Cities are the places where people that have specialized in different areas congregate, allowing industries to combine their know-how. Rich cities are characterized by a more diverse set of skills that support a more diverse and complex set of industries — and thus provide more job opportunities to the different specialists.
In the process of development, cities, states and countries do not specialize, they diversify. They evolve from supporting a few simple industries to sustaining an increasingly diverse set of more complex industries. Achieving this implies solving important coordination problems, because an industry that is new to a city will not find workers with industry experience or specialized suppliers. However, policymakers can do a lot to solve these coordination problems.
This is why the idea that cities, states or countries should specialize in their current areas of comparative advantage is so dangerous.
Focusing on the limited activities at which they currently excel would merely reduce the variety of capabilities — or “letters” — that they have. The challenge is not to pick a few winners among the existing industries, but rather to facilitate the emergence of more winners by broadening the business ecosystem and enabling it to nurture new activities.
This is all the more important today, because the globalization of value chains is de-localizing supplier-customer relations. Cities and countries would be ill-advised to focus on a few “clusters” and consolidate the value chains in their location, as is so often recommended. Instead, they should worry about being a node in many different value chains, which requires finding other industries that can use their existing capabilities if they were somehow expanded and adjusted to new needs.
Competition inevitably tends to winnow out the less efficient firms and industries. It is not the policymakers’ role to hasten their death. Their task is to identify productivity-enhancing interventions that can harness economies of agglomeration by adding new activities and productive capabilities, making the whole bigger than the sum of the parts.
Ricardo Hausmann is a professor of economics at Harvard University, where he is also director of the Center for International Development.
Copyright: Project Syndicate