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Productivity Growth Drives Successful Regions

Productivity Growth Drives Successful Regions

By James Clary

Economist


On Thursday, July 21, 2011, the Hampton Roads Planning District Commission released a report titled, Hampton Roads Regional Competitiveness. This report reviewed literature and empirical evidence regarding economic growth to determine implications for the Hampton Roads economy.

The term “regional competitiveness” is somewhat of a misnomer, as economic competitiveness is really about productivity growth, and not actual competition between economies.  Noted economist and Nobel Prize winner Paul Krugman suggests that our society has a dangerous obsession with the word “competitiveness”, noting that economic development is not a zero-sum game, but rather has the capacity to build synergies where one region can benefit from the increased productivity of a neighboring region.  That said, the notion of competition often serves to inspire action or to drive policy decisions.

Where does productivity come from?

There are a host of different economic models, but all of them indicate one of three forms of regional economic development.

1.    Regions as Sites of Export Specialization: Also known as basic sector industries, these are industries that ship goods/services out to other areas, bringing money back into the region. This suggests that the idea of economic diversification, while well meaning, is not achievable in a modern interconnected world.
2.    Regions as Sites of External Returns to Scale: Also known as increasing returns to scale, this form dictates that as an industry grows in a region, that it will become more productive. This used to be rooted in avoiding transportation costs as suppliers and producers would co-locate (Detroit’s auto industry, or the rust belt’s steel industry); however, the primary vehicle now relates to information exchange and a shared labor pool. External returns to scale encourage regions to specialize in fewer areas and produce more.
3.    Regions as Hubs of Knowledge: This form concerns human capital, particularly as it relates to particular industries, and how it leads to economic growth and innovation.

There have been several waves of economic development theory, from old fashioned smoke stack chasing, to the encouragement of entrepreneurship, but these the forms of economic development indicate that all productivity gains are the result of economic clusters rooted in regional competitive advantages.

What is a cluster, and what are Hampton Roads’ clusters?


Cluster theory is what brings together all of the end states of economic models to come up with what is called the “third wave” of economic development. In their most basic form, a cluster is a geographic concentration of firms that have co-located in order to gain performance advantages in efficiencies. Many shipping and intermodal firms are located in Hampton Roads because of the port, and there are firms that service the trucking and warehousing industry so that they can support these firms. Hampton Roads also has well developed clusters in the defense and tourism industries, which are based on the region’s water resources (Hampton Roads, the Chesapeake Bay, and the Atlantic Ocean).

When considering economic development however, planners are interested in clusters that represent strong long term growth opportunities. Particularly, you want clusters that will achieve sustainable per capita income growth, while increasing employment opportunities. A strong region would experience productivity growth (which tends to be followed by wage growth) in excess of the regional and national averages.

Unfortunately, determining what will be a cluster in the future is a difficult process. The “Vision Hampton Roads” document identified 6 potential growth clusters in Hampton Roads, and a previous report of the HRPDC had identified several others. Most of the data that is available does a relatively poor job of identifying employment within a cluster. Determining economic clusters requires detailed knowledge of the suppliers and clients, as well as the composition of the local firms.

What not to do?

Easier then describing the process of development is the discussion of ineffective efforts that squander resources or worse yet, efforts that are counterproductive.

Research consistently reveals that targeted industry strategies do not work. This is true on the national, regional, and local scale. The common contrary example is the efforts of Japan to develop the automobile and electronics industries, that many countries and regions tried to copy after Japan’s successes in the 70’s and 80’s. What is less well noted is the pressure this placed on the Japanese banking system that has led to the economic doldrums that Japan has experienced for the past two decades. In the U.S., attempts have been made to start up biotechnology sectors in Ohio and Michigan, and mini-Silicon Valley’s throughout the country, and while some of the successes are bandied about, for the most part these efforts are expensive failures.   The reality is that successful and sustainable industries develop as a result of regional competitive advantages.

Another common failure is the ideology that business attraction can drive regional economic growth. While for smaller economies, attracting a new manufacturer can be the difference between success and failure, the majority of employment growth in a large mature economy like Hampton Roads will come from business births and growth in existing industries. Firms will relocate to the region, and firms will leave the region, but the underlying health of the region will be based on the growth of local businesses.

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