Retaining wealth by plugging leaky economies

The Bevan Foundation is exploring how money enters communities, how it leaks out and to find practical steps to plug them. But why is it important and how can it help retain wealth locally?

Our recent workshop drew on the concept of the ‘leaky bucket’ -devised by the New Economics Foundation (NEF). It asks people to imagine their local economy as a bucket. Money (water) pours in through wages, pensions, spending on goods and services, grants, tourism and so on. The money is said to leak out when it does not ‘stay local’ such the spend of wages in a national chain supermarket that ends up back at HQ – the more leaks, the less long term local benefit of the money. Identifying where and how money comes in and helping it circulate locally longer can help strengthen the economy and retain wealth for the betterment of the community as a whole.

Why is it important?

It is about choice. A ‘leaky’ local economy will see more of the money coming in leaking back out. The leaks act as an umbrella so that the inward investments shoot off before reaching local people. Finding ways to circulate the money through local businesses ensures the money funnels towards local people.

Crucially, local businesses that are rooted in the community are more likely to deal with other local businesses. As NEF says:

“local enterprises are more likely to employ local people, provide services to improve the local quality of life, spend money locally and so circulate wealth in the community, promote community cohesion”.

Another benefit is that the longer the money circulates the more it generates through the ‘multiplier effect’.

The multiplier effect

The multiplier effect is a way of identifying the impact of the money circulating locally based on three ‘rounds’ of spending; the initial sum, how it is spent locally and finally surveying local businesses/residents to see who has benefitted. NEF have found that each round of spending can be worth five times more to the local economy – illustrating the importance of finding steps to plug the leaks.

As NEF say of the effect:

“ The principle behind this approach is that people who live and work in a place, and others who care about its future, are best positioned to find enterprising solutions, implement them and reap the rewards”.

Through exploring the multiplier effect, Tayside Council found that locally owned B&Bs generated twice as much wealth for the community than nationally owned hotels. This is despite the hotels having four times as many bookings. Initial observations would assume the hotels were better for the local economy but by using the effect and investigating how the money circulates around Tayside the council found this not to be the case.

The ways money leaks out of a place can vary; online shopping, using nationally owned shops and services, outward commuter spend or using some non-local contractors. Some are unavoidable, others are not.

Investigating how the money circulates is important. Knowsley Council on Merseyside ran a test to assess the impact of procurement contracts. They gave one to a local firm one an outsider. They found that actually the outside firm’s work generated more wealth than the local firm. Partly because they employed more local people but also because further investigation found the ‘local’ firm was actually a regional base for a national HQ. It shows how this is not a black and white process.

How to plug the leaks?

This is the most challenging part. Plugging the leaks has to be a collaborative effort amongst residents, businesses, anchor institutions, and other local organisation. The benefits of a more robust economy are perhaps obvious, but we wanted to scope the potential barriers. For example

• Are people able to spend locally easily – i.e. having a level of disposable income to spend in the first place, accessing
• Do institutions with spending power use local businesses? Is there an established relationship present? Or can the institutions even easily identify the businesses?
• is there sufficient capital, business support or willingness amongst local businesses to grasp opportunities?

The leaky bucket is not an exact science but it helps people think about how their local economy ticks. The potential to retain wealth and for residents and businesses to help achieve it could bring a real benefits for valleys communities.

Lloyd Jones is Project Support Officer with the Bevan Foundation. His project explores the pre-conditions for growing the everyday economy in the south Wales valleys