Economic Policy Program

August 2012

Summary: Given the well-documented rise of the emerging worlds superior growth to the Western average, policymakers and business leaders in the transatlantic community should be doing all they can to learn from the exceptional regions in their midst. The only four metro areas in the MetroMonitor top 40 are characterized by a combination of fast-growing new businesses, population growth, and high levels of patented innovation and knowledge sectors. The larger question for Western countries is how to fashion policy to encourage more of the kind of growth we see in Dallas, Houston, Stockholm, and Stuttgart.

Geography of Opportunity
by Ryan Streeter Why have some regions in the United States and Europe grown during the crisis while others have lagged? And why does it matter to policymakers and business leaders?
Introduction It is common knowledge that Western nations lag the economic growth rates of emerging countries, and that the economic crisis made this trend worse as North America and Europe suffered the starkest economic effects. The crisis exposed systemic flaws in the financial sector as well as consumer credit, housing markets, education, and sub-national governments such as U.S. states. Policymakers and the media have understandably focused on macro-level policy responses to address these and other challenges. There is widespread agreement that public policies played a role in creating the conditions of the crisis, even if there is frequent disagreement about which policies were the most significant. Another topic has received virtually no attention, although it is arguably just as important for policymakers and the media to understand. In Western countries, regions exist, albeit only a small number, that perform more like emerging countries than Western ones. These regions grow at rates well above their national average. Why do some places within a common policy environment outperform their peers so significantly? But they are more than a curiosity, they are a window for policymakers and thought leaders into the kinds of conditions that might be essential to reinvigorating Western economies more generally. Most of the discussion post-crisis has been at the macro level, such as the macroeconomic effects of tax policy, regulatory harmonization, and monetary policy. There is also a role of microeconomic analysis as well, especially when it is rooted in the geographic regions that contain lessons for their less-fortunate, and more numerous, neighbors. We might call these successful regions geographies of opportunity. They embody the aspirational tendencies of high-growth cities in the Europe and the United States of yesterday or the Asia, Africa, and South America of today. They are characterized by the higher-than-average per capita GDP and income growth we typically associate with places where investors look for opportunity, where entrepreneurs

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start businesses, and where people move to increase their hopes of upward mobility. Good indicators of aspirational cities and regions are population growth (especially among young people), income and job growth, new enterprises and commercialized innovation, and the whole cluster of quality of life measures such as a favorable cost of living and good educational options. Policymakers, thought-shapers, and business leaders in the transatlantic community can learn a lot by taking a careful look at the geographies of opportunity within Western countries. The Elite Club: Dallas, Houston, Stockholm, and Stuttgart At first glance, Dallas, Houston, Stockholm, and Stuttgart might seem like an odd grouping, but they have one thing in common: they are the only four Western cities in the Brookings Global MetroMonitors list of the 40 strongest metro economies worldwide.1 Given that 95 percent of the slowest growing largest metro economies in the world are in North America and Europe, the fact that these four Western cities are in the top fifth is noteworthy. The Brookings ranking is a different, and probably more important, way of comparing cities than the more common indexes of wealth, influence, quality of life, and economic activity, such Knight-Frank Global Cities Index.2 Such indexes tend to favor larger, more western cities because of the quality of life and influence measures that are used (though fewer western cities rank in the top ten on economic activity each year). The Brookings study rather looks at a few straightforward metrics united by one common concern growth. When we look at income and employment growth, as the MetroMonitor does, we get a good sense of the trajectory of an economy. Its no surprise that the fastest growth is occurring in Asia, Latin and South America, and Africa. What is surprising is that two U.S. and two European cities made it in the top 40. It raises the obvious question: what is going on in those four places such that they are outpacing the
1 Emilia Istrate, Alan Berube, and Cary Anne Nadeau, Global MetroMonitor 2011, Brookings Institution (December 2011), p. 11. http://www.brookings.edu/metro/MetroMonitor. aspx 2 Tales of the Cities: Results of the Knight Frank Global Cities Survey, The Wealth Report 2011: http://www.knightfrank.com/wealthreport/2011/global-cities-survey/

average growth rats of their own countries and the regions around them? These four cities have other things in common besides ranking high in the MetroMonitor list. In fact, it is in virtue of the fact that they share some important characteristics that they are likely to have made it into the top tier of Brookings list. The MetroMonitor notes that these four Western cities turned in a solid showing due to their expansion in high value commodities, manufacturing, and financial services. But the sources of these cities performance go deeper than this, as we shall see. Two key pillars of any aspirational region worth its weight are dynamism in its economy and growth in its population. Economic dynamism can take several forms. One is entrepreneurial activity understood as startups or new enterprises. Another is the ability to commercialize and expand innovation (innovation for its own sake is not dynamism). Yet another is an above-average growth rate in jobs in growing sectors of the economy. An above-average percentage of children in a growing economy is typically a good indicator. Population growth can happen through high birth rates, positive immigration, or both.

