The key to economic success? Geography
October 9th, 2012
01:13 PM ET

The key to economic success? Geography

By Enrico Moretti, Special to CNN

Editor’s note: Enrico Moretti is professor of economics at the University of California, Berkeley, and director of the Infrastructure and Urbanization Program at the International Growth Centre (London School of Economics and Oxford University). He is the author of ‘The New Geography of Jobs.’ The views expressed are his own.

The economic map of America today does not show just one country – it shows three increasingly different countries. At one extreme are America’s brain hubs – cities like Seattle, Raleigh-Durham, Austin, Boston, New York and Washington DC – with a thriving innovation-driven economy and a labor force among the most creative and best paid on the planet. The most striking example is San Francisco, where the labor market for tech workers is the strongest it has been in a decade. At the other extreme are cities once dominated by traditional manufacturing – Detroit, Flint, Cleveland – with shrinking labor force and salaries. In the middle there is the rest of America, apparently undecided on which direction to take.

Historically, there have always been prosperous communities and struggling communities. But the difference was small until the 1980’s, and has been growing dramatically since then. In 1980, the salary of a college educated worker in Austin was lower than in Flint. Today it is 45 percent higher in Austin, and the gap keeps expanding with every passing year. The gap for workers with a high school degree is a staggering 70 percent by some estimates. It is not that workers in Austin have higher IQ than those in Flint, or work harder. The ecosystem that surrounds them is different. The mounting economic divide between American communities – arguably one of the most important developments in the history of the United States of the past half a century – is not an accident, but reflects a structural change in the American economy.

Sixty years ago, the best predictor of a community’s economic success was physical capital. Workers in Flint and Detroit were among the most productive – and best paid – in the country because they had access to the most advanced machines. With the shift from traditional manufacturing to innovation and knowledge, this has changed. Today, the best predictor of a community’s economic success is human capital. A growing body of economic research suggests that a company’s success depends on more than just the quality of its workers – it also depends on the entire ecosystem that surrounds it, especially on the share of workers with a college degree in the community. Over the past three decades, cities with many college-educated workers and innovative employers started attracting more of the same, and cities with a less educated workforce and less innovative employers started losing ground. It is a tipping-point dynamic: once a city attracts some innovative workers and companies, its ecosystem changes in ways that make it even more attractive to other innovative workers and companies. This self-reinforcing trend inevitably magnifies the differences between winners and losers among American communities. The share of college graduates has increased by more than 35 percent in Austin, Boston and San Francisco since 1980, but it has declined in Flint. The same difference emerges for R&D expenditures, venture capital investment and patent per capita.

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These dynamics are not limited to the U.S. In India, the Bangalore region has an innovation-driven dynamic economy where productivity and salaries are growing faster than in Silicon Valley, while the more “backward” state of Bihar has output and average income low even for developing country standards. In China, Shanghai has reached a per capita income close to that of a rich nation. Its students outperform American and European students in standardized tests by a wide margin. Its public infrastructure is better than that of many American cities. But agricultural communities in western China have made much less progress. The regional differences within India and China are growing, even if the difference between India and China as a whole, and richer countries, has shrunk.

The growing divergence between cities with a well-educated labor force and innovative employers and the rest of world points to one of the most intriguing paradoxes of our age: our global economy is becoming increasingly local. At the same time that goods and information travel at faster and faster speeds to all corners of the globe, we are witnessing an inverse gravitational pull toward certain key urban centers. We live in a world where economic success depends more than ever on location. Despite all the hype about exploding connectivity and the death of distance, economic research shows our salary, productivity and creativity increasingly depends on the place where we live.

Video conferencing, e-mail, and Skype have not made a dent in the need for innovative people to work side by side. In fact, that is more important than ever. Thousands of well-educated innovative workers are now moving to San Francisco and Silicon Valley, many attracted by jobs in social networking. They will produce software intended to create virtual communities that erase distance and allow us to share ideas and information from any corner of the world. Ironically, in order to do that successfully, all this talent must concentrate into a single location. Research shows that our best ideas still reflect the daily, unpredictable stimuli that we receive from the people we come across and our immediate social environment. Most of our crucial interactions are still face-to-face, and most of what we learn that is valuable comes from the people we know, not from Wikipedia. The vast majority of the world’s phone calls, Web traffic, and investments are still local. Telecommuting is still relatively rare.

