No Fool’s Gold

A look at Local Money Multiplier

The idea of strong and self-sufficient Local Economies has been, for long, seen as the solution to current chaos – whether it was through Gandhi’s Swadeshi proposition, Michael Shuman’s summing it up as the tension between TINA (there is no alternative) v/s LOIS (locally owned import substitution) or Wendell Berry’s concept of Solving for Pattern, the process of finding solutions that solve multiple problems, while minimizing the creation of new problems. To us, in WOTR, it seems more and more the only viable way out and towards a longer-term sustainable solution. If our Development efforts have to work, they need to be based on the foundations of a Local Economy that works… and it is with this in mind, we set out to understand the dynamics in the local economies in the village clusters of our Climate Change Adaptation program.

The Local Multiplier Effect (LME), we understand, is a very valuable, hidden feature of our economies. The term refers to how many times the dollar (or in our case the rupee) is re-circulated within a region’s local economy before leaving through the purchase of an import. The ‘multiplier’ is an economics concept with which we can intuitively understand how money entering into an economy multiplies (or drains) in way it is spent and re-spent. More re-spending within the local economy naturally means a higher multiplier effect because more income is generated within it.

Local Money Multiplier (LM3), a concept developed by New Economics Foundation, is a simple indicator that can help measure the money flows and helps communities to think about the leakages and how these can be plugged and highlights where the community can build its resilience.

LM3 derives its name from the 3 steps that are followed to measure Local Money flows. The measuring process starts with (1) identifying the source income in a defined region, (2) following how it is spent and (3) re-spent.

At WOTR, we started out by calculating the LM3 of Akole cluster – a cluster of 9 tribal villages. Surprisingly, we found that 97% of the income in Akole cluster drains out in the first round itself and only 3% gets re-circulated for another round. The surprise lay in the fact that the Akole cluster is predominantly tribal, remote and seemingly cut-off from the external economy… and yet, the local economy was so highly porous!

The writing on the wall was clear – while our development activities increased the money inflows within the community, the external dependencies marked by the outflows remained high. These dependencies left the communities highly vulnerable to external market shocks and continued to erode their resilience.

It was therefore important now for us and the communities to understand and find out how these drains to the local economy could be reduced.






We used the metaphor of the “leaky bucket” and through games and discussion opened up conversations in the communities about local economy and money flows into and out of that community. The bucket was the local economy – into which water was being poured – to represent inflows through agriculture, livestock, forest produce, labour etc. and leaks out of the bucket being purchases of goods and services from outside the cluster.

The next step was to see what opportunities existed that could help plug these leakages.

We did this through an exercise of “envisioning the cluster” with the leaders and opinion makers of the region. We explored, along with them, their “dreams” and needs, the obstacles that prevent these being fulfilled, potential enterprise opportunities and  the resources needed to dynamize them. We pondered on a few questions: How could goods and services be delivered differently such that it could keep money circulating locally, and reduce waste? What impact would these actions have on the 5 capitals (natural, human, financial, social and environmental)? What assets do we (as a community) already have? What abilities already exist within the community and what new abilities do we need to acquire? What are our self-defeating and self-validating attitudes that we need to overcome and nurture respectively? What actions need to be taken and who would take them?

To the people’s surprise, what emerged was a long list of options that existed within the community. All that was required was an infusion of right capital at the right place and development of skills and techniques, which were the obstacles the group saw as being the major one.

The learnings from these experiences have been enriching. It is clear – to the communities as well as to us – that the starting point for building a strong local economy is the energy within the community, and the natural resourcefulness, skills and passions of local people. The principle understanding 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. 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 and are likely to have a smaller environmental footprint. The approach also recognises that communities do not develop their local economies in isolation, but need to be strongly connected and networked within an appropriate geographic area to become resilient and be able to sustain themselves in the long run. This can build resilience within the communities that can not only rejuvenate their natural eco-systems, but also reduce external dependencies, withstand market volatility and face down climate variability.

- Radha Kunke 

23. September 2011 by admin
Categories: Adaptive Sustainable Development, Climate Change Adaptation, Green Economy | Leave a comment