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The Regional Divide and the Future of Small Towns

Paul Collits

Manager Regional Policy, New South Wales Department of State and Regional Development
Adjunct Senior Lecturer, Faculty of the Built Environment, University of New South Wales

Presentation to the "From Strength to Strength" Regional Development Conference, Timaru, New Zealand, September 2003

> >Speech Notes

Background Paper

What is happening in the world cannot but affect small towns. Change has inevitable and diverse spatial consequences. While the changes are largely the result of the actions of individuals, households and firms, communities often simply have to accept that significant contributors to their fate will come from outside.

Economic, demographic, social and cultural changes of massive proportions are occurring and regions are caught up in the cataclysm. What is driving the changes that are occurring in regions and communities?

New discourses reflect new trends in society. There are a number of emergent social and economic trends, including the following, that have also provided Florida and others with fertile ground for exploring the fundamental spatial changes that have been occurring in the new economy. These include, but are not confined to:

• Outsourcing - firms are increasingly downsizing and leaving to others things that were once regarded as their own core business;
• The new economy has brought a new style of working and new labour relations, typified by the casual dress codes of the dot-com era;
• Business is done in the coffee shop as well as the office in what Macken has called "outsourcing the daily grind";
• Careers are increasingly horizontal, with greater job mobility and movement between sectors;
• Instant response communications have revolutionised the workplace, ushering in the time driven economy. This has increased the pace or work, and reduced traditional barriers between office and home - work is more exciting, if never ending, for members of the creative class;
• People are living longer;
• There is increasing tolerance of alternate lifestyles and cultures;
• The middle classes have dramatically increased their wealth, especially in metropolitan locations, often on the back of real estate investments, freeing up people to relocate, retire early, and/or move to part-time work;
• People are marrying later if at all, leading to what The Economist has termed the "Bridget Jones economy". This has had profound social consequences, for example in the context of debates over the ageing of the population and fertility issues, as well as in relation to housing issue, but it has also had consequences for the space economy.

Hence business has changed, individuals have changed their career paths, social relationships have changed, and these all have their own spatial consequences. And under the new regime, it is knowledge workers that are the standard bearers of the new economy.

The trends affecting regions are economic, social and, importantly, cultural.

The big change has been the fallout from increased national and global competition. Outsourcing and downsizing means increased uncertainty about jobs and careers, less commitment between firms and individuals, and consequently greater career shifting. Individuals wanting to play it safe are more likely to locate in thick labour markets with multiple job opportunities.

Social change is critical and under-noticed in relation to small town survival. Some critical changes that have occurred include the increased value placed by society on education. One of the great changes in Australia in the last twenty years has been the growth in importance of education. This has occurred at a number of levels.

Some figures will help make the point. In 1980, the high school completion rate in Australia was 35%. Now it is 73%. This is an astonishing increase by any measure. In relation to numbers enrolled in higher education, the number nationally in Australia in 1980 was 324 000. In 2003 the figure is 828 000. And this has occurred in spite of dramatic increases in the cost to individuals of higher education.

Other developments make the point equally well. They include:

• the annual, almost manic media focus on the Higher School Certificate in New South Wales;
• the willingness of parents to move house (with its attendant high transaction costs) in order to qualify residentially for attendance by their children at better state schools;
• the massive growth in numbers of students in Year Six sitting for selective high school;
• the employment of subject coaches during secondary school and even primary school;
• the growth in selective schools;
• the huge growth in numbers of students at private schools;
• the growth in regional universities and campuses; and
• the growth in postgraduate study.

Arguably, all this has had a profound impact on economic geography. It means that regions that do not offer strong educational opportunities will lose people who feel they need them. And the numbers in this class is growing daily.

A recent study by Burnley and Murphy of internal migration in Australia found that around 85% of Year Eleven students in Coffs Harbour were intending to leave their region after finishing school. Apart from showing that regional out-migration by youth is not just an inland or a small town phenomenon, and that having a university campus does not, of itself, guarantee retaining young people in the region, these figures underline the importance of the knowledge economy and of education. The latter point is consistent with Florida's emphasis on talent in the new economy and its link to economic success, Reich's notion of "symbolic analysts" driving the new economy, and the Welsh Development Agency's conclusion that quality research universities are critical to regional performance.

