Urban Policy in a Global Economy

Urban Dynamics and Growth, CEA, vol. 266 Roberta Capello and Peter Nijkamp (editors) q 2004 Published by Elsevier B.V.

CHAPTER 25

Urban Policy in a Global Economy ˚ ke E. Anderssona, Lata Chatterjeeb and T.R. Lakshmananb A a

b

Department of Economics, Jo¨nko¨ping International Business School, Jo¨nko¨ping, Sweden Center for Transportation Studies, Boston University, Boston, MA 02215, USA

Abstract Contemporary globalization is characterized by a global production system driven by two factors: the activities of global network corporations trying to capture economies of scale in knowledge, economies of scope in their corporate networks, and favorable factor prices, and by the growing demand for consumption variety attendant on rising income. Global corporations use cities as organizational commodities to maximize returns on capital, initiating a worldwide urban economic competition. The paper highlights the rise of the entrepreunerial city with an increasing role for urban economic policy and a redefined role for traditional urban public goods provision. It discusses the policy and institutional innovations to support the entrepreneurial city. The resulting spatial restructuring of urban activities increeases efficiency but also widens inequality and polarization in the urban fabric. Keywords: trading regimes, global network corporations, intercity competition, entrepreneurial city, urban policy and institutional innovations, new urban spatial order JEL classifications: R50, R58 25.1. Globalization: underlying processes, urban consequences, and policy implications

Globalization is not a new phenomenon, but one whose context, underlying processes, and manifest spatial forms have evolved

838

A˚.E. Andersson et al.

over time.1 The nature of contemporary globalization is twofold. It means, first, an increasing role of exports and imports in the global economy and its constituent countries and regions. This is evident in the growth of world trade at more than twice the rate of growth of world product in the last two decades. Second, globalization also means the following: an increasing spatial extension of trade, growing economic interdependencies as manifest in a globally organized system of production and (knowledge, materials, and financial) flows, and a consequent spatial specificity. This is indicated by the fact that world trade, while still concentrated in the so-called Triad area (North America, Europe, and Japan) has been expanding rapidly in the last quarter century between the Triad and newly industrialized countries, particularly in East Asia. This vast increase in the scale, scope, and speed of global economic interactions – in terms of flows of goods, services, capital and knowledge – has, in turn, promoted a complex worldwide division of labor and a spatial organization of production (Ohmae, 1990). Such processes of globalization have a distinct spatiality in the sense that they lead to specific geographical patterns. This derives from the fact that global operations of monitoring, coordination and control carried out by global network firms (as elaborated below) is centered in urban areas. It is in these urban areas where one can observe clearly the phenomena associated with globalization forces – the evolving structure of employment, the development of vast new real estate, new forms of urban governance, and the partitioning of the urban area into parallel residential and business areas (UNCHS, 2002; Lakshmanan and Chatterjee, 2003). 25.1.1. Evolution of globalization processes, urban patterns and policy domains

A fuller understanding of the processes underlying contemporary globalization, their manifestation in the forms and functioning

1 The old Silk Route, the trade of Italy and the Hanseatic League of Northern Europe from 1100 AD, the extensive world trade after the discovery of the New World, and the global trading system organized by the Colonial Powers in the Industrial Era are earlier examples of economic and cultural linking of diverse societies across very long distances (Andersson, 1986; Foltz, 2000).

Urban Policy in a Global Economy

839

of urban areas, and the consequent agenda being set for urban policy can result from a quick survey of key factors that differentiate the present era of globalization from those of the immediate preceding eras. Table 25.1 offers such a capsule summary of the forces of globalization, the resulting urban structures, and the consequent urban policy domain of the contemporary globalization as contrasted with the earlier Industrial and Mercantile eras.2 In each era, the forces propelling globalization were twofold: a set of physical technologies and infrastructures, and a set of nonphysical infrastructures (Lakshmanan, 1993). In the Mercantile phase, the most important innovation was the new sailing technology, first introduced with the deep-sea-going Caravelle and later by the more economically efficient ship called the Flute, invented by the Dutch ship builders. These inventions and innovations made trans-oceanic transportation possible and opened up Europe for long-distance international trade with the Americas and by seaways to Asia (Hugill, 1995). Trade was further stimulated by new means of payment. The arrival of precious metals from the Americas allowed transactions at a much larger scale than ever before. The creation of new financial institutions supported by the city administration of Amsterdam further facilitated the expansion of world trade. Slowly, but steadily, the focus of world trade was shifted towards the north of Europe and by 1650 the capital of world trade had been established in Amsterdam, which will hold that position for over 100 years thereafter (Braudel, 1992). This logistical revolution carried with it a new phase of urbanization as a mirror image of increasing division of labor and world trade. This time urbanization was more in terms of growing size of the most important commercial cities rather than in an increasing number of towns (Andersson, 1986). By the end of the 18th century the role of Amsterdam and the Netherlands as the focal point of the world economy was fading, giving way for an increasing role of Great Britain as the new center of world trade and the first focal point of the next logistical or industrial

2

There is an extensive literature on cross-cultural trade in earlier periods. Curtin (1984) surveys cross-cultural trade from early times to mercantile era. Pomeranz and Topik (2000) provide a broad view of trade development since 1400, and discuss the interrelationships between culture, society, and the world economy.

A˚.E. Andersson et al.

840

Table 25.1. Evolution of globalization forces, urban patterns and urban policy domain Key Attributes Mercantile Era

Globalization Era Industrial Era

Technologies and underlying processes

New transport technology; sailing ships; Caraville; Flute, sextant, etc.

Steam power; railroad; steamships; machine fabrication

Non-material infrastructure

Cartography; new means of payment: precious metals and financial innovations of Amsterdam facilitating trade

Spatial patterns; urban forms; and functions

Increasing urbanization arriving with new division of labor; increasing size of major cities; e.g. Amsterdam, London, etc.

