Articles: "Danville works: new IKEA factory hums;" "Troubled asset relief: Bank of America repays government loans;" "Apples, soybeans, poultry: Virginia's exports to Cuba grow;" "Cash economy: underground commerce grows in recession"Economic conditions ; Federal Reserve District, 5th

Betty Joyce Nash

Daniel Brooks

David Van Den Berg

Renee Courtois

English

Research Papers in Economics

2 Region Focus • Fall 2009
UPFRONT
Economic News Across the Region
Danville Works
New IKEA Factory Hums
Swedwood, the manufacturing unit for IKEA, opened
its first U.S.-based manufacturing facility in Danville,
Va. By the time the factory opened in May of 2008,
there were more than 175 employees at the 930,000
square-foot plant. Swedwood expects to hire another
625 workers by 2013. 
For Southside Virginia, the new factory brought
relief. Here the economic blues are nothing new.
Danville, home to 48,411 residents, according to the
2000 Census, has struggled with high unemployment
and a stagnant economy for a decade. In the current
recession, Danville’s unemployment jumped to 13.9
percent in January 2009, well above the 7.6 percent
nationwide unemployment rate. By October, the rate
had fallen to 11.2 percent, much higher than Virginia’s
6.3 percent rate.
Manufacturers have generally left Danville for the
cheaper labor found overseas. For example, textile
manufacturer Dan River Inc. was facing overseas com-
petition and steadily decreased its production. The
textile mill once employed as many as 15,000. By 2008,
only a handful of workers remained when the company
filed Chapter 11 bankruptcy. The departure of the tex-
tile mill and smaller manufacturers crippled the
economy. For a city where about 15 percent of jobs were
in the manufacturing sector (compared to the 7 percent
Virginia average), the decline of manufacturing was
particularly devastating. 
For some manufacturers, transportation makes up a
large percentage of total costs. This is especially true
for IKEA, known for low-priced furniture. Two years
prior to IKEA’s 2006 announcement that they would
open the Danville plant, crude oil had more than 
doubled in price, from about $30 a barrel in 2004 to
$70 a barrel by August of 2006. 
The Danville facility produces wood-based prod-
ucts such as bookshelves, and coffee and side tables.
According to Jorgen Lindquist, vice president of
Swedwood in North America, “this kind of lightweight
furniture is cheap to make, so transportation is a huge
part of the overall cost.” Having to ship goods from fac-
tories in Eastern Europe all but wiped out the benefits
of manufacturing in such low-wage economies. 
Now IKEA’s products can be shipped to East Coast
distribution centers in Georgia, Maryland, and New
Jersey. Proximity to those centers was one reason why
Danville was chosen. Amanufacturer also needs skilled
labor, and Danville had plenty who were eager for
employment.
The Danville Office of Economic Development
especially welcomed the arrival of Swedwood. After the
tobacco settlement in 1999, in which states received
$206 billion over 25 years from tobacco companies,
millions of dollars went to aid Danville’s weakening
economy. The city and its home county, Pittsylvania,
used that money to attract industry and built the 900-
acre joint industrial park Swedwood now occupies. 
Swedwood was also lured by the industrial park’s
communications capacity. Using money from the
tobacco settlement, the state initiated the Mid-
Atlantic Broadband Cooperative (MBC) to construct a
fiber-optic network covering a large section of south-
ern Virginia. This enables Swedwood to connect to 
its home office in Sweden. According to Tad Derisa,
general manager of MBC, it cost less for Swedwood to
buy connectivity to Sweden through the cooperative
than other carriers.
Because IKEA is not publicly traded, it is difficult
to gauge the impact of its manufacturing move to the
United States. With the value of the dollar declining
and the rise in oil prices at the time, other manu-
facturers were reviewing the United States for possible
sites. The outsourcing trend is unlikely to reverse, even
with a sharp increase in oil prices. But in some cases,
these high transportation costs may provide some
employment relief for small towns like Danville.
—DANIEL BROOKS
One manufacturer decided to swim against
the outsourcing current and situate a 
factory close to its market. 
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IKEA’s Swedwood manufacturing plant in Danville, V a.,
specializes in wood-based furniture such as bookcases and
side tables.Fall 2009 • Region Focus 3
Bank of America in December repaid the $45 
