In contrast with clustering in traditional manufacturing industries, that in advanced manufacturing and services tends to prefer capital cities and others with attractive and convenient environments. The cumulative effect of this is to privilege a relatively small number of cities and regions in a restricted number of parts of Europe.
Important forces are driving differences between cities, regions, whole countries and eventually entire parts of Europe, making forever bigger contrasts between the north-western core and southern and eastern peripheries. One of the pressures behind this macro-level trend is a very micro-level factor: firms in many branches of the economy find advantages in clustering, in locating themselves geographically near to others in the same or related fields. In contrast with clustering in traditional manufacturing industries, that in advanced manufacturing and services tends to prefer capital cities and others with attractive and convenient environments. The cumulative effect of this is to privilege a relatively small number of cities and regions in a restricted number of parts of Europe. Market forces reinforce the trend, and government policy, understandably seeking to reinforce national ‘winners’, follows suit. Only highly imaginative, large-scale public policy actions at European Union (EU) and national levels stand a chance of reversing it.
Clustering is well known to economic geographers, most obviously proximity to natural resources as in the case of the early steel industry needing to be located near reserves of iron ore for its raw materials as well as coal for its high energy demands. This explains the existence of regions like the Ruhr. The availability of reserves of skilled labor, drawn to an area because of the presence of some firms in a particular industry, will also serve as a magnet for other firms. One example is the film business, which tends to locate in a small number of famous places; another is the specialized investment activities of the financial sector, whose firms crowd together in high-rise buildings in specialized districts in a small number of cities. Particularly important for branches with high rates of innovation throughout the economy are flows of tacit knowledge: exchanges of information and ideas that happen spontaneously and beyond the reach of intellectual copyright law when people from various firms working on similar issues meet each other informally and socially.
The region around San Francisco continues to be the core global hub for innovative information technology firms, despite a heavily overcrowded and deteriorating infrastructure and high land costs.
Wealthier Areas will Attract More Quality
It had once been thought that, because many services activities lacked strong locational requirements, they would be spread more evenly across territories than those branches of manufacturing and mining that have very clear physical geography needs. This was expected to be especially true for high-technology activities, which could locate themselves more or less anywhere and had low space requirements in relation to their added value. The reality has turned out to be very different. True, services that are delivered person-to-person and without payment at the point of delivery tend to be distributed according to population density. This is the case for many public services; schools, hospitals, care services, and police will tend to follow a straightforward population density pattern. Marketed personal services, such as restaurants, shops, hairdressers, and local transport serve local populations and will be partly determined by local demography, but also by the wealth of the local population. Wealthier areas will attract more and better quality of these services, exacerbating existing inequalities even as they create employment.
Particularly important, however, are those high value-added services branches, which do not have a particular need for local markets, have few logistical constraints, and can choose where they go. This does not lead them to spread evenly across a territory, but to prefer high-quality locations, especially if they are primarily employing people with special skills, who need to be attracted. Capital cities, with their excellent transport connections, cultural amenities and access to government personnel, are especially favored, as are other culturally rich or beautifully appointed cities. These branches are strong examples of firms’ need to cluster to take advantage of the informal knowledge exchanges that characterize innovation and creativity.
The Differential Location of Sectors and Income
Economists argue that clustering eventually creates problems of land costs and overcrowded transport networks, bringing diminishing returns to the cluster and leading firms to relocate to new places. From their perspective, extreme clustering is a short-term issue. This may well have been the case for some manufacturing sectors, whose typically large space needs make them sensitive to the increases in land prices that accompany concentration. However, firms in most services branches have low space to earnings ratios and therefore low land-cost elasticities. They are also particularly dependent on the tacit knowledge that flows around clusters, making them highly resistant to incentives to relocate. The region around San Francisco continues to be the core global hub for innovative information technology firms, despite a heavily overcrowded and deteriorating infrastructure and high land costs. Those services that are truly footloose are usually lower value-added activities, sensitive to local costs and not needing to attract scarce staff. It is these that are more likely to move to poorer, unattractive cities. Examples are warehousing (though with a larger space need), back offices engaged in routine tasks, and call centers.
As this last point shows, there is often a relationship between the differential location of sectors and income. A location multiplier is at work, which becomes an inequality multiplier. Cities and regions that already possess advantages will attract the most activities with interesting future prospects and high-earning personnel. These, in turn, spend part of their income on local services of various kinds, creating more local wealth. Local government benefits from property taxes on the services firms, which enables it to maintain and enhance the attractiveness of the city. This attracts more firms seeking pleasant locations. A high proportion of the persons working in these services being highly educated, they are likely to produce children who also acquire a high level of education, boosting the quality of the local labour market and thereby attracting more firms needing highly educated workers. The opposite spiral affects cities that lack the amenities that attract high value-added activities. Young people, and especially well-educated ones, leave the region altogether. Often the local economy stagnates; or it might, as in Germany, remain a strong industrial one, but with anxieties about a future in which manufacturing will become ever less important.
The importance of strictly local exchanges of ideas is today moderated today by the communications opportunities of the Internet. Colleagues can work with each other across the world as rapidly as with someone in the next room. However, this is unlikely to cover the implicit exchanges of tacit knowledge. A totally isolated firm or research unit can connect itself to the Internet for exchanges, but that is all they will have. Firms located in geographical clusters can enjoy the same Internet exchanges, plus the tacit knowledge of geographical propinquity. Marginal cutting edges of this kind are particularly important for firms and workers in sectors in the throes of rapid innovation, where the development of ideas is particularly important to competitive advantage.