Urban policy domain

NA

Exploiting economies of scale; vertical integration of production; factory systems; assembly line; labor unions; property rights; central bank; currency; monetary policies; compulsory minimum education Massive urbanization; rise of new factory towns; increase in average size of towns. Massive problems of urban areas; problems of cities (housing, infrastructure; spatial organization); problems in cities (unemployment, health, welfare, education, etc.) National public policy. domain. Keynesian fiscal and monetary policies. Redistributive public goods (health, welfare, education and environment), Urban public policy domain. Distributive public goods (water supply, sewer, transport and energy infrastructure), etc.

Contemporary Era New transport and communication technologies; knowledge-rich technologies of production Exploitation of economies of scope; open trade regime institutions; new logistical innovations; facilitating flows of goods; services, capital and knowledge New urban regions competing globally for economic activities; relatively fast changes in economic fortunes of many cities causing local dislocations; rise of large global urban regions or corridors around major cities

Urban policy is the joint work of public, private and civil society sectors; increased focus on urban economic development, a mix of (a) supply side policies to attract globally mobile capital and (b) entrepreneurial demand side strategies supporting urban endogenous economic growth

Urban Policy in a Global Economy

841

revolution (Braudel, 1992). With the industrial revolution, division of labor had become a deeper concept, in the sense that it was now openly accepted that conditions of production as well as of transportation and transactions could be influenced by the capitalists involved in trade (Hobsbawm 1996). The key new technologies of this era were steam power, railroads, steamships, and machine fabrication (Hugill, 1995). The supportive organizational developments came from the massive increase in the division of labor, exploitation of economies of scale, vertical integration of production and the development of the assembly line. In addition, in every industrializing country the nation states have played a significant role as providers of basic material and non-material infrastructure. Postal and telephone networks and railroads were established, connecting factory towns and raw material provision centers with each other and the world market, served by major deep-sea ports. Every industrializing country provided the firms with the financial infrastructure in terms of a national central bank, reliable currency and monetary policies. A system of free basic education was established and distributed to most regions. National defense systems, police forces and other institutions provided law and order and protection of property rights (Andersson, 1986; Lakshmanan, 1993). The trading decision problem in this era was: Can the price in the region of import be sufficiently larger than the marginal cost of production to compensate for the minimized transaction and transport costs? This formulation of the problem implies that the prices of goods in different regions must be seen as functions of the quantities produced and traded: Is ri 2 cj ðxj Þ . tji ðxÞ þ tji ðxÞ? where cj ðxj Þ is the marginal cost of production of a given good in region j; tji ðxÞ the marginal cost of transaction when the given good is traded from region j to region i, tji ðxÞ the marginal cost of transporting the given good from region j to region i, and x the vector of production of the different goods produced in the regions. A general equilibrium requires that

rci 2 ccj ðxj Þ # tcji ðxÞ þ tjic ðxÞ for all goods c and all i and j; with an inequality, if no trade in that good and the given regions i and j is profitable.

842

A˚.E. Andersson et al.

The fine division and massive deployment of labor to exploit economies of scale in production and the development of assembly line associated with the industrial era has led to distinct spatial patterns – in the form of a massive urbanization, and specific urban forms and functioning. Not only did the average size of towns and cities increase, but with growing industrialization new factory towns were also established in every industrializing country. The arrival of new technologies of fossil energy use based manufacturing into these factory towns influenced their physical, economic, and quality of life characteristics. The owners of capital and the means of production were the principal beneficiaries in terms of wealth accumulation. The workers providing the labor for this wealth creation drew low wages and often lived under miserable conditions. As this spatial form of industrial towns developed over the national landscape, two types of problems emerged. First, the rising income inequalities in early industrialization yielded widespread poverty, and low levels of education and health among the industrial workers. Since these workers lived in cities, these national problems of poverty and welfare became problems in cities (Lakshmanan and Chatterjee, 1977). While massive investments of capital took place in machinery and buildings to support productive activities in these towns, complementary investments on urban infrastructure (water supply, sewers, transportation, energy, etc.) necessary to support basic quality of life in the dense urban environments lagged far behind – leading to extensive slums. The resulting problems – inherent in urban living and organization, with its high densities, shared services, and externalities – represent the second class of problems, namely the problems of cities (Lakshmanan and Chatterjee, 1977). These sets of problems of the industrial era yielded over time a broad policy domain (an arena where decision makers develop and implement policy solutions). As Table 25.1 indicates, public sector actors inhabited this policy domain in the industrial era. The national level public policy actors offered solutions: (a) Keynesian type (guided capitalism) national fiscal and monetary policies to promote national and urban employment, and (b) for problems in cities in the form of redistributive public goods (health, welfare, education, and environment). The urban level public sector, for its part, provided

Urban Policy in a Global Economy

843

a set of distributive collective goods (water supply, sewer, transport, and energy infrastructure), to address problems of cities. It is important to note that urban policy in the industrial era globalization was dominated by the public sector – though the precursors for many such initiatives were in the civil society such as the Settlement House Movement in the late 19th and early 20th centuries. As we will note below, the advent of contemporary globalization processes in the last two decades or more has made possible by a weaker role for public policy. In reality, contemporary urban policy is largely the outcome of partnerships between the public, private, and civil society sectors. This recent evolution of the urban policy domain and actors reflects powerful processes, changes in ideology and institutions, and spatial and urban consequences of the new globalization. We turn next to a discussion of such changes and how they define the agenda for today’s urban policy. 25.1.2. Contemporary global network corporations, demand for variety and urban consequences

Contemporary globalization is driven by a combination of new transport and communication technologies, knowledge-rich technologies of production, new open trade regime institutions, neoliberal ideologies, new logistical innovations facilitating flows of goods, services, capital and knowledge, etc. (Drucker, 1990; Ohmae, 1990; Castells, 2000). Many countries have now come to this stage of post-industrial development (Bell, 1999). This stage is no different in terms of advantages of spatial division of labor. But it is different from earlier stages of economic transformation in one important respect. The dependency on an expanding supply of natural resources and thus of land has drastically weakened. Simultaneously, there has been a shift towards creativity and the use of knowledge and information as major resources for economic decision making (Jacobs, 1970; Bell, 1999). This has implied an increasing emphasis on accessibility by communication for the transmission of information and accessibility to other forms of knowledge by personal transportation (Andersson, 1986). Further, current notions of liberalization and deregulation are now slowly but steadily weakening the nation states institutions. The free flow of information and the advantages of international

