Countering Rural Disinvestment: Appalachia’s Ecosystem-Based Approach

What does it take for a low-wealth, chronically underinvested region to develop a community-centered investment system?

This is a central question addressed in a new report that Sandra Mikush—a former Mary Reynolds Babcock Foundation network officer and deputy director—and I recently coauthored. In the report, By Us, For Us: Growing a Community Investment System in Central Appalachia, we identify some lessons that might benefit others pursuing similar work elsewhere. While some of the principles are universal, this is fundamentally a story about a particular place—Appalachia—and the ongoing work to overcome structural barriers to shared prosperity.

 

Equity and Economic Exploitation

The report illustrates how Central Appalachia—one of the most historically impoverished regions in America—has collectively laid the foundation for a new economy that is more equitable, sustainable, and resilient. Specifically, it shows how the region has developed a home-grown community investment ecosystem capable of directing large-scale capital flows in support of community priorities. If properly resourced, this ecosystem could transform the region’s economic landscape for generations to come. But how did this happen?

When readers think of Appalachia, they face a barrage of negative media tropes—Trump country, opioid addiction, coal mining, and poverty, among them. The bestselling memoir Hillbilly Elegy implicitly attributed many regional problems to cultural dysfunction, casting a blind eye to obvious historical economic forces or structures. This book and line of thinking have been so thoroughly debunked it would take an entire book to summarize the counterarguments. (In fact, said book already exists).

Another common trope is that Appalachia is all white. While the region is majority white, Black Appalachians and other communities of color have long played important roles in Appalachian labor movements, culture, cuisine, agriculture, and industry. Racism exists in Appalachia, but so does a strong antiracism tradition and an increasing regional focus on racial equity in philanthropy and community development.

Appalachia’s equity challenge sits at the intersection of racial, economic, and environmental injustice. Even in a region like Appalachia where poverty cuts across racial lines, efforts that focus on the most excluded will inherently advance the universal goals of inclusivity, fairness, and resilience. As Dr. Ibram X. Kendi put it during in a 2020 discussion on racial equity in West Virginia, “Appalachia can still be a leader in racial equity, by creating the conditions for inclusive and just societies and economies that empower all who live here and make all feel welcome here.”

Appalachian communities, regardless of race, face many structural barriers to opportunity that should make them natural allies of other historically marginalized groups. Bringing poor rural communities into the movement for economic justice and equity creates the potential for big paradigm shifts—while leaving them out means that manipulative political forces will continue to exploit rural poverty for political gain.

Rural communities in Appalachia should be part of the movement for a more equitable, inclusive economy, but building that supports requires organizing. Investing in underserved regions benefits not just area residents, but national civic well-being. Politically, chronic disinvestment and economic marginalization create fertile ground for anti-elite and anti-government political ideologies—this is true globally as well as in Appalachia. The feeling of being left out, of being abandoned by society as economic powers decide you’re no longer necessary, is palpable in a region that literally sacrificed its people and land to fuel a century of US economic growth.

For those unfamiliar with the region’s economic history and context, Appalachian historian Ron Eller offers this concise, powerful summary:

Rampant, unregulated free-market capitalism has ravaged the land and people of the mountains since the turn of the 20th century, creating an internal economic colony that provided natural resources for the modernization of the rest of country but left the working-class residents of Appalachia dependent and poor. Efforts to reduce regional poverty over the last five decades…provide a semblance of growth and opportunities for a few…but they do not fundamentally alter the economic, political, and institutional structures that have plagued the region for more than a century.

Appalachian poverty is not unique, of course, but the resource extraction that has defined the region’s economic history shines a light on some of our nation’s most pernicious structures and patterns. As Eller argues, “The tendency to view Appalachia as part of some ‘other America’ has long limited our ability to recognize the inequalities within the region and, by extension, within the American system itself.”

 

Where Investment Does Not Flow

Seemingly disparate regions, such as Central Appalachia, the Black Belt of the rural South, Black neighborhoods in urban centers, and tribal nations have more in common than is initially apparent. Each face historical barriers—land theft, systemic racism, resource extraction, a lack of access to capital, and economic exploitation—that have not been addressed in a substantial way. And each continues to receive disproportionately low levels of investment.

One might imagine that because Appalachian poverty is regularly reported on by the press that the region gets its fair share of philanthropic resources. Not so. According to a 2017 report from the National Committee for Responsive Philanthropy, the coalfields of Central Appalachia receive an average of $43 per capita in annual philanthropic giving, compared to $451 nationally (and $4,095 in the San Francisco Bay Area).

