When one thinks of thriving Canadian cities, Toronto, Vancouver, and oil-rich Calgary come to mind. Quebec City, though? The provincial capital of Quebec, it’s a charming place and an appealing tourist destination, with its Old World architecture, but not generally known as an economic dynamo. Situated far from major markets in the cold northeastern corner of North America, it has no obvious location advantage. Its metropolitan population of some 750,000 puts it on par with midsize American cities like Knoxville, Wichita, and Akron. And Quebec City is overwhelmingly white and French-Canadian, making it the antithesis of a cosmopolitan metropolis. It’s more like a big village—un gros village, as many locals put it.

Yet data reveal a surprisingly dynamic economy and a remarkable turnaround after several decades of decline. Over the last 15 years, Quebec City’s employment numbers and GDP growth have outperformed the Quebec provincial average. More impressively still, its unemployment rate—4 percent in spring 2016—has consistently ranked well below the Canadian average and among the lowest for Canadian cities. By comparison, metropolitan-area unemployment rates were 7.9 percent in nearby Montreal, 6.8 percent in Toronto, 5.3 percent in Vancouver, and a whopping 8.8 percent in Calgary, which was hard-hit by the global drop in oil prices.

Quebec City proves that size is not a precondition for economic success; small cities can also excel. Not long ago, though, the situation was quite different. From the 1960s to the mid-1990s, Quebec City resembled many midsize American cities, hard-hit by economic restructuring and suburban flight. Then the story changed.

A half-century ago, Quebec City was, in many respects, a dual village. Its Upper Town, the seat of government, was home to bureaucrats and lawyers and other residents of the political world. The Lower Town was solidly blue-collar, home to clothing, leatherwear, and related industries. Starting in the 1960s, the balance between these two economic worlds began breaking down. The city’s low-wage industries, as elsewhere in North America, struggled in the face of trade liberalization and Third World competition. The 1988 closure of Dominion Corset, once the largest corset factory on the continent, in the working-class neighborhood of Saint-Roch marked the end of an era.

Public-sector employment grew exponentially during the ensuing years, especially with the growth of the welfare state, the rise of Quebec nationalism, and the emergence of a powerful Quebec provincial state with a full range of ministries and agencies. Government was the region’s dominant employer by the 1980s, with Quebec City becoming the equivalent of a one-company town. Public-service unions loomed large, driving up the capital city’s wages, which now topped those of Montreal, on average, and exceeded the Canadian urban average, undermining economic competitiveness and further contributing to the decline in manufacturing. Private-sector growth stagnated, shrinking the tax base. By the 1990s, it had become painfully obvious that the public sector and the welfare state had swollen out of proportion. Now one of the most highly taxed and indebted jurisdictions in North America, the Province of Quebec was heading toward a fiscal cliff—and Quebec City was in similar straits.

Two parallel events had helped accelerate the capital city’s decline. In 1965, Laval University, with its 20,000 students (now 48,000), housed for more than three centuries in Quebec City’s Old Town neighborhood, chose to move to a new campus in the suburban community of Sainte-Foy. Old Town lost its Latin Quarter flavor and the student and intellectual life that came with it. At about the same time, near the new university campus, developers built two mega-size shopping malls—Place Sainte-Foy and Place Laurier, together touted as the biggest shopping-center complex in Canada. Quebec City’s central retailing district swiftly fell into decline. Shops closed, and real-estate prices plummeted. The final blow came from the provincial government, which built a series of superhighways that split neighborhoods and cut Old Town off from the rest of the city.

In short, Quebec City in the 1960s and 1970s made all the classic mistakes that first-year urban-planning students are taught to avoid—and this in a city with a lopsided, uncompetitive local economy. Suburban Sainte-Foy, with its university campus, new office towers, and techno-park—the latter two housing many public organizations and laboratories—was increasingly seen as the region’s economic center, with negative fiscal consequences for the City of Quebec. By the late 1980s, the regional economy was trapped in a familiar vise of uncompetitive costs, inter-municipal rivalry, central-city decline, and one-industry dependency. Tourism flourished, but tourism is rarely enough to sustain local economies, unless you’re Las Vegas. The city remained an entirely pleasant (if uninspiring) place, but the economy languished.

During the late 1990s, with the province facing unsustainable deficits and debt, the Parti Québécois government—nominally left-wing, ironically—embarked on a radical therapy of budget cuts and belt-tightening, including layoffs and hiring and wage freezes across the public sector. Civil-service employment declined by 20 percent, with a corresponding drop in wages. The 2001 census showed average regional wages, once above the urban Canadian average, now 15 percent below. In the space of barely a decade, Quebec City ceased to be a one-company town, with the public sector as the dominant career choice. Manufacturing employment began growing again, generally in mid-tech industries, where costs are a determining factor.