844

A˚.E. Andersson et al.

diversification of financial portfolios have eroded the role of monetary policies by the free flow of financial capital. Traditional Keynesian fiscal policy is losing its efficiency in the same process. Policies generating large government budget deficits regularly generate counteracting reactions in the financial markets in the form of increasing rates of interest and decreasing value of the currency. Also as a provider of infrastructure, the nation state has lost its fundamental role. With the dramatic increase of real income per capita, combined with a dramatic rise of levels of knowledge in all regions of industrialized countries, the regional dependency on centralized provisions of funds for most types of infrastructure has decreased while privatization trends are stronger here.3 A similar loss of nation state responsibilities is with the development of the networks for long-distance transportation.4 It is worth noting that while the above statement is true in general, the case of the newly industrializing countries is somewhat different. In these countries which are telescoping the industrial and the post industrial eras, the role of the public sector in creating and enabling infrastructure for transportation and communication is still vital. A major agent of this current economic transformation is the global network corporation (e.g. Ikea, Ford, GM, Microsoft, or Pfizer). The economic rationality of these global network corporations is the simultaneous reaping of the advantages of 1. economies of scale in knowledge, 2. economies of scope in the use of the corporate network and

3 Meanwhile, much of the new infrastructure is being provided at levels higher than the nation state – i.e. by continental authorities like the European Union or multinational communication network providers. However, some types of infrastructure, which earlier for financial reasons had to be provided by national funds, like universities and research institutions, are now funded at the regional level. One example of such a shift is Germany. Other examples are given by the restructuring of higher education and research in Japan and other East Asian countries. 4 At the early stages of industrialization, nation states invested heavily in railroad networks and deep-sea ports, especially in Western Europe. Currently the airline networks with their airports are primarily invested in by private companies or regional governments. Most of the deep-sea ports of Western Europe are being privatized or regionalized. The nation state is losing importance for the regional and the multi-national levels, and the supra-national level institutions are becoming important.

Urban Policy in a Global Economy

845

3. the enormous variation in local market conditions and the corresponding variance in local prices and wage rates. The impact on profitability by these strategic factors can be shown with the following corporate profit maximization model. In this model, we assume that the net price, after deduction of transportation and transaction costs, of a given product sold in a given region is determined by the corporate-wide availability of knowledge. The role of knowledge varies between different markets. Creativity might play a great role in some design-sensitive markets, while other markets are less interested in such characteristics. Similarly, some markets with a highly sophisticated infrastructure might place a high value on more sophisticated products than less developed markets. This can be reflected by an assumption that the net price of the product in a given market depends on the use of the knowledge stock available to the corporation. The second aspect of the optimization model is the assumption that the volume of output per period of production is dependent both on the capacity of the corporate network as a whole and the use of local resources. A corporate network normally consists of a financial network, a marketing and sales network, a logistical network and an information network. The local resources are the conventional input of a standard production function, e.g. local labor and its capital equipment. For analytical simplification knowledge is assumed to enter the price functions only, while network resources are assumed to enter the production functions only. Both the price functions and the production functions are assumed to be concave and differentiable everywhere. The optimization model is summarized in the following equation. The network corporation profit maximization problem: X X ri ðKÞqi ðN; Li Þ 2 rK 2 lN 2 vi Li Maximize P ¼ ðK;N;‘Þ

i

i

where P is the corporation-wide profit, ri the price of product of region i; net of transaction and transport cost, K the level of corporation-wide knowledge stock influencing the price in region i; qi the quantity of production in region i; N the logistical network capacity of the corporation in terms of finances, information, transportation, etc., Li the local input in region i; r the unit cost of expanding corporation-wide knowledge stock,

A˚.E. Andersson et al.

846

l the unit cost of expanding network capacity, and vi the unit cost of local input in region i: The ri – and qi – functions are assumed to be concave and differentiable everywhere. The conditions of maximum profit are thus: X ›pi p ›P ¼ q 2r¼0 ›K ›K i i X ›qi p ›P ri 2 l ¼ 0 ¼ ›N › N i ›P ›qi p ¼ r 2 vi ¼ 0 ›Li ›Li i X X q r qi ; Q; ai ; i ; ri ¼ r; bi ; i ; Define : Q r i i Thus: X

ai

›ri r ¼ ›K Q

½Economies of scale in knowledge

bi

›qi l ¼ r ›N

½Economies of scope in network

i

X i

This model can, of course, be made more realistic (and complicated) by introducing a further differentiation of the product space, the knowledge and network characteristics of the local resources. However, these complications would add little to the explanation of the rationales behind the formation of global network corporations in the post-industrial economy with its increasing role of creative, logistic, and communicative capacities. These network corporations, with their global extension and dependency on efficient logistics, are able to simultaneously exploit economies of scale and scope at the corporate level, while maintaining production units in many urban regions around the world. In this context, global capital in these network corporations uses cities and urban regions as an organizational commodity to maximize returns on their capital. Two factors govern the choice of particular production regions or cities, and thus the global geography of production. First, while this global distribution of production centers

Urban Policy in a Global Economy

847

is driven by the need to reduce factor costs, a key factor is the choice of production locations with sufficient infrastructure capacity in terms of integrator terminals with reliable global accessibility. This favors locations not only in the Triad area (North America, Europe, and Japan), but also locations in newly industrializing countries which have invested and developed their global accessibility. A second factor pertains to the fact that the global network corporations derive their economic advantage from corporate-wide exploitation of knowledge in terms of design and other qualitative characteristics of their products. Locating creative and efficient knowledge centers in regions with comparative advantage in terms of higher education, research and development facilities in relevant scientific technological fields is thus a key strategic variable in these corporations. Thus global network corporations seek a combination of infrastructure investments for improved global accessibility and the provision of knowledge. This explains the rapid growth of multinational firms in towns and cities in large metropolitan corridors around global cities, e.g. the corridor connecting Cambridge, London, Heathrow, Reading, and Oxford. 25.1.3. Demand for variety