Globalization and localization are two sides of the same coin. More than ever, local communities are the secret of economic success. In the coming decades, the number and strength of America’s brain hubs will determine whether, as a country, we will prosper or decline. Physical factories will keep losing importance, but cities with a large percentage of interconnected, highly educated workers will become the new factories where ideas and knowledge are forged. Supporting growth in America’s innovation hubs while arresting the decline elsewhere is the real challenge that we face as a nation.

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Topics: Business • Economy • Technology • United States

soundoff (26 Responses)
  1. Rita Policarpo

    Another asspect in economic devlopment is geographical. An example is Peru; There is a narrow coastal area that is dry, extending at its widest only 10 miles. Then you have the Andes, high and mighty mountains that dominate the country. This geographical peculiarity makes economic development most ch.allenging

    October 9, 2012 at 1:29 pm | Reply
  2. www.twitter.com/hlmelsaid

    Economic,jobs,industrial map.

    October 9, 2012 at 4:46 pm | Reply
  3. krm1007 ©™

    The Indian Debacle could overshadow the European crisis. GDP that has dropped off the cliff (4% est), budget deficits, collapse of Indian rupiah, rampant poverty, unemployment, FDI reversal, companies leaving town are some of the disastrous events that are threatening the Indian state. The downward spiralling is so severe that the Indian government has been unable to control it. Even the Americans have been unable to help and several trips by the treasury secretary were not helpful. This also has security repercussions for India and US defense secretary and secretary of state have flown in to counsel India on how to protect its borders with the help of Israel/IDF. Rumors have it that the breakup of India along the lines of Soviet Union is a very plausible scenario that I am sure intelligence agencies all over the world are factoring in their geopolitical stress tests.

    October 9, 2012 at 6:08 pm | Reply
  4. Osprey

    We have invested a lot of resources in India over the past two decades and given a lot of aid to prop it up. There has been no investment on this return. Instead India has squandered all the resources in building nuclear weapons while poverty remains rampant in the country. We need to revisit our relationship with India. American taxpayers will not tolerate this anymore. We need to take care of our own populace going forward. We cannot be exporting jobs to India or giving it financial or technical handouts.It has become too big to govern or create any value for western countries or even for its own population. India needs to be carved up into smaller independent states to be a viable economically and geo politically.

    October 9, 2012 at 6:10 pm | Reply
  5. Leftcoastrocky

    Cities which do not yet fall into the first category need to invest in and build the infrastructure, facilities and environment needed to attract the college educated workers and the innovation-driven businesses. These would include modern educational as well as recreational facilities. Fareed, this would make an interesting extension of your article. For example, you could take a city like Bakersfield and have a team of experts design exemplary infrastructure as mentioned above for a follow-up article.

    October 9, 2012 at 8:17 pm | Reply
  6. rjb_boston

    there will come a time when programmers become the auto and steel workers of the workforce at which point the high tech cities of today will be be in decline. in the 50's, 60's and 70's nobody would have thought that steel mills and auto plants and manufacturing would become a low skilled outsourced activity. of course programmers and tech workers will argue today that programming is here to stay and will always be the bedrock for innovation – time may well prove them wrong. cities like boston, however, with a smart combination of essential industries, will always be hedged – they have healthcare, education (these two aren't going anywhere), financial services and technology. diversification is always the key to sustainable returns.

    October 9, 2012 at 10:55 pm | Reply
    • r4st4

      Curent economic condition proof that countries with balanced high-low tech business and local consumer survive this tidal wave of financial crisis. The key is to balance it out, and nurture all.

      October 10, 2012 at 4:12 am | Reply
  7. 100 % ETHIO

    Some of the keys of economic successes are:-

    1) leave politics behind and distribute the Wealth of 1% RICH people, to let others to grow and

    2) Stop denying others, not to invest and not to enter into the World free-trade or willingness to participate in the Worldwide Markets, just for personal and political reasons.

    If we let everyone and every world to participate in worldwide market, recessions will never occurred.

    The current signs of recession is the preparations of the upcoming war with Iran. Nothing else.

    Recession and war are created by people. Don't blame Almighty God.

    October 9, 2012 at 11:59 pm | Reply
  8. j. von hettlingen

    Aristotles said that we humans are social animals. These workers in Silicon Valley need to work side by side in order to exchange ideas, experiment them together and learn mistakes and success from each other. Indeed products that reach the masses need a collective "trial and error" process. It's not like writing a novel or a op-ed column.

