Reading the metropolitan economy: spatial interdependence, land use and growth

1. Reading the metropolitan economy: spatial interdependence, land useand growth Geoffrey J.D. Hewings Regional Economics Applications Laboratory Institute of Government & Public Affairs University of illinois 607 S. Mathews, Urbana, Il 61801-3671 hewings@illinois.edu www.real.illinois.edu

2. Outline • Organization of research – REAL • The Context • Stylized Facts • General Perspectives • Regeneration Economies • Structural Changes in Urban Economies • Challenge of Supply Chain Analysis • What is happening inside City Regions? • Final Thoughts

3. Introduction to the Regional Economics Applications Laboratory (REAL) • Formed in 1989 • Goal: enhance quality of public policy decision-making through creation of strategic analysis of state and local economies • Move from theory to formal analysis to public policy presentation • Train next generation of economic analysts to be “schizophrenic” • Present analysis in one form for academic audience • Present modification in form suitable for policy analysts • Provide monthly employment analysis Illinois; monthly index leading indicators for Chicago economy and each Illinois MSA; housing market analysis and forecasts • Annual forecasts for Illinois, Chicago and other Midwest state economies through 2040 • Developed models for states and regions in EU, Brazil, Colombia, Chile, Japan, Korea, Indonesia. • Participants in 2012 from: Colombia, Chile, Brazil, Peru, Argentina, China, Indonesia, Bangladesh, Korea, Japan, Italy, Turkey, Spain, Puerto Rico, India, Guatemala • Provided support (2 years or more) for >40 doctoral dissertations in economics, agricultural economics, urban and regional planning and geography • “bolsa sanduiche” program with University of São Paulo

4. REAL’s Role in Economic Development • Too many decisions and certainly too many public policy initiatives have been predicated on little or no information about how the economy works • REAL’s competitive advantage is in providing insights into • how economies work, • how and in what direction they are likely to change, • “what if…?” and forecasts 1 month to 30 years ahead • Evaluation of alternative strategies

5. The Context • World-wide, over 50% of the population is located in urban areas • Forecasts 50, 40, 30, 20, 10 years ago all suggested that there was an upper bound to the size of metropolitan areas – but the larger ones continue to grow notwithstanding the presence of significant negative externalities (congestion, pollution, inefficiencies)

6. The Intellectual Legacy • Systems of cities: concept initially rested on propositions of central place theory now posited within the context of the New Economic Geography • Internal organization of cities: initially von Thunen (regarded by Samuelson as a greater contributor to economic theory than Ricardo) then Muth-Mills-Alonso, new urban economics etc. • Challenge has always been to link the two

7. Stylized Facts • Cities in the developed world transformed in the last half century from dominance by manufacturing to service production of physical goods replaced by production of ideas • Cities at one and the same time becoming more competitive and more complementary as a result of: • Hollowing out • Fragmentation • Exchange of self-contained to interdependence • Exploitation of scale economies/cheap transport/love of variety/greater exchange • Intercity trade growing faster than>>City Gross Product

8. What can we learn from each other? • How do our economies function? • What is the role of • Infrastructure • Labor force development • Smart specialization/diversification • Public-private partnerships • Enhancing trade Midwest-West Midlands (do we even know the volume?) • Location advantages as Chinese wage rates accelerate • Seizing the opportunity for 3-D printing; can these regions create new manufacturing jobs?

9. General Perspectives • Policy makers rarely take the time to discover how their city works • How and in what direction it is likely to change • Formal evaluation of expected outcomes of alternative development strategies • Policy without formal analytical support is just speculation • REAL is part of a consortium operating under the umbrella Regeneration Economies, A Civic-Market Collaborative Leveraging its Assets to Revitalize Great Lakes Economies We cannot solve today’s economic development problems with the same thinking that got us here [with apologies to Albert Einstein]

10. General Perspectives • New business recruitment and relocation initiatives and incentive programs must be combined with programs that stimulate growth of existing and emerging enterprises to benefit a community or region. • Growing viable firms must be linked with sustainable workforce demand and development • Unmeasured economic development is resource expenditure, not investment; meaningful and visible measurement of outcomes supports wise management of economic development resources.

11. Regenerative Urban Economies

12. Regenerative Urban Economies • Analysis requires consideration of the MACRO regional economy • Then, evaluation of the MICRO (firm-level) economy especially in the context of key VALUE CHAINS • Development of a strategic DEVELOPMENT STRATEGY • Cycle back to evaluation of options at the MACRO level (impacts on production, income, employment, growth rates, population, migration….)

13. Initiating Our Understanding of the Metropolitan Economy • How are the activities linked together? • Directly and indirectly • How has this structure of interdependence changed over time • What drives the metropolitan economy? • Dependence on local, domestic and international markets • Where are the major trading partners? • What is the balance of trade? • How diversified is the export portfolio – both sectorally and spatially? • How has this changed over time? • Growth accounting – role of technology and demand in generating changes in production levels

14. Initiating Our Understanding of the Metropolitan Economy (2) • How does the trade in people (migration) compare to the trade in goods? • Is the metro economy dominated by net in- or out-migration? • What is the age and occupational capital composition of migration? • How is the age profile changing – what is the role of ageing? • How is the ethnic composition changing • How is the dependency ration changing (number of non labor force participants “supported” by each member of the labor force)?