While the emphasis so far has been on global network corporations and urban growth stimulated from the production side, recent developments on the consumption side also generate incentives for growth and evolution. These derive from the growing demand for consumption variety attendant on rising income. A new analytical framework (driven by scale economies) has emerged – called the ‘new economic geography’ – which addresses just such situations and provides a host of new insights into the spatial configuration of economic activities. It develops a new framework for trade by exploiting the analytical breakthrough of Dixit and Stiglitz (1977) who incorporated scale economies into a general equilibrium model assuming a monopolistically competitive market structure (Krugman, 1991, 1999). In this model, product variety is the critical component of competition so that all firms produce distinct but substitutable goods. Consumers’ utility functions are defined in such a way that they prefer to consume a variety of goods rather than to concentrate their production on a small number of goods. Thus goods are imperfect

848

A˚.E. Andersson et al.

substitutes. This means each firm has some degree of monopoly power and can therefore set its price above its marginal cost. The cost structure for each firm includes a fixed component and a constant marginal cost, which results in a downward sloping average cost function indicative of scale economies. By opening up trade, producers in each region are able to reach broader markets for their unique goods, allowing them to move down their average cost curves and earn greater profits. Naturally this market expansion effect is limited by interregional transportation costs, and any reduction in transportation costs yields increased trade benefits. In the long run, however, more firms – each providing a unique product variety – will enter any market where profits are being earned. The presence of more firms shifts the demand curves of all preexisting firms downward until excess profits are exhausted. Thus it is entry of new firms that brings about an equilibrium. This view has a number of advantages. For one thing, its emphasis on product differentiation as opposed to direct price competition among producers of perfectly substitutable goods is in keeping with the long-term trend away from commodity production towards highly differentiated and specialized goods. Growth in consumer utility in recent decades has been due not only to the quantity of goods consumed, but also to the ever-increasing variety of goods – especially consumer electronics and other categories of goods where constant product innovations define the competitive environment. Furthermore, the fastest economic growth has occurred in consumer and producer services, which are also highly differentiated. Another advantage is that by adopting imperfect competition and scale economies, this view is able to tackle a whole range of explicitly spatial phenomena, such as agglomeration and persistent regional differences in wages, which mainstream economic theory has largely ignored. Finally, the new view provides theoretical underpinnings to a variety of observations about contemporary urbanization. For example, the strategy by which some urban regions attain competitive advantage on a global scale by specializing in the production of one or a few high value added commodities, which has been observed by Porter (1990), is consistent with results on agglomeration. Indeed the notion of demand for variety in the context of economic and urban growth needs to be framed in a larger context than that of goods and services. For example, urban areas attract

Urban Policy in a Global Economy

849

(and have done so in the past) a variety of persons and views, promote their disciplined interactions, leading over time to technical and organizational innovations and creativity (Jacobs, 1970).5 Indeed, the demand for variety in the broad sense is ultimately a search for new ideas, techniques, and organizational and institutional innovations (a more probable outcome in urban agglomerations) for promoting growth and development (Andersson, 1986; Sassen, 2000). Florida (2002) suggests the rise of a varied new creative class in contemporary society (numbering in the tens of millions), whose function is to generate new ideas and technologies, which transform work, leisure and other aspects of contemporary life. As the global cities serve to some degree as extra-national platforms for global capital, they also serve as magnets for attracting a broad range of knowledgeable and creative people from around the world – including dynamic minorities, immigrants, and refugees. Multiculturalism is as much part of large cities as international finance (Lakshmanan et al., 2000; UNCHS, 2002). 25.1.4. Urban consequences

As noted below, global cities such as London or New York are not passive observers of the technological and organizational changes initiated by global network corporations and the demand for diversity, but actively create their own environments (Savitch, 1988; Lakshmanan et al., 2000). These cities are creative actors who endogenize their own growth. Utilizing their own resources, they adapt old areas to new uses, mixing them in numerous permutations and combinations, and pyramiding one asset on another until they have reinvented themselves. However, smaller urban areas, less endowed in the combination of global accessibility and knowledge stocks, fare differently in the competition for production locations in the global production system. Multinational corporations, driven by the need to reduce factor costs, distribute the various stages of production among countries and cities 5

Rosenberg and Birdzill (1986) suggest (in their book, How the West got Rich) that the creativity sustained in Europe over many centuries derive from that society’s ability to create and maintain the following conditions: diversity of groups and views, their autonomy and experimentation as a method of going forward.

850

A˚.E. Andersson et al.

to take advantage of the spatial differences in factor costs. The ability of an urban region to participate in this global division of labor depends upon its ability to engage in this spatial competition by offering such cost advantages. This process of competition among urban areas to serve as production sites is, however, dynamic. The global distribution of production activities itself changes over time as factor costs change among countries and regions, and component production activities get shifted among countries. In such a context, the geography of production activities is constantly evolving. What is produced, and how and where it is produced undergo frequent change. These accelerating changes in the scale, composition, and location of production activities in the urban areas worldwide have major consequences. These urban consequences of global forces in the postindustrial era are in terms of changes in the fortunes of industries, cities and urban regions, and in the life chances of urban residents. Such changes in urban economic performance and its volatility become a matter of policy concern for the relevant private and public economic actors in the affected cities. The urban economic consequences of globalization thus enter the urban policy agenda. The urban policy actors, as they attempt to respond to these economic shifts, sense a major change in the contexts or the environment in which individuals, firms, and urban public sector entities exist and operate (representing a new ‘urban world’ for these actors).6 As the technical, economic, and social forces of globalization 6

There is a significant business and social science literature on this new ‘action contexts’ of such private sector actors (firms) and city and state governments, and the broad range of economic and social consequences of such actions. The consequences of such globalization are extensively debated. One group emphasizes, in the neo-liberal vein, the inevitability of globalization and the overall positive economic, and technological gains deriving from the globalization market forces; the other group notes the very uneven incidence of such gains worldwide on households, neighborhoods, cities, and countries, and the powerlessness of the regional or local public sector in mediating these impacts. There is, however, a growing third view that the impacts of globalization are more complex than is allowed in the above two views. The corporate economy, society, and the state and urban public sectors are all changing, but talk of ‘decline and withering away’ of state and urban governments is premature. There is an increasing role for public policy (complementary to other social actors) to help fashion desirable economic and social outcomes from globalization forces. This third nuanced view of globalization impacts is beginning to attract scholarly attention in social sciences, and urban planning (e.g. Cerney, 2000; Clarke and Gaile, 1998; Savitch, 1988; Palan and Abbott 1996).

