City Journal

Mario Polèse
Urban-Development Legends
Grand theories do little to revive cities.
Autumn 2011
Cities that have used incentives to lure heavy industry have created little long-term growth.
E.O. Hoppé/Corbis
Cities that have used incentives to lure heavy industry have created little long-term growth.

For decades, city fathers and academics have studied economic development, searching diligently for ways to make urban economies prosper. Surely this quest is understandable—as understandable as the search for success that so many people undertake in the personal-finance section of the local bookstore. But just as personal finance has yet to unlock the secret of how to get rich, no surefire government-led strategy exists that can turn around a troubled economy like Buffalo’s or Gary’s. Cities, like people, are too diverse to allow anything but fairly commonsense prescriptions. A lot of grand theories have been advanced—targeted tax incentives! bike paths!—but they have proven of little practical use.

The history of local economic development is a story of academic fads. The 1960s, when I was a student at the University of Pennsylvania, were the heyday of growth poles and multipliers, of econometrics and mathematical modeling made possible by powerful mainframe computers. For a city, the key to generating jobs and income was to lure strategic industries by offering them tax breaks, loans at favorable rates, promises of infrastructure development that would benefit them, and so on. This approach would propel the entire local economy forward, the theory held, so long as the city picked the right industries. On a corridor wall in Penn’s Wharton School building was plastered a huge input-output table of the Philadelphia economy, which would help planners make the right choices. The direct and indirect employment effects of any investment could be precisely predicted. It was all very scientific.

The unfortunate results of that optimistic epoch were large industrial complexes, often in petrochemicals or steel, which created jobs but little subsequent growth. It turned out that input-output models were essentially static, limited to one-shot income and employment effects. Over the long term, in fact, investing in supposedly strategic industries frequently had a negative effect on growth; for example, those large plants tended to be unionized, which pushed up local labor costs and drove employers away. Take the Canadian province I hail from, Quebec, which in the 1960s proudly inaugurated a large steel complex in the city of Sorel, near Montreal. The story of Sorel since then has not been a happy one; employment there has long been stuck below the province’s average rate.

The next fad was high-tech industrial parks. Every city wanted its research park, equipped with all the latest frills and a billboard declaring it the high-tech capital of the region, the nation, the world. Accompanying the parks were goodies that cities offered firms to induce them to come. Some parks, such as North Carolina’s Research Triangle, were highly successful, but just as many weren’t. Many other conditions had to be in place for the approach to work, such as competitive costs, a propitious location, and the presence of major research universities.

In the 1980s, “clusters” came along, thanks in no small part to the marketing skills of Harvard Business School professor Michael Porter. Porter noted that related industries tended to bunch together. The key to success, then, was identifying a cluster—say, health or fashion or aerospace—in which a city purportedly held a competitive advantage and then building on it with targeted public investments. Though cluster-based strategies remain popular among economic-development strategists, they contain an inherent flaw: today’s winning clusters may be tomorrow’s losing clusters. Building an entire development strategy on one cluster is as risky as assembling an investment portfolio concentrated in one or two stocks. And history shows clearly that politicians are even worse at picking winners than investment bankers are, which these days is saying a lot.

The story of Montreal’s Multimedia City, launched in the 1990s, is illustrative. Montreal and Quebec decided to jump-start a “high-tech multimedia cluster” in a dilapidated city neighborhood—and to stimulate the wider local economy—by building a new high-tech complex and promising generous tax write-offs to firms that would locate there. The firms came. But Montreal’s most dynamic software companies flourished in a different part of the city, a gentrifying area with a lively street life and a long tradition of small business. Multimedia City had no such natural advantages; all it had was the dubious distinction of having been publicly anointed. Firms and communities elsewhere then began to demand equal treatment, and Quebec eventually extended the program to them, simultaneously making it even more costly and defeating its original intent. Montreal was left with a shiny new building filled with subsidized firms, but few visible economic spin-offs. Quebec has since ended the program—no newcomers need apply—and one may well ask what will happen to the current beneficiaries when their subsidies expire.

