Paul
Rocheleau, a senior chemical industry executive with
Richmond-based Albemarle Corporation told me a story
two years ago that has always stuck in my mind. Back
in 1997 he boarded a plane, an American-made Boeing,
bound for Kunming, a sprawling city deep in China's
mountainous interior. The airplane, he recalls was
packed with Chinese and Thais; he was virtually the
only westerner. Yet, as the plane taxied into the
Kunming airport, the sound system was playing
American Christmas carols sung by the likes of
Gloria Estefan and Amy Grant. Getting
off the jet, Rocheleau was struck by how
cosmopolitan this backwater Chinese city had become.
The airport supported four flights per day from
Bangkok alone. Who would have guessed? He could
receive calls on his European-made cell phone. People were
driving German-made Volkswagen cars. But modernity
mixed poignantly with an ancient way of life: Within
sight of the airport, peasants were plowing fields
with oxen. That's when it hit Rocheleau how rapidly
China was changing -- indeed, how rapidly the world
was changing.
As
New York Times columnist Thomas Friedman
famously put it in a recent best seller of the same
name, "the world is flat." Technology,
economic and political barriers to global trading
continue to fall away. Twenty years ago, the nations
of the global trading system -- North America,
Western Europe, the Asian Rim, the petro-states and
parts of Latin America --
constituted a billion to a billion-and-a-half
people, depending on how you count them. Today, as
chunks of China, India and the former Soviet bloc join that
system, the number is closer to three billion. As
isolated regions of China, India, Russia and Southeast Asia build the
capacity to plug in --
airports, telecommunications, ports and highways -- tens of millions of new workers enter
the trading system every year.
Globalization
has brought extraordinary
prosperity to the world, lifting people out of
poverty at a rate unprecedented in human history,
flooding every continent with cheap material goods, and
providing abundant capital for anyone who can invest
it well. At the same time, the trading system has proven
highly disruptive to uncompetitive businesses and
traditional ways
of life. In an earlier book, "The Lexus and the
Olive Grove," Friedman explored how differently
countries around the world were responding to the
turmoil unleashed by what they perceived as
"Americanization."
Here
in the United States, Americans are no less anxious
about what we call "globalization" -- that
which the rest of the world is doing to us. While lapping
up inexpensive manufactured goods at Target and
Wal-Mart, Americans also fear for their livelihoods.
Change distresses them. They bash U.S. companies for investing
overseas -- and protest when foreign companies buy American assets. They worry about immigrants entering
the country -- and fear a brain drain
out of the country. According to a recent NBC/Wall
Street Journal poll,
80 percent of the population believes the United
States is undergoing a "long-term
decline." Two-thirds believe their children's
lives will be no better than their own.
Globalization
and the frenetic pace of technological change that
accompanies it is one of the great challenges of the
United States in the early 21st century. (The other
is the spread of militant, fundamentalist Islam,
which threatens to undermine the global trading
system, a topic beyond the scope of this series of
columns.) While many Americans have been trained to
look to the federal government for solutions, the
challenge of globalization can be met only at the level
of states, regions and municipalities. Congressmen
and bureaucrats in Washington are not equipped to build
more prosperous, more livable communities -- that is
a task that must be performed by the citizens
themselves.
When
the challenge of economic development was simply to
recruit business to the state, Virginia was a
stand-out. The Old Dominion mastered that old
economic development model, chasing corporate
investment. However, as the
nature of the economy changed, requiring a new model
of economic development, the Old Dominion stagnated.
The
chart below, based on numbers from the Bureau of
Economic Analysis, shows Virginia per capita income
expressed as a percentage of national income. In
1970, Virginians' per capita income was seven
percentage points behind the national average.
However, in a sustained burst of growth, the state
caught up to the national average in 1980 and zoomed past it by 1985. Then Virginia hit a
15-year plateau. Only since 2000 has the
Commonwealth resumed its gains relative to the rest
of the nation.
But
the improvement from 2000 to 2005, concentrated largely in Hampton Roads and Northern Virginia,
reflected a post 9/11 redistribution of federal
spending to the state's military, intelligence and
homeland security communities -- not an enduring
increase in economic potential.
As
a commonwealth, Virginia has yet to systematically re-think what it
takes to prosper in a globally competitive knowledge
economy amidst rapid technological change, rising
energy costs and heightened environmental threats.
