Peter Karl Kresel's presentation
Let me begin by telling you that it is a great pleasure and honor for me to address this distinguished gathering of scholars and officials at a conference dedicated to discussion of urban competitiveness. I would like to take a moment to thank my host Ni Pengfei for extending to me the invitation to participate in this conference and also to thank Gao Haiyi for arranging for that participation to be so effortless on my part. I am sure you agree with me when I say that competitiveness is one of the primary issues that will confront city leaders for the foreseeable future. While I would not be so presumptuous as to think I could tell you anything about the Chinese economy or the economy of its cities, I do believe I can offer some interesting and perhaps instructive comments on the research that has been done on the primary subject of this conference. Before I do that, however, I will comment briefly on the context in which our discussion of urban competitiveness takes place, and I will end my presentation with some thoughts on some aspects that I believe will have impacts on the policy initiatives that city leaders will introduce during the next couple of decades.
The Context
Economics is fundamentally concerned with questions treating the production of goods and services, their distribution among the various classes, entities and individuals in the global economy, and the allocation of resources among various lines of production. These activities have been powerfully affected by the two primary components of the globalization that is so powerfully affecting the economic activities of nations, cities and individuals.
First, goods, services and financial markets have been dramatically liberalized during the past half century. On the global level we have the initiatives of the General Agreement for Tariffs and Trade, through which tariff levels have been reduced during the past 55 years from in excess of 40 per cent to less than 5 per cent, and agreements have been adopted that govern the behavior of national governments with regard to other barriers to trade, such as quotas and subsidies. The World Trade Organization is struggling to continue this work into the 21st century. At the regional level, we have seen the growth of scores of agreements to liberalize trade from grandiose projects such as the European Union to bilateral agreements between minor players. Similar liberalization has occurred in financial markets, but labor markets have not been similarly affected.
Second, much of the liberalization of markets has been facilitated if not demanded by extraordinary advances in production, transportation and communication technologies. Goods can be sent to markets thousands of miles distant for the same cost as a shipment of a hundred miles a few decades ago. Using the most recent innovations in telecommunications technology, production processes can be monitored by quality-control supervisors located far from the production site. Large scale industrial agglomerations, such as those in automobile and steel production, can be broken down into components and sited in locations that are optimal for them individually. For most cities, the locational advantages of rivers, raw materials, and low cost labor have given way to proximity to markets, to cities with the cultural and leisure activities that are attractive to highly educated and skilled workers, and to airports, although the degree to which this has is occurred differs among national economies. The economic advantages of traditional centers of production and distribution have been replaced by the newer ones, and economic actors in cities everywhere find they are increasingly subjected to the threats, challenges and opportunities coming from competitors throughout the global economy.
Concomitant with these economic forces of globalization is the reduced capacity, and even willingness, on the part of national governments to intervene in a protectionist fashion in economic matters. However, contrary to what many have argued I do not agree that globalization has diminished the role of national governments; it is the national governments that have caused this reduced capacity to take place. National governments worked for the past half century to liberalize trade and financial markets, they have done much to support technological progress, and many of them have adopted the policy approach of reducing taxes and constraining in their engagement in economic activities. However, we must remember that national governments could reverse this process of liberalization and abstention from intervention at any moment.
It is in this context of steady market liberalization, rapid technological advance, and reduced support from national governments that city leaders have found themselves in the position of having to become increasingly engaged in strategic planning and in adopting policies to promote the enhancement of their competitiveness vis à vis other urban economies throughout the world. It is this necessity of local engagement in policy formation, either by themselves or in conjunction with powerful regional governments, that has give rise to studies on urban competitiveness.
