The Winners' Choice: Sustainable Economic Strategies for Successful 21 st Century Regions

1. The Winners' Choice: Sustainable Economic Strategies for Successful 21st Century Regions Mark D. Partridge, The Ohio State University and M. Rose Olfert, University of Saskatchewan North Central Regional Center for Rural Development Michigan State University, Lansing Michigan. November 1, 2011

2. Introduction • How have regions evolved? • Economic Development Responses to date • Effective Regional Strategies for the 21st Century • Future Challenges for Regions • Implications Overview

3. RURAL areas are components of Regions—where people live, work, play, shop, access public services • Dividing a region between rural and urban is not sensible for policy because of spillovers. Economists say externalities need to be internalized. • Regions compete globally—households and firms have fewer mobility costs in location choices • Regional policy increasingly important in a global world • Need to understand how regions are evolving to design appropriate policy Introduction

4. Expanding regions: rural space attaching to urban places Rural areas are increasingly dependent on urban centers of economic activity, reversing historical direction of causation Commuting to jobs, accessing urban amenities and public services, input-output linkages Expanding boundaries of regions, extent depending on the size and nature of urban focal points; regions include extensive rural space How have Regions Evolved?

5. Trade Center Hierarchy Evolution, Saskatchewan, Canada 1961-2001 Source: Stabler and Olfert. 2002. Saskatchewan’s Communities in the 21st Century.

6. Commuting rates around Edmonton, Alberta in Canada, 1981 and 2001 Source: Statistics Canada, Censuses of Population

7. The 1950-2003 Expansion of the Atlanta Metropolitan Statistical Area, Georgia Source: U.S. Census Bureau.

10. The Urbanization Intensity in Four MSAs, Evolution 1950-2009 Source: U.S. Census Bureau.

11. 2. More Open Regions • From within the region, firms increasingly have easy access to inputs and markets anywhere in the world • Consumers can access goods and services globally • Similarly regionally produced goods and services are accessible to buyers globally • Regional competitiveness in production is very important to regional growth • If the regional production is NOT competitive, the region will lose out to other jurisdictions How have Regions Evolved?

12. Regional labour force and population are also subject to global competition • Highly mobile Households and Firms choose optimal locations based on income/profit and Quality of Life considerations • Connectedness to Global economies and networks affects competitiveness • Knowledge workers/sectors particularly mobile 2.More Open Regions (cont’d)

13. 3. Regions Matter More than Ever in the 21st Century • Regional Policy for Large, Porous regions is becoming MORE important; in the global economy Winners have a worldwide market while losers shed capital, entrepreneurs and workers to the rest of the world. • Physical size of the (functional) Region is limited by transportation costs for commuting to work, accessing schools, recreation, shopping—this is the “PLACE” that must be globally competitive • “Getting it right” essential to be the chosen location for households and firms How have Regions Evolved?

14. Suboptimal, Counter-productive, Backward-looking Policies • Regional growth potential varies over time and across regions, triggering resource flows • Policies directed at regional inequalities inherently vulnerable to rent-seeking in geographically-based democracies—sectors, lobbyists, politicians • Policies devised to intervene, if inconsistent with economic fundamentals, will be ineffective, costly and in aggregate growth-inhibiting Current Policy Setting

15. Reliance on Fad-Based and Inefficient Policy • Local economic development craze (replicating Silicon Valley, biotechnology, attracting immigrants to declining areas, creative class/bohemians, Green Jobs) develops around a kernel of truth. • “Picking Winners” requires oracle-level knowledge of supply-chain linkages, future demand/supply, technological change, global conditions/policies, an understanding of where an industry will be competitive, and the local agglomeration economies. • Glaeser and Gottlieb, 2008 Suboptimal Policies…. Cont’d

16. Reliance on Fad-Based and Inefficient Policy • Tax incentives and subsidies to recruit businesses costly, unfair, very low probability of success (Holmes 1995; Goetz et al. 2011). • Governments either have to cut services or raise taxes on households and businesses in order to pay for the incentives. This will hurt offset growth. • Displacement costs or relabeling what people do: e.g., incentivize a Mexican restaurant may cause an existing one to go out of business or truck drivers for Iowa ethanol. Suboptimal Policies…. Cont’d

17. Reliance on Fad-Based and Inefficient Policy • Picking winners is difficult as the bankruptcy of Solyndra shows. • Governments do not have the human capital to pick winners and even Wall Street’s record shows no excess returns as Random Walk down Wall Street showed. • A 2011 New York Times article noted that Lawrence Summers was warned that Solyndra was a poor investment in 2009. Summers said: “I relate well to your view that gov is a crappy vc.” (vc is venture capitalist). • The problem is that even IF the government was a good venture capitalist, that is the wrong goal. A VC would often pick firms that would crush the competition, but that may displace workers in other local industries. VCs do not consider displacement costs, they only consider profits of the business at hand. Suboptimal Policies…. Cont’d

18. Example, the Longevity of the Clusters ‘fad’ • Variant of sectoral policies (Porter 1998) • Kernel of truth—localization economies (Martin and Sunley 2003; Duranton et al. 2010) • Absence of systematic evidence—doubling the size of a Cluster leads to 2% increase in wages, but just for Cluster employees (Duranton et al. 2010) • Mean reversion suggests an industry’s local growth is inversely related to its size (Desmet and Fafchamps 2005; Partridge et al. 2008) • Artificial promotion of Clusters diverts scarce resources from more productive uses Suboptimal Policies…. Cont’d