No major national foundation has engaged in sustained large-scale grantmaking in Appalachia, a region of 26 million people, in recent memory. A relatively modest program from the Ford Foundation between 2009 and 2015 is the most significant exception. Private investment also lags, and commercial bank access is extremely limited in many parts of the region. Some angel investing networks are emerging, but their focus on businesses with high growth potential limits their capital to a subset of the myriad projects and businesses communities need to thrive.

Federal support also remains limited. In countries that have successfully transitioned fossil fuel-producing regions to new diversified economies—including Germany, Spain, and Wales (United Kingdom)—there has been massive public investment in workforce development, access to capital, and small business support in the billions of dollars.

By contrast, in the US the primary federal funding source dedicated to coal transition and economic diversification thus far is the POWER program operated by the Appalachian Regional Commission (ARC), which has provided $297 million for economic development projects since 2015. Through the recent American Rescue Plan Act passed in early 2021, the Economic Development Administration has committed $300 million to coal-impacted communities. These investments are historically significant, and are themselves the result of hard-fought advocacy, yet are an order of magnitude smaller than their European counterparts.

This is an issue of political will and national priority, not a lack of resources. For comparison, the federal government provides crop insurance subsides for producers of five major commodities (corn, soy, wheat, rice, cotton) at a rate of about $25 billion each year. That is 83 times the entire six-year ARC POWER program budget. In 2020, 40 percent of farmer income—to be clear, virtually all of this money goes to large industrial agriculture operations in a handful of states—comes from the federal government and, ultimately, US taxpayers.

While the federal government heavily subsidizes some parts of the economy (e.g., commodity agriculture, arms manufacture), public investments to repair historical harms done to marginalized rural regions, tribal nations, and disinvested BIPOC neighborhoods remain paltry by comparison.

 

Stone Soup, Appalachian Style

What would it take to empower a community-led vision of a new economic future where poor and working-class people of all races and zip codes can see themselves? Increased federal and philanthropic investments are needed, but in the meantime, community development nonprofits and other place-based groups in Appalachia have been making “stone soup” for generations—sharing limited resources and building on each other’s work to develop a locally rooted, community investment ecosystem.

The report I coauthored focuses on three phases of development, but in truth it barely scratches the surface of Appalachia’s complex and expansive community development history. The first phase summarizes some of the critical place-based work from prior to 2010, which in truth stretches back to the founding of the Highlander Center and the labor movements of the early 20^th century.

In the latter part of the 20^th century, key milestones included the founding of anchor nonprofits that have led 40-plus years of innovative community and economic development strategies. Among these legacy groups are Mountain Association, a Kentucky-based community economic development nonprofit; Appalshop, a Kentucky nonprofit focused on arts and culture; the Appalachian Center for Economic Networks (ACEnet), a local business development nonprofit based in southeast Ohio; FAHE, a multistate lender formerly known as the Federation of Appalachian Housing Enterprises; and Kentuckians for the Commonwealth, an environmental justice and community organizing nonprofit.

A diverse array of place-based, bottom-up approaches to economic diversification and community development began to coalesce in the early 21^st century and led to a second phase (2010-2015) of increasingly formalized networks such as the Central Appalachian Network (community economic development organizations), Appalachian Funders Network (philanthropy), and Appalachian Community Capital (small business lenders). In a third phase (2016-present), collaborative work has centered on ramping up the capacity and coordination of the region’s community investment system, preparing it to be able to absorb and deploy large-scale investment.

 

How to Make Investment Capital Flow “Uphill”

What if regions like Appalachia had the resources to meet their own investment needs? What could a regionally rooted, community-accountable investment system that provided the right blend of capital for historically disenfranchised people achieve? We cannot undo a century of exploitation and disinvestment just by having the right analysis. It takes political will and resources. Such an effort, as current USDA Deputy Undersecretary for Rural Development Justin Maxson used to remind people during his time in Eastern Kentucky, will be “long, slow, and expensive.” Expensive refers to the reality that in broken markets it will take more than conventional financing to build functional economies.

Historical disinvestment creates direct barriers to capital access today: real and perceived risk, limited collateral and tangible assets, lack of borrower credit or track record, and more. It creates a vicious cycle of scarcity and lack of opportunity for residents, whether they’re in a historically Black neighborhood or a poor rural county. So-called “investment-readiness” is the result of systems, policies, and decision-making that benefitted some but left many others behind. Undoing this harm requires an acknowledgement of historical disinvestment, a vision for what needs to change, and the financial capital to make that change possible.