15. Initiating Our Understanding of the Metropolitan Economy (3) • Short- and Long-run Forecasts • What are the expected growth rates of aggregate indicators like GRP, population, income and employment? • How will different national and international scenarios affect the metro region’s economy? • What are the expected changes in sector, income and employment compositions over the next 10, 20 and 30 years? • How will the occupational structure change? • Supply-demand dynamics of the labor market • Role of skill migration in enhancing/detracting from the labor market’s competitiveness

16. Initiating Our Understanding of the Metropolitan Economy (4) • What REAL provides • Regional macro models of Midwest states and metro economies • Growth rates vis a vis nation • What are sources of stimulus for a state/regional economyintegration with labor markets • Migration analyses • Energy analyses • Short-term indices – leading indicators • Specific analyses - examples • Impact of ageing • Impact analysis e.g. high speed rail • Role of trade – foreign and domestic on specific economies

17. Initiating Our Understanding of the Metropolitan Economy (5) • For Chicago, provided forecasts through 2040 • Most dramatic change is increase in Latino population share from 13% (2010) to 37 (2040) • Evaluated the impacts of ageing and immigration (more later) • Examined impacts of structural change • Identified processes of fragmentation and hollowing out – decreasing intra- and increasing inter-regional dependencies • Identified importance of interstate trade and its concentration in intra-industry trade • Estimated impacts of structural change on pollution generation in Chicago and Midwest (using a continuous time version of the models)

18. Initiating Our Understanding of the Metropolitan Economy (6) • Over the past three decades important structural changes in the US economy • Decreasing relative contribution of manufacturing to GNP • Changes in location of economic activity • Changes in the spatial organization of production • Midwest has experienced greater absolute impacts from these changes • Impacts have not always been uniform across Midwest states • For example, IL became a non-manufacturing dominated state 2-3 years ahead of the US as a whole • States within the region becoming more complementary at the same time as more competitive

19. Initiating Our Understanding of the Metropolitan Economy (7) • Midwest characterized by • Significant interdependence • Both internal markets (i.e. within Midwest) • International markets – international trade dominated by exports to Canada and Mexico • Structural problems • Labor force issues • Net out-migration of highly endowed human capital (Chicago loses $1.5 billion/year ≈ 20,000 jobs [50% good year’s growth]) • underinvestment in high-skill blue-collar human capital • Governance issues – failure to appreciate and exploit spatial (interurban) economic interdependencies (OECD study)

20. Production Block 1 Service Link Production Block 2 inputs markets Two Major Structural Changes in Urban Economies 1. Each state is hollowing out – typical establishment is now less dependent on sources of inputs within the state and on markets within the state ---- ripple effects of change within the state are now smaller than 20 years ago 2. Structure of production is changing – fragmentation is now a characteristic of production • The value chain is now longer • Firms are organizing production to exploit economies of scale in individual plants in specialized component production and shipping to other plants to add further components

21. Changes in the Structure of Production

22. Spatial Interdependence: Job Losses in the Recession Change in Impacts in Metro Area

23. Urban Regions as Competitors & Complements • As urban regions become both more competitive and interdependent at the same time, it will be even more important to know: • The nature and importance of external trade • The geography of this trade – important trading partners • Sustainability of trade and the nature of economic vulnerability (e.g. supply chain disruptions) • Policy instrument that a single region can employ to enhances its competitiveness • Without access to formal models, none of this will be possible

24. Challenge of Supply Chain Analysis • Work at the country level (e.g. Kukasaku, Meng and Yamano, 2011) has revealed greater country integration in Asia as a result of fragmentation of production • Expectations: • Decrease in intra-region elements as production value chains involve more establishment to establishment flows • More interregional and international flows • But process may not be homogenous – trade-off between increase in complexity and increase in spatial fragmentation

25. Challenge of Supply Chain Analysis • In analysis of Chicago economy, two dimensions are differentiated within the fragmentation process: • Spatial: decrease in the complexity of production systems inside any given economy • Functional: outsourcing may increase the density of transactions and linkages within a given economy • Implications for the Chicago region were studied from a set of input-output tables estimated for the period 1978-2014 using Average Propagation Lengths (APLs).

26. Challenge of Supply Chain Analysis • (1) The Chicago economy has experienced a process of hollowing out due to spatial fragmentation, causing an overall reduction in intermediation – multipliers are decreasing • (2) A decrease in the variety of goods and services produced in any one sector (i.e. secondary product production has decreased). • (3) An increase in the specialization of production in each sector. • This latter observation is consistent with the NEG ideas of the dominance of scale economies and the ability of an individual establishment to serve more extensive geographic markets.