19. Persistence of Suboptimal Regional Development Policies • Attraction of the “Quick Fix” • Short-term attraction of ‘ribbon-cutting’ • Difficulty in accurately assessing impact • Overconfidence bias and small sample bias. {from the management and psychology literature, Busenitz and Barney, 1997} • Principle Agent Problem • Incidence of Benefits and Costs of ‘mistakes’ Suboptimal Policies…. Cont’d

20. Persistence of Suboptimal Regional Development Policies • Attracting the big firm will save our state/province/town/region. • Big firms hurt the diversity of an area and perform slightly worse than smaller firms on average. • Next figure shows how attracting large “million dollar” facilities is not associated with faster growth. • Contrary to the Greenstone et al. (2010) Journal of Political Economy paper that uses the winner vs loser counterfactual. Suboptimal Policies…. Cont’d

22. Standard Government Provision of Public Goods, Mitigating Negative Externalities, providing Good Governance (not glamorous) 1. Efficient provision of Government Services • Region size appropriate to internalizing externalities (FEA) • Beneficiaries = Taxpayers • Economies of size and scale Effective Regional Strategies for the 21st Century

23. 2. High Levels of Human Capital and Knowledge • Local high quality education and training facilities • Providing local conditions that retain and attract human capital: • Local human capital stock, esp. knowledge workers • High Quality of Life attracts human capital • Good governance—security, public services, transportation and communication infrastructure, recreation, cultural amenities Effective Regional Strategies for the 21st Century

24. Individual earnings significantly rise with knowledge, skills, and education. Why the Race for Knowledge?

25. Government of Alberta: Office of Statistics and Information.

26. US Mean Earnings by Educational Attainment, 2009 U.S. Census Bureau, Statistic Abstract of United States, 2012, Table 232, http://www.census.gov/compendia/statab/cats/education.html

27. This understates an individual’s gain to education as employment rates rise and unemployment rates fall with education. Source: OECD, 2010. • So they are more likely to work, and among those working, they are more likely to earn more. • For the US in September 2011, UR 25+ for ≥ Univ. Grad: 4.2%; UR no high school completion, 14.0%, Source, U.S. BLS, September 2011 Employment Situation Report. • Educated workers suffer less in downturns in terms of unemployment—more resilient. Why the Race for Knowledge?

28. Good for people, but what about communities? • There are ‘social’ gains from greater education. People who work in areas with more education have higher earnings themselves • (Source: Moretti, 2004). • Knowledge spillovers. • Places with a more educated population grow faster in terms of jobs and people. • (Source: Simon and Nardinelli, 2002; Glaeser and Shapiro, 2003) • In Canada, the growth inducing effects of education hold in both urban and rural areas. • Source: Partridge et al., 2007. Why the Race for Knowledge?

29. Summary: Communities with a more educated population are richer, grow faster, have lower unemployment, and have greater resilience to withstand shocks. • Community colleges become the best feasible alternative for rural areas. For example rural Alberta? • Rural Alberta does not stack up well for university graduates, but it does well for college graduates. The key is to provide access for college education in rural Alberta. Why the Race for Knowledge?

30. Alberta Educational Attainment: Urban and Rural Government of Alberta: Office of Statistics and Information.

31. 3. Support for Entrepreneurship and Innovation • Small businesses and self employment are strongly associated with growth. (see Partridge et al., 2007; Stephens and Partridge 2011 in print for references; Deller and McConnon, 2009;Goetz and Raupasingha, 2009; Loveridge and Nizalov, 2007) • Reduce uncertainty about future conditions • Appropriate regulatory environment • Infrastructure—transportation, communication • Skilled local labour force • Does not discriminate against sectors or follow current fads—successful entrepreneurs exist across industries. • The resulting diversification is beneficial Effective Regional Strategies for the 21st Century

32. 4. Externalities and Market Failures • Recognize and address negative externalities—environmental protection • Infrastructure investments to mitigate negative externalities or market failures • Consistent long-term perspective Effective Regional Strategies for the 21st Century

33. Reality Check No Guarantees !! Many necessary conditions for regional development, none individually sufficient - large set of exogenous factors Not all regions will succeed Consequences of pursuing Suboptimal Policies are worse, high cost and destructive Effective Regional Strategies for the 21st Century

34. In addition….. • Globalization and global exposure is likely to increase—communication, transportation and standardization across borders is likely to continue. • Technological innovations change the relative competitive advantage of regions, globally. • E.g., new technology made the oil sands competitive or shale natural gas, but green innovations may erase that. • Fundamentally more binding budget constraints may result as the economy falters Future Challenges for Regions

35. Future Challenges for Regions, cont’d. • Energy prices—the specter of $200 oil remains—costs of transportation and production would fundamentally change • Climate change will alter regional attractiveness for households and firms • Attractive climates as places to live will shift • Agricultural Production patterns will shift • Access to water, essential to many production process • A region should strive to be the safe haven to economic uncertainty and use it as an opportunity.

36. Regions, based on functionally integrated rural and urban components, are the appropriate units of analysis and policy design for global competitiveness • Basic Good Governance trumps short term fads for long term viability and growth • Payoffs to broad-based support for innovation to raise productivity and living standards, in terms of retention and attraction of knowledge workers • Regions need to be aware of Climate Change and other shocks that may fundamentally alter regional competitiveness. Regions should aim to be safe haven. Implications

37. Thank-you!Mark D. Partridge and M. Rose Olfert. 2011.The Winners' Choice: Sustainable Economic Strategies for Successful 21st-Century Regions Applied Economic Perspectives and Policy 33(2): 143-178.