Urban Policy in a Global Economy

851

create a new global geography of competitive advantage and restructured webs of power, the contexts in which urban governments exist and function are altered. In an open and integrated world economy where global network corporations depend on production chains that span several countries, urban areas compete to attract mobile economic activities in an increasingly competitive global economic environment. In turn, the politicians and bureaucrats who populate the different urban governments have an increasing incentive: (a) to promote their urban area’s competitive advantage for specific production and service sectors, and (b) to enable the private sector in their localities to innovate and produce goods and services for the global markets. 25.2. Emerging urban policy domains and strategies

The central reality of today’s globalization is the increasing competition between cities as well as among nations (Porter, 1998). Today’s post-industrial city not only represents itself but also the hopes of its nation. Success in adaptation to the new competitive global environment entails for the city advantages in terms of jobs, income, and tax revenue. Since successful cities in this global competition acquire economic prowess, and leadership, there is a premium on developing successful adaptation strategies. Such strategies must be fashioned to be consistent with the context of emerging political and institutional trends. Two such broad political and contextual developments which influence the development of urban policy are noteworthy. 25.2.1. Increasing role for urban economic policy

The first such broad development is the changing ideology of development and how it impacts on the economic policy role of urban areas. The last two decades or more when a globally organized production system was evolving, was also a period of growing neoliberal ideologies. National governments have been shedding their economic policy roles with a ’privatization of the public sphere’, in the form of deregulation, liberalization, muting of macroeconomic policy roles, and an emphasis on freer markets and voluntarism. What was accepted previously as belonging to the public sphere becomes essentially ‘private phenomena’ in the wider global

852

A˚.E. Andersson et al.

context. As the economic policy role at the national level becomes weakened, urban areas engaged in global competition assume an increasing economic policy role, as explicit spatial policies are required to help market capitalism function effectively in the ongoing economic competition among cities worldwide. In contemporary capitalism, private entrepreneurs face additional economic crises that manifest at the urban scale. Cities and localities in cities face multiple problems resulting from an imbalance between demand and supply of goods and services such as transportation infrastructure, land developed previously for industry, housing of inadequate quality, lagging skills, rising crime rates, etc. The creation of a new physical urban environment – transport facilities and terminals, office towers, shopping malls, universities, hospitals, research centers, etc. – has to be done smoothly while synchronizing a vast set of transactions between private, public, and civil society actors. There is need for coordinating facilities, securing of finances and working out a new system of laws and rules. The neutral role of the intermediary is no longer adequate for the urban public sector. The private entrepreneurs at the urban level are incapable of solving the basic production problem of securing capital and land at the right place, at the right time and at the right cost, in order to lower their fixed and operating costs and to maintain profitability in a global competition environment. Whether it be Times Square (New York), Docklands (London) or Le Defense (Paris), there is public –private partnership: public acquisition of land, partial public ownership, concessions, leases, etc. (Savitch, 1988). Thus, the increasing economic policy role of urban government (when national economic policy is weakening) represents the current phase of guided capitalism, as active public intervention is required to ensure that the market for these spatially determined goods function in an orderly way. This assumption of active economic policy role by city governments has an important implication. The ideology of market primacy associated with globalization modifies and transforms the traditional roles, tasks, and activities of urban governments. Changes occur in two types of public goods provided to urban residents in a national welfare state framework of the earlier era – redistributive public goods, and distributive public goods. In the contemporary globally oriented urban economy, new ideologies

Urban Policy in a Global Economy

853

of liberalization, and privatization of governmental activities, combine with the strong imperative to retain competitive conditions in a variety of different and fast changing international markets for the city’s goods and services. The result is an undermining of the traditional urban government’s ideology, identity, and role – in the process modifying its functions, tasks, and activities. In other words, the way the urban politicians and bureaucrats view, pursue, and deliver ‘public goods’ is being transformed. As national level resources in general, and those available for redistributive public goods (health and welfare services, education, environmental protection, etc.) at the urban level are dropping significantly, the provision of these goods is declining significantly. As cities had to pick up more of the burden for these services through their local tax base, richer cities had an advantage, thereby augmenting income inequalities by service inequalities among cities. At the same time, the urban distributive public goods (garbage collection, water supply and quality services, transport and energy infrastructure) are being organized for market or quasi-market provision. 25.2.2. Emerging institutions and policy strategies

As urban governments begin to pursue international competitiveness as a major goal, the stakeholders (to whom the urban political actors respond) expand beyond the urban households, resident firms and civil society to include the economic interests in the global economy and the complex linkages and interdependencies thereof. In this context, the boundaries between international private actors and functions on one hand, and urban actors and roles on the other, intersect and influence one another at many levels. The consequences, as elaborated below, are threefold: † the emergence of new aims and roles for the politicians and

bureaucrats in urban government, † the redefinition (if not erosion) of some of their earlier public

goods functions, and † the emergence of new institutions or urban governance structures.

As the urban politicians and bureaucrats develop their expanded economic policy role, they create new institutions for governance

854

A˚.E. Andersson et al.

that bring together various stakeholders in urban development. Typically, they take the form of different partnerships between urban public sector, private sector, and urban non-profit sector. Partnerships are just illustrative of the wide range of institutional innovations which permit the assumption and implementation of new urban policy missions. The more successful the region, the greater the variety and depth of institutions, with considerable redundancy in the institutional structure (Grabher, 1993). The institutional variety an urban region can offer provides a constantly changing portfolio of potential organizational solutions to problems of collective response to changing economic circumstances (Amin and Thrift, 1994). Indeed, we highlight in Section 25.2.3 this institutional diversity as we describe the urban policy strategies being pursued by urban areas in US and elsewhere. 25.2.3. Changing urban policy orientation and innovations

