Growing economies deliver wealth and jobs

This article is written by David Irwin. David is a practitioner who has recently been supporting the City of Bavet in Cambodia to develop ideas to improve competitiveness as part of an Asian Development Bank initiative on Livable Cities. He is a visiting fellow in the Department of Politics at Newcastle University. He was the founder and CEO of the UK’s Small Business Service.

• The problem: Economic growth creates wealth, creates jobs and leads to better quality of life but many countries are facing low or zero growth at present. Moreover, many countries are becoming more protectionist or imposing more barriers to trade, likely to result in firms that are less innovative, less productive, less profitable – and paying less tax.
• Why it matters: This is important because citizens in western countries have been led to expect continued improvements in real incomes and in their quality of life. When that implicit contract breaks down, it results in increasing disparities between rich and poor, increased poverty and, ultimately, conflict.
• The solution: There is no simple solution, but taking a more strategic and holistic view – encompassing a range of complementary responses – would make a big difference. Freeing cities to develop their own responses could lead to more innovation.

There is much encouragement at present – from the Chancellor, the World Bank and the UN amongst others – to take action to promote greater competitiveness and economic growth. Neither are likely to emerge from a few freeports or enterprise zones. Those offer the illusion of action but merely shift productive activity from one location to another, often at considerable expense to the taxpayer.

I have recently been working on an assignment for the Asian Development Bank to assist Bavet, a small city in Cambodia, to develop proposals for actions that could make it more competitive. Whilst every city that wishes to become more competitive will have its own particular characteristics, three key lessons emerge:

1. Every high-price consultancy firm worth its salt has detailed views on how to assess competitiveness, typically based on 100 or more indicators, though these can generally be simplified to a small number of key requirements

2. The more that local actors – including local government, business associations, large corporates, inward investors, universities and colleges – are involved, the easier it is to share the burden with each actor taking responsibility for just one or two actions.

3. Whilst cities need a clear vision, they do not have to implement all the actions simultaneously but rather encourage and facilitate over time.

A competitive city encourages entrepreneurship and attracts investment; it also supports its businesses to raise productivity, market themselves competitively and create employment opportunities. These will generate more income for the city allowing it to improve the quality of life for its citizens through improved infrastructure and better services. Competitive cities are hubs for growth and development. Becoming more competitive will contribute to the elimination of poverty and to the promotion of shared prosperity. This can be brought about through effective economic development. But what might this look like?

There is no magic list of actions and some will require national governments to play their part but actions in five broad areas will all make a difference:

1. Developing and maintaining an entrepreneurial support ecosystem,
2. continually improving the business-enabling environment,
3. promoting economic dynamism,
4. developing infrastructure and,
5. improving the quality of life.

At first glance, it may seem odd to include quality of life since it could be argued that this will result from delivering the first four. However, cities with a favourable quality of life are more likely to be a magnet for potential residents and will improve the quality of available labour – meaning businesses that locate in such cities gain greater access to a wider range of skilled people. Cities cannot do all this by themselves. Resolving challenges requires close collaboration not only between public and private sectors but also between cities and higher tiers of government.

Focus on the entrepreneurship and innovation support ecosystem

As long ago as 1954, Peter Drucker was arguing that there are only two entrepreneurial functions, marketing and innovation. New businesses foster competition and economic growth, entrepreneurial activity supports job creation, and small businesses are flexible, innovative and responsive. Economies with a high proportion of smaller and medium-sized businesses are more resilient to external shock and will have a greater likelihood of more businesses growing into large businesses. But we need to encourage businesses to start and support them to grow. Some countries are over-reliant on consumer spending to drive growth – the UK is one of them – but encouraging manufacturing will offer more opportunity for smaller businesses to integrate into multinational global supply chains, spurring further innovation and skills development.

Many of the most innovative, entrepreneurial businesses in the US (certainly the technology ones), emerged from research institutes and large company research labs where bored and stifled researchers and middle managers realised that the only way to ‘do their own thing’ was to resign and find a garage. Fairchild Semiconductor, founded in 1957, spawned 10 new ventures in its first eight years; indeed, most of the 31 semiconductor firms founded in Silicon Valley in the 1960s – including Intel, Advanced Micro Devices and Raytheon – could trace their roots back to Fairchild. Bill Hewlett and Dave Packard started their business in a garage in 1939. Steve Jobs and Steve Wozniak did not even have their own garage: they started Apple Computers in Jobs’ parents’ garage in 1976. So we need more garages – but we also need more opportunities for people to be exposed to high-level technologies and then provide more support to help them launch.

Focus on the technologies of tomorrow

In the absence of firms with advanced technologies and research laboratories, we will have to make more use of university research facilities and do more to encourage collaboration to solve everyday problems. And there needs to be a focus on the industries of tomorrow. These include artificial intelligence, life sciences, battery technology, robotics, advanced automation and internet of things, and hydrogen technology.

Focus on talent development

Working in these industries will need completely different skill sets. We are already discovering that car mechanics need many more skills to service electric vehicles and that plumbers need many more skills to install heat pumps. So we need to do more to give people those skills now but we also need to make it easier for people to engage in lifelong learning. Too often there is an expectation that someone else will make the difference, so more needs to be done to promote personal responsibility and aspiration.

Everyone has different talents and different skills, and personal attributes rarely match closely with local labour demands, so it is also important to make it easy for people to move to where the jobs are, whether domestically or internationally. This means looking in a different light at policies that discourage labour mobility.

Focus on improving the business environment

Generally, making it easier to do business by mitigating the impact of regulation and legislation is not within the gift of cities and instead requires that national governments take the lead. Rather than creating anomalies or derogations in selected enterprise zones or free ports, however, governments would be better served by treating the whole country as one. If it makes sense to ease regulation in one place, surely it makes sense to ease it everywhere. Otherwise, it becomes clear that governments are simply trying to encourage a particular behaviour to achieve specific local ends, and that never works out. This principle can be extended to free trade and the need to minimise the barriers to both import and export, in terms of tariffs, non-tariff barriers and excessive paperwork.

Focus on infrastructure

Developing and maintaining infrastructure is much more costly than any of the other drivers, though no less important: good transport connections; reliable power; adequate health, education and leisure facilities; and suitable premises. These all make cities more attractive as destinations for investment.

Partnership and collaboration

Lastly, too often, local and national governments think that they alone can deliver competitiveness and growth. It is much better to collaborate with those who can really do it – the private sector – through their business associations, and with those providing the skills of tomorrow – the colleges and universities. Indeed, there are many examples around the world where chambers of commerce or other private sector organisations have taken the lead on local economic development. If we all work together, then we can make a significant difference.

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