Herein lies a lesson for small and midsize cities. They cannot count on the advantages of agglomeration and buzz to carry them through bad times. Small cities must offset their limitations with a cost advantage, be it on wages, real estate, or taxes. Quebec City’s resurgence in the 1990s required that its labor costs fall below those of larger Canadian cities.

Lower costs aren’t enough, though, without good local governance, a reasonably well-educated labor force, and a business-friendly, entrepreneurial environment. In 1989, Quebec City elected a mayor who would take steps to ensure all these elements. A rare combination of intellect, integrity, and political savvy, Jean-Paul L’Allier had no illusions about the challenges facing the city. Initially, he could do little about Quebec City’s public-sector dependence, but its fiscal and urban-planning challenges were a different matter. L’Allier launched a two-pronged strategy aimed at redressing the fiscal gap between the city and the suburbs and reversing downtown decline.

Here is where the story takes a turn different from those of many American cities. Redressing the fiscal gap, L’Allier understood, meant some form of tax-sharing across the region, perhaps going as far as the amalgamation of central and suburban municipalities—a prospect that the suburbs were understandably reluctant to embrace. Were L’Allier the mayor of an American city, the effort would have ended there. In the U.S., any project for regional tax-sharing (let alone amalgamation) requires the prior consent of the municipalities—a virtual impossibility, given almost universal suburban opposition.

“Small and midsize cities cannot count on agglomeration and buzz to carry them through bad times.”

It’s different in Canada, where local governments are subservient to provincial legislatures that can create and abolish them at will and have repeatedly modified municipal boundaries and powers. This derives from the British tradition, under which, to take a historical example, Prime Minister Margaret Thatcher abolished the Greater London Council in 1986 with a simple vote in the House of Commons. But L’Allier first needed to convince the Quebec provincial legislature that the capital city’s impending financial crisis justified a major overhaul in regional governance.

L’Allier’s timing was good. He was not the only central-city mayor pushing for change; Montreal mayor Pierre Bourque had been aggressively promoting the idea of Une Île, Une Ville (One City, One Island), under which Montreal Island’s 30-odd municipalities would combine into a single city. Bourque prevailed. And in 2002, after heated political debate, the Quebec National Assembly approved a bill calling for the amalgamation of urban areas across the province, creating a new City of Quebec, now nearly triple in size (jumping from 169,000 to 480,000 inhabitants) and comprising the former City of Quebec and surrounding municipalities—including wealthy Sainte-Foy.

The art of politics is knowing when and how to seize chances. Even as the amalgamation debate raged, L’Allier persuaded the province to provide Quebec City with direct financial relief, cleverly playing on the symbolic role of Old Quebec (la Vielle Capitale) as the province’s “national” capital. In 1995, the National Assembly created a National Capital Commission, with a mandate to oversee and finance projects consistent with the city’s role as a capital. This did not resolve Quebec City’s fiscal predicament (that would have to wait for amalgamation), but it did reduce its financial burden. The commission became an invaluable tool in L’Allier’s fight for urban revitalization. Almost all the commission’s projects targeted the central city, a prime example being the successful conversion of the old railway station (Gare du Palais) into a multimodal (bus/rail) transport hub.

Looking to rejuvenate the dying downtown, L’Allier began by targeting a specific neighborhood: Saint-Roch, Lower Town’s retailing core, which had been devastated by the combined impact of suburban shopping malls and surrounding plant closures. L’Allier’s approach was not to try to outdo suburban shopping centers but to focus on the features that make a lively downtown. He sought to attract the young and curious (not only shoppers), while also addressing social issues and physical surroundings. L’Allier worked with churches and community centers to ensure shelter for itinerants and other unfortunates who congregated in the area. Though conducted on a smaller scale, his approach resembled Rudy Giuliani’s cleanup of Times Square and other neighborhoods in New York. In terms of physical space, the hoped-for revival centered on a new urban park, which the mayor pledged to make the most beautiful in the city.

All these efforts would go for naught without jobs. L’Allier persuaded the newly created state university system (the University of Quebec) to locate its offices and several affiliated schools around the new urban park, now appropriately dubbed Place de l’Université du Québec. He brought the owner of the now-abandoned Dominion Corset plant on board for a joint venture, eventually transferring the city’s urban-planning department and persuading Laval University to transfer its Faculty of Visual Arts to the refurbished building. The upshot was the arrival of several thousand jobs in and around Saint-Roch, many also in the IT sector. Saint-Roch was now “in,” with cafés, eateries, and natural food outlets. The administration also shrewdly used a provincial tax credit (30 percent on wages in specified IT sectors) to target the area. Saint-Roch today is home to several IT start-ups, software developers, and publishers—Quebec City’s own little Silicon Valley.

