Resilience and Local Economic Growth Paths · Resilience – resilire: to resume form and function...

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Resilience and Local Economic Growth Paths

Ron Martin*, Peter Sunley**, Ben Gardiner*** and Peter Tyler****

*Department of Geography, University of Cambridge **School of Geography, University of Southampton

***Department of Geography, University of Cambridge and Cambridge Econometrics

****Department of Land Economy, University of Cambridge

(ESRC Grant: ES/1035811/1)

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First book devoted to the general idea: A Zolli and A Healy (2012) Resilience: Why Things Bounce Back

“a notion whose time has come”

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1. Introduction

  ʻResilienceʼ - new buzzword or key concept? "  Being applied in numerous contexts"  From psychology to environmental science"  Notion increasingly applied to regional and city

economies"  Even becoming a policy objective - ʻbuilding

regional and urban resilienceʼ"  But rush into policy may be premature -

concept lacks clarity and consensus "

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1. Introduction   Why is the concept relevant to local/regional

economies?"  Focus of regional/local economic theory has been

on determinants of (long-run) growth"  But shocks and disturbances equally important: "!“Even now, many economists still think of recessions as a minor issue, their study as a faintly disreputable subject; the trendy work has all been concerned with technological progress and long-run growth. These are fine, important questions, and in the long run they are what really matter - but as Keynes pointed out, in the long run we are all dead” (Paul Krugman, The Return of Depression Economics, 1999)

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What is Regional/Local Economic Resilience?

  Resilience – resilire: to resume form and function elastically following a disturbance"

  Resilience as ʻbounce backʼ to pre-shock state or path – ʻspeed of recoveryʼ"

  Resilience as ʻability to absorbʼ shocks – ʻstability of structure and functionʼ "

  Resilience as ʻrobustnessʼ – capacity to maintain core system performance through ʻadaptability of structure and functionʼ#

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  A possible definition of regional/local resilience:"

"The capacity of a regional or local economy to withstand or recover from market, competitive and environmental shocks, possibly by undergoing adjustments among its firms, workers, institutions and infrastructures, and where those adjustments may be influenced by policy intervention, so that the region or locality is able to maintain or restore the full and productive use of its physical, human and environmental resources and the standard of living/quality of life of its population

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Local Economic Resilience as Process

!

Regional Growth

Path

Depth of Reaction to

Shock

Extent and Nature of

Adjustment to Shock

Post-Shock Regional

Growth Path

Vulnerability and Exposure

to Shocks

Scale, Nature and Duration

of Shock

RESISTANCE ROBUSTNESS RECOVERABILITY VULNERABILITY

Inherent and Inherited • Inherent economic dynamism • Economic openness • Sectoral structure • Export concentration • Competitiveness/productivity • Policy regime

Adaptable • Productivity/efficiency • Sectoral structure • Export orientation • Technology • Labour skills/utilization • Policy regime/priorities

DETERMINANTS OF RESILIENCE

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  Key issues:" What constitutes a shock? Sudden versus ʻslow

burnʼ" What is the regional/local ʻreferenceʼ path against

which resilience is measured?" What determines a regional/local economyʼs

vulnerability and resistance to shocks?  What are the mechanisms that shape recovery?  Recoverability to what?   Impact on, and relationship with, long-run growth

paths"


•  Various approaches to the study of regional/ local economic resilience:

  Case-study based – Eg. Munich (Evans and Karecha, 2013)

  Composite resilience indices - Eg. US cities (Augustine et al, 2013)

  Statistical time series models – Eg. UK regions (Fingleton, Garretsen and Martin, 2012)

  Counterfactual models (what would have happened in absence of shock)

  Structural (explanatory) models 9

Reacting to Economic Shocks: Friedman’s ‘Plucking Model’

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Y*(t) - Maximum feasible growth ceiling Y(t) - Actual growth path S(t) - Shock

!!Y (Output or Employment) !!!!!!!

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Local Differences in Recovery Speeds/Times (d) for Employment: Four LEP Areas, Early-1990s

Recessionary Shock

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Local Differences in Recovery Speeds/Times (d) Employment: Four LEP Areas, Early-1990s

Recessionary Shock

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Resistance and Recovery from Recessionary Shocks, 49 British Local Economies (Three

Shocks, Two Recoveries): Employment

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Resistance and Recovery from Recessionary Shocks, 49 British Local Economics (Three

Shocks, Two Recoveries): Output

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Shocks and Long Run Local Growth

  Shocks may be important influence on local long run growth paths"

  Recoverability – core idea of resilience"  Recovery of what to what? "  Friedman type ʻplucking modelʼ assumes (regional/

local) economy returns (rebounds) to growth ceiling, which is assumed unchanged "

  But severe shocks may well have permanent, not simply transitory, effects - hysteretic shifts to new growth ceilings (regimes)"

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Negative Hysteretic Effects of a Shock

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Growth path lowered but pre-shock growth rate resumed

Both growth path and growth rate lowered

Positive Hysteretic Effect of a Shock

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Growth path raised but pre-shock growth rate resumed

Both growth path and growth rate raised

The Black Country and the Impact of Early-1990s Recession on Employment: A Case

of Hysteresis?