Northern Virginia, a world-class technology center,
has made some progress in re-conceptualizing the
"economic development" piece of the
equation -- the recruiting and retention of
businesses -- but it has flunked the test of
refashioning itself as a more livable community.
NoVa is choking in its own growth.
Outside
Northern Virginia, the economic development model
remains much as it was 20 years ago in the state's
hey-day. No region has made a comprehensive effort to re-envision
itself as a community adapted to the demands of
the 21st century economy. Neither of the two
dominant political parties, the Democrats or
Republicans, are any help whatsoever. Captive to
their own demographic constituencies and special
interests, the two parties
are mired in
partisan bickering, divisive culture wars and a
stale conventional wisdom.
In
this series of columns, "Economy 4.0," I
will try to lay out a comprehensive framework of
analysis for building more prosperous and livable
communities in the 21st century. Many of my thoughts
about the over-arching importance of human
settlement patterns reflect a long and fruitful
collaboration in Bacon's Rebellion with E M
Risse, author of
"The Shape of the Future" and a Bacon's Rebellion columnist
for nearly five years. But I have sought to broaden the framework to
other realms of Virginia's economy and society.
Hopefully, many of the perspectives presented here
will strike most readers as on the mark.
Just
one warning: This is a work in progress. I am still
thinking things through, so my conclusions are
subject to change. But I am confident that this new
framework for analysis will encourage citizens to
begin the arduous process of thinking differently
about some of the most vital issues of our era.
New
Urban Regions
The
nation state is losing its preeminence as the
fundamental unit of economic development in the
world today. The cross-border flow of information,
capital and technology is unprecedented, and the
flow of labor is close to unprecedented. No country
can long defy the “electronic herd” (another
Friedman coinage) of money managers who shuttle
billions of dollars between currencies, equities,
bonds and derivatives around the world within nano-seconds. Even the
mightiest nation on earth, the United States, must
pursue monetary and fiscal policies within the
constraints imposed by the herd or suffer the
consequences.
Although
important economic decisions continue to be made at
the national level, many key differentiators in
global competitiveness are occurring at the regional
level. This shift has been called by some the
rise of the “city state.” Economic boosters
allude to this phenomenon when they make statements to
the effect that Richmond (or any other city
you prefer to name) "isn't just competing against
Raleigh or Charlotte, it's competing against Lyons,
Dublin and Nagoya."
The
"city state" image is somewhat
overwrought, however, as cities in the United States
are not sovereign entities comparable to Greek
city-states of the ancient world or Italian
city-states of the Renaissance. American
"cities" do not maintain their own
currencies or conduct their own foreign relations.
We prefer Risse's term, New Urban Regions, or NURs for
short.
A
New Urban Region is roughly conterminous with a
Metropolitan Statistical Area (MSA), a region of
multiple municipalities bound by history,
transportation and a common labor market.
Historically, NURs originated as densely populated
urban centers, which we conventionally refer to as
"cities," but evolved into
multi-jurisdictional entities as growth leap-frogged
past the city borders. In Virginia, these outlying
jurisdictions are labeled
"counties."
For
purposes of economic competitiveness, it is useful
to think of a New Urban Region not as a gaggle of
cities and counties but as a single social and economic entity:
a labor market where citizens, businesses and
institutions share a common geographic identity.
That viewpoint is all the more compelling as human
capital increasingly becomes the driving force of economic development among the
advanced, industrial nations. If we view NURs as distinct labor
pools, the workforce characteristics of the region – the
general education level, the
industry-specific skill sets, the capacity to teach
new skills, and cultural attributes such as work
ethic and appetite for entrepreneurial risk taking
-- largely define its competitiveness.
There
are other factors, as we shall argue, that affect an
NUR's ability to prosper in a globally competitive
economy. The quality of life, which affects the
region's ability to recruit and retain skilled and
educated workers, is one. The level of taxation, the
health of the environment, and the condition of the
physical infrastructure -- broadband, roads, rail,
water, sewer -- are others. But human capital, the
wellspring of productivity and innovation, is
paramount. In the knowledge economy, all other considerations are secondary.
New
Urban Regions and their economically dependent
hinterlands have shown widely varying degrees of
success over the past several decades. Some have
prospered in the globally competitive economy,
giving rise to new knowledge-based industries with
tremendous growth opportunity. Others have declined as
traditional industries have eroded with nothing to
replace them.
