren’t there before, can sniff the extra money and arrive in town to help extract more from the local economy. They even put some of the local enterprises out of business causing further leakage.
The same reinforcing feedback loop occurs as in the dam metaphor. The more the inflows increase the more the leaky economy...well, leaks!
“So what? The townsfolk have more money!’ They certainly would have more disposable income as long as the inflow can be maintained and the inflow was owned by locals. However extra inflow is rarely owned locally and therefore not embedded in the local economy. In other words, the inflow is owned by someone who has no loyalty to the community and can remove it at will – for instance, when commodity prices or global markets change and when inputs like energy and labor are cheaper elsewhere.
But even more real world than these circumstances is the basic fact that increasing the inflow substantially is sometimes next to impossible as compared to decreasing the outflow.
Here is a real world example from the town I live in, Toodyay, Western Australia.
Murdoch University did a study of Toodyay in 2004 and found there were 91,200 day tourist visits each year. According to the Wheatbelt Regional Development Commission these day-trippers average $45 expenditure each.
The Murdoch study also found that there are also 27,800 overnight visitors averaging 2.1 nights who spend, on average, $80 per visitor per night stay
Overnight spend seems disproportionately lower than it should be because 36% of these people stay free at friends and relatives home. So, day-trippers contribute about $4million pa to Toodyay and overnighters about $4.7 million for a total of approximately $8.7million
Likewise, you could keep a further 10% of household expenditure in Toodyay and add an estimated $7million to the local economy. That's equivalent to an extra 155,000 day visitors a year. That’s right, you’d have to increase day visits from 91,200 to 246,200!
The point is, turning the tap on harder…is harder! You can keep 10% more of the money that is already in Toodyay local, or increase tourists who don’t exist yet by over 150%. Even getting the ones that do exist to spend more will need increases of about 80% to do the trick.
How would you give this a crack? What would have to be done to Toodyay to make this happen?
The biggest festival in Toodyay each year, the Moondyne Festival, attracts about 10,000 visitors. Another 15 events of that size would have to be organized! Maybe a theme park or an international airport might help? Perhaps tourism isn’t the answer. Maybe a mine or a factory could do it…although perhaps not without affecting the tourism industry and probably not actually increasing the inflow by $8.7 million at all. Even $8.7 million in wages (about 100 employees) wouldn’t totally stay in town if the leaks weren’t plugged.
Plugging just 5% of the leaks of both households AND businesses would probably easily match this and in doing so increase business opportunities for local entrepreneurs.
More entrepreneurs = more unique shops in town not found anywhere else. Wouldn’t this attract more tourists as well? Perhaps it would help them spend more too?
What’s the easiest, simplest and neatest way to fill an economy?
1. Put a plug in the leaks
2. Turn the export/investment tap on
 Wheatbelt total dollar spend divided by total visitor nights: July 2006, Wheatbelt Dev Commission Economic Perspectives Report.