billion it borrowed from the government’s Troubled
Asset Relief Program (TARP). Bank officials said in a
press release that the repayment clears a “significant
hurdle” and demonstrates the company’s strength 
following the nationwide financial crisis.
More than half of the repayment came from cash,
with more than $19 billion coming from a new
issuance of stock. Bank of America is the nation’s
largest bank-holding company by assets and received
the second-biggest chunk of TARP money behind
Citigroup.
Most banks want to repay the money, in part to be
free of government influence over executive pay and
other operational issues. But it’s not easy. Banks must
prove they’re out of financially tumultuous waters
before using resources to pay back TARP funds. This
includes judging whether the weak economy could
pose further troubles. 
For Bank of America, the decision likely also fac-
tored in possible financial challenges issuing from its
acquisitions of Countrywide in 2008 and Merrill
Lynch in 2009. “It may still have to stomach losses
from its portfolios associated with [those] acquisi-
tions,” notes Daniel Indiviglio of The Atlantic.
TARP was initiated by the U.S. Treasury in
October 2008 following the onset of the financial cri-
sis. The program gave eligible banks capital in
exchange for preferred shares of common stock 
granted to the government. The only way for banks to
recoup those shares is to buy them back which, 
in effect, is a repayment of the TARP money. But
they can only do that with government approval.
Treasury allows TARPrepayment based on an institu-
tion’s soundness, capital, and ability to lend, all of
which are determined in concert with the bank’s 
regulator.
Regulators also have a say in how banks finance
TARP repayment. Banks are required to hold a cer-
tain amount of capital against assets to protect
against possible future losses. Using existing cash to
repay TARP funds will lower the bank’s capital ratio,
all else being equal. Abank’s capital cushion will help
weather strains stemming from the financial crisis.
That means repaying TARP funds could impair its
ability to withstand future turmoil. Alternatively,
banks can repay TARP funds by issuing new shares,
but that displeases current shareholders who want
shares to stay scarce and, hence, more valuable.
The Federal Reserve’s Fifth District was home to
two of the nation’s largest banks prior to TARP’s
inception: Bank of America and Wachovia, both
based in Charlotte. However, San Francisco-based
Wells Fargo announced in the same month TARPwas
created that it would merge with Wachovia. Wells
Fargo received $25 billion in TARP funds, and repaid
the money late in December. 
Citigroup, the New York-based bank, was the
largest recipient of TARP funds at $50 billion.
Citigroup paid $20 billion back in December.
Repaying TARP funds and reassuming control over
executive pay likely also made it easier for Bank of
America to secure a replacement for CEO Kenneth
Lewis who retired at the end of 2009. Brian
Moynihan, an internal pick, was chosen as the new
head of the banking giant.                  — RENEE COURTOIS
Troubled Asset Relief
Bank of America Repays Government Loans
Apples, Soybeans, Poultry
Virginia’s Exports to Cuba Grow
Cuba is an expanding market for Virginia agricultural products, with $45 million sold as of the third quarter of 2009.
Virginia ranks among the top five states in the value of exports to the Caribbean nation. Cuba was opened to medical
and agricultural exports in 2000 for the first time since 1962.
The Virginia Department of Agriculture and Consumer Services reports that the state’s agricultural exports totaled
$2.2 billion in 2008 to all corners of the globe to the mutual benefit of farmers and consumers. Virginia cattle, for
instance, are shipped to Turkey and this export of genetic stock improves Turkish stock, says VDACS marketing director
Charles Green. Virginia also sells $100 million in agricultural goods annually to China.
Farmers and VDACS representatives went to Cuba last November to promote and negotiate shipments of soybeans,
pork, poultry, and apples. The state has exported agricultural products to Cuba since 2003, when it sold $838,000 in4 Region Focus • Fall 2009
Some transactions in the economy aren’t conducted on the
books. Some are simple cash transactions between people in
what analysts call the “underground economy.” Contrary to the
connotation, much of this activity is not illicit. Most of the
underground economy does not involve drugs, prostitution, or
other illegal activities but is more likely to involve paying a
neighbor to mow your lawn or shovel snow — tasks that, were