The increased importance of education is reinforced by the growing realisation by people that they will change jobs, even careers, several times in their lives. Such a realisation leads to lifelong learning and the need have access to educational facilities.

The psychologist Abraham Maslow talked of a hierarchy of human needs. Smaller places, especially, those without amenity, may be suffering as people move up the hierarchy, beyond meeting basic needs of sustenance towards self-actualisation.

In terms of cultural change, Bernard Salt has argued in his book, The Big Shift, that the third great wave in Australia, after the bush and the suburbs, has been the beach. Australians have always clung to the coast, despite the image of the stockman and the sheep dog. Many people live for the buzz of inner city life, drawn by its cultural appeal and its lifestyle. They do their business in the coffee shop and value the "F2F" (face to face) networks of the global city.

All of these changes seem to favour places with scale and with global connectivity. Working together, they threaten the viability of small, insular, mono-culture, static, unattractive unchanging communities. Migration has increased, transforming countries like Australia's into multicultural societies. Places like Sydney are genuinely global in this sense.

Counter-urbanisation has occurred on a grand scale, with sea changing and down shifting and lone eagles and now investors going bush, the winners have largely been places close to the cities, places on the coast, and larger inland centres.

Summary of Key Trends

Small towns have been buffeted by change, both at the local level and by broader movements in society and the economy. Government policy shifts have reinforced the trends. There has been a regionalisation of economic development and services, reinforced by better transport and communications. Bigger towns have done better. People have been voting with their feet for better access to education, jobs and lifestyle. Many people expect more from their lives and value the face to face buzz of the city. Outsourcing has strengthened the services sector which thrives on big markets. Agglomeration economies have been enhanced by globalisation.

Much of the discussion about regional development understandably concerns the reasons why some regions grow while others decline, or, at best, grow slowly. If regions and governments knew what drove success, they would do things that would encourage the success factors, and would avoid doing things that would inhibit success factors - other things being equal. There are at least three sources of wisdom about the drivers of regional success - traditional theories of regional development; recent additions to the literature; and the regional practitioners and others writing about their experiences in local economic development.

Traditional Theories of Regional Development

There is a rich literature relating to theories of the "where" of regional development.

Regional economic theory attempts to explain differences in regional growth rates, the causes of decline and the nature of the settlement pattern, and therefore sheds some light on the ongoing economic difficulties of small towns. Theories help explain the limitations on growth in regions and the structure of industries in regions.

Location theory explains why businesses choose to locate in certain areas.   These theories focus on least cost models, market area models and profit maximising models. A wide range of factors determines business location decisions, including access to raw materials, labour, skills, support services and markets. Traditionally, transport costs have been important for some industry sectors. Locations seek to attract businesses for obvious reasons - they create direct jobs, as well as two kinds of indirect jobs ("multipliers"). These are jobs created by the existence of suppliers and service industries, and jobs created by the consumption needs of employees.

Agglomeration economies drive businesses to locate in proximity to one another, and the benefits of agglomeration economies are generally felt most in larger cities. Agglomeration economies help explain the growth of larger centres. Businesses receive both internal cost benefits and shared benefits by proximity to other firms.

The theory of growth poles holds that economic development is "lumpy", or occurs unevenly across space. There are positive benefits of growth to regions surrounding growth "nodes" (so-called "spread" effects) as well as negative effects (so-called "backwash" effects). It is the latter that characterise the phenomenon now known as "sponge cities", where growth is sucked away from smaller centres by the growth of larger centres.

Central place theory holds that the growth of a region or town relates to the demand for goods and services of its hinterland. Growth is therefore a function of size and income levels within the region. Generally the theory sees a hierarchy of "central places", from villages to cities, each providing for different consumer needs. Central place theory is useful in explaining the size and spacing of settlements in a region.