Two key pillars of any aspirational region worth its weight are dynamism in its economy and growth in its population.
Energetic, Disruptive Economies Why do Houston, Dallas, Stockholm, and Stuttgart perform so well? The answer, first, lies in their ability to break through the average performance of others within their environs when it comes to enterprising activity. They represent energetic activity amidst seas of relative economic lethargy. They are disruptive not necessarily in the creative destruction sense commonly deployed by libertarians but in the sense that they find new ways of creating income,

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jobs, and growth in a way that makes them more attractive than their neighboring cities and regions. Stockholm and Stuttgart: The Power of Patents and Knowledge Take Stuttgart, for example. When it comes to income growth, the capital of Baden-Wrttembergs economic life is in eighth place among cities globally that outpace their national average, according to the MetroMonitors analysis. Stuttgarts 5.1 percent income growth exceeds the national rate of growth by 2 percentage points, which is significant for a European city. According to Eurostat, Stuttgart has one of the best economic activity rates among large German cities.3 So what sets Stuttgart apart? Its rebound in manufacturing is well-known. What is less well-known is the citys research and development (R&D) investment compared to the rest of Germany (and Europe for that matter). In the years leading up to the 2008 economic meltdown (2003-2007), Stuttgart was the only German city/region other than Dresden to increase its R&D investment, raising it by 25 percent. In 2003, it was already outspending every region in the country except Braunschweig in the R&D department, and then in the 2003-2007 period, Braunschweig fell 23 percent. France looks like Germany overall in this category, as does the U.K. overall. No regions in those countries spent what Stuttgart did in 2003, and most have all declined since then as Stuttgart leaped ahead.4 What has Stuttgarts commitment to R&D yielded? OECD data on patents presents us with a good picture. Table 1 shows patents per million inhabitants in major German metro areas in 2007, followed by the percentage increase since 2000. This type of innovation drives the Stuttgart economy unlike anywhere else in Germany. Second only to Hamburg in growth in patents since 2000, Stuttgart clearly leads in absolute numbers by a long shot. In fact, among metro areas in OECD countries, only four outpace Stuttgart: Boston (581), Table 1
City Stuttgart Munich Frankfurt Berlin Hamburg Kln-Bonn Ruhrgebiet Patents per million residents 478.1 282.5 201.6 173.3 160.4 113.7 81.1 Percent increase since 2000 54.7% 51.5% 27.9% 36.3% 66.2% -6.3% 12.3%

Stockholm (568.2), Minneapolis (543.4), and Helsinki (529.4).5 Both Stockholm and Stuttgart have fairly high percentages of population with tertiary education. According to Eurostat, the percentage of Stuttgarts population with post-secondary education grew from 21.1 to 25.4 from 1999-2009, behind only Munich and Berlin and higher than the German average considerably. Stockholm grew from 27.7 percent to 32.2 percent, also considerably higher than Sweden as a whole and high overall by OECD country standards. Of all European cities, Stockholm is second only to the area around Oxford, U.K. when it comes to the percentage of employment in high-tech manufacturing and knowledgeintensive industries. Nearly one in ten working people in Stockholm are employed in high-tech, knowledge sectors. Stuttgart, on the other hand, is not especially exceptional in this regard.6 Rather, it excels in the proportion of researchers overall, which explains its relatively high R&D investments and patents.7 Stockholm, it should be noted, benefits from a national policy context more directly than Stuttgart does, though both cities have taken advantage of their relatively favorable national policy frameworks. Germanys R&D investment as a share of GDP is first in the world, and Swedens is second. Stuttgarts R&D culture has buoyed the national numbers
5 Ibid. 6 Employment in high-tech sectors by NUTS 2 region, Eurostat: http://epp.eurostat. ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tgs00039&plug in=1 7 Researchers, all sectors, Eurostat: http://epp.eurostat.ec.europa.eu/tgm/table.do?t ab=table&plugin=1&language=en&pcode=tgs00043

3 Labour Market in Urban Audit Cities, Eurostat: http://epp.eurostat.ec.europa.eu/tgm/ refreshTableAction.do?tab=table&plugin=1&pcode=tgs00084&language=en 4 Regional Statistics for Metropolitan Regions, OECD (2012): http://www.oecd.org/docu ment/0,3746,en_2649_201185_46462759_1_1_1_1,00.html