it not for the nonreporting of the earned income, would be
otherwise perfectly legal.
Recessions tend to be fertile periods for these deals. One
way to measure the underground economy is to evaluate the
ratio of unreported income to reported income. Edgar Feige,
professor emeritus of economics at the University of
Wisconsin-Madison, estimates that in 2008, unreported income
reached about $2 trillion, the highest since World War II. This
estimate puts the percentage of unreported income at between
22 percent and 24 percent of reported income. 
As a first step to estimating the underground economy, 
Feige took a look at currency in circulation, which at the start of
2009 hit $824 billion. His research shows that about a third of
U.S. currency is held overseas, less than earlier estimates. The
remainder, Feige notes, includes underground transactions. 
During World War II, the calculated percentage of 
unreported income rose dramatically, but fell off during the
post-war period and remained fairly stable until 1973. This 
figure rose to a temporary peak in 1982, also a recession year.
Feige estimates that the 1980s and 1990s showed considerable 
fluctuations in levels of reported and unreported income. 
Yet during the past decade, levels of unreported income rose 
substantially. 
Lack of employment opportunities probably plays a role in
the rise of unreported income. “People do try to substitute
work in the unofficial sector for work in the official sector
where they’re losing their jobs,” Feige says. 
When so much income is unreported, legislators have fewer
tax revenues at their disposal. His findings suggest that govern-
ments could be out more than $600 billion a year, which
includes money from overseas tax havens. That figure, called the
“tax gap,” was last published by the Internal Revenue Service in
2002, when it was about $345 billion. Collecting that money
could allow lawmakers to reduce deficits. 
Feige also posits a close relationship between distrust of
the government and the growth in unreported income. Events
like the Vietnam War and Watergate scandal caused 
an increase in government mistrust. That led to an increase in 
noncompliance with tax laws, Feige says. He expects dissatis-
faction with the Iraq War and other policies to drive increased
rates of government distrust. “I suspect that could be an impor-
tant factor in the increase in noncompliance we’ve witnessed.”
— DAVID VAN DEN BERG
Cash Economy
Underground Commerce Grows in Recession 
products. In 2008, that number had grown to $40 million. 
The process takes patience, though. Transactions must go through a third-
country bank. But the relationship is paying off. The Cuban government buys
through its agent, Alimport. VDACS sets up meetings between exporters and 
government representatives. “They may relay a desire to quote on a particular
product; we bring it back and put it out here to the industry to see if anyone is
interested in providing a quote on that particular product,” Green says. 
Foreign consumers can help diversify markets for farmers. Apple growers 
Philip Glaize of Winchester, Va., and Henry Chiles from Crown Orchards, for
instance, work together to supply necessary volume for their overseas buyers. 
The Cuban government agency coordinates purchase requests of multiple agencies, and consolidates them
into contracts with exporters, Green says. The market could be expanded, he says, but current trade and travel
restrictions limit growth. There are other transaction costs as well. Because of everything from travel licensing
to the necessary export licenses from the U.S. Treasury and U.S. Department of Commerce, it’s not as easy as
going to Mexico City to visit a customer. But it has been worth the investment.
This is one of those markets where it’s truly unique when you see someone who is American,” Green adds.
And when he does, it’s often someone from the South. “Geographically it makes sense — we have a competitive
advantage. It’s a three-day transit time to get a vessel down there with soybeans.”      — BETTY JOYCE NASH
838K    2.4
8.2
26
32.6
40.7 45
40
35
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25
20
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2003 2004 2005 2006 2007 2008
Virginia Agricultural Exports to Cuba
$
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SOURCE: Virginia Department of Agriculture and Consumer Services

Upfront: Economic news across the region

http://www.richmondfed.org/publications/research/region_focus/2009/fall/pdf/upfront.pdf

Upfront: Economic news across the region

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