Different levels of growth can be explained both by "supply side" factors and "demand side" factors. Supply side theories focus on the factor endowments of regions - their competitive advantages - while demand side theories seek an explanation of growth by analysing a region's "economic base" or export base. Basic industries are those which provide income to the region from outside, and hence are key industries for regional growth.

Some theorists have talked about virtuous cycles of growth (and vicious cycles of decline). This has been termed "cumulative causation", and explains why some locations suffer persistent decline while others continue to grow. Whatever the original drivers of growth in a region, growth will continue to occur in the "centre", often at the expense of the "periphery". This has been the case with many small towns, where out-migration has led to the loss of services and the closure of businesses, which in turn has led to further out-migration and a much more difficult development task for communities.

One of the contemporary theories that seeks to explain the ongoing difficulties of smaller towns has been referred to above by Powell as the new economic geography. This theory links the centralising effects of traditional agglomeration economies with the cost of transport in an explanation of the apparently increasing concentration of economic activity into larger cities.

The above theories help explain how regional growth occurs and why some regions are more successful than others. Agglomeration economies result in lumpy economic growth across the space economy. Growth occurs around nodes. Business is attracted to larger market areas.

However, there is no single, unifying theory that explains regional development. This makes it extraordinarily difficult for governments, for communities, for economic development professionals and for those interested in evaluation.

Recent Thinking

In the 1980s and 1990s, thinking about what drives regional growth has taken a number of new and interesting directions. There has also been a renewed recognition of traditional growth drivers.

A number of more recent theories of regional growth have added considerably to the earlier work. New growth theories, including those of Paul Romer, suggest that growth is driven by knowledge. The "new regionalism' of Cook, Morgan and others builds on the knowledge theory. These (mainly European) writers argue that regional growth is driven by dense networks of informal or "tacit" knowledge.

Coming from another angle, a number of writers, drawing on Robert Putnam (2001) have advanced the notion that social capital helps drive regional development. The places that do best will be those that have social cohesion. Many government programs, of course, set out to build community capacity, and in the process end up effecting the building of social capital.

Michael Porter, Michael Enright and a clutch of other writers, building on 1950s growth pole concepts, have fashioned an ostensibly new theory of clusters. Here the argument is that regional growth is built on the co-location of competitive and collaborative firms in high growth industry sectors.

Doug Henton has identified collaborative leadership as the key to regional success. In an appealing yet very simple explanation of regional development, Henton et al argue that the places doing best in the United States are those where the stakeholders work together.

More recently still, a number of writers, most prominently Richard Florida, suggest that economic development success is a function of human capital, specifically "creative capital". Florida argues that economic development success is a function of the coincidence of what he terms the "three Ts" of development - technology, talent and tolerance. He suggests that regions should develop a good "people climate" rather than just a good business climate in order to attract the creative people that are increasingly powering the new economy.

Many of these theories provide powerful explanations for regional growth, and they ring true of regional circumstances in New South Wales. For example, Sydney's dominance reflects both cumulative causation and core-periphery explanations of concentration. Growth poles explain the fact that generally it is larger regional towns which are achieving higher growth. Florida's thesis about creative capital fits global Sydney like a glove. Putnam's social capital theory explains how some regional communities have built a positive future without massive growth, by focusing on community pride. Clusters theory is followed in a number of regional development strategies.

Yet, together, where do the theories leave us, and what do practitioners tell us about regional growth?

Recent Government Reports in Australia

The Commonwealth established the Regional Business Development Analysis (RBDA) as part of its Stronger Regions, A Stronger Australia package in August 2001. The purpose of the RBDA was to have an independent panel investigate impediments to regional business development in regional Australia and present options to the Commonwealth.

The Panel chaired by businessman John Keniry received 197 submissions and visited 50 regional centres. The Panel's terms of reference required any recommendations to be revenue neutral. The Panel's findings were in 4 areas - investment attraction and access to finance; dealing with government; attracting skilled people to regions; and infrastructure.

