Economic Development Strategy

What is regional economic development? Economic development is a set of strategies (EDS) that try to improve the well-being of people who live in an identified place. Conceptually, the place may be a region of the world, a nation, a sub-national region, a state, metropolitan area, city, or neighborhood. In the United States, EDS are most often applied to geographic areas that are smaller than the national level, especially from communities on up to states or multi-state regions.

We can think of several very general EDS along the following dimensions:

  1. Enhancing economic opportunities for people in a specific geographic area through heightened labor demand (e.g., usually through jobs development or the attraction of firms and capital); i.e. “bringing jobs to people.”

    The marketing and promotion of regions are common EDS, along with more fundamental fashioning of a region’s business climate to attract investment and firm start-ups. An understanding of decisions about firm location and investment location is important for those regions that attempt to hike local labor demand by lowering firm costs of doing business through favorable tax or fiscal incentives. A useful introductory collection of essays on firm location decisions and economic policy can be found in Henry W. Herzog, Jr., and Alan M. Schlottmann, 1991, Industrial Location and Public Policy, Knoxville, TN: University of Tennessee Press.

  2. Improving workforce skills and education, thereby creating opportunities for people to qualify for existing jobs.

    The literature here is vast and varied. For a broad policy perspective, see the essays on returns to education by Nobel Laureate James J. Heckman. Among his recommended policy interventions are to “catch ‘em while they’re young” (invest in early childhood education), though his writings are nearly comprehensive concerning other possible actions such as adult workforce training and the efficacy of school reforms (e.g., voucher programs).

  3. Accomplishing both of the above for an economically depressed area.

    Perhaps to meet the most common demand for an economic development strategy a region would need to employ a dual approach. That is, to raise local work force skills at the same time that local job opportunities are created for those skills. Obviously, this is a tall order, especially in that these two achievements most likely must take place in the same time period.

  4. Linking more closely existing jobs or labor demand to available workers through several means.

    These would include providing easier transportation (more convenient commuting), greater affordable housing closer to job sites, and improved labor market information or lower transaction costs for filling or matching existing jobs. The so-called jobs mismatch hypothesis suggests that housing segregation or residental building patterns isolate low-income workers from job opportunities.

    For an introduction to academic studies of jobs mismatch, see Katharine L. Bradbury, Yolanda K. Kodrzycki, and Christopher J. Mayer, 1996, “Spatial and labor market contributions to earnings inequality: an overview – Special Issue: Earnings Inequality,” New England Economic Review, May-June.

  5. Having people migrate to outside regions of greater opportunity.

    Such a strategy is seldom advanced by politicians and policymakers. Local residents, even in depressed areas, rarely want to leave their home regions, and local politicians do not often find it in their interests to encourage “their votes” to migrate. Yet, migration is an important mechanism to improve well-being on the world stage, and in highly mobile places such as the U.S.

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Rural Economies and Globalization

Rural economies in the U.S. are on the front lines of the upheavals associated with globalization. Many rural economic engines are based on commodity production and traded goods—namely, routinized manufactured products and production agriculture. Such industries are coming under competitive pressure from overseas economies that often enjoy significant cost advantages. These are also the types of production activities that regularly experience sharp productivity gains—and attendant labor efficiencies—as a result of technical progress. As a result, many rural work forces are shrinking; rural economies are, on average, underperforming metropolitan area economies. In response, rural areas are searching for ways to become innovative in nature rather than commodity-based as a way to stay vibrant.

The Global Chicago Center of the Chicago Council on Foreign Relations recently convened its second in a series of meetings intended to assist print journalists connect global events with their readerships. The Global Chicago Center has fashioned a web-based guide for media so that local experts on global affairs can be readily sourced by local journalists. This particular meeting in Chicago focused on newspaper journalists in rural regions of the Midwest. Experts and analysts of rural regions met with the journalists to discuss the ways in which globalization is affecting rural economies and what, if anything, can be done about it. For some rural regions, the answer to the latter question is not much.

Due to high productivity on farms, which has helped give Americans the world’s highest standard of living, production agriculture employs relatively few people. Indeed, farmers account for only 2 percent of the U.S. work force and only 11 percent of rural population.

Manufacturing now dominates many more rural counties than does agriculture, but the type of manufacturing activity there is vulnerable to global competition and displacement. Over the past 50 years, manufacturing plants locating in rural areas have been seeking a low-cost environment and high-quality but lower-skilled rural workers. Nonetheless, technological progress and heightened global competition often have an adverse impact on these operations. As the figure below shows, metropolitan economies in the Seventh District are easily outperforming nonmetropolitan areas on average.