Those
regions whose political, civic and business leaders
understand the challenges, build the necessary
institutions and create the right conditions will
have the potential to achieve unprecedented
prosperity. Those who cling to familiar, comfortable
ways of thinking will stagnate. Some may even
retrogress to Third World living standards.
The
disparity in performance can be seen in the chart below, based on
Bureau of Economic Analysis (BEA) data. Compare the fate
of Bridgeport, Conn., the affluent New York suburb,
with the likes of Detroit, Cleveland and Rochester.
In 1967, Bridgeport's income was 153
percent of the national average. Four decades
later, it has increased to 195
percent -- nearly double -- the national
average, for a gain of 42 percentage
points. Rochester incomes, by contrast, have
declined from well above the national average to
below it.
Wealth-Creating
Winners and Losers
(Per
capita income as % of national average) |
|
1967
|
2006
|
Gain/
Loss
|
Bridgeport-Stamford-Norwalk,
CT
|
153
|
195
|
42
|
Boston-Cambridge-Quincy,
MA-NH
|
115
|
137
|
22
|
Charlotte-Gastonia-Concord,
NC-SC
|
90
|
107
|
17
|
Durham,
NC
|
86
|
102
|
16
|
Detroit-Warren-Livonia,
MI
|
119
|
109
|
-10
|
Cleveland-Elyria-Mentor,
OH
|
116
|
103
|
-13
|
Rochester,
NY
|
116 |
98 |
-18 |
Over
the same 40-year period, Virginia New Urban Regions have out-performed the
nation. Charlottesville and Northern Virginia led
the state with 18 percentage-point gains in relative
national standing, with Richmond and Winchester
logging in respectable 11 percentage point gains.
Only Blacksburg-Christiansburg and
Staunton-Waynesboro lost ground, and even they did
so only by small amounts.
Wealth
Creation in Virginia
(Per
capita income as % of national average)
|
|
1967
|
2006
|
Gain/
Loss
|
Charlottesville
|
85
|
103
|
18
|
Washington-Arlington-Alexandria,
DC-VA-MD-WV
|
123
|
141
|
18
|
Richmond,
VA
|
95
|
106
|
11
|
Winchester,
VA-WV
|
76
|
87
|
11
|
Bluefield,
WV-VA
|
68
|
74
|
6
|
Virginia
Beach-Norfolk-Newport News, VA-NC
|
91
|
96
|
5
|
Kingsport-Bristol-Bristol,
TN-VA
|
75
|
79
|
4
|
Roanoke
|
91
|
95
|
4
|
Danville
|
71
|
75
|
4
|
Lynchburg
|
82
|
84
|
2
|
Harrisonburg
|
78
|
79
|
1
|
Blacksburg-Christiansburg-Radford
|
74
|
72
|
-2
|
Staunton-Waynesboro,
VA
|
86
|
84
|
-2
|
As
the BEA data makes clear, over long periods of time New Urban
Regions (or MSAs) can significantly out-perform or
under-perform the national average. While some
factors are beyond a region's control, such as rising/falling price of petroleum or agricultural
commodities, which can devastate major industries, critical
factors such as the development
of human capital, the level of taxes and investment in infrastructure
are entirely within a community's realm of
influence.
Productivity
and Innovation
As
a high-wage state in the nation with the highest
wages in the world, Virginia cannot compete in the
global arena on the basis of low labor costs. It
must find other competitive advantages. Two
advantages consistent with a high standard of
living are productivity and innovation.
Productivity
is the ability to perform economically value-added
work that can support high wages and salaries.
Innovation
is the capacity to create new technologies, products
and business models that reap outsize economic
gains. Disruptive innovation enables
enterprises to leap past its rivals' incremental
improvements.
It
cannot be stated forcefully enough: To maintain its
standard of living in a
globally competitive knowledge economy, Virginia must develop a
productive workforce and an innovative business
community.
In
a world where other New Urban Regions are
discovering and acting
upon this basic truth, the Commonwealth of
Virginia and its NURs must do the same. Indeed, we
must go a step beyond: We Virginians must apply our
unremitting focus to
productivity and innovation. We must reinvent every
supporting institution -- land use, government,
transportation, education, health care -- to support these sources of wealth
creation. We must embed an obsession with
productivity and innovation deep in our culture. For
individuals, that translates into better
education, more skills, higher levels of personal
discipline.