    October 10, 2012 at 7:22 am | Reply
  9. doriani

    Unfortunately we continue to follow the hierarchical Roman regimes of work. That is why we need geographically concentrated hubs of knowledge and work in order to go on and communicate via e-mail and over the phone. it is a habit and we can break free, should we wish for a better future.

    October 13, 2012 at 1:41 pm | Reply
  10. krehator

    1) Create a business selling junk products for big profits.
    2) Lie in marketing.
    3) Pay your workers poorly.
    4) Dodge taxes
    5) Move to China
    6) Blame unions and the poor

    October 14, 2012 at 7:15 pm | Reply
  11. We Meant It

    r4st4's post was very wise.

    October 15, 2012 at 8:01 am | Reply
  12. Richard Michael Abraham

    FED BERNANKE INADVERTENTLY
    CREATED REAL ESTATE DEVELOPMENT OPPORTUNITIES
    FOR ENTREPRENEURIAL DEVELOPERS

    Central banks across the World, following in the lead of FED Bernanke, have manipulated low interest rates.

    These policies have created grave economic imbalances. For example, while home values are still 25%-50% lower than their peak, the stock markets are just 5% off their 2007 highs.

    Under FED Bernanke and the Central Bank policy Worldwide niche real estate development opportunities are being created for real estate developers.

    When interest rates are held artificially low, these interest rates alter all yields.

    For example, it’s impossible to get any yield putting money into a savings account.

    The FED and Central Banks want to force savers and investors to put their money at risk in equities whether stocks, commodities or real estate.

    Now, real estate income properties like Mixed Use Developments, Strip Malls, Single Use Leased Properties, Office Buildings, etc., are valued based on the capitalization of the cash flow income of the property.

    As the interest rates are held down by Central Bankers, then cap rates in real estate investments are also artificially low.

    When cap rates are low, income property rises in value and visa versa.

    Consequently, investors in real estate income property now pay higher prices. They don’t like that but they don’t want to put their capital in a savings bank for less than a 1% annual yield.

    Let’s Look At An Example

    In 2007, if an office building had Net Operating Income of $300,000. Before FED Bernanke and Central Banks manipulated interest rates, the cap rate was about 7%.

    So, in 2007, this office building was worth $300,000/.07 or $4,286,000 rounded.

    But, today, as an illustration, low interest rates drove down cap rates to about 5%. So, now this same office building is priced to sell at $300,000/.05 or $6,000,000.

    So think of FED Bernanke’s manipulated low interest rates (same globally) as a “Value Generator” for you to put together basic need developments producing income properties in DEMAND and creating fabulous opportunities for investors.

    One thing is for certain – a good new development is a better opportunity for a joint venture investor than an excellent existing income property thanks to the manipulated monetary policies of FED Bernanke and Central Banks across the World.

    Another way to look at it relates to wholesale vs. retail. An existing income property could be asking $10,000,000 as an asking price. This same income property can be developed for about $7,900,000, creating $2,100,000 in “added value.”

    And so, if you learn the real estate development skills, now is the time to package niche income producing developments. Investors will be banging on your door to get in. You’ll have a fabulous project for joint venture investors, and yourself as Joint Venture Developer.

    Geographically, expect a booming real estate development business in Africa.

    Warmest,

    Richard Michael Abraham
    Founder
    The REDI Foundation
    http://www.redii.org

    October 22, 2012 at 10:18 am | Reply
  13. LP

    This article is really just a summary of Glaeser's "Triumph of the City"

    November 3, 2012 at 3:24 am | Reply
  14. Waldo Hennigan

    there are so many recreational activities that we can enjoy."

    Brand new blog post on our webpage
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    January 23, 2013 at 9:30 pm | Reply
  15. Joyce Jaselin

    The internet is the ultimate equalizing factor and has the potential of changing the way we work. New products and services pop up every day that help us work remotely for large multinational companies and earn decent livings. In recent years, many laid off professionals have turned to freelance work to make ends meet. With the internet a worker in one city can connect and work with an employer on the other side of the globe. Services like TransparentBusiness.com make it possible for companies to hire remote workers with confidence by creating transparency. Transparent Business also helps freelance workers accurately track the hours they spend on projects so there are no disputes about worked hours at the end of the month. In a world that is shrinking, these types of services are invaluable because they empower workers and employers from across the world to connect and work towards common goals.

    January 24, 2013 at 1:32 am | Reply

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