27. Challenge of Supply Chain Analysis: Vulnerability and the 3-D printing • Fukushima tsunami revealed dangers of excessive fragmentation+consolidation • DENSO encouraged to concentrate production of chip controlling use of battery/gas engine in hybrid cars • Factor destroyed in tsunami – loss of 9 months’ production • 3-D printing offers prospect of further agglomeration of supply chains around sites of final production • Saving of logistics/coordination costs • Increased flexibility – easier to solve problems • Findings of Romero et al in Chicago may be first indication

28. Supply Chains • NOW: Dispersed-------Concentrated--------Dispersed • 3-D: Concentrated….Concentrated……….. Dispersed.

29. What is happening Inside Metro Regions? • Krugman has argued that patterns and impacts of trade have similar impacts • Between countries • Between regions inside countries • What about within large metropolitan regions? • Detailed analysis of the Chicago economy provides some insights into the nature and strength of trading relationships • Goods and services • Flows of people (commuting) • Flows of expenditures by households

30. Spatial Division of Chicago

31. Chicago Intra Metropolitan Flows Goods and Services Flows Wages and salaries Flows of commuters and their incomes by zone Household expenditures Flows of expenditures by zone

32. 5.25% 5.63% 100% 5.81% 1.44% 1.49% 2.97% 90% 80% 70% 60% 93.58% 89.81% 90.30% 50% 89.96% 40% 30% 20% 10% 1.38% 2.83% 2.77% 2.40% 2.21% 2.17% 0% CBD R of Chicago Suburbs Outer Suburbs CBD R of Chicago Suburbs Outer Suburbs Interindustry Interdependence • Limited connections across regions

33. Total Spatial Interdependence • Substantial interdependence when all interactions considered

34. Changes in the Nature of Dependence as Complication Increases • Layer 1 • Intrazonal flows dominate the production relationships in the assembly of $479 billion worth of goods and services. • Somewhere between 90% and 94% of the direct and indirect effects of trade remain within the zone • Layer 4 • With the exception of zone 4, less than 50% of the total production impacts can be traced, directly and indirectly, to activity that is generated within the zone • Almost 14% of the impact in zone 4 (outer suburbs) can be traced to zone 1 (the central area or CBD) with a further 6% traced to zone 2 (rest of the City of Chicago)

35. Unexpected Result: The Miyazawa Interrelational Income Multiplier • Region 2 – least prosperous but generated largest income multiplier • Significant asymmetric spillovers – suburbs benefit more from income growth in other regions than vice versa

36. Change 2000-2030 Cohort Number % Under 18 13,662 0.4 5-17 -41,976 -1.8 18-24 17,468 1.4 25-44 -302,690 -8.0 45-64 373,007 14.0 65+ 912,152 60.8 The Demographic Tsunamipercentage of population >65 Note: Significant decline in 25-44 age cohort Significant increase in >45

37. Comparison of Population Structure 2000, 2040 2000 1 million more retirees 0.7 million fewer working age 2040

38. Dramatic Changes in Ethnic Composition: Growth Hispanic Population 2010: 13%

39. Implications • Variety of goods and services purchased will change as the age distribution changes • Significant differences in spending patterns by age • Housing needs will change – more 2-person households • Senior population will have far greater share of income that is disposable and flexible (often no housing costs that can consume 30% of average household budget) • Ethnic composition will add further significant change

40. Consumption and Age: Selected Goods(allocation of a typical dollar by age and product group)

41. Forecasts Compared: Representative Household Versus Disaggregated Households Note: 1HH is the single representative household Growth in Consumption 2003-2030 by Age-Cohort Households, Chicago

42. Immigration, Aging and the Chicago Economy • Immigration has a positive impact on GRP Aging only 0.6% immigration 1.2% immigration 1.5% immigration

43. Land Use Linkage • REAL has provided a link between • Regional macro economy (9 m population) • 300 local communities with land use regulatory authority • Land use development at the 30m square parcel level using a cellular automata model • Preliminary results indicate that community-level decisions may prevent the region from locating the population and businesses forecast to develop over the next 25 years

44. Land Use Linkage

45. Comparison of Constrained and Unconstrained Population growth

46. Comparison of Constrained and Unconstrained Employment growth

47. Implications • Region may accommodate more of the forecasted employment than population (more vacant land zoned for business and industry) • Region’s inability to house additional forecast population may have serious impacts • Under utilization of public goods such as schools, water, sewer and transportation infrastructure • Loss of economic impacts associated with the spending and re-spending of wages and salaries – additional population will likely be housed outside the region

48. Final Thoughts • World Bank, OECD, IDB, ADB have all discovered that the internal heterogeneity of countries requires them to focus on region-region interactions • Metropolitan areas are similarly heterogeneous and thus there is a need to focus on • Nature and strength of the external linkages • The interactions between parts of the internal metropolitan structure • Interactions between the two – role of internal connectivity is as important as external connectivity • Known for a long time about inter-urban connectivity across countries but less about how the internal structure affects international competitiveness

49. Final Thoughts (2) • Urban and regional economies are more complex, and they are changing more rapidly than in the 1990s or 2000s • Global challenges, rapidly changing markets, speed of information flows create different needs for response and innovation • Regions are becoming more competitive but more complementary through spatially extensive supply chains We cannot solve today’s economic development problems with the same thinking that created the problems