Geoff rey J.D. Hewings

Reg i ona l Economi cs App l i ca t i ons La bora to r yIns t i tu te o f Gov ernment & Pub l i c Aff a i r s

U n i ve r s i t y o f i l l i no i s607 S. Ma thews , U rba na , I l 61801 -3671

hewi ngs @i l l i no i s . eduwww. rea l . i l l i no i s . edu

Reading the metropolitan economy: spatial

interdependence, land use and growth

Outline

Organization of research – REALThe ContextStylized FactsGeneral PerspectivesRegeneration EconomiesStructural Changes in Urban EconomiesChallenge of Supply Chain AnalysisWhat is happening inside City Regions?Final Thoughts

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

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

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)

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

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 interdependenceExploitation of scale economies/cheap transport/love of

variety/greater exchangeIntercity trade growing faster than>>City Gross

Product

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?

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]

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.

Diagnosis and Analysis

• Regional occupational and business cluster identification and assessment against a portfolio of metrics (REAL)

• Diagnose practices and performances to assess competitive position (e.g., PROBE, TBM)

Collaborative Innovation

• Strategic Doing Workshops and Training for developing strategy to establish networks

• Workshops in regional strategy, workforce development collaborations, sustainable development, and business clusters

Delivering Outcomes

• Action plan development to accelerate the journey to competitive leadership

• Strategy and marketing leadership for individual firms and local and regional initiatives

Output: multi-generational solutions to support short-term viability and long-term

sustainability.

Output: Collaborative

strategies with clear owners and metrics

Output: Full assessment of

trends, opportunities and

barriers

Regenerative Urban Economies

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….)

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

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)?

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

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 economy

integration 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

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)

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

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)

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

inputs Production Block 1

ServiceLink

Production Block 2

markets

Changes in the Structure of Production

Spatial Interdependence: Job Losses in the Recession

Change in Impacts inMetroArea

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 competitivenessWithout access to formal models, none of this

will be possible

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

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).

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.

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’

production3-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

Supply Chains

NOW: Dispersed-------Concentrated--------Dispersed3-D: Concentrated….Concentrated………..

Dispersed.

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

Spatial Division of Chicago

Chicago Intra Metropolitan Flows

Goods and ServicesFlows

Wages and salaries

Flows of commuters and their incomes by zone

Household expenditures

Flows of expenditures by zone

Interindustry Interdependence

Limited connections across regions

89.96%

2.97%1.44%5.63%

2.40%

90.30%

1.49%5.81%

2.17%2.77%

89.81%

5.25%

2.21%2.83%1.38%

93.58%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CBD R of Chicago Suburbs Outer Suburbs

CBD R of Chicago Suburbs Outer Suburbs

Total Spatial Interdependence

Substantial interdependence when all interactions considered

48.90%

5.97%

18.98%

26.15%

11.29%

47.47%

11.57%

29.67%

17.48%

5.69%

49.87%

26.96%

13.82%

6.60%

14.69%

64.89%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CBD R of Chicago Suburbs Outer Suburbs

CBD R of Chicago Suburbs Outer Suburbs

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)

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

The Demographic Tsunamipercentage of population >65

0.0

5.0

10.0

15.0

20.0

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030

US Chicago

Cohort Number %Under 18 13,662 0.4

5-17 -41,976 -1.818-24 17,468 1.425-44 -302,690 -8.045-64 373,007 14.065+ 912,152 60.8

Change 2000-2030

Note:Significant decline in 25-44 age cohort

Significant increase in >45

Comparison of Population Structure 2000, 2040

2000

2040

1 million more retirees

0.7 million fewer working age

Dramatic Changes in Ethnic Composition: Growth Hispanic Population

2010: 13%

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

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

Food

5%

10%

15%

20%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Beverages and Tobaccos

0.5%

1.5%

2.5%

3.5%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Housing

25%

30%

35%

40%

45%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Clothing

0%

2%

4%

6%

8%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Transportation

10%

15%

20%

25%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Health Care

0.0%

5.0%

10.0%

15.0%

-24 25-34 35-44 45-54 55-64 65-

80s 90s 00s 10s 20s

Forecasts Compared: Representative Household Versus Disaggregated Households

70 80 90

100 110 120 130 140 150

2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

1HH -24 25-34 35-45 45-54 55-64 65-

Note: 1HH is the single representative household

Growth in Consumption 2003-2030 by Age-Cohort Households, Chicago

Immigration, Aging and the Chicago Economy

Immigration has a positive impact on GRP

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070

Aging only0.6% immigration1.2% immigration1.5% immigration

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 modelPreliminary results indicate that community-

level decisions may prevent the region from locating the population and businesses forecast to develop over the next 25 years

Land Use Linkage

Comparison of Constrained and Unconstrained Population growth

Comparison of Constrained and Unconstrained Employment growth

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

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

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