As urban governments have tried in recent years to reduce their vulnerability to ‘shocks’ from globalization forces and stabilize the level of good jobs for residents and their own revenue base, they have experimented with different strategies and policy instruments to increase local employment and income. This urban vulnerability and policy response has a longer history in the US (where the contemporary globalization arrived earlier) than in Europe. The combination of such forces – outmigration of firms (seeking lower factor costs), increasing participation of US in international markets, and the real declines of national aid to cities – led initially to a set of supply side policies on the part of cities to attract mobile capital to themselves. As elaborated below, this approach turned out to be ineffective and wasteful. Obliged to depend more on their local resources and increasingly aware of the limitations of the supply side policies to attract mobile capital, urban governments did not adopt the risk aversive stances of political decision units with limited resources. Instead, they turned towards an entrepreneurial strategy, exposing their revenues to some risk and incurring some opportunity costs in order to create endogenous growth. Towards this end, the entrepreneurial urban areas have taken over the last two decades a variety of innovative steps to support their local firms in generating employment. These

Urban Policy in a Global Economy

855

innovations are of two kinds: new policy instruments and new institutional arrangements for developing and implementing the policies to support generation of local economic growth. We explore next how the entrepreneurial city has expanded its policy domain with a range of new instruments which, while pragmatic and nonideological, express the ascendance of market feasibility criteria over social criteria, and which redefine the city’s responsibilities as a public developer. Further, we describe how the entrepreneurial city has enlarged its institutional space for policy implementation, with an emphasis on public partnerships with the private and non-profit or civil society sector. 25.3. The American entrepreneurial city: policies, institutions, and new spatial order

The entrepreneurial city functions much like a Schumpeterian entrepreneur, but in partnership with private sector economic agents. It seeks to identify market opportunities for private economic actors whose exploitation of those opportunities can serve the city’s public objectives. The city government becomes a risk taker, a promoter of city businesses’ global competitiveness, an enabler in finding new markets, and a catalyst in forming private – public partnerships in testing and developing new technology. Table 25.2 provides an overview of the city’s recently changing policy domain – an arena where political actors attempt to develop and implement problem solutions. The policy domain has expanded as the economic contexts have changed and the orientations and scope of policies of urban areas have adopted increasingly entrepreneurial postures. It is worth noting that once policies are adopted there develops supporting constituencies, making termination of older policies difficult for political concerns. While the tool kit of policy instruments expands, older instruments remain to some degree, providing a layering of approaches. One can recognize three phases in this policy evolution (Table 25.2): † Phase 1. Supply side policies and strategies to attract mobile

capital, † Phase 2. A transitional phase towards entrepreneurial strategies,

and

A˚.E. Andersson et al.

856

Table 25.2. Evolution of the urban policy domain in the global economy Phase 1a (Supply Side Policies)

Phase 2b (Transition to Entrepreneurial Approach)

Phase 3b (Entrepreneurial Policies)

Attract firms to the city through locational incentives

Emphasize local capacity building for market expansion using federal grants

Based on the concept of spatial comparative advantage

Based on the concept of enabling strategies and removal of barriers in labor, capital and land markets

Stimulate new enterprise development by shaping market opportunities and through leverage of public funds to increase private investment Channel investment for physical, institutional and human capital expansion Based on concepts of public, private partnerships and coproduction Based on concept of knowledge and network economies

a

The actual time period of the phases varies between cities. Some innovative cities such as New York and Baltimore started earlier. Later cities acted as imitative public entrepreneurs. b New objectives did not replace earlier ones. These objectives were added on and prioritized.

† Phase 3. Entrepreneurial policies to promote endogenous growth of

human, physical, and social capital in the urban area. 25.3.1. Phase 1: policies and strategies to attract mobile capital: supply side

Guided by supply side view of the economy, these cities attempted to create for mobile firms an advantageous factor price structure in the urban area. The policy instruments used were typically capital subsidies in the form of assistance in site selection and preparation, low-interest financing (tax credits, abatements, exemptions, deferments, industrial revenue bonds, etc.) and expenditures for labor training (Clarke and Gaile, 1998). The aim was to offer lower costs for business in one’s city compared to others. Over time this approach lost appeal for several reasons. As this policy approach of bidding for businesses became widespread among cities, it could not pass muster on grounds of effectiveness or efficiency (Blair and Premus, 1987). No net national economic growth occurred, and the firms enjoyed rents. Cities were left with underused infrastructures (which were

Urban Policy in a Global Economy

857

built with government bonds), leaving them with spatial rigidities of fixed capital, while firms enjoyed the benefits of capital mobility. How appropriate is the use of local public funds for subsidies to firms, which might have made investments anyway? Changing economic conditions and a growing new understanding of urban economic growth process reduced the appeal of supply side policies of inducing firms to locate in one’s area (Premus et al., 1985). 25.3.2. Phase 2: a transitional phase towards entrepreneurial strategies

These strategies derive from an understanding that markets have failed and public intervention is required to reduce market imperfections. The policies (a) lower barriers to the creation and expansion of small firms and the level of entrepreneurial activity in the urban area, and (b) risk public funds and invest them to help local private firms engage in value creating activities. The overall thrust of the urban public sector in this approach is to promote the flexibility and adaptive capability of the urban private sector, and help it adapt to the ‘shocks’ from globalization processes. Utilizing funds provided by federal government programs such as Economic Development Administration (Business Loans, Adjustment Assistance), and Department of Housing and Urban Development (Community Development Block Grant programs), the cities learnt and acquired experience with market-based strategies. The institutional innovation to leverage the city’s funds was public –private partnerships which take many forms: public ownership and private rental as in industrial parks, public tax expenditures for revitalizing urban neighborhoods, small business grants, funding community development corporations, equity participation in development projects. Indeed, all sectors were mobilized as in waterfront development schemes in many cities. Rigid laws and codes were modified, preferring performance-based criteria over formula-based entitlement criteria. Adaptive use of abandoned structures, like the Piano Factory in Boston as housing and center for artists, adaptive reuse of schools for high end condominiums were developed either by the private sector or with partnerships between the private and civil sectors like Community Developments Corporations (CDC). Security and crime prevention became important and neighborhoods began to partner with the police

858

A˚.E. Andersson et al.