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Innovation in Electric Power?

Electric power is often considered the most transformative technology of the past 100 years. Its near universal adoption in our homes and workplaces (e.g., to power appliances, communications, and computers) is indeed remarkable. As a result, the electric industry today boasts $600 billion in assets in the U.S., as well as yearly sales of $260 billion (double that of the telecom industry). However, many believe that the business model by which the U.S. and Midwest produces and delivers electric power is outmoded and subpar. Movement toward a more competitive framework can be expected to produce innovations that would achieve significant cost reductions, greater reliability, and a cleaner environment.

The executive director of the Northeast-Midwest Institute, Dick Munson, has recently written a book entitled From Edison to Enron, which recounts the history of electricity and suggests an innovation-based vision for the future of the power industry.

In it, Munson describes major shifts in the electric power industry since its inception. At the dawn of the twentieth century, Chicago mogul Samuel Insull combined many small neighboring electric generation facilities, which achieved economies of scale and balanced loads throughout the day. In doing so, Insull was able to lower prices and increase reliability, thereby expanding the market and use of the product. At the time of his company’s peak in the 1920s, it served 4 million customers in 32 states.

Insull’s innovations transcended the physical production process. Tired of dealing with (and compensating) many local governments for the rights to serve fragmented local markets, Insull successfully pushed for state level regulation of electric power. And so, the state-regulated monopoly model eventually became the national norm. This bargain provided reliable power at regulated prices to consumers in return for state-sanctioned rates of return on investment for utility owners.

Though this model remained intact for most of the twentieth century, Insull’s business empire eventually collapsed amidst charges of corrupt business practices. Munson draws a thoughtful parallel between Samuel Insull’s business and Kenneth Lay’s Enron Corporation. Laying aside the later collapse of Enron, its futuristic business model for electric power production and delivery, trading across the broad geography of the United States, continues to shape the industry today. It is a model of competitive power production and, in some instances, competitive delivery, in which individual power producers have the incentive to innovate because they have a broad market in which to sell their product.

What are the possible gains (i.e., possible innovations) in following this new business model? According to Munson, the costs to businesses of power interruptions are on the order of $120 billion per year under the existing state-regulated monopoly model. Yet, under this older model, almost no research and development (R&D) takes place by the industry. At a recent book chat at the Chicago Fed, Munson said, “Last year, R&D expenditures by the dog food industry exceeded those of public utilities.”

Munson believes that we are on the verge of a vast array of innovations, if only they are not blocked by existing legislation and the old business model. In particular, progressive techniques for co-generation and other recycling of energy and waste energy are capable of producing remarkable efficiency gains. For instance, Scandanavian countries such as Finland are leading the way in co-generation, achieving upwards of 80% energy efficiency in electric power–heat production. And from an environmental perspective, efficiency gains from such techniques are every bit as “clean” as those touted from alternative fuels.

The Great Lakes region could become a leader in reforming its power industry if it chose to do so. However, if the region is to acheve a workable model of competition, a large and well-managed infrastructure must be put into place which would allow buyers and sellers to readily trade electric power (link).

In the meantime, the monumental price-spike disaster in California five years ago, following its experiment to decouple power production from the distribution of electric power, continues to give policymakers great pause. For instance, Illinois passed the Restructuring Act of 1997 that began to decouple power generation businesses from the power delivery and service businesses. In northern Illinois, very large customers (e.g., big corporations) began to negotiate their own purchases of electric power, while their local utility company typically maintained the responsibility for delivering it. For smaller customers, particularly residential customers, decoupling was deferred until 2007, and rates were frozen (actually lowered 20 percent) until that time. In the meantime, independent power producers were encouraged to get on to the delivery network. After 2006, the utility company, Commonwealth Edison (CE), will act as a purchasing agent for residential customers, buying power from independent producers through an auction process and passing along both distribution charges and power costs to consumers.

After the rate freeze expires, CE will require a rate increase to pay for its infrastructure investments in the distribution system since 1997. In 2005, some critics feared that the particular process by which CE would bid for power would raise customer rates unduly. And so, the prospect of a price spike for residential customers when the price freeze expires contributed to an outcry over CE’s plans to move to the auction process in 2007. Nonetheless, plans for this next phase of deregulation were approved by the state’s regulatory authority.