L’Allier did not resist or lament the initial tide of job losses that accompanied the public-sector cuts of the 1990s. Nor did he blame others for the city’s problems, as politicians are all too often willing to do. And herein lies another essential lesson: the importance of effective and principled political leadership. During L’Allier’s 16 years as mayor—he was reelected three times—Quebec City earned a reputation as a well-managed, people-connected city, admirably free of corruption and cronyism. L’Allier’s strong but largely corruption-free successors have maintained the city’s stature since amalgamation. Without such political leadership, it is doubtful that suburban populations would have willingly merged into the new City of Quebec.

In 2008, Quebec City commissioned me to do a study of its economy, focusing on the IT sector, the growth of which surprised even the locals. My team interviewed a number of IT companies—often subdivisions of Montreal-based firms—that had chosen to locate in Saint-Roch. The reasons they gave for moving there were always the same. Here was a pleasant neighborhood attractive to computer whiz kids who were—and this was crucial—willing to work at 10 percent to 15 percent below the going rate in Montreal. Real-estate costs and municipal taxes were also lower, resulting in considerable savings. Tasks dependent on big-city advantages could still be carried out in Montreal or elsewhere, but many operations could be profitably transferred to Quebec City.

This explains the businesses’ attraction to Quebec City—but what about all those computer-literate workers? Why, after graduating from Laval University’s science and engineering programs, didn’t they decamp to Montreal (or Toronto, or California), where they could earn more? This brings me to the most elusive ingredient of Quebec City’s success story: what I call building-block glue, or the mix of reasons that motivate young, talented individuals to stay in their home regions. Glue requires two elements: a strong sense of regional identity and a lively entrepreneurial spirit, both difficult to measure. However, several indicators suggest that Quebec City’s public-sector job and pay cuts of the 1990s triggered a change in mind-sets and attitudes. One would normally expect cities with strong public sectors to lean left politically, if only because of the influence of public-sector unions. Yet Quebec City and its surrounding region have continually stood out from the rest of the province by voting for right-leaning, pro-business parties. The current mayor, Régis Labeaume, reelected in 2013 with 74 percent of the vote, is a self-made millionaire with a pro-growth agenda.

A newfound sense of regional identity expressed itself in the results of the 2004 referendum on de-amalgamation. The forced amalgamations of 2002 provoked a backlash across the province. In response, the newly elected provincial government promised referendums, which would let citizens confirm or reject the merger. The results were unequivocal: with the exception of two small communities, all the former municipalities, including Sainte-Foy, favored staying in the new Quebec City. It’s difficult to imagine Quebec City’s current fiscal strength, strong business climate, and political clout without amalgamation. The Quebec story teaches us that municipal boundaries should not necessarily be viewed as sacrosanct. At the same time, regionalism (to use the American term) is not a cure-all, and outright amalgamation (the most dramatic form of regional integration) is certainly not appropriate in most cases. It worked in the Quebec City region—and even there, part of the greater metropolitan region has remained outside the new amalgamated city—not only because of its relatively small size and homogenous population but also because of the former central city’s reputation for good governance and its mayors’ political leadership.

Perhaps nothing better captures Quebec City’s transformation than the city’s own perception of itself. I live in Montreal but have studied and worked in Quebec City, which is also home to my in-laws. The image projected by Quebec City today is that of a brash, even arrogant, upstart, a far cry from the provincial backwater I once knew. Though Montreal remains the greater metropolis, Quebec City’s citizens have visibly shed all sense of inferiority. Montreal, Paris, New York, and other “great” cities continue to act as magnets for the young, but working in Quebec City is no longer perceived as a sign that one couldn’t make it in the Big City.

Many stars had to align for Quebec City to turn itself around. The final lesson: success is never a permanent condition. Success is all too often a handmaiden of hubris. Ambitious mayors find it hard to resist the lure of grand signature projects, for example. In 2011, Mayor Labeaume announced that Quebec City would soon get a new stadium worthy of a great metropolis, with which he hoped to attract a National Hockey League team. The new stadium, costing some 400 million Canadian dollars—half borne by the municipal taxpayer—opened its doors on September 12, 2015. The city remains the owner of the stadium, but it has outsourced management to a private corporation in a highly controversial 25-year contract. I can only hope that the mayor’s wager eventually pays off, but the early signs are not good. The city did not obtain a major-league hockey franchise; perhaps it will one day. The stadium registered an operating deficit for the first four months of some 1.4 million Canadian dollars. The Quebec City taxpayer again picked up half this cost—not a recurring event, one hopes. The competitive advantages of small cities are fragile.

Photo: The city’s revitalization efforts have attracted shoppers back to the Old Town area. (CHRISTIAN HEEB/LAIF/REDUX)


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