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London and the Impact of Early-1990s Recession on Employment: A Case of

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  Shocks may trigger inter-area flows of capital and labour"

  From less resilient localities to more resilient localitiess"

  Lowering maximum feasible growth ceilings in former, raising them in latter

  Hence differential resilience to shocks across regions may be a cause of long-run local and regional economic divergence

  Locality’s underlying growth dynamics influences its resilience, and resilience affects its long run growth dynamics

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Resistance and Long Run Growth (Resistance to Three Recessions, and Average Growth

1980-2010): Employment

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Recoverability and Long Run Growth (Two Recoveries and Average Growth 1980-2010):

Employment

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R=0.56

Resistance and Long Run Growth (Resistance to Three Recessions, and Average Growth

1980-2010): Output

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Recovery and Long Run Growth (Two Recovery Periods and Average Growth 1980-2010):

Output

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•  Results run counter to what Friedman found for US national economy – deeper the shock, the faster the recovery

•  But consistent with IMF work on nations – that countries that are less resistant to shocks tend to have slower long-run growth rates

•  Factors that make for resilience also make for long-run growth, and vice versa

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The Determinants of Local Economic Resilience

•  Different studies emphasise/assert different influences - egs:

•  Glaeser, 2005 (Boston and other US cities) – puts stress on human capital and inherited and transferable skills

•  Evans and Karecha, 2013 (Munich region) - highlights structural variety, local knowledge base, intelligent economic governance

•  Krugman, 2006 (old industrial regions) – favourable externalities and fundamentals

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Some Determinants of Local Economic Resilience

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Structure •  Diversity •  Specialisation •  Modularity •  Redundancy •  Firm Competences

Externalities •  Knowledge base •  Labour skills •  Business practices •  Intermediaries •  Finance

Fundamentals •  Educational institutions •  Entrepreneurial culture •  Infrastructure •  Public policy regime •  Governance structures

Pyschology •  Expectations •  Perceptions •  Business confidence •  Sentiments •  Attitudes

Local Economic Resilience


• Regional/local economic structure often assumed to be crucial: "“The general contention is that those places with diverse economies are more resilient in socio-economic terms than those with a narrow economic base” (Davies and Tonts, 2009)

• Structural diversity supposedly reduces vulnerability to shocks, enhances robustness (scope and resources for adaptive adjustment)

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• Diversity enhances modularity - degree to which different components of local economy are independent: minimises spread of shock through entire economy

• Structural diversity provides redundancy - degree to which some local structural components (firms or industries) can be lost without impairing functioning of local economy as a whole (so-called ʻrivetʼ problem)"

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• What about economic geographers’ idea of ‘related variety’? – what matters is not (unrelated) variety, but activities with related competences, related inputs

•  Implications for regional resilience are actually ambiguous - as related variety increases so modularity decreases, and resilience declines

• What do empirics say about structure and resilience? •  Can use shift-share procedure to decompose local

resistance to and recovery from shocks, to identify national, structural and ‘locally-specific’ effects

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Contribution of National, Industry-Mix, and Locally-Specific Factors, to Local Resistance to the 1980-1983

Recessionary Shock: Employment

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The Convergence of Local Economic Structures: Krugman’s Dissimilarity Index, Selected LEPs,

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  Locally specific effects seem to be more important than industry structure, but what are these local effects?"

  Initial regression analysis undertaken across 49 areas for the recovery period 1991-2007"  Various explanatory factors: previous recession / recovery

growth, specialisation, accessibility, human capital, market potential, extent of agglomeration, innovative activity, spatial spillover""

  not possible to capture all factors: governance, FDI, innovation systems, access to capital"

  Recessionary period 2008-2009 also analysed"  similar geography and set of variables, plus firm-level data on

birth rate and proportion of small firms (< 50 employees)"35


  Significant factors associated with both resistance and recovery"

36

Recovery Period (1992-2007) Recoverability Index

Recessionary Shock (2008-2009) Resistance Index

Local labour force skill base (+ve) Market potential (+ve) Degree of agglomeration (+ve)

Local labour force skill base (+ve) Growth in previous (recovery) period (-ve) Proportion of small firms (-ve)

Some (Tentative) Conclusions

  Local economic resilience is a complex process#  Also recursive – both shaped by and in turn

shapes long-run dynamics of local growth"  More work needed to understand determinants"  Need to understand micro-level adjustment

mechanisms of local resilience "  Promoting resilience about forging local dynamic

competitiveness and adaptive growth"  ʻBuilding resilienceʼ not a one-off challenge, but

an ongoing task – continuously moving target"37

Resilience and Local Economic Growth Paths · Resilience – resilire: to resume form and function...

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