Innovation in community economic development in a declining population era

Ryohei Nakamura

Many Japanese municipalities found recent population predictions for the next 30 years rather alarming. Unfortunately, most of them do not have an effective solution to the declining population problem. This column discusses different strategies that could ignite innovation and stimulate the growth of the population. Bringing in new business, identifying their comparative advantage, and stimulating community innovation could make municipalities attractive places to settle down.

Declining rural areas

Municipality population projections for 30 years from now by the Japan Policy Council made big headlines on 9 May 2014, not only in national but also in local newspapers across the country. The Council’s alarming predictions – such as “the number of women in their 20s and 30s will decrease by half in half of the municipalities”, “the population will fall below 10,000 in 523 municipalities”, and “some municipalities will cease to exist” – drew the attention of the local media. These projections are estimates based on certain assumptions, but many municipalities received the news with some astonishment.

We can make approximate predictions by looking at the population trends over the past several years. Extending the trend lines into the future shows that some municipalities will have no residents. We all know that and want to do something about it. However, “there are no effective solutions that we can think of” would be the true sentiment of many (rural) municipalities.

Population change consists of two components: A natural change resulting from births and deaths, and a social change resulting from move-ins and move-outs. A higher proportion of elderly population would lead to a greater number of deaths, and a decrease in the number of women in their 20s and 30s would result in a smaller number of births. Meanwhile, there are push factors that drive people out of their municipalities and pull factors that bring them in. Although a decrease in the overall population in Japan has now become an unavoidable reality, municipalities are hoping to make the impact of social changes neutral and increase the fertility rate by encouraging young people to settle down.

Municipalities striving and achieving success

Some municipalities in hilly and mountainous areas have been making strenuous efforts and achieving success. Standing out among them is the town of Kamiyama-cho in Tokushima Prefecture.

Kamiyama-cho’s revitalisation efforts started with attracting more people – rather than businesses – to the town. Specifically, it invited artists both from within and outside of Japan with an aim to create a ‘circulation of people’. Taking advantage of a sophisticated IT environment that has been developed extensively under a policy of the Tokushima prefectural government, Kamiyama-cho has been inviting companies to set up their satellite offices in the town. This initiative is also aimed at bringing in more people. Indeed, a design company president visiting from the Tokyo metropolitan area generated new value by helping design labels for locally produced processed foods. This is what we could call the ‘creation of added value’ or ‘innovation in community building’.

As a result, Kamiyama-cho’s way of dealing with people within and outside of the town has changed. As shown in the figure below, the number of move-ins has been on the rise, but the overall population has been continuing to decline. Any excess in the number of move-ins over that of move-outs has been far more than offset by a large natural decrease in population because of the high elderly population. This tendency will not remain limited to rural municipalities. Those in urban areas will face the same problem in the near future.

Figure 1. Changes in Population in the town of Kamiyama-cho, Tokushima Prefecture

Note: Foreign nationals are not included.

Source: Created by the author based on data provided in “Jumin Kihon Daicho niyoru Jinko, Jinko-Dotai oyobi Setaisu [Population, Population Trends, and the Number of Households Based on the Basic Resident Register],” Ministry of Internal Affairs and Communications

Sustainability of municipalities

In order for municipalities to ensure sustainability, it is crucial to draw up strategies to decrease the number of move-outs and, hopefully, increase the number of move-ins. An environment that enables elderly people to generate added value also needs to be created. Bringing in factories would generate a certain number of jobs, but we must consider what kinds of workers would be needed there.

Naturally, municipalities vanish when everyone is gone. To live is to make a living, and one needs to have a source of income. A higher proportion of elderly people within a municipality would naturally make its economy – consumption economy in particular—reliant on pension income. However, unless its people generate their own income, the municipality would not be able to sustain its economy. Therefore, there must be businesses in the municipality of the kinds that are capable of earning income from outside. By creating such businesses, municipalities can be able to expect young people to stay and settle down, and might be able to stop or slow down the pace of natural decrease.

Interpretation of comparative advantage

One of the leading theories advocating free trade is the theory of comparative production costs by David Ricardo. In essence, the theory states that overall efficiency is achieved when each region exports goods in which it has a comparative advantage and imports those in which it has a comparative disadvantage. The underlying assumptions here are a different set of production technologies for each region and no inter-regional transfer of production factors such as capital and labour. The latter assumption does not reflect the present-day reality. Today, cross-regional capital transfers are occurring extensively as seen in the relocation of plants. People also move across borders and migrate to regions where they can expect higher returns or greater satisfaction.

In a world where constant returns to scale are prevailing, the mobility of capital and labour would mean the narrowing of inter-regional gaps. This, however, does not hold true where the effect of agglomeration or the effect of scale economy comes into play. In reality, people and businesses gravitate toward big cities, and inter-regional gaps are continuing to grow. And income generated in urban areas is distributed to rural areas.

Then, what production factors are immobile across regions? For instance, we can think of natural resources or environmental resources. Forests and farmland are immovable. Municipalities located in hilly and mountainous areas can define them as production factors in which they have a comparative advantage. Municipalities that embrace indigenous local industries can aim to generate high added value by capitalising on their comparative advantage in such immobile production factors as skills and craftsmen. What about the so-called kigyo jokamachi or those industrial cities and towns that have grown with the development of, and thus are heavily reliant on, a major manufacturer and its supporting industries? They may be losing their comparative advantage due to competition with foreign countries as manufacturing bases. Those municipalities need to find new comparative advantages against the backdrop of the ongoing competition. Identifying such advantages would lead to the creation of new export-capable industries.

Igniting innovation

If municipalities want to create business and develop it into an industry capable of earning income from outside, strengthening the mechanism for cross-industry collaboration is the key. One typical example of such attempts is collaboration among the primary, secondary, and tertiary industries to create a ‘senary industry’. This means that primary industries (agriculture, forestry, and fisheries), secondary industries (manufacturers in particular), and tertiary industries (commerce, transportation, financial services, etc.) are linked with one another in transactions. The most popular approach is to develop and manufacture processed food products using locally produced farm produce and sell them in other regions. This would enable municipalities to earn income from outside.

However, they face competition from not only other municipalities within Japan but also those outside the country. How can they make their business sustainable amid such competition? What is crucial in this context is to evolve the aforementioned mechanism for senary business collaboration into an interactive mechanism that would also involve innovation. By ‘innovation’, I am not talking about the development of new technologies or the acquisition of new patents. Instead, I am referring to the generation of new, innovative ideas for community building. For that, community workshops with the participation of residents would be necessary.

Such innovative ideas then must be put into practice to change the existing interactive mechanism within the community or region. That is to say, we should seek to deal with those with whom we have never done business before. From the viewpoint of companies pursuing efficiency in their business activities, this would be a waste. However, municipalities may as well consider designing community building plans by simulating an economic model that incorporates the ideas discussed above. That would enable them to find ideas for innovative community building.

Editors’ note: This column was reproduced with permission from the Research Institute of Economy, Trade and Industry (RIETI).