Much like residential and small customers in most of the nation, those in Illinois have enjoyed a long period of stable or declining prices. From 1995 to 2005, the real or inflation adjusted price of electric power has declined by an annual average of 4.4 percent. Of course, electric bills have climbed along with the increasing consumption of electricity in powering home electronics and electrical appliances.

The chart below displays average electric revenues (so-called average prices) for providing electric power to residential customers in the Seventh District states. Price rises since have been tame or have declined in real terms.

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Foreign Direct Investment in the Midwest

Recently, companies from China have begun to explore direct investments in the Midwest and elsewhere around the world(link). Direct investment differs from portfolio investment, such as investment in U.S. Treasuries, in that direct investors have an equity interest that allows them to have some hand in the operation of the enterprise and its assets. Though direct investment from China is miniscule so far, past experiences with other emerging nations, such as Japan, suggest that the growth prospects may be large. Beginning in the 1980s, Japanese companies began to heavily invest in the Midwest, especially in automotive assembly and parts operations. Many of these ventures brought new capital and new ideas to the region’s economy, thereby easing the region’s adjustment to competitive decline and import competition. Such investments continue today as in the case of Toyota, which is scouring the nation—including Michigan—in siting a planned engine production facility. Can investors and partners from China and other emerging countries play a similar role in the Midwest in the years ahead?

Part of the globalization phenomenon has occurred through the integration of capital markets, including direct ownership of companies by overseas parents. Data from the U.S. Bureau of Economic Analysis records foreign direct investment (FDI) transactions, along with characteristics by location of foreign-owned companies and their affiliated establishments in the United States. As a result, FDI in the U.S. may be either an acquisition of existing operations or a new investment, such as the building of a new manufacturing plant. The figure below displays wage and salary employment of FDI affiliates as a share of total employment in both the Midwest and in the rest of the U.S. It is telling us that this share has doubled in both the Midwest and the U.S. over the past 25 years.

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By this measure, the Midwest has kept pace with the U.S. In one respect, this is surprising since the Midwest is far way from the coastal economies, where one might think that access to and linkage with global companies would be more intensive. On the other hand, most FDI takes place in the manufacturing sector, which is more concentrated in the Midwest relative to the rest of the U.S.

From which countries does our FDI originate? Inbound FDI has been taking place for a long, long time, back to our country’s founding when you stop to think about it. For this reason, it may not be surprising that most of our FDI is today domiciled in Europe (table below). As of 2000, Europe made up two-thirds of FDI employment at foreign-affiliated establishments in the Midwest, with over one-half of these domiciled in Germany or in the United Kingdom. The remaining one-third of FDI employment is equally split between Asia and the Americas. Almost all of the Americas’ FDI originates with Canadian companies, while almost all of Asia’s FDI originates with Japanese companies.

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Rural Economic Development

Necessity is the mother of invention, and if ever invention was needed, it is in today’s rural America. This is especially true in the portion of the Midwest stretching from central Illinois westward to Kansas and Nebraska and, from there, north and south from the Dakotas in the north to west Texas in the south. There, declining population, disappearing towns, and falling incomes plague many communities. In such places, farming and farmland have traditionally been the way of life. But rising productivity in farming has almost eliminated the need for farmers to live on and work the land, with barely 1 percent of American’s population living on farms according to the 2000 Census. As jobs and population shrink, derivative businesses such as banks, schools, and hospitals are consolidating and re-shaping vigorously in order to survive and prosper.

Many rural communities continue to fight back. The Chicago Fed’s Community Affairs program and its partners gathered in Des Moines this past November to assess the “invention” taking place in rural America (link). Bankers, economic development officials, and business and community leaders met to explore avenues to economic development in the rural Midwest; they met to share best practices and approaches.

The entire Des Moines conference will be summarized for an upcoming issue of the Chicago Fed publication Profitwise News and Views (link). But for those of us, like myself, who’d rather not wait, many fine presentations from this event are already available online (link).

Many communities have turned to manufacturing and distribution activities as sources of income and jobs. The same roads and rail that are useful for farm products are readily adaptable for hauling processed and finished goods. Today, according to the analysts at the USDA’s Economic Research Service (link), more rural counties count manufacturing as their dominant economic base than they do farming. Those same roads are also often a convenient vehicle to convey skilled workers many miles to jobs at factories and distribution centers. The further processing of farm products continues to boost manufacturing, especially food processing and, more recently, the processing of farm product into bio-fuels (link). A downside has been that rural production wages have not fared well, on average.

Advances in telecommunications hold the promise that service jobs can develop or can be outsourced to rural counties, much as some are decentralizing overseas. Broadband and other high-speed high-capacity infrastructure services have been expanding in rural areas, though this growth lags that of urban areas where proximity makes the up-front costs of connection less prohibitive.