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significantly. However, when it comes to business start-up costs, Swedens are sixth-lowest globally while Germanys are lower than the global average according to the Legatum Prosperity Index.8 The effects of a favorable growth environment in these two cities can be seen in labor statistics. Stuttgarts employmentto-population ratio that is, the percentage of people aged 15-64 who are working is on the high end for all metro German regions, let alone large ones (Stuttgart is the sixthlargest German city). Its ratio stands at 73.7 (by comparison, Kln stands at 68.0, Berlin at 65.6, Hamburg at 71.6). It was at 75.3 before the recession hit. As a result of a favorable working environment, unemployment in Stuttgart is lower than the other German metro areas, except Munich. Stockholms employment-to-population ratio is 75.9 and stood at 77.0 before the recession.9 This ranks among the very highest rates in Europe and is uncommon for a city of Stockholms size. Stuttgart also has the second highest rate in Germany of 55-64 year olds actively in the labor force. Among Germanys largest cities, it is the leader in this regard. More than 63 percent of people in this age range are working. In Stockholm, 73.1 percent of the population in this age range are employed.10 Some will argue this is the result of rising retirement ages and a less generous welfare state, but evidence suggests that these figures are more the result of people wanting to be employed longer in Stockholms case and of a favorable working environment in Stuttgart. These trends have resulted in a favorable growth environment that has helped Stockholm and Stuttgart behave more like emerging regions. For instance, most emerging regions benefit from high levels of economic growth because their starting point is considerably low, and each new investment brings rates of growth above what we see in developed economies. This is why Stockholms performance is so impressive. It has the eighth highest per capita GDP of all the worlds metro areas, and yet it has posted income and
8 Sweden and Germany Country profiles, Legatum Prosperity Index 2011: http://www. prosperity.com/country.aspx?id=SE; http://www.prosperity.com/country.aspx?id=DE 9 Employment rate of the age group 15-64, by NUTS 2 region, Eurostat: http://epp. eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tgs00007 &plugin=1 10 Employment rate of the age group 55-64, by NUTS 2 region, Eurostat http://epp. eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tgs00054 &plugin=1

Most emerging regions benefit from high levels of economic growth because their starting point is considerably low, and each new investment brings rates of growth above what we see in developed economies.
employment gains well beyond other wealthier developed metro areas.11 Thats quite a feat. And for Stuttgarts part, its impressive economic performance has led to strong fundamentals in other important areas: iii-Investments, the real estate investment arm of Hypovereinsbank, recently named Stuttgart as the strongest of 32 European cities for potential growth in its real estate markets.12 Dallas and Houston: The Power of New Firms and an Opportunity Outlook Turning to Texas, we see similar trends for different reasons. Like Stockholm, Houston posts impressive gains in employment and income for a city that is already a leader in per capital GDP. Houston is 13th globally by this measure. Both Houston and Dallas are among the top ten cities globally that outpace their national averages in both income and employment growth. For instance, Houston leads the world in income growth at 5.5 percent, fully 4.7 percentage points above the U.S. average, and Dallas, in fifth place, at 3.7 percent growth, which puts it 2.8 points ahead of the U.S. average. Houston is in sixth place in employment growth, while Dallas comes in ninth. The top five spots ahead of Houston include three Chinese cities, one Indian, and one Mexican. According to the Dallas Federal Reserve, Texas was responsible for 49.9 percent of net new jobs in the United States
11 Global MetroMonitor, p. 6. 12 http://www.iii-investments.de/frame2.htm; http://bit.ly/w4pt0c

