Flexible Economic Opportunism: Beyond Diversification in Urban Revival

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Discouraging employment data have recently dampened optimism about America’s economic recovery. These challenges are nothing new for developed regions long beset by manufacturing decline amidst globalization. Exemplars of this trend, America’s rust belt cities have battled unemployment, decaying infrastructure, and social challenges since economic decline emerged in the 1960s. In response, some now cultivate service, knowledge, and tourism industries. Explaining these new growth models, analysts often espouse the virtues of diversification. However, legacy industrial systems and native constraints (e.g. geography and culture) can hinder this strategy. Chasing diversification for its own sake diverts policy attention from a more valid determinant of growth. Post-industrial urban policy should target structural flexibility, enabling diversification or specialization – neither deserving preeminent status – to occur naturally.

In exploring rival economic development strategies, two management theories are particularly relevant: Michael Porter’s competitive advantage and Harry Markowitz’s portfolio theory. Competitive advantage describes the strategic orientation of business operations and brand image to command an inimitable market position. Portfolio theory is the logic behind investment diversification to maximize returns for given risk preferences. In management, these are not rival theories. However, when applied to urban economic development they present a direct contrast. The former can be likened to specialization, and the latter to diversification.

In attempting to revive their economies, cities often reduce strategic options to the simple dichotomy of specialization versus diversification. Some compromise by favoring a primary industry and enabling the emergence of secondary industries. Economic orthodoxy generally argues that diversification is the wiser choice in volatile economies. This portfolio-style approach assumes that stability in one industry offsets decline in another. This argument is convincing: many “single-engine” economies have underperformed amidst globalization. Besides the usual cases, overlooked examples are Oakland, California (shipbuilding and automobiles), Birmingham, Alabama (steel), and upstate South Carolina (textiles). A similar fate befell the British Midlands and German Ruhr Valley, where recovery strategies have generated mixed results. Instability in single-industry dependence is not limited to manufacturing. Las Vegas, where the pro-cyclical tourism mirrors national economic trends, remains fairly irrelevant outside its casinos and related industries.

By contrast, many successful cities boast diversified economies. New York has a path-dependent advantage in finance, with recent volatility offset by tourism, business services, and the arts. The 1986 collapse in oil prices tested the resilience of Sunbelt boomtown Houston, whose shipping industry offset energy sector declines while banking, finance, and healthcare kept the city competitive. Large cities are naturally more diversified, but smaller cities can also exhibit diversification: examples are Austin, Texas (research, education, and technology), Nashville, Tennessee (entertainment, insurance, and health care), and Tampa, Florida (military, tourism, trade, and retirement services). Austin added jobs even during the 2008 recession, and has routinely been labelled the nation’s best-performing economy in recent years. These examples show that economic resilience is dependent more on diversified industrial portfolios than on size.

Nevertheless, a larger story underlies America’s revitalization champions. While the flag of diversification flies high, at the base of the pole stands structural flexibility, arguably a more durable, achievable, and powerful mechanism for growth. Cities prepared to re-orient towards emerging opportunities maintain development potential across economic cycles. Furthermore, flexibility gives cities of any size hope for transformative growth. Not every city has the native advantages to meaningfully diversify, but flexibility can be their wild-card strategy.

Two former manufacturing cities have exhibited post-industrial flexibility: Pittsburgh and Bilbao. Once the pride of America’s post-WWII steel industry, Pittsburgh suffered a precipitous decline in the 1980s as manufacturing moved overseas. 200,000 jobs and nearly half the population were lost. However, Pittsburgh’s situational advantages provided a flexible platform for revival. Well-endowed cultural institutions and flourishing medical, education, and research sectors supported a lifestyle economy based on knowledge, services, and creative entrepreneurship. Pittsburgh’s economic performance was seventh best in the nation during the 2008 recession, an example of how flexible planning, private sector creativity, and situational advantages converged to make progress halting seemingly irreversible decline. Similarly, Bilbao, Spain, sharply declined after the withdrawal of manufacturing. Without its economic engine and facing crisis-level unemployment, it creatively turned to tourism and culture. The government’s stated commitment to collaborative policy making and quality-of-life now complements efforts to sustain post-industrial competitiveness. Like Pittsburgh, Bilbao has used flexible, opportunistic planning to pursue economic growth.

Despite their highly publicized transformations, however, these post-industrial success stories are not without challenges. The Pittsburgh metropolitan area has failed to gain population for years, and lost nearly 5,000 residents between mid-2013 and mid-2014. The city’s stagnant job growth has led some claim that Pittsburgh’s amenities, rather than employment opportunities, are a relocation magnet. Others claim that flat overall job growth conceals local economic restructuring, as manufacturing industries give way to the creative sector. Despite recent signs of a recovery, Spain’s persistent unemployment (23.8% in the first quarter of 2015) indicates that the nation, and particularly secondary cities such as Bilbao, continues to struggle in the stubborn wake of the 2010 euro crisis. Further, Bilbao’s top-down approach of museum-based revitalization has failed to generate vitality in the grassroots cultural scene, where artists have collectively mobilized but still struggle to obtain financial support.

Manchester has recently enjoyed consistent growth, and is now considered the UK’s healthiest economy outside of London. Like Pittsburgh and Bilbao, the city experienced rapid mid-century decline with the closure of its shipping port and loss of heavy manufacturing. The city’s economic revival has pivoted towards knowledge, services, and entertainment, a strategy attracting recognition for liveability and cultural vibrancy. Financial services now outsize manufacturing and engineering, with no single industry representing more than 16% of the economy. Poised to benefit further from devolutionary reforms and “northern powerhouse” status, Manchester has garnered recognition for its economic diversity and entrepreneurial spirit. The city exemplifies a flexible approach to post-industrial development, particularly for a hinterland region overshadowed by a dominant neighbour (London).

Other efforts at revitalization, however, have produced lesser results. Like Pittsburgh and Bilbao, Cleveland’s steel industry flourished in the mid-20th century before industrial decline gutted the city of jobs and population. In 1969 the emblematic Cuyahoga River fire brought national attention to Cleveland’s economic crisis. Since 1990 the city has caught fire once again – in a revival driven by services, tourism, and entertainment. Global connections in knowledge industries and education complement Cleveland’s flexible economic vision. However, the city still struggles with disinvested neighbourhoods, ageing infrastructure, and regional competition from Pittsburgh, where flexible strategies also target culture and technology.

Taken superficially, these revival cases support the concept of diversification. Cities focusing on a singular competitive advantage – geography, image, or path-dependent conditions – tend to specialize but often struggle to re-configure inflexible industrial infrastructure for new opportunities. Regardless, specialization versus diversification is a false choice. Beyond this continuum, the true survival instinct is structural flexibility. Diversification often correlates with overall growth but is more a lagging indicator of opportunistic preparedness. Flexible policy broadens structural capabilities and builds resilience into urban systems, in either a specialized or diversified economy. The outputs include infrastructure both hard (transport, technology and housing) and soft (education, culture, and institutions). In providing platforms for investment that adapt to global trends, this strategy transforms industrial determinism into flexible economic opportunism.

Kris Hartleyis a visiting researcher at Seoul National University and PhD Candidate at the National University of Singapore, Lee Kuan Yew School of Public Policy. For more details about his argument, see his book Can Government Think? Flexible Economic Opportunism and the Pursuit of Global Competitiveness.