Thoughts on Community Economic Clusters

Please, no! Not another economic development study on how to expand the local clusters! Haven’t we learned anything about the fragility of global dependencies from this pandemic?

Last week, I spent several hours reading two recent economic-development studies done for Ulster County, New York. One was entitled “Food and Agriculture Cluster Development.” It was a serious piece of work by ACDS LLC and Fairweather Consulting in early 2017. Because Ulster County already has a critical mass of firms involved in craft beverages, special sauces, specialty dairy products, and online grocers, the study argued that these economic “clusters” should be the focus of economic development efforts.

This methodology is now deployed ad nauseum by economic developers all over the world. We can thank Harvard Professor Michael Porter for introducing the concept of clusters in the late 1980s. The basic idea is that every region has competitive advantages, defined by its location, its resources, its people, and its history. Clusters represent those sectors of the local economy with a competitive amalgam of firms, suppliers, distribution networks, and support institutions like universities. And rather than support one specific firm, economic developers should support the best clusters. Notable examples might be motion pictures in Los Angeles, computer hardware and software in Silicon Valley, and banking in Charlotte.

This is really a more nuanced and modern version of David Ricardo’s argument about “comparative advantage.” Every region, Ricardo believed, should produce those items it produces best and import everything else.

In the Ulster County study, the consultants argued that the mission of the “food economy” is to steadily increase exports. In the area of craft beverages, for example, Ulster County is currently home to 27 related firms, including ten wineries, three breweries, and one distillery. To assist this cluster, the study recommends putting together a real estate inventory for new or expanded firms, improving water quality and water distribution systems, and providing more tax incentives to attract the right outside firms.

What’s wrong with this? It’s the antithesis of local self-reliance. The more dependent your region is on imports and the narrower your economy, the more vulnerable you are to sudden shocks in the global system. Like COVID-19. Or climate change. Or wars. Or capital flights. Or any one of hundreds of what Donald Rumsfeld once called “unknown unknowns.” Put another way, the obsession with clusters winds up cluster-f**king the economy and destroying any hope it has of achieving diversification and resilience.

As Stanford business professor Bob Sutton writes, cluster-f**ks are “debacles and disasters caused by a deadly brew of illusion, impatience, and incompetence that afflicts too many decision-makers, especially those in powerful, confident, and prestigious groups.”

Especially stunning about the Ulster County study is that it came from a region that’s a hotbed of localization. A final report of the Ulster 2040 Working Group, entitled “Building a People Centered Economy,” sets out a clear objective for the food sector: “Ulster County will have the most dynamic and resilient food system in the nation, where local growers work together with local food and beverage manufacturers, distributors, and retailers to supply an array of healthy products that not only sustain our residents, but provide food security for New York City and the surrounding region.”

This is a terrific vision: Maximize local self-reliance and maximize exports, and do both through locally owned businesses. But the County’s food study shows zero interest in the resilience part of the equation. Local self-reliance, apparently, is for sissies. Nor is there consideration that an economic-development strategy mostly or exclusively focused on exports undermines the possibility of local food self-reliance. If you focus your local money, time, and policy on exporters, you have no bandwidth for expanding the small firms that meet local food needs. You can throw around the word “resilience” all you want, but unless you focus at least some of your economic development work on local self-reliance, you cannot possibly achieve it.

At a minimum, therefore, cluster development should be pursued in an equal and balanced way with local self-reliance. Half of any local food study should focus on export opportunities, but the other half should focus on import replacement.

There are also strong arguments for fundamentally rewiring the cluster analysis. For example:

• Because we know that locally owned businesses generate two-to-four times the income, wealth, and jobs as non-locally owned businesses—and that they stick around longer to generate these benefits—the clusters worth focusing on should be locally rooted. If your cluster is anchored by a publicly traded paper company and it suddenly splits town, you’re doomed.

• Stop using cluster analysis to justify taxpayer giveaways. These “incentives,” as I’ve discussed in an earlier blog, are costly, ineffective, invisible, undemocratic, and corrupting. If your cluster is as good as you say, you don’t need to bribe new companies to join it or expand public infrastructure to attract them.

• Economic developers should strive to tap the strengths of existing clusters to grow new clusters. The entrepreneurs running craft beverage companies, for example, might mentor entrepreneurs seeking to create food manufacturers that do not yet exist in Ulster County—maybe small-scale pork processing. Or they might discern that they are importing machinery that can and should be produced locally. Or they might develop a common brand, or a joint distribution system, or a concerted effort to supply the food needs of local anchor institutions.

But the argument I find more compelling is this: Clusters represent businesses that are already thriving. Why lavish scarce public resources on the winners? What needs the assistance of economic development is the rest of your local economy. As the great regional economist Jane Jacobs argued, if you focus on nurturing local firms to meet more local needs, you can have confidence that, as they grow, they will naturally start to focus on regional, national, and global markets—and they won’t need any special assistance to do so. We should focus economic development on the small businesses creating new goods and services for local markets, which requires special attention to entrepreneurship, local purchasing, and community capital.

If your economic development department presents a study that only contains a cluster analysis, please give it the grade of “Incomplete.” Until they analyze how to expand local businesses to meet more local needs, they will just be setting your up community for the next cluster-f**k. Resilience matters.

-- reprinted from michaelhshuman.com