departments through Neighborhood Watch schemes. Chambers of commerce with their urban boosterism, venture capitalists looking to support innovative firms in their local communities are all ingredients of the entrepreneurial city at this stage. Universities partnered through R&D activities, research and consulting jointly with the public sector. As a result of this multipronged and multifaceted approach firms begin to cluster in attractive/ entrepreneurial cities where the quality of life issues for their employees are critical for retaining qualified labor. Employees of IT firms, and other tech sectors are attracted by exciting neighborhoods, plays, music venues and such. Thus, both production and consumption attractors emerge as important ingredients in urban revitalization in a period of stiff competition. New York and Cleveland, for example, provide good examples of the synergies between the public, private, and civil sectors in production and consumption activities. In an increasingly knowledge-intensive economy, growth and nurturing of human capital is a critical element of entrepreneurial strategies. 25.3.3. Phase 3: entrepreneurial policies to promote endogenous growth in the urban area

A wide range of instruments are used to shape the structure of local market opportunities, to leverage public and private funds to stimulate new enterprises and local economic growth, and to use contingent partnerships with private sector and civil society – while exposing their own resources to risk. There are two interactive elements in these partnerships. There is a hierarchical element and a cross-sectoral element. There is a growing partnership between the three levels of government: federal, state, and local to increase the competitive advantage of urban areas. Currently, the highly competitive environment has compelled the adoption of entrepreneurial practices for basic survival in all sectors. In Table 25.3 selected illustrations of the variety of institutional forms developed by entrepreneurial cities are provided. For each institutional form innovated, the table identifies the objectives sought, the types of policy instruments (e.g. financial and fiscal), and the physical and administrative infrastructure used to promote the sought objectives. For example, take the institutional form of a local development council and a business incubator which represents

Table 25.3. Institutional Forms

Entrepreneurial city’s objectives, institutions, instruments and infrastructure Types of Instrumentsa

Financial

Physical

Objectives

Administrative Streamlining licensing permitting

Tax abatement from the city government

Capital improvement in streets and neighborhoods

Tax increment financing

Skilling, networking Industrial parks on Greenfield and Brownfield sites

Property improvement tax abatement; sales tax exemptions

Public transit provision; worker training

Income tax credit

Retrofitting buildings; Linkage to business consulting services for owners via Boston Office of Business new construction Development

Creation of business technology centers; promote and market trade associations

Neighborhood revitalization and employment creation Seed and nurture startup companies; attract high-tech firms Retain existing industry; attract new investment; foster local entrepreneurship

Energy conservation through upgrading, retrofitting, and consulting for new construction, reduce factor costs, of firms, attract new investment

Urban Policy in a Global Economy

Community Development Community bloc Corporation (CDC) development grants, other project grants, venture capital pools Use of various debt Local development instruments such as councils and revenue bonds, business incubators venture capital pools Empowerment zones and Federal grants for capital promotion enterprise through communities. leveraging EZ/EC (Partnership between Fed/State, city government and private sector Funding for energy Rebuild Boston Energy companies Initiative (Partnership of city government, utility companies, community organizations and energy consultation

Fiscal

Infrastructure

a

A selected and illustrative list. Not all instruments were used by all cities. The package varied between cities and in time within a city.

859

860

A˚.E. Andersson et al.

a partnership between actors in the private, public, and university sectors, aiming to promote start-up companies that can offer new goods and services in the global markets. Towards this end, the incubator wants to create infrastructure – industrial parks on Greenfield and Brownfield sites and flexible and sophisticated human capital. The urban public sector financial instruments to develop this infrastructure capital will be drawn from debt instruments such as revenue bonds and venture capital pools. Tax increment financing is the fiscal tool in this case. The specific forms derive from the context. Globalization affects cities differentially, but the responses of the city varies by the local aims of ameriolization, local, social, and political mobilization and institutional history. 25.3.4. A new spatial order in the entrepreneurial city

The deployment of the policies and institutional innovations noted above have enabled the entrepreneurial cities in the US and other OECD countries to restructure their economic activities and adapt and grow in the context of globalization. While the forces of globalization and creative urban adaptation and restructuring have created aggregate growth benefits, the incidence of these benefits is very uneven. Mirroring a key aspect of globalization, there is widening inequality or polarization among cities and within cities (Harvey, 1985; Lash and Urry, 2000; Marcuse and Kampen, 2000; Friedmann, 2002). The economic and social disparities one observes between core and peripheral regions on the world scale are typically reproduced within cities (UNCHS, 2002). Affluent districts and vital business districts coexist with dilapidated neighborhoods in cities, with little interaction among them. While cities in the industrial and earlier eras have shown functional, cultural, and status divisions, the widening inequality of incomes and polarization in contemporary globalization has further increased the differentiation within urban areas, hardening the lines between the areas, sometimes walling off the rich from the poor. There is increased fragmentation of cities – physically, economically, and socially (Marcuse and Kampen, 2000). This widening inequality has a strong spatial dimension in the emerging urban areas. The link between inequality and

Urban Policy in a Global Economy

861

contemporary urban space is not the simple division of urban society into a rich and a poor part, as observed in 19th century industrial era. It is today a deeply divided, partitioned, or quartered city, reflecting the extent and forms of emerging income and asset inequalities in urban areas (Friedmann, 2002). The increasing mobility of capital, the growing span of control that is possible have led to a great concentration of the wealth at the top and a widening gap between the rich, the affluent, and the poor. Indeed, this polarization has several dimensions: an increase in the relative numbers of the rich and the poor; second, a widening of the wealth distance between them; and third, a greater differentiation of the people who are in between the rich and the poor. Consequently, there are multiple classes, and a sharper differentiation among them. Such differences are reflected in the patterns of segregation of people and land uses in the emerging city (Marcuse and Kampen, 2000; Beauregard and Haila, 2000; UNCHS, 2002). The resulting partitioning of the city is a fivefold formation of parallel residential and business districts (with limited interactions among them): † the luxury district and controlling district (citadels of wealth and † † † †

business); the gentrified district and the district of the advanced services; the suburban district and the district of direct production; the tenement district and the district of unskilled work; and the abandoned district and the residual district.