Another school of thought became popular in the eighties: “community economic development,” which arose in reaction to the failed smokestack-chasing, handout-bestowing strategies of the past. Communities watching plants move elsewhere—plants that they had generously provided with a new industrial park and assorted tax breaks—felt betrayed. Outside interests were inherently fickle, the communities concluded; the only reliable source of sustained economic growth was local. A community’s ultimate strength was its own people and their ability to nurture homegrown businesses. Who but the locals were best equipped to identify local investment opportunities?

And so the 1980s saw a flowering of local development corporations of all stripes. The concept appealed to both sides of the political spectrum. Backers on the left, where the word “community” evoked positive feelings, envisioned corporations that would stress such social objectives as poverty reduction. Backers on the right were drawn to the small-business, entrepreneurial ethos of community economic development, as well as to the implication that the responsibility for success (or failure) resided with the community, not with the state. That implication also made the community approach attractive to higher levels of government; the only thing needed was the occasional handout to community organizations (with appropriate photo ops), and the mechanics could be left to the locals, who would now be in charge of encouraging the right businesses to come by means of counseling or, again, tax breaks and attractive loans.

Local business-development corporations remain a staple of city strategies. But no methodology exists for verifying that the jobs they purportedly created wouldn’t have emerged anyway. This fuzziness, in fact, is one of their political strengths. Once funded, even temporary initiatives tend to become permanent.

Other ideas have emerged or reemerged. Branding is now in fashion, for example. A powerful brand, the thinking goes, will attract companies, and every city now wants to see its logo in The Economist or Fortune. But branding can go only so far. For a city’s brand to show results, it has to be believable, founded on qualities that residents as well as outsiders recognize. A declining Rust Belt city can’t be turned around simply by inventing a snappy slogan. In the late 1970s, Rochester launched a marketing campaign with the tagline “I’d rather be in Rochester.” To judge from the city’s fortunes, the branding didn’t produce the desired results. It’s hard to imagine that the new slogan that Rochester introduced in the 2000s—“Rochester. Made for living”—will do any better.

Economic-development experts also have turned their attention of late to so-called soft factors: quality of life, the arts, creativity. The reason is the rise of the service-based knowledge economy, which has made human capital, not physical capital, the most precious commodity. Smokestack-chasing is passé; “factory” has almost become a dirty word. Chasing people (that is, certain types of people) is now the name of the game. Before, investments in strategic industries supposedly generated employment, which then attracted people. Now, it’s the other way around. Attract the right people—the young, educated, and talented, the drivers of today’s knowledge economy—and jobs will follow.

This approach is generally associated with Richard Florida, arguably the most successful urban guru at the moment. Florida believes that tolerant cities with bohemian, cosmopolitan neighborhoods draw in an economically desirable “creative class.” The term is a stroke of rhetorical genius, whatever one may think of its usefulness. Attract creative people, and they will, by definition, create; what more is there to say?

Florida isn’t entirely mistaken in pointing out a relationship between knowledge-intensive industries and unconventional lifestyles in such cities as San Francisco, Seattle, and Austin (whose motto is “Keep Austin weird”). His intuition harks back to an earlier urban guru, Jane Jacobs, who also lauded the economic virtues of cosmopolitanism, diversity, and lively street scenes. The theory, though, has spurred a troubling focus on the arts as engines of economic development. If a city is to attract creative people, surely it needs a world-class symphony orchestra, top-notch museums, and an avant-garde theater scene! In Montreal—and one can think of numerous American examples as well—the local cultural lobby has sold this line to city hall and received generous public investments in the arts. Perhaps the most prominent is the $120 million that the federal, provincial, and municipal governments are spending to overhaul an old neighborhood and erect there a Quartier des Spectacles, or theater district.

Don’t get me wrong: I’m not ideologically opposed to public investments in the arts. But it’s hard to demonstrate that they promote economic growth. The problem is the direction of causality: Does a vibrant cultural scene cause local prosperity, as Florida’s acolytes say, or is it the consequence of local prosperity? (See “The Curse of the Creative Class,” Winter 2004.) Atlanta, one of the country’s fastest-growing metropolitan areas, doesn’t owe its success to an above-average endowment of educated workers, world-class universities, museums, and cafés. If Atlanta keeps growing, however, we may reasonably predict that it will, in time, house a highly educated population, spawn top-notch universities and cultural institutions, and maybe even nourish trendy neighborhoods where bohemian classes will hang out.