A further impediment to locating many information jobs in rural areas is that information exchange via telecom is not an easy substitute for some types of human discourse, especially where face-to-face communication is needed to evaluate information or where the information is otherwise ambiguous or interpretive in nature. Nonetheless, for those workers who prefer rural living or quality of life, telecom infrastructure at least makes rural location possible.

Many rural communities are on the forefront in making the most of their abundant land resources to enhance rural quality of life. Traditional outdoors amenities such as hiking, birding, and hunting are being augmented with new initiatives like agricultural tourism, including harvest fairs and winery-related tours, retail, and lodging. At the same time, small towns are using available economic development financing tools to redevelop their towns and to help new generations discover the sense of place and social fabric of rural America.

Midwest payroll job growth—Turning but weak

Sample-based estimates of payroll employment are among the most prominent and timely indicators of regional economic performance. Recent trends in reported payroll data indicate lagging economic performance in the Seventh Federal Reserve District, which comprises all of Iowa and major parts of Illinois, Indiana, Michigan , and Wisconsin . Payroll job growth over the past year varies among these states, with losses in Michigan pulling down the District’s job growth average.

The District’s payroll job performance during the period following the 1990 national recession compared much more favorably to that of recent times. Have the region’s fortunes temporarily turned for the worse? Or is this lagging performance an indication of a structural worsening in the region’s growth path?

Payroll job estimates for December 2005 were released by the Bureau of Labor Statistics on January 24, 2006. While these figures seemingly complete the calendar year 2005, they have not been finalized yet. When the January figures are released (every March), monthly data are revised back for the previous 18 months. Because current data are based on reports from a sample of establishments, the data are later revised or benchmarked to a so-called universe of establishments that report their employment covered by the Unemployment Insurance tax system. The revisions can sometimes be significant and we will examine them during the week of March 6.

Over the past year, this preliminary data suggest that payroll job growth is trending up in all District states except Michigan. However, job growth continues to lag the nation in all District states except Iowa.

Looking back over the past five years to one quarter prior to the onset of the last national recession, there have also been steep job losses. The table below indicates that Michigan’s monthly average payroll jobs declined 6.7% from the fourth quarter of 2000 (prior to the onset of the national recession) to the fourth quarter of 2005. Reviewing payroll jobs data over this same five-year period for other Distict states and the rest of the nation, we can see that there was a 2.8% loss in jobs for the average of all five District states and a 2.2% gain for the remainder of the U.S.

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Looming Crisis or Tempest in a Tea Pot? State and Local Government Pensions

State and local government pension obligations have been growing at a rapid rate. Payouts from major public pensions rose by 50% from 2000 to 2004 to $118 billion according to the U.S. Census Bureau . While this payout only represented a little less than 2.5% of total 2003 state and local government spending, the picture may worsen as aging government work forces reach retirement age in greater numbers.

There are nearly 14 million state and local government workers and six million current retirees who are owed more than $2.3 trillion dollars in eventual pension payouts by more than 2,000 different governments. Strains to make these payouts will be especially acute for those governments that have not kept their contributions current in funding obligations and where economic growth is lagging, such as parts of the Midwest. In such regions, government cannot outgrow its obligations through economic and population growth, but must rather dig deeply into current spending on public services or raise taxes to meet the pension obligations of the past. Not a promising recipe for a revival of growth and development in lagging regions.

How this pension crisis occurred and what can be done about it will be the focus of a half-day program organized by Rick Mattoon to be held at the Chicago Fed on February 28, 2006 (conference announcement and agenda)and cosponsored by the Civic Federation and the National Tax Association. At this event, pension experts will describe the current condition of state and local public pensions and offer some solutions for returning fiscal balance. Issues that will receive particular scrutiny will include:

  • To what extent are today’s pension systems funded, especially in the Midwest? What are the demographics of the state and local government work force and the attendant size of the potential pension funding stress? What are the resulting implications for general fiscal stress and strain?
  • How do public pension systems compare with private pensions and Social Security? Can and should they be structured differently? Most public pensions are still “defined benefit” plans where payouts are guaranteed over the retiree’s lifetime regardless of contributions. Should pension benefits for future retirees be changed to reflect their actual contributions?
  • What will be the likely financial impact of new accounting regulations that will require governments to recognize non-pension retiree expenses such as health care costs as future liabilities?