For business enterprises, that means
more technology research, more product development,
greater attention to process improvements, and a greater capacity
to solve complex problems.
Evolution
of Economic Development Paradigms
To
succeed in the 21st century, the economic-
development nostrums of the 1970s and 1980s
won't serve anymore. Every New Urban Region must
develop a strategy to bolster productivity and
innovation. To borrow yet another of Thomas
Friedman's coinages, Virginia communities must
upgrade their economic operating systems.
Here
is how I dissect the evolution of economic-
development paradigms in Virginia over the
past 40 years.
Economy
1.0: Buffalo Hunting. The industrial-
recruitment model of the 1960s, '70s and '80s
achieved economic growth by recruiting outside
manufacturing: bagging the trophy quarry.
Municipalities and regions focused on (1) marketing to
corporations, and (2) building industrial
infrastructure, primarily Interstate highways, rail
lines, industrial parks, water, sewer and electrical
power. As long as there was abundant unskilled and semi-skilled
labor, there was little need to worry about human
capital.
Economy
2.0: Safari Hunting. In the 1980s, some economic
developers began updating their industrial-
recruitment model for the service
economy. They didn't chase just smokestacks anymore -- they went after back-office
operations, call centers, distribution facilities,
even corporate headquarters. Like safari hunters,
they hunted anything that moved.
Corporate
requirements became more sophisticated. Broadband
Internet access joined the list of "must
have" infrastructure. Service companies
typically had specific skills requirements, so
economic developers became more
attuned to the nuances of labor markets, collaborating with
high schools and community
colleges to ensure that workers could acquire those
skills.
Economy
3.0: Tending the Garden. The shift from the
"hunting" model to the "grow your
own" model took root in the 1990s. According to this line
of thinking, fast-growing, entrepreneurial companies
-- gazelles, as MIT economist David Burch calls them
– are the greatest job creators in the U.S.
economy. Drawing upon the success of Silicon Valley
and the Boston area, NUR leaders began thinking
about “soft” infrastructure such as research
universities, incubators and networking groups, to encourage
entrepreneurial start-ups, and gave more attention to
the small-business tax and regulatory climate.
Economy
4.0: The Creative Class and Sustainability. Economy
4.0, the economic development model that advanced
New Urban Regions are now moving towards, contains all
the elements of the previous models -- and more.
Savvy NURs still recruit corporate
investment, build and maintain hard
infrastructure, tend to the soft infrastructure
and nourish a business climate where entrepreneurs
can thrive. But Economy 4.0 adds a new component:
the systematic building up of human capital.
Economy
4.0 springs from the realization that the ultimate
source of productivity and innovation is people. A
disproportionate share of value-added economic
activity and innovation emanates from a group of
entrepreneurs, scientists, artists, educators and
complex problem solvers that Richard Florida refers
to as the "creative class." The central challenge
for civic leaders adopting the economic development-through-innovation
model becomes developing, recruiting and retaining
members of this
creative class. In recognition of the reality that
"creatives"
are highly mobile and that they often choose where to live on
the basis of values and lifestyle considerations, economic development then morphs into
community development: the building of more livable
regions.
While
the civic elites of several New Urban Regions in
Virginia have gotten the message about the
"creative class," they have only recently
begun to decipher the attributes in a region that
the creative class values. Often,
civic boosters still get it wrong. Spending money on
Economy 2.0-like projects like convention halls,
sports stadiums and performing arts centers goes in
entirely the wrong direction, squandering
resources that could be spent more usefully in
other ways.
There
are two other characteristics of the next-generation economic
development model that warrant comment here. Regional
economies are inextricably embedded in a global
energy system and a global environmental system. Virginia, like the
rest of the U.S., has built its economic base and
physical infrastructure on cheap,
abundant energy. Indeed, Virginia's economy is one of the
most electricity-intensive in the world. As a
consequence, the state will see its competitiveness
erode in the face of rising energy costs propelled by
surging demand from China, India and other
developing countries. Furthermore, intense resource
consumption has deleterious effects on Virginia's
environment, degrading the state's natural capital
of clean water, clean air and clear earth. A
comprehensive model for economic development, I would
argue, seeks to minimize resource consumption and
its adverse environmental impact.
Future
sections of this series will elaborate what it takes
to achieve Economy 4.0.
--
Sept. 4, 2007
|