Clustering and the Formation of Peripheries
The innovative sectors of the post-industrial economy are therefore creating new patterns of centrality and peripherality. This is happening within individual countries, as former mining and manufacturing cities fail to attract innovative services activities, and, once at the center of industrial economies, form a new periphery. Similar processes are at work across Europe as a whole, with entire countries playing the roles of cities and regions within nation-states.
Interesting evidence relevant to this hypothesis comes from the EU’s 2015 list of the cities and other geographical clusters that it regards as having the most advanced information and communications technology hubs among its (then) member states. ICT can be regarded as an indicator of territorial economies with advanced skills in a growing, future-oriented branch. To qualify for the list, cities also had to be connected and networked with similar places around the world. These are not, therefore, cities that are particularly dependent on face-to-face networking. Nevertheless, they show distinct geographical patterns.
The importance of strictly local exchanges of ideas is moderated today by the communications opportunities of the Internet. Colleagues can work with each other across the world as rapidly as with someone in the next room.
The EU lists the 34 cities and districts scoring more than 40% in the EU’s ICT Hub measures. Twelve of these are located in Germany, seven in the UK, three in France. All but two of the rest (Madrid and Milan) are located in north-west Europe. Two of the German cases (Berlin and Dresden) are in former East Germany. Otherwise, there are none in the former state-socialist bloc—and Berlin is a special case. It is interesting to note that, while the German cases are distributed widely across the country (although mainly in the west), all but one of the British cases are within, or in easy travel reach of, London. The exception is Edinburgh, the capital of Scotland. All three French cases are within or in very easy travel distance from Paris. Nearly all cases in smaller countries were in capital cities, or (Uusimaa, near Helsinki) near them, although there were also Brabant and Louvain in Belgium and Delft in the Netherlands. The capital city regions of all western European member states figure in the list, except for the south-western cases of Athens, Lisbon and Rome (although Italy is represented by Milan). The ambiguous Berlin is the only Central European capital in the list.
The Austerity Policies Imposed are Reinforcing the Gap
The ICT sector is by no means the only sector of interest to the advanced European economy; others may have different patterns. It does, however, serve as an important indicator of a growing core/periphery separation. The superior incomes and wealth of north-western over eastern and Central Europe are of course of very long-standing. What is notable is how an advanced new sector like ICT follows and therefore reinforces those earlier patterns; its novelty does not challenge them and provides opportunities for new places.
Similar though their situations seem, the European south-west and central-east are on different trajectories from each other. The countries of the south-west (Greece, Italy, Portugal, Spain) used to find their role as suppliers of low-cost goods, especially white goods, clothing, textiles, and fresh food to the wealthier countries of the north-west. To be a low-cost producer is a peripheral role, but in these cases it was a stable one. There were also exceptions to it, such as high-quality machine tools and fashion goods from central Italy, motor vehicles from north-west Italy and parts of Spain.
These high-quality sectors survive, but (apart from fresh food) the low-cost role has been lost as, within Europe, the countries of the center and east, and more globally the Far East, have taken it. The austerity policies imposed on the south-western European countries following the financial crisis of 2007-8 and consequent Euro crisis are today reinforcing the gap between them and the north-west, but did not create it. It was there already in the failure of these countries to adapt to the loss of their low-cost role following the arrival of the new entrants. That failure was as much a cause of the southern debt crisis as the other way round.
The collapse of communism opened a new way for the post-1989 political elites and the media to de-historicize and distort such fundamental concepts of democracy as liberalism, feminism, socialism and human rights.
Public Investments Could Reverse the Contrasts
The situation in Central and Eastern Europe is more varied, which is not surprising, as this is a larger and more diverse region. Some countries— mainly the Czech and Slovak Republics, and Slovenia—have become the important new center sees of manufacturing in Europe, even if they are peripheral to branches like the new ICT economy. These countries have higher proportions of working in manufacturing and related sectors than elsewhere in Europe. Hungary had been part of this group, but has dropped behind in recent years. The same is not so true for the rest of Central Europe or of ex-Yugoslavia, which seem to be fully peripheral.
Deep historical patterns therefore lie behind center-periphery differences in Europe. Areas that were once fundamental to industrial Europe, such as the manufacturing cities of the British north and midlands, leave the center and go to the periphery, but other historically central cities, like capitals, rather than entirely new places, are forming the new core of post-industrial Europe. Without major public intervention to establish infrastructure and generally desirable characteristics in new regions, it is difficult to see how this will be reversed.
ICT can be regarded as an indicator of territorial economies with advanced skills in a growing, future-oriented branch.
The example of California is often cited as an instance of how a large region became home to the new and highly profitable information technology industry. But California already had a long history of being a desirable location for many activities, attributable partly to its natural environment, but also to massive investments by the federal government, dating back originally to the early twentieth century, when the state of California was economically backward. The original investments were in armaments, aircraft and other military business, moving on later to those in the infant computer industry.
It is likely that only major public investments by the EU and by individual governments could reverse the slide to extreme centre-periphery contrasts across Europe. Such investments already exist; the EU’s contribution to improving infrastructure in the south and east of the Union has been extraordinary and has brought major positive results. The problem is that the market is working all the time to undermine any rebalancing and exaggerate existing patterns. Also, the public policy itself to some extent has to echo what the market does. If a new high-value-added sector develops, promising increased wealth, governments have to respond to its needs for various public provisions. But every time they do so, they reinforce the advantages of those cities and regions against those of others, whose lack of comparable facilities prevents them from being the sites of similar developments, and keeps them in the periphery. This is not an easy dilemma to resolve.
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