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from June 2009 to June 2011. Among only the states that experienced positive employment growth during this period (i.e., excluding the states that had a net loss), Texas accounted for 29.2 percent of all job growth. While Texas governor Rick Perrys entrance into the 2012 presidential race brought politicized attention to the Texas job machine, the undeniable reality is that a state that accounts for 8 percent of the nations economy created a disproportionately high share of new jobs during tough economic times.13 There are many factors contributing to Texass economic performance. One important factor is the boom in employment opportunities in Texass leading metro areas. Dallas and Houston have capitalized on success in core industries (e.g., energy) by expanding in other economic sectors. The Milken Institutes Best-Performing Cities Index, which places extra weight on technology growths contribution to job creation and economic progress, ranks San Antonio first nationally, El Paso second, and Austin fourth. Texas makes a good showing in the index, which is a good indicator of the underlying mix of factors contributing to new firm growth in a region, among other things. Houston is by far the best-ranked of the countrys largest five metro areas. It comes in at 16th, and ranked 10th the previous year (the Milken index, it should be noted, experiences quite a bit of fluctuation each year). Dallas comes in a respectable 20th. If we look at the nations top ten largest cities in the index, the top three are San Antonio, Houston, and Dallas.15 Important in the Houston-Dallas story is not so much a snapshot of entrepreneurial activity at any given point in time, but a trajectory of improvement. From 1998 to 2009, Texas moved from 24th to 2nd place in a Harvard study looking at new business formation among clusters of key industries.16 Since the study looked at how new firms are formed in the productive segments of a states economy, it appears that much of Texass strength comes from having figured out how to use its strengths to support new business formation. During the same period, the state rose from 11th to 4th nationally in job creation. The long economic boom in Texas, which insulated its major cities from the severe effects of the Great Recession experienced in most other parts of the United States, has had a kind of compound-interest effect. Capital and jobs have flowed even more voluminously to the area because it has become something of a safe bet in hard times. For instance, long buoyed by its thriving energy sector, Houston leads the country in heavy metal manufacturing growth. Its long arc of industrial success has produced an environment in which big steel feels right at home.17 To be clear, the decade-long economic expansion in Texas in general and Dallas and Houston in particular is owing
15 Best-Performing Cities Index 2011, The Milken Institute: http://bestcities.milkeninstitute.org/bestcities2011.taf?rankyear=2011&type=rank200 16 Michael Porter, Texas Competitiveness: Creating a State Economic Strategy, Harvard Business School (September 2011). Unavailable online, but part of the States and Regions Initiative at the Institute for Strategy and Competitiveness: http://www.isc.hbs. edu/econ-statesregions.htm 17 See Joel Kotkin, Heavy Metal is Back: The Best Cities for Industrial Manufacturing, Forbes, December 15, 2011: http://www.newgeography.com/content/002572-heavymetal-is-back-the-best-cities-for-industrial-manufacturing

Dallas and Houston have capitalized on success in core industries by expanding in other economic sectors.
Another important factor in Texass outsized economic success over the past decade, which has been less discussed in commentary about Texass growth, is the role of new business formation. As a whole, for the past few years, Texas has ranked among the top ten states nationally for entrepreneurial activity. Among the largest metro areas nationally, Houston ranks fourth and Dallas ninth in entrepreneurial activity, according to research by the Kauffman Foundation and Texas A&M University.14 Austin, Texas, has earned the reputation as a national leader for start-ups and highgrowth young companies so much so that it has been easier to overlook the entrepreneurial nature of Austins bigger brothers, Dallas and Houston.
13 Richard Fisher, Connecting the Dots: Texas Employment Growth, Dallas Federal Reserve (August 17, 2011): http://www.dallasfed.org/news/speeches/fisher/2011/ fs110817.cfm; see also Rick Wartzman, Texas, the Jobs Engine, Los Angeles Times, July 3, 2011: http://articles.latimes.com/2011/jul/03/opinion/la-oe-wartzman-texas-20110703; 14 Ali Anari, Fostering Innovation, Tierra Grande, Real Estate Center at Texas A&M University, no. 1978 (October 2011): http://recenter.tamu.edu/pdf/1978.pdf

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to factors that go beyond new business formation. But its also impossible to understand the Texas phenomenon without grasping the role of new, fast-growing companies. In Kauffmans latest New Economy Index, Texas ranks seventh nationally in entrepreneurial activity and eighth for fastest-growing firms. From the index, its clear that Texass national leadership is not owing to its R&D expenditures and patents, as is the case with Stockholm and Stuttgart, or because of an especially well-equipped workforce. Rather its ability to start fast-growing firms stands out.18 People Matter: Aspirational Regions Add People to Their Ranks Another important indicator of prosperity is population growth, especially among children. This indicator often does not get mentioned in economic development literature, but along with measures such as new firm formation and firm growth rates, if people are moving to a region and having children there, that is usually a good thing. It exhibits long-term strength, a favorable cost of living, and an orientation toward the future in educational and cultural institutions. Europes demographic challenges are well-known, even if they play less of a role in policymakers deliberations than they should. But some places in Europe buck the trend such as Stockholm. Stockholm had the highest rates of population growth in 2009 for a large European city (19 percent) and 2010 (17.3 percent) only Oslo and Luxembourg rival these numbers.19 These are exceedingly high for a European city. Berlin, by comparison was 5.2 percent in 2010, London was about 10 percent, and most other continental European cities are consistently in the mid- to low-single digits. Every single region in Germany in OECDs population tables lost population in the 15-64 year old range, except Hamburg. And Hamburgs growth was a mere 1 percent, from 1,199,576 to 1,212,702. And, of course, every region grew in the 65+ category. Baden Wrttemberg, where
18 The 2010 State New Economy Index, The Information Technology Foundation and the Kauffman Foundation (2010): pp. 8-9, http://www.itif.org/files/2010-state-new-economyindex.pdf 19 Crude Rates of Population Change, Eurostat: http://epp.eurostat.ec.europa.eu/ portal/page/portal/region_cities/regional_statistics/data/main_tables

