Friday, June 24, 2011
The Role of Soft Infrastructure in Regional Development
As I had mentioned on a previous entry, I was at a OECD conference last week in Paris. The best presentation I heard last week was given by Mark Drabenstott, former chair of the Territorial Development Policy Committee (TDPC), a committee of the OECD that conducts research on regional economic development.
Dr. Drabenstott, an economist and a former Vice-President of the Federal Reserve Bank of Kansas City, was nominated Secretary General of the Global Coalition for Efficient Logistics (GCEL) a bit more than a year ago. GCEL, based in Geneva, is a non-profit, public-private partnership that brings together leading firms, governments, and non-profit organizations to lower the cost of trade and promote economic development around the world.
In all, GCEL’s global initiative aims at reducing the cost of trade by 30% which would trim the cost of producing goods by as much as 15%. Their Global Logistics System is “an open platform technology that delivers significant new efficiencies to the industries associated with trade—operations, logistics, finance, insurance—all at no cost to end users.” It is what Mark Drabenstott refers to below as Soft Infrastructure.
Here are the highlights of Mark Drabenstott’s speech. These are only my notes, not his actual speech; as usual, in such cases, all errors remain solely mine:
“Policy should be about the real world. Some like to debate for the sake of debating: “Where there is smoke, there is smoke!”
“The effects of many our policies are now relatively benign. We have reached the limit of policy efficiency. Thus, innovation is now the only answer to the current situation.
“Policies are needed because markets don't always get it right as the last financial crisis demonstrates. Markets may lead to over investment. But it can also lead to underinvestment. This is happening because there is no perfect information and markets make mistakes. “When you add all those who suffer from some form of unemployment today, unemployment affects 25 million people in the United States today.
“Yet, regardless of the muscular policies we adopted, these people are not moving: They have roots, families as well as mortgages which are worth less than their houses.
“This problem is not going to be fixed with a one-size fits all policies. It is in the regions where these solutions are going to come from. This is where labour markets clear and this is where innovation is going to be developed.
“There are two critical points in terms of innovation that are converging to make place-based policies even more relevant than ever.
“The first is the globalisation of innovation. You can choose to innovate anywhere. Regions will therefore become more important, not less.
“The second is the rising importance of soft infrastructure to the innovation process. The next century belongs to soft infrastructure. When we see that this soft innovation process is working, it will drive hard infrastructure investment. Soft innovation will emerge first, then hard investment will follow. And, again, as soft innovation can emerge anywhere, regions are increasingly important.
“Implications of these trends convergence are often entirely regional. For instance, Indonesia has a high costs of logistic compared to the U.S. and this impedes its trading potential. However, with soft technological innovation this disadvantage can be eliminated in a very short time. This type of soft infrastructure will allow Indonesia to leap frog other regions in terms economic development. It is for reasons like this that regions will be ever more important.
“Regional economic development is one part art (governance), one part science (ability to identify the problems). However, art often trumps science. Regions are battle grounds for policy makers with often very little results. One of the reasons is that stakeholders are remote from policy makers. These have no skin in the game. There is no alignment of incentives and thus no buy-in from the local stakeholders.
“This offers opportunities. If we perceive regions as the athletes in the global economic Olympics, we should ask ourselves: Who then should be responsible to develop the needed policies and play the role of convener to coordinate these initiatives?
“If there is a role for the central government it is to provide better provisions for the convener to exercise its role; in other words, the role of government is to provide a framework for governance. Governance is the highest form of art.
Place-based (i.e. regional) policies matters because regions is where it all happens.
Innovation is going to be the driver of economic growth, not policies.
Soft infrastructure is rising in importance and will give a more important role to regions.
Globalisation will make regions more important not less.
Governance is the most important tool to make this a reality.