Federal funding can boost this capital supply, but to be effective, it must be consistent. This is rarely the case. As Sara Morgan of Fahe (originally the Federation of Appalachian Housing Enterprises), a major regional community development financial institution (CDFI), points out, “Consistent, predictable flows of capital are what has been missing. When the federal government turns on the tap, everyone scrambles to capture it because who knows when it’s going to turn back off.” This creates a start-stop cycle where nonprofits and CDFIs adapt to fit limited, highly prescriptive programs—often disrupting established staffing and programs to do so. The lack of predictability and control over capital flows makes it difficult to plan. It limits the region’s ability to move towards financial self-sufficiency and inclusive investment.

If investment is truly going to flow “uphill” to the most underserved markets, there must also be an appropriate blend of capital. That means substantial subsidy (grants, credit enhancements) as well as repayable investment. Market-rate capital alone can’t support the inclusive market-building work necessary to repair a legacy of exploitation.

Investment-ready projects don’t happen spontaneously in low-wealth places where markets are broken or underdeveloped. Subsidy in the form of grant funding is necessary for technical assistance, community planning, capacity-building, and other predevelopment functions that help to build an inclusive and investable pipeline of projects. These functions are usually not financially compensated as part of the ultimate transactions that they helped make possible.

CDFIs are critical actors in this equation, lending capital as well providing “technical capacity” that makes up one of the report’s core themes of ecosystem development. However, CDFIs face constraints regarding risk, credit, and underwriting standards. CDFIs need more capital tools that complement their lending if large-scale repayable investment is going to be accessible to the most under resourced communities.

A major underexplored leverage point for increasing investment is the in-between space of credit enhancements. These capital tools are potentially repayable and explicitly designed to absorb risk on behalf of low-wealth borrowers and mission-driven lenders. Examples include subordinated debt (a community investor takes a “first loss” position in a deal to leverage financing from a CDFI or risk-averse bank), loan loss reserves and loan guarantees (which mitigate collateral requirements for low-wealth borrowers), interest rate buy-downs (making loans more affordable), and non-extractive financing like character-based lending or conditional repayment loans (i.e., repayment schedules based on revenue or profitability).

Each time a credit enhancement is used, it unlocks investment capital for projects and borrowers who can’t otherwise access it. It allows community lenders and impact investors to put repayable dollars into things that are investment-worthy but not quite investment-ready. Without credit enhancements, subsidies, and other flexible non-extractive capital to accelerate and de-risk projects, large-scale investment will not reach the underserved residents of low-wealth places like Appalachia.

This “missing middle” of the community investment capital spectrum not only meets low-wealth community projects and businesses where they are; it also helps to redefine risk. An intentional, explicit, structured approach to sharing risk and benefits can help to move us beyond the current impasse, where banks, impact investors. and foundations want to support impact but often place the burden of risk on the community lender (and ultimately borrower) in the low-wealth community they want their capital to reach.

 

It Takes a Village (or an Ecosystem)

The good news is that the Appalachian region has a much stronger community investment ecosystem that it did a decade ago. What do I mean by that? To use the framework developed by our friends at the Center for Community Investment, it means we have collectively developed the “capital absorption” components of shared priorities, pipeline, and enabling environment, which together allow larger scale social investment to reach the ground.

The groundwork for transformative investment, in short, has been laid. We have more “technical capacity” than ever before, in the form of high-performing CDFIs and community finance intermediaries who coordinate with each other and other elements of the ecosystem. Dozens of place-based nonprofits connect their local work to regional-scale sector development strategies in the food system, clean energy, asset-based tourism, and reuse industries. Place-based and regional funders are working together and thinking outside the box to support inclusive development. Grassroots leaders are being empowered through peer networks and skill-building trainings. A broad array of regional stakeholders has a sharper, shared analysis of equity, inclusive development, and values-based investment. And new community-controlled capital platforms and credit enhancement tools are coming online to help plug critical investment gaps.

With this community-centered ecosystem in place, there are unprecedented opportunities to channel large-scale impact capital to the ground in support of a just and inclusive economic transition.

What would this look like if this system were fully resourced? It would mean that funding and investment flows prioritize businesses and projects led by or benefitting women, people of color, and other historically disenfranchised people. It would mean non-extractive investment helps foster local ownership and living wage jobs. It would mean targeted investments in food systems, clean energy, placemaking, and community health. Ultimately, it would drive restorative economic development capable of transforming painful historical legacies into durable and inclusive prosperity.

Of course, the work is not easy. If it were, someone would have done it already. And yet, there’s no time like the present. Right now, there is a rare chance to change the future trajectory of historically marginalized communities and regions like Appalachia. By building on locally rooted capacity, working collaboratively to get to scale, and pushing the boundaries of repayable investment with new tools, we can make capital flow “uphill” to the people and places that have been failed by our economic system for too long. The region is ripe with time-sensitive opportunity, and a wave of new blended investment capital can create transformative results for generations to come.