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China and Midwest Biotech

Many Midwest businesses are scrambling to adapt to the rise of China’s economy in world trade and financial markets. Import competition is especially keen. Some Midwest automotive parts suppliers are watching with concern as China has climbed to the number four exporter to the U.S. behind Japan, Mexico, and Canada (CFL).

How can U.S. businesses successfully adapt to the expansion of the dynamic Chinese economy with its low labor costs and less stringent environmental regulations? One way is to shift some operations overseas, investing in China for export back to the states and/or for sales to the growing Chinese market. So far, China has grown at a spectacular rate by inviting foreign companies to set up shop there. While many U.S. multinationals such as GM, Tenneco, and Motorola have done so, so have smaller producers such as Wahl Clipper (hair grooming products) out of Sterling, Illinois, and Atlantic Tool and Die Co. of Strongsville, Ohio.

Another avenue to survival and adaptation is to partner with Chinese companies on investment inside the U.S. So far, foreign direct investment (FDI) by Chinese companies in the U.S. has been miniscule. A few prominent examples of late may make Chinese FDI seem larger than it is, such as Legend’s purchase of IBM’s personal computer business and CNOOC’s failed attempt to purchase Unocal (petroleum). Over time, it is natural to expect that as Chinese companies grow and mature, they will sometimes find it advantageous to invest overseas. Likewise, foreign investment flows into the U.S. can mean new technologies and new portals to global markets for U.S. products, which often keep American workers productive and well-compensated.

This week I am speaking about biotech in the Midwest to the Midwest China Association (MWCA). The MWCA’s mission is to attract inbound Chinese investment into the greater Midwest. They do so by educating the Chinese business community about the benefits of the Midwest, as well as educating our region about overseas opportunities. The MWCA sees Midwest biotech as one of the future cornerstones of the Midwest economy and aims to gather a portfolio of information that can be used to characterize and market the region to potential Chinese investors and partners.

Where can the MWCA and foreign investors learn about biotech activity and opportunities in the Midwest? Currently, there is no Midwest biotech association that compiles information and markets the region’s industry assets. However, journalist and seasoned industry veteran Michael S. Rosen is a virtual encyclopedia of information on the Midwest biotech business scene (link). And for a more active way of gathering information, the nation’s premier biotech meeting, BIO2006, will be held in Chicago this coming April. Due to its nearby location and Illinois sponsorship, Midwest states will be heavily represented.

As we learned at the December Chicago Technology Forum, past “BIO” meetings have galvanized the host regions, if not spurring them to significant cooperative efforts and partnerships, then at least delivering a more comprehensive and cohesive image and understanding of biotech activity and opportunities in the host region. Past meeting have been held in Philadelphia (2005), San Francisco (2004), Washington, DC (2003), Toronto (2002), San Diego (2001), and Seattle (1999).

How will I characterize the Midwest biotech landscape when I speak to the MWCA? For one, the Midwest is long on research and short on commercialization (CFL). A familiar refrain among biotech wannabe locales across the U.S. is their inability to attract venture capital investment flow and to originate startup companies, which is also true of most locales in the Midwest. However, less common among U.S. biotech wannabe locations are the host of potential assets for commercialization that can be found here in the Midwest.

Our region’s universities and federal labs boast prodigious R&D funding and activity (see figure below). One prominent ranking of world universities’ science capacity reports that the states of Iowa, Minnesota, Missouri, Wisconsin, Illinois, Indiana, Michigan, and Ohio are the domicile of 7 of the top 50 and 12 of the top 100 institutions. Overall academic R&D funding in Midwest states tends to be above the U.S. average, with Ohio, Illinois, Michigan, Missouri, and Minnesota ranking 9th, 10th, 11th, 12th, and 14th nationally in 2004. Licensing revenue from the region’s universities amounted to $197 million for FY2003, with 47 new startup companies created, many of which are biotech in orientation. A young organization, the Midwest Research Universities Network (MRUN), is a collaboration that promises to raise the number of startups emerging from the regions universities and labs.

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Bullish on the Chicago Metropolitan Economy

So far this decade, the Chicago metropolitan area’s economic performance has been disappointing. As in the surrounding Midwest, job declines during the recent recession were worse here than in the nation as a whole, and this area’s job growth during the expansion has since been lagging. With this lackluster performance, there has been a special disappointment for Chicagoans; the metropolitan region’s economy led the nation and most of the surrounding Midwest during the 1990s. During that time, there was a sense that Chicago’s economy had evolved beyond its role as regional business capital into one as national and global business center.