Studies of Competitiveness and the Urban Economy
During the past decade, a small group of academic scholars and government researchers has turned its attention to analysis of urban competitiveness. Major works of scholarship have been published in China by Ni Pengfei, in Mexico by Luis Sobrino, and in Europe by Iain Begg and Bill Lever, and in Canada and the United States I have worked with my colleague Balwant Singh and with Pierre-Paul Proulx of the University of Montreal. Reference to each of these works is provided at the end of this paper, so I will not examine them in detail here. But I would like to suggest to you what I believe to be the most important aspects, with regard to both methodology and results, of these works. First, it is important to understand that not all cities need to follow the same path to competitiveness; that is, while some cities may find success as centers of research and development and high technology production, others may succeed as financial centers, national headquarters centers, centers of culture and recreation, transportation ports or hubs, traditional manufacturing, or gateway cities, that is, as continental point of entry cities for firms from the rest of the world. The objective should be that of providing good paying, interesting jobs to workers over the long run; that is, some version of sustainable development. Thus the indicators of competitiveness should, at the first stage, reflect this broad conceptualization. In my work I have used a weighted index of manufacturing value added, retail sales and professional services. These variables capture both economic success and the ability of the urban economy to refocus or reorient itself as the context changes over time. Mr. Ni, as you probably know, uses as his composite independent variable: city income at a moment of time, growth of that income over a period of time, income generated per unit of cost, and some measure of urban assets (location, reputation and environmental quality). Luis Sobrino uses the change in industrial production, the share of the city’s output in that of the nation, and the export base. Thus, each of us uses general indicators that could capture success of cities fulfilling a variety of roles or functions in the international economy. In Europe all of the studies with which I am familiar focus on what it takes to be a successful urban economy of a specific character, with most of them focusing on information-communications technology, high technology production in a sector such as bio-pharmacology, or as centers of research and development and advanced education. From my experience in working on European urban economies I suspect that the lack of comparable data across the cities of all EU member countries makes the sort of work one can do in North America and China virtually impossible. This results in researchers working from the determinants of a particular type of urban economy and a specific set of urban assets back to the individual city rather than from the economies of 20, 30 or 50 cities forward to discovery of the determinants of urban competitiveness.
This leads to the second thing one must keep in mind: studies of urban competitiveness are best done if they are quantitative in methodology. There is a rich literature on various social-economic aspects or variables that should, in theory, have an impact on a city’s competitiveness, and much of this is itself the result of quantitative analysis of that particular variable. But in practice some of these variables work to limit the impact of others. An example might be the share of the labor force that is composed of administrators and professionals. One could argue that a city needs these categories of workers to provide leadership and decision-making capability. However, one could also argue that, for example, the United States is “over-administered.” In my research I found that the share of the work force that is administrators and professionals was often negatively correlated with urban competitiveness, perhaps because it take the place of production line workers. It was not one of the significant determinants of competitiveness. Regression-correlation analysis generates sets of variables that work together in a positive manner to give an understanding of the actual, objective determinants of urban competitiveness.
The third point I would like to make is that the study of urban competitiveness has been done in a context of increasing globalization, so that national markets are being opened, barriers to the exchange of goods, services and capital are being lowered, and the same large multinational companies are operating throughout the global economic space. These firms try to modify their operations to local conditions, but they also have the same operational objectives and seek the same policy environment and complex of economic factors wherever they operate. This means, in effect, that the results of urban competitiveness analysis done in one or more countries in which there is ample comparable data for a sufficiently large number of cities, such as China or the United States, should have relevance for cities in other countries in which this sort of empirical analysis is not possible. Of course, one who is familiar with the conditions in the smaller country would have to use his or her knowledge to apply these research results in that country. We have already noted that it is difficult to get data on many economic variables for the, now, twenty-five members of the European Union. Furthermore, none of the individual EU member countries has a sufficiently large number of cities with comparable data for this type of analysis to be done. Local traditions or political institutions or cultural practices will, of course, mean that care must be taken, but as long as we are dealing with the same large firms which operate in many countries or with smaller firms that function in that same operational environment results of research done in, say, China or the United States should have applicability for cities throughout Asia, the Americas and Europe. We may properly consider China and the United States to be the primary laboratories for the study of urban competitiveness.