Little policy attention has been directed at the resultant welfare inequities across urban space. The focus of urban entrepreneurial policy actors has been on creating aggregate growth benefits at the urban level, neglecting distributional issues. In view of the powerful forces underlying the process of intercity competition, it is likely that these unfavorable consequences in terms of urban living may worsen in the future – creating thereby worsening livelihood chances and unsustainable cities. The current focus on growth and the neglect of distributional and intraurban quality of life issues are likely to be unsustainable in the continuing age of globalization. Very likely, urban entrepreneurs will generate an agenda for future urban policy and move towards redressing the current imbalance

862

A˚.E. Andersson et al.

and promoting equity issues. Such future policy efforts are likely to build upon on the experience and learning from current civil society initiatives (e.g. low income units in mixed housing development). References Andersson, A. (1986), “Presidential address: the four logistical revolutions”, Papers of the Regional Science Association, Vol. 59, pp. 1 – 12. Amin, A. and N. Thrift (eds.) (1994), Globalization, Institutions and Regional Development in Europe, Oxford: Oxford University Press. Beauregard, R.A. and A. Haila (2000), “The unavoidable continuities of the city”, pp. 22 –36, in: P. Marcuse and R.V. Kampen, editors, Globalizing Cities: A New Spatial Order?, London: Blackwell. Bell, D. (1999), The Coming of Post-industrial Society: A Venture in Social Forcasting, New York: Basic Books. Blair, J.P. and R. Premus (1987), “Major factors in industrial location: a review”, Economic Development Quarterly, Vol. 1(72), p. 8. Braudel, F. (1992), Perspective of the World Civilization: Civilization and Capitalism in 15– 18th Century, Berkeley, CA: University of California Press. Castells, M. (2000), The Rise of Network Society, 2nd edition, London: Blackwell. Cerney, P.G. (2000), “Structuring the political arena: public goods, states and the governance in a globalizing world”, pp. 21 – 35, in: R. Palen, editor, Global Political Economy, London: Routledge. Clarke, S. and G. Gaile (1998), The Work of Cities, Minneapolis: The University of Minneapolis Press. Curtin, P. (1984), Cross-Cultural Trade in History, London: Cambridge University Press. Dixit, A. and J.E. Stiglitz (1977), “Monopolistic competition and optimum product diversity”, American Economic Review, Vol. 67(3), pp. 297 – 308. Drucker, P. (1990), The New Realities, New York: Mandarin. Florida, R. (2002), Rise of the Creative Class: How it is Transforming Work, Leisure, Community and Everyday Life, New York: Basic Books. Foltz, R. (2000), Religions of the Silk Road: Overland Trade and Cultural Exchange from Antiquity and the Fifteenth Century, Basingstoke, UK: Macmillan. Friedmann, J. (2002), The Prospect of Cities, Minneapolis: University of Minnesota Press. Grabher, G. (1993), In Praise of Waste: Redundancy in Regional Development, Berlin: Edition Sigma. Harvey, D. (1985), Urbanization of Capital: Studies in the History and Theory of Capitalistic Urbanization, Baltimore, MD: Johns Hopkins University Press. Hobsbawm, E. (1996), The Age of Capital: 1848 –1875, New York: Vintage. Hugill, P.J. (1995), World Trade Since 1431: Geography, Technology, and Capitalism, Baltimore, MD: Johns Hopkins Press. Jacobs, J. (1970), The Economy of Cities, New York: Vintage Books.

Urban Policy in a Global Economy

863

Krugman, P.K. (1991), Geography and Trade, Cambridge, MA: MIT Press. Krugman, P.K. (1999), “The role of geography in development”, International Regional Science Review, Vol. 22(2), pp. 142 –161. Lakshmanan, T.R. (1993), “Social change induced by technology: promotion and resistance”, in: Nordal Ackerman, editor, The Necessity of Friction, Berlin: Springer, Reissued as paperback, Westview Press, 1999. Lakshmanan, T.R. and L. Chatterjee (1977), Urbanization and Environmental Quality, Resource Paper RP 77-1, Washington, DC: Association of American Geographers. Lakshmanan, T.R. and L. Chatterjee (2003), The entrepreneurial city in the global marketplace, paper prepared for the International Workshop on Modern Entrepreneurship, Regional Development and Policy: Dynamic and Evolutionary Perspectives at Tinbergen Institute, Amsterdam, May 23– 24. Lakshmanan, T.R., D.E. Andersson, L. Chatterjee and K. Sasaki (2000), Three Global Cities: New York, London, and Tokyo, Gateways to the Global Economy, Cheltenham, UK: Edward Elgar, pp. 49 –82. Lash, S. and J. Urry (2000), The End of Capitalism, Madison, WI: University of Wisconsin Press. Marcuse, P. and R.V. Kampen (2000), “Conclusion: a changed spatial order”, pp. 249 –275, in: P. Marcuse and R.V. Kampen, editors, Globalizing Cities: A New Spatial Order, London: Blackwell. Ohmae, K. (1990), The Borderless World: Power and Strategy in the Interlinked Economy, New York: Harper Business. Palan, R. and J. Abbott (1996), State Strategie in the Global Political Economy, London: Pinter. Pomeranz, K. and S. Topik (eds.) (2000), The World Trade Created: Culture, Society and the World Economy, New York: M.E. Sharpe. Porter, M. (1990), The Competitive Advantage of Nations, New York: Free Press. Porter, M. (1998), On Competition, Cambridge, MA: Harvard University Press. Premus, R., C. Bradford, G. Krumbhaar and W. Schact (1985), The US Climate for Entrepreneurship and Innovation, A report prepared by the Joint Economic Committee US Congress, Washington, DC. Rosenberg, N. and L.E. Birdzill, Jr. (1986), How the West Got Rich, New York: Basic Books. Sassen, S. (2000), Cities in a World Economy, 2nd edition, California: Pine Forgr/ Sage. Savitch, H.V. (1988), Post-Industrial Cities: Politics and Planning in New York, Paris and London, Princeton, NJ: Princeton University Press. UNCHS (United Nations Centre for Human Settlements) (2002), Cities in a Globalizing World, Earthscan, London: Earthscan.