Most Roads Lead to Rome, But Some Roads Lead to Lab City: Spatially Differentiated Paths to Economic Growth Synergy Session Presentation Memorial University, March 16, 2017 David Freshwater, University of Kentucky

What Leads to Regional Growth? Economists since Adam Smith have tried to determine the causes of national growth – what determines The Wealth of Nations? Simplest answer is increases in population and increases in productivity, but this leads to the question of, why does productivity grow? Currently the focus is on endogenous growth models, where growth is driven by technological change that is brought about by investments in research and development. But while science based innovation is clearly important, how do we explain growth prior to the late 19th century, when science became relevant as a source of innovation, and how do we explain current innovations that come from other approaches?

Modern Growth Models Generally try to explain economic growth as a closed system – investments in formal R&D lead to innovations that increase productivity by more than the cost of the total R&D effort. Induced innovations provide an engine of growth that no longer has to accept technological changes as serendipity. Models, such as those in Aghion and Howitt, are elegant and offer a tidy resolution to the question of how national growth occurs. But, the assumptions underlying these models are strong and not commonly met in reality. Moreover, the models can usually only deal with one driver of growth at a time if they are to have a solution. Specific drivers of growth in Aghion and Howitt include – induced innovation, strong financial markets, increased trade, stages of growth, progressive institutions.

Regional Growth Regions are smaller than nations and all regions within a nation face identical macroeconomic conditions. This means that differences in regional growth cannot come from macroeconomics. In the OECD in almost all countries there is a greater variability in internal regional growth rates than there is across the OECD countries. This raises the question of what, other than macroeconomic variables, influence growth? However, most regional growth literature simply takes standard national growth models and uses them to explain growth.

Smart Specialization and Regional Growth Current popular approach to increasing regional growth is the adoption of a “smart specialization strategy”. Too often this is defined in terms of science based sectors and large investments in formal R&D that generate patents– computer technologies, bio-technology, pharmaceuticals, social media, financial intermediation. Essentially an urban focused growth agenda that relies on universities, government research canters and corporate headquarters to lead the strategy. All good, but only part of the story.

Most Growing Regions are Urban, but not all Long body of OECD analysis going back to 1994 showing that some rural regions grow faster than most urban regions. 2016 Regional Outlook shows that of the 50 fastest growing TL2 regions in terms of productivity growth (GDP per worker) between 2000-2013, about half were rural with no large urban place (> 250,000)

Dilemma – accepted growth model assumes growth can only originate in urban regions – need a broader approach. Step back from formal models of growth and look for broad concept “drivers of growth” – forces that can facilitate a growing economy. Inspiration comes from Joel Mokyr, an economic historian, who looks at causes of national economic growth from the Industrial Revolution to present. Mokyr’s four main drivers: Innovation (Schumpeter) main long term factor – new products, new technologies Trade (Smith) greater trade allows labor specialization and the chance to capture scale economies in production Capital deepening (Solow) investing in better machinery increases labor productivity and improves efficiency. Better institutions (North) a sound social, legal and political framework can help or hinder growth by affecting economic opportunities

But we are interested in regional growth, and in the differences between urban and rural growth mechanisms. Three additional drivers at the region level: Initial endowment (Weber) regions have specific amounts of: natural resources, particular climates, and inherent transport conditions that influence their opportunities and constraints. Agglomeration effects (Marshall) firms in the same industry can benefit from co- locating – specialized labor, specialized suppliers, opportunities to learn from peers. Urbanization effects (Jacobs) large cities provide amenities that cannot be obtained in smaller places (broader choices, cultural benefits, better transport connections etc.). These seven factors in different combinations can provide a way to understand why and how some regions grow while others do not.

Differences between Urban and Rural Economies

How the 7 Forces Impact Urban & Rural Regions -1

How the 7 Forces Impact Urban & Rural Regions -2

Policy Connections - 1

Policy Connections - 2