Fourth, the methodology utilized by Ni, Sobrino and Kresl with Singh and Proulx is based on the understanding that there is no variable called “urban competitiveness.” Therefore, great care must be taken in the selection of the variables that will stand in for this concept and be used as a proxy for it. This is necessarily the result of a search of the literature on the economics of urban regions as well as the judgment of the researcher.
Once we have done our analysis of urban competitiveness and we have ranked the cities in our study according to their competitiveness, we must put this knowledge to use in formulating policies and strategies for city leaders in their quest to put in place the most effective and satisfying urban economy for the city’s residents. This gets us to the next topic of this presentation – strategic planning for competitiveness enhancement.
The Necessary Link to Strategic Planning
Once the city leaders know the degree to which their city is or is not competitive in relation to other cities, they will want to act on that knowledge. That is to say, they will want to plan strategically for the enhancement of their city’s competitiveness. We scholars can assist them by going beyond just ranking cities, to looking behind the indicators of competitiveness to its determinants. We can use statistical analysis to verify that certain variables determine or explain the urban competitiveness ranking. Then we can study the city’s ranking for each of these determinants and from this we gain an understanding of the important areas in which the city is relatively strong or weak. For example, a city may be ranked tenth in competitiveness but fifteenth or third in the education of the labor force, or its cultural institutions, or its transportation or communication infrastructure. We would have previously ascertained that these specific variables are significant determinants of competitiveness so strength or weakness in them is important for effective planning. The city should then strengthen its weaknesses and maintain its strengths. The results from this project will be valuable because they are based on data and statistical analysis rather than purely on the judgment of the planner. The danger of the latter is that strategies are often primarily the result of what might be referred to as the “strategy of the day,” a fad, such as bio-pharmaceutical centers or the importance of clusters for all industries and for all cities. Each city must chart its own course that is based on its comparative strengths and weaknesses.
In designing a strategic plan, city leaders must understand that, as I mentioned earlier, some cities can be successful as financial centers or producers of traditional products such as automobiles or steel or as processors of agricultural products or as corporate headquarters centers or as transportation centers. The previous analysis of strengths and weaknesses combined with a deeper analysis of the assets of the urban economy will enable city leaders to choose the optimal strategic path. Once this has been done, further analysis will be required to understand exactly which assets or policies must be present for success with this strategy. For example, if the city is to be focused on exports to foreign markets it will have to support the development of small and medium sized firms, it will have to develop alliances with other cities and international linkages, and it will need to have in place specialized business services. For a city to succeed as a center of research and development it will have to support the development of smaller firms and close linkages between companies and research labs at universities, the high skill labor force will require certain housing and urban amenities, such as cultural institutions and leisure time opportunities, and it will require a sophisticated communications infrastructure. Each possible strategic focus can be treated in this way.
The result of this process will be a strategic plan that is tailored to the specific assets, strengths, and weaknesses of that individual city. It will be based in large part on objective quantitative analysis and in part on the informed understanding of local individuals in the government and in companies. Given the limitations of time, I must now move to the final part of my comments – a brief speculation about the future.
Final Thoughts about the Future and Urban Competitiveness
History is replete with forecasts of or comments about the future that proved to be not only false but also embarrassing for those who made them. Forecasts in August 1929, November 1941, January 1973 or August 2001 are only the most graphic and notorious of scores of examples of our inability to look reliably into the future. The best we can do is to identify what are most likely to be the forces or phenomena that will exert an influence, of undeterminable power, on actors in the not too distant future. That is all I will attempt to do in this final section of this presentation.