The Florida approach has also led to a renewed emphasis on education, on the assumption that an educated population will probably have much in common with a creative one. But improving local schools, while important in its own right, isn’t a proven economic-development tool, at least for struggling cities. After all, an educated population is an asset that can be lost. A city with poor development prospects is doing the right thing in educating its young effectively, of course, but it is also increasing the chances that they will leave, which is good for the students but makes the city even poorer. Indeed, the fact that education in America is usually financed locally means that richer cities are essentially free riders, importers of labor educated elsewhere.

Why have the economic-development experts failed to come up with a universally successful approach? One reason may simply be that the city’s economic-policy-making powers have real limits. Unlike nations or states in federations, cities don’t control monetary and trade policy, for instance. Even if, as Harvard professor and City Journal contributing editor Edward Glaeser has demonstrated, a positive relationship exists between metropolitan areas’ initial human-capital endowments and their subsequent growth—suggesting that better education policies can spark development—no mayor has control over an entire metropolitan area. Say that New York mayor Michael Bloomberg wants to encourage economic development by improving local education. Without power over the schools in nearby Yonkers or New Rochelle, how is he supposed to do it?

Big and small cities are also very different economic animals, so no one development scheme is likely to work across the board. The small ones mostly compete by trying to offer lower costs (especially in real estate and wages) and access to various nearby markets, not by attracting the café latte crowd. But economic-development studies seldom address the challenges that small cities face. There is little in them of practical use to decision-makers in, say, Youngstown, Ohio.

In 2009, the Federal Reserve Bank of Boston issued a report that nicely—though doubtless unintentionally—illustrated the difficulties of going beyond general commonsense statements about urban economic development. Entitled Lessons from Resurgent Cities, it examined 25 old, industrial, midsize cities in the Midwest and Northeast, ten of which were “resurgent”; the bulk of the report sought to explain why they had performed so well. The keys to success, according to the Boston Fed: strong public and private leadership, collaboration among various constituencies, innovation, and long-term commitments. I certainly don’t want to belittle such findings. They are right, obviously. How useful are they, though, to urban policymakers? The remaining 15 cities in the study—including Gary, Indiana; Akron, Ohio; Erie, Pennsylvania; and Rochester, New York—were not “resurgent.” Were Akron and Rochester really lacking in public and private leaders committed to collaboration, innovation, and the betterment of their communities? I somehow doubt it. Why, then, have those cities continued to decline?

Some sources of decline, such as technological progress, geography, and bad weather, are admittedly beyond the ability of cities to do much to alter. Cities in western New York, Pennsylvania, and the Midwest have been the victims of all three sources of decline. Only slightly easier to fix is the mind-set that particular industries imprint on a community—think of those urban economies founded on brawn, large plants, and high levels of unionization that have generally found things difficult to turn around. Such places have, in essence, priced themselves out of the market, hindering local start-ups in the process. Resurgence will remain elusive as long as wage expectations remain above what market conditions warrant. What we do not understand is how to change the mind-set of such communities.

In other cases, the institutional environment in which a city finds itself can take some of the blame for the city’s economic problems. Part of the reason for the woes of cities in western and upstate New York is the state’s tax structure, which the Tax Foundation’s 2011 State Business Tax Climate Index calls the nation’s worst for businesses, with “the third worst individual income tax, ninth worst sales tax, and worst property tax.” The Big Apple may survive those taxes, but industrial cities like Syracuse and Buffalo are withering under them. The troubled condition of many American inner cities is similarly due in part to institutional factors: once wealthier residents start leaving for the suburbs, they reduce the tax base, which further harms city services and spurs still more residents to leave. That vicious cycle is almost unknown in Canada, not because Canadian politicians have demonstrated better leadership but because services are funded differently. Education, for example, is funded by the province, meaning that a small migration to the suburbs doesn’t spark a full-fledged exodus.

The conclusion to draw from all this isn’t that cities can do nothing to promote economic development. It’s that they should avoid academic fads and quick fixes, which are no substitute for obvious policy goals like competently providing mandated services at reasonable cost, keeping streets safe, and not taxing and regulating away businesses—good governance, in sum, and even that comes with no guarantee to work.

Mario Polèse is a professor at the Centre Urbanisation Culture Société at Montreal’s Institut National de la Recherche Scientifique.

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