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

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