First, cities throughout the world will experience continued challenges to their economic structures and their place in the global urban hierarchy as the world economy moves through a transition to a new division of labor. Workers in Third World economies are as intelligent and trainable as their counterparts in the already industrialized world. Once they have put effective educational systems in place for the mass of the population, have achieved political stability and instituted transparent and predictable systems of laws and enforcement each of these countries will begin to attract investment, production and jobs from developed economies or will generate its own for meeting the demands of global markets. This period of transition will continue for decades. This is not to say that the liberal economic forecast of factor price equalization and specialization according to comparative advantage will lead to economic development and equal incomes and prospects for all; this does not even happen within developed countries. However, these forces will be at work and will have significant impacts on the lives of scores of millions of people in both the developed and Third World economies. Therefore, cities in the developed world should expect to be confronted by a need to adapt and continually reshape their economies as they will have no choice but to make room for these new competitors and cities in the rest of the world should anticipate opportunities to present that competition.
Second, the pace of trade liberalization may be slowed by the political reactions of people in all countries to its consequences. In the next decade or so, the advances in the opening of markets to international trade will involve concessions from the industrialized countries in areas in which they have resisted concessions because of the political reaction from those who will be negatively affected. The two primary areas in which these concessions will have to be made are reductions in financial support for agriculture and acceptance of the trade off of exports of high tech goods from industrialized countries for imports of labor intensive goods from the Third World. In all industrial countries, farmers have been increasingly vocal and politically engaged in their resistance to their loss of market share to Third World producers. The WTO has just acted against US cotton subsidies and against protectionist EU sugar policy and has apparently made considerable progress in the current negotiations. These successes have emboldened Third World countries to press their cases in other sectors of agriculture. The US government has just had the WTO find against its 30 per cent tariff on imports of steel and its support of cotton producers, and the EU has had a similar finding with regard to its sugar supports. The increasing vulnerability of farmers and blue collar industrial workers in Europe and North America is certain to generate political pressures against further trade liberalization schemes. In the US presidential race, Democrat John Kerry has indicated the he will not support the Central American Free Trade Agreement and that he will re-examine the trade agreements, primarily the North American Free Trade Agreement and the granting of most-favored nation status for China. While cities are by definition urban places, many of them, such as Chicago and Minneapolis in my country are strongly linked to the vitality of their agricultural hinterlands. Whether via the route of agricultural conflict or via the deterioration of their manufacturing sectors, a halting or reversal of recent trade liberalization initiatives would have a powerfully negative impact on the economies of the cities of both the industrialized and the developing world.
Third, technological change must be expected to continue at a rapid, and perhaps increasing, pace. As international competition for markets increases, firms and governments are forced to devote larger shares of revenues to research and development. This suggests that new technologies and new product development will continue at a rapid if not increasing pace. Clearly, this in itself has its disruptive impacts. But what may be of greater importance is the emergence of China, India, Brazil and other emerging economies as centers of technological advance. Hundreds of thousands of young people from these countries have pursued higher education in industrialized countries as well as their own. This means that the control over technological advance, both its direction and its pace, will to a significant extent shift from industrialized to other countries. This will generate an environment that is even more challenging and threatening to city leaders in North America, Europe and Japan, but equally promising for those in China, India and Brazil, among others.
Fourth, if national and state and provincial governments continue to be pressed by electorates to reduce taxes this will mean that expenditures of these governments and their transfers to municipal governments will have to be reduced. The consequence will, of course, be less expenditure on social welfare programs, education, urban renewal, income maintenance and even, perhaps, public safety except for the broad category of “homeland security.” This sets up a conflict between the skills and stability needs of the contemporary economy and the increasing income and wealth inequalilty, both in the city center and the suburbs. The burden on municipal governments to maintain their urban assets and to reduce the incidence of urban social pathologies will only grow, and when the burden becomes too great the city will find its competitiveness and attractiveness to firms will deteriorate. Should this be the case one should expect to see increased militancy on the part of disadvantaged inner city minorities. This will only add to the difficulties with which city leaders will be faced as they try to maintain or to enhance their city’s economic competitiveness.