What is Chicago’s outlook for 2006? I am optimistic, although there are some defensible reasons for caution. For one, goods producing industries in the surrounding region may continue to pull down Chicago’s service sectors. Chicago’s outsized business and professional service sector continues to serve the Midwest, as do its travel, distribution, and business meeting services. But looking ahead, the Midwest economic outlook is clouded by the prospects for its automotive industry. Nationally, automotive sales growth is not expected to be robust this coming year, especially for the Big Three automakers and their suppliers that populate the eastern part of the Midwest region as well as northern Illinois and southern Wisconsin. Accordingly, this segment of the Midwest cannot be expected to propel Chicago’s service economy in 2006.

There is a second reason to be cautious: National economic growth is expected to moderate modestly in 2006 (link). Since Chicago and the Midwest generally follow national trends—perhaps even follow them in a magnified fashion—there is some doubt that the metropolitan economy’s performance will gain momentum as the national economy moderates.

Still, despite these trends, and with a great deal of uncertainty, I offer some reasons for optimism for those of us who are inclined to be bullish about Chicago.

Not all of the surrounding Midwest manufacturing activity is moribund. The region’s capital goods industries, such as the machinery and equipment industry, are expanding. Looking forward, as national and global economic growth continues, U.S. and world demand for “new tools” and added production capacity tend to lift capital goods sectors. In turn, employment in manufacturing sectors, along with physical expansion of factories, tend to take place with a lag as excess capacity becomes squeezed.

More generally, recently reported data indicate that improvement in Chicago’s labor markets is already underway. During the autumn, Chicago’s year-over-year payroll job growth exceeded 1 percent for the first time since the year 2000, while the unemployment rates were down in the fourth quarter (according to preliminary reports).

Chicago’s vaunted business and professional services industry is once more reporting strong employment growth. Though it has much catching up to do from its poor performance in recent years, Chicago’s year-over-year job growth in this sector is exceeding the nation’s.

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Midwest and the Global Economy Part I

From the slow progress being made on the Doha round of global trade liberalization, it would seem that globalization is slowing down. Yet, this is not the case at all. As the 2002 Economic Report of the President articulated, globalization continues to be enhanced by ever-falling costs and technical advancements in communication and transportation. Such developments are magnifying trade flows of merchandise and commodities and, more recently, services such as software, R&D, call services, and data processing. Springing from these developments in information technology and communication, global capital markets are deepening, which in turn further heightens trade in goods and services.

Regional economies, especially that of the Midwest, are being affected by globalization. Tradable goods such as manufacturing and agriculture products play a significant role in the upheavals of globalization. And so, Midwestern households and business would benefit from timely and appropriate adaptation to the globally induced upheavals taking place in industries, companies, and occupations in the region.

Since households continue to learn about globalization from the print media, The Global Chicago Center of the Chicago Council on Foreign Relations and the Ford Foundation are fashioning a project called the Midwest Media Project. The project intends to assist journalists throughout the region to help put local interests in the broader context of global economic developments and events. In this way, Midwesterners can become more attuned to globalization, especially as it relates to the region.

At the first meeting of the project on January 10, researchers and policy leaders are being asked to present globalization topics and information to the attending journalists. In turn, several senior journalists will lead discussions on ways in which global events and trends can be linked to local stories in engaging ways.

I was asked to deliver the overview on the Midwest economy, highlighting the linkages between our region and the world economy. And when I stop to think of the linkages, there are many. For one, given our sharp manufacturing concentration, the Midwest economy is about on par with the nation in terms of exports, and our region’s exports to the world are large and growing. Not surprisingly, it is our “capital goods” that stand out as prominent exports—construction and farm machinery, medical equipment, engines, and electrical equipment. Automotive exports are also prominent, with most of them destined for nearby Canada rather than for far-away locales. As Thomas Klier, automotive expert here at the Chicago Fed has said, “the binational region’s auto industry knows no boundaries.” (Chicago Fed Letter on border conference) Close to 40% of the considerable U.S.–Canada merchandise trade crosses the border in Michigan through the Detroit–Windsor corridor or over the bridge at nearby Huron-Sarnia, much of it being automotive parts and finished vehicles.

Partly owing to this tight automotive production integration, Great Lakes exports to Canada represent 50.4% of the region’s exports versus only 18.2% for the overall U.S. If we were to deduct U.S. exports to Canada from both the Great Lakes region and the U.S., the pattern of export destination by country would be nearly identical for both the region and the overall U.S., with a slight tilt of Midwestern exports to Europe rather than toward Asia.

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