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Making money local

In his latest book Local Dollars, Local Sense, Michael Shuman makes the case for local alternatives to the global financial system. He talks to Clare Goff about creating the infrastructure for local investment.

THE SUBTITLE OF YOUR BOOK IS ‘HOW TO SHIFT YOUR MONEY FROM WALL STREET TO MAIN STREET AND ACHIEVE REAL PROSPERITY’. HOW CAN WE MAKE THIS HAPPEN?
We need to abandon one very widely-used practice in economic development – the attraction of corporate business – and embrace three new ones. The effort to attract and attain non-local business is an obsession. In the United States it is synonymous with economic development. People may understand that there is another way but it is still widely practiced, not only in subsidies but in time. Every hour of economic development time put into this is an hour not available for creating real prosperity by better means.
The three principles I urge people to take on are:

  • MAXIMISE THE PERCENTAGE OF JOBS IN LOCALLY-OWNED BUSINESSES. Ownership is key. There’s too much focus on distances travelled – e.g. in food, from farm to table – but to me of greater consequence is that the businesses in the chain are locally owned. Ownership governs economic impact.
  • MAXIMISE LOCAL SELF-RELIANCE, not to hermetically seal ourselves from global trade but because a community that increases its local self-reliance will be in a better position to benefit from global links from a position of strength
  • IDENTIFY, CELEBRATE AND SPREAD MODELS OF THE TRIPLE BOTTOM LINE. Many believe business that is mindful of standards will perform poorly but so many disprove that and we need to spread that.

WHY DID WE GET STUCK IN THE CURRENT LOCAL ECONOMIC DEVELOPMENT PRACTICE AND HOW CAN WE GET OUT OF IT?
For a long time attracting corporate business was part of the school and the theories were widely prevalent. Now there is so much evidence against it but it’s not so much about economics but about politics. Politicians want to attract big corporates. Compare one business that brings in 1000 jobs with the difficult but important work of a few jobs in a lot of businesses that don’t grab headlines. We need to get practices back in alignment. We need to either abolish economic development or figure out ways to make it less biased. I will be urging the abolition. I feel most of the people working in economic development are so far beyond reform we have to start from scratch. Practitioners love international travel. I think we should tell staff that we’ll send them on an international trip anywhere on the condition that they spend 11 months of the year doing their job at home. I would also take economic development out of the public sector and put it in to private sector.

HOW CAN WE GET ECONOMIC DEVELOPMENT PRACTITIONERS TO THINK DIFFERENTLY?
In the work that I do it’s around helping better thinking economic development practitioners to recalibrate their programmes. I get them to focus on six categories, all of which begin with P – planning, people, partners, purse, purchasing, public policy.

  • PLANNING: We need to identify leaks in the local economy and find those businesses that will make progress in plugging those leaks.
  • PEOPLE: We need to train entrepreneurs or a new generation to lead replugging businesses
  • PARTNERS: We need to create partners to achieve more competitive networks
  • PURSE: Local investment (see my Top Tools for local investment below)
  • PURCHASING: This is the most common feature. We have to think local first and move towards full cost accounting of tax revenues that are collected. You will collect more from a company that spends more money locally. That is the direction for reform for procurement. I’m not in favour of overt favoritism for local but favour full cost accounting that takes into account tax revenues.
  • PUBLIC POLICY: A lot look for ways government can be in favour of local business. I’m more modest. I’d like to end government discrimination against local business. Most economic development can be considered a subsidy for global companies against local business. My view is to remove the advantages to global business. There are so many examples: no anti-trust laws followed with rigour; tax policies that impinge heavily on local retailers but not on internet sales. There is some movement to fix this in the US.

Local economic development can try to think about the ecology one can create in a community in support of those six Ps listed above. Can we do many of those ‘P’ activities through self-financing business?

SO HOW CAN WE CREATE THE INFRASTRUCTURE TO ALLOW MORE LOCAL INVESTMENT TO HAPPEN?
We have a four-page overview of tools and we’ve seen a huge revolution in local investment in the last year. The basic problem is that when you look at long term investment in US – for retirement for example – it totals about $30tn and they are big categories – stocks, bonds, mutual funds, pension funds and insurance. All of that money is invested in corporates but half of the US economy is local/small business. Roughly speaking in an efficient capital market place half of the capital should go to small businesses but at the moment nothing is. To me this represents a massive capital market failure.
The reason is the bias in the law that makes it so expensive for a small business to do the paperwork to get a dollar that it doesn’t happen. In the US we have recently overhauled securities to make it cheaper and easier to issue stock. We’ve addressed one problem in law, but it’s still very difficult to trade stock and a whole new set of laws are needed. In a local ecosystem you would have a lot of stock, trading of stock and also investment companies that created that stock. We need to do it one step at time.
I’ve been arguing that economic development would be stronger, and smarter, if it embraced self-financing models. This way, it would be less dependent on fickle contributions for local government and philanthropy. So, there are examples of incubators that self-finance, mostly by charging a fee for service before or after incubation.  The problem with these models is that they adversely affect the incubated business’s bottom line. A smarter approach is for the incubator to take an equity share in the company, and then sell it. My thought, then, is that an incubator might help client businesses transform themselves into small stock companies and market the shares. But the incubator would keep, say, 10-20%, just like an underwriter does when it assists companies doing an IPO.

WHAT ARE YOUR TOOLS FOR LOCAL INVESTMENT?
I have 24 tools for local investing. Here are five of them:

1.    MOVE YOUR MONEY: Move all your day-to-day financial activities to a local bank or credit union so that the capital is recycled locally.
2.    TAKE YOUR LOCAL BUSINESSES PUBLIC: In the US thanks to crowdfunding reforms companies can now ‘go public’ very cheaply and unaccredited investors can purchase stock.
3.    ISSUE SLOW MUNIS: Local government issues bonds all the time. How about creating bonds to finance local businesses? Food bonds for example could be created the proceeds of which go into a local fund that collateralized loans from local banks and credit unions to high-priority local food businesses. If structured properly these bonds could be tax exempt and the bonds could be purchased by local residents.
4.    CREATE A LOCAL STOCK MARKET: As crowdfunding spreads there will be a growing number of local stock purchasers who will to sell their share and you can facilitate this by creating a local or regional stock exchange.
5.    PREPARE A COMMUNITY LIST: Imagine a local Craig’s List of all the local investment opportunities in your community.  A list like this is easy to create and invaluable for potential local investors.  As long as the list does not ‘offer advice’ on the quality of various investments, it is completely legal.

ARE THERE ANY GOOD EXAMPLES OF THIS HAPPENING NOW?
There are a lot of great models everywhere. One model is Bendigo Bank. It’s a global bank – the fourth largest in Australia – and they have created community franchises to allow the local community to own and operate a local branch. It was initially launched as a response to the closure of rural banks but has since been rolled out in cities.

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