Fifth, demographically, there are several developing situations that promise to become even more important for urban economies than they already are. First, the rural to urban migration continues except for some poorly performing and relatively unattractive cities that have lost population in recent years. Second, many cities are situated in countries in which the population is aging to the extent that in these countries severe fiscal difficulties are foreseen as retirement and health care expenses rise but revenues from a declining percentage of the population that is workers and tax payers diminishes. In many Third World countries just the reverse is the case. Whether from the push of relatively unattractive prospects at home or from the pull of inducements from industrialized countries, we may expect to see a migration of young, energetic but not necessarily skilled workers from Third World countries adding to the inward migration from rural areas. Both of these migratory flows have the promise of long term benefit, but at the cost of short run expense and increasing social, ethnic and racial tension. Third, rising levels of education, especially in some Third World countries, promise to bring the positive returns one would hope would be the natural consequence of investment in human capital. The challenge to cities is that of making themselves attractive, in terms of housing, recreation, culture and stimulating jobs so they can capture a sufficient share of these talented young workers on whom the future of all cities will be grounded.
Sixth, and on the positive side, city officials have gained considerable experience with networking and inter-urban inter-action, and with public-private sector cooperation during the past couple of decades. Given the needs for pro-active planning and initiative at the level of the municipality and the urban region, often in cooperation with the state or provincial government, this recently gained competence and awareness will be put to good use during the perhaps difficult next couple of decades. During the past two decades there have been many initiatives such as Eurocities, port cities, northern cities, and so forth. Where city leaders have participated in these ventures, they have come to understand that they need not think that they will be forced to deal with these problems individually, but will be able to share concerns about common problems, to discuss responses to changes over which they have no control, to study solutions and responses that have or have not worked, and to form cooperative ventures and structures. Cities that choose to go it alone will find themselves in a world of uncertainty in which the risk is high, as are likely to be the pay-offs or loses from what they decide to do. Cities do need a bit of entrepreneurship and risk-taking, but it must be remembered that what is at stake is the economic future of the city’s residents. Entrepreneurship in this case is best leavened with prudence. Firms and other private sector actors are the natural allies in this effort and successful cities will be the ones that have got this multidimensional inter-action right.
Seventh, and lastly, as energy costs rise urban area dwellers may be forced to reconsider the wisdom of continued sprawl, use of the private automobile as the sole means of transportation, investment in public transportation and, as Ken Livingston the mayor of London is arguing, building vertically rather than horizontally. Significant change will not be immediate as the constraints of decades of urban development based on cheap energy will make change costly, in the short run, and difficult to gain acceptance. Access to water may also make it costly, if not impossible, to continue to expand urban populations in arid areas such as the US West and Southwest. Conflict between agricultural users and cities, and among states sharing the same river, lake or aquifer is increasing and all of the possible resolutions of this conflict, except perhaps desalinization of ocean water, can promise relief only in the short term. These energy and water issues will force both a gradual restructuring of, and limit the possible expansion of, affected urban areas. Many cities that had been privileged in the years of ample low cost energy and water will find themselves disadvantaged in the new resource supply and cost environment.
As a final comment, I would argue the need for increasingly effective and competent municipal and urban regional governance. Schumpeter’s “creative gales of destruction” are more powerfully operational and effective in today’s globally-open economy than they have ever been. Their impacts on firms, communities, the labor force, governments at all levels, and the well-being of individual households will in many cases be profound. The challenges of governance will be greater than ever before and enlightened public servants and statesmen and stateswomen, more than run-of-the-mill politicians, will be needed to lead city halls around the world. The challenges to all cities are clear and I hope that in this presentation I have clarified some of them, suggested approaches to their resolution, and given guidance to public and private sector leaders in individual cities in a way that was both interes, ting and instructive to you.
I know that many of you have experiences and knowledge that would be at least interesting and instructive to me and I do look forward to learning from you during the next couple of days. Thank you very much for your kind attention. Let’s have a good conference!