Noteworthy recommendations include:

• The establishment of a Taskforce to investigate single regional structures for planning and to deliver services;
• The leveraging of Commonwealth funding to achieve a consolidation of existing regional bodies;
• The encouragement of regional benchmarking;
• The establishment of an advisory group (to the Council of Australian Governments) to prioritise national regional infrastructure needs;
• The development of a regional infrastructure bond market;
• The creation of a small business financing program, including a revolving loan fund in certain regions and a pilot business angels investment program;
• Investigation of incentives for individuals over and above the First Home Owners Scheme;
• Linking the various regional leadership programs, including young people.

Overall, the Action Plan does not advocate a big spending approach. In this it implicitly endorses the NSW Government's approach. For example, the Action Plan rejects enterprise zones and the forced investment of superannuation funds in regional areas. The Action Plan presents a realistic view of regional Australia, with its strengths and weaknesses. It also rejects the negativism that sometimes occurs among regional leaders and communities who often talk about the decline of regional Australia. This is counter-productive to the investment attraction efforts of governments and regional development practitioners. The Action Plan also recognises the importance of successful regional businesses for regional well being, and the critical importance of growing existing regional small businesses. As in many other similar reports, the importance of partnerships is stressed.

The Commonwealth Government also recently released a review of the effectiveness of government interventions in regional development, in the Bureau of Transport and Regional Economics (BTRE) Working Paper 55, Government Interventions in Support of Regional Development: Learning from Experience.

The report points out some of the realities of regional policy, its limitations and the inherent difficulties in determining definitive drivers of regional growth and evaluating the impacts of policy. It examines policy approaches in overseas countries and theories of regional development. Its findings in relation to overseas practice are broadly consistent with the findings of other recent reports.

The report also traces the evolution of interventions in Australia up to the recent focus on region-specific approaches, sustainable development and endogenous or "bottom up" growth strategies. The main role of government should be to provide infrastructure and sound economic "fundamentals" and removing institutional impediments (better regional governance). Business is rightly recognised as the key driver of regional growth, though the importance of "social capital" is also emphasised, consistent with much of the emerging literature on regional development. A long term commitment to building competitive advantage is emphasised.

The report contains much that supports current approaches in Australia. The report also suggests possible areas of increased program emphasis, for example networks and industry clusters, and increased attention to knowledge as a driver of economic development.

Overseas Studies

The Welsh Development Agency (WDA) recently published a report, Competing With the World, which studied some of world's most successful regions in order to see what was behind their success.

The findings are instructive. The regions that have done best had a series of "fundamentals". They had a strategic or central location. They had well-developed transport and telecommunications infrastructure. They had innovative businesses. They had an entrepreneurial culture. They had a small number of "driver" industry clusters. They had a polycentric urban structure. They had long-established industries. Businesses in the region recognised the need for productivity and competitive advantage. They had strong Small and Medium Enterprise support systems. They had a highly skilled workforce and world class educational institutions. They had a high quality of life. They had a strong self-image and local pride. Networking within the region was highly developed. They had international networks. They had high quality analysis of their situation. And they locally appropriate levels of autonomy and leadership.

These are the attributes to which Australian regions must aspire, with the strategic support of government. Lessons include the following:

• The overriding objective should be to create regional competitive advantage;
• The role of connections between business and higher education in regeneration is critical;
• Entrepreneurship must be supported;
• Cluster development is important;
• Rigorous analysis must precede strategy development;
• The SME sector is the main source of economic vigour.

The findings of the WDA report are consistent with recent thinking in regional development about the knowledge driven, networked economy and the importance of creative capital, an idea recently popularised by the American researcher Richard Florida. As indicated above, Florida has argued persuasively that regions should have a good "people climate" as well as a favourable business climate, that they should try to attract and nurture creative talent as well as high technology sectors and that they should develop a tolerant attitude to diversity in the community.

Work by the Organisation for Economic Cooperation and Development (OECD)

The OECD published a paper in 1999 that coincided with the Regional Australia Summit in Canberra. The paper reported that in recent years most OECD member countries had abandoned earlier, big-spending approaches designed to boost the economic fortunes of lagging regions, in favour of more bottom up approaches.

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