Europes demographic challenges are well-known, even if they play less of a role in policymakers deliberations than they should.
Stuttgart is located, basically held steady, with its decline in working age population around .6 percent. And unlike the rest of Europe, Stockholm actually increased its share of children (0-14) by approximately 4 percent from 2004 to 2009. By European standards, thats huge, especially considering that, as a whole, Sweden saw its child population drop 3.5 percent (Oslo increased its child population by about 7 percent during that time, it should be noted). Stockholms working age population also grew at 4 percent. According to Eurostat, there were 22,622 births in Stockholm in 2001 and 29,619 in 2010 a considerable jump for a European city. For comparison, Dsseldorf dropped over roughly the same period from 45,365 to 42,010, and Hamburg rose only from 15,707 to 17,377. Most other German cities look more like Dsseldorf. Stuttgart dropped 38,059 to 34,652. However, Stuttgart has the lowest percentage of single-person households of all large German cities, and nearly in all German cities more generally.20 While multiple people in a household does not always signify strength, in developed societies such as Germanys, it suggests at least a proclivity toward family, even if loosely defined. Overall, though, Stuttgart succeeds on the population front only by treading water as others fail faster, not because it exhibits signs of strength as Stockholm does. Dallas and Houston lead the United States in one allimportant population indicator children. Between 2000 and 2010, while child populations declined in almost half of U.S. states and a third of U.S. cities, the number of children in Dallas and Houston grew significantly.21 While
20 Population tables, Eurostat: http://epp.eurostat.ec.europa.eu/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=tgs00080&language=en 21 William Frey, Americas Diverse Future, Brookings Institution (April 2011): http:// www.brookings.edu/~/media/Files/rc/papers/2011/0406_census_diversity_frey/0406_ census_diversity_frey.pdf

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other, smaller cities are growing faster, Houston and Dallas continue to add population. The 2010 Census showed a Texas growing its population at twice the national average.22 In a Forbes-Praxis Strategy Group study last year called The Next Boom Towns in the U.S., which included measures such as youth population growth and educated migrant levels, four of the top ten cities were located in Texas. Houston was fifth, and Dallas was seventh.23 If we look at Dallas, Houston, and Stockholm together, we see population growth trends far enough above their respective national, or continental, averages. The downward demographic trend of Western nations does not have to be absolute. It can change, as these cities have shown. Why are people moving there, and why are the number of children growing there while their number declines in so many other places? One clear reason is opportunity. Businesses are fairly easy to start in all of these places. Moving from one firm to another is possible. Quality of life is reasonable. That is, the cost of living and public amenities work fairly well for families. And there are jobs especially for those who take learning and enterprise seriously. At the end of the day, though, it is usually all of these factors together that combine to create an environment that attracts capital and talent by offering concrete rewards for ideas and ambition. Conclusion Given the well-documented rise of the emerging worlds superior growth to the Western average, policymakers and business leaders in the transatlantic community should be doing all they can to learn from the exceptional regions in their midst. The only four metro areas in the MetroMonitor top 40 are characterized by a combination of fast-growing new businesses, population growth, and high levels of patented innovation and knowledge sectors. The larger question for Western countries is how to fashion policy to encourage more of the kind of growth we see in Dallas, Houston, Stockholm, and Stuttgart.

About the Author

Ryan Streeter is a non-resident fellow with the German Marshall Fund of the United States.

About GMF
The German Marshall Fund of the United States (GMF) is a non-partisan American public policy and grantmaking institution dedicated to promoting better understanding and cooperation between North America and Europe on transatlantic and global issues. GMF does this by supporting individuals and institutions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democracies. Founded in 1972 through a gift from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has seven offices in Europe: Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, and Warsaw. GMF also has smaller representations in Bratislava, Turin, and Stockholm.

22 Candy Evans, Census 2010: A Texas Perspective, New Geography (Feb. 25, 2011): http://www.newgeography.com/content/002079-census-2010-a-texas-perspective 23 Joel Kotkin, The Next Boom Towns in the U.S. Forbes (July 6, 2011): http://www. forbes.com/sites/joelkotkin/2011/07/06/the-next-big-boom-towns-in-the-u-s/