The spatial economy – mapping our future prosperity
Spatial economics examines how space and geographic location impacts economic activity. The advent of the knowledge economy, built on global communication networks, has reshaped the geo-economic boundaries between service providers, producers and buyers. The knowledge economy is the use of knowledge to generate tangible and intangible value. Technology, and in particular knowledge technology, helps to transform a part of human knowledge to machines.
To compete in this relatively new space, the Australian economy needs to cultivate its knowledge industries, which, from a geographic perspective, depend on government policy and the development and evolution of our major cities.
A report from the Grattan Institute, Mapping Australia’s economy: cities as engines of prosperity, explains this further.
“Today the Australian economy is no longer driven by what we make – the extraction and production of physical goods – but rather by what we know and do,” write the report authors, Jane-Frances Kelly and Paul Donegan.
“Like other advanced economies around the world, our economy is continuing to become more knowledge-intensive, more specialised and more globally connected. Knowledge-intensive businesses, which are the most productive today, tend to cluster and thrive in the centres of large cities.”
The principals of economic geography
In the past people have tended to settle in an area depending on the type of work or economic activity they engage in. A business cluster is a geographic concentration of interconnected businesses, suppliers, and associated institutions in a particular field. Clusters are considered to increase the productivity with which companies can compete, nationally and globally.
Others will settle where people have already settled. They may engage in the main occupation of those already settled or they may provide other goods and services to that community where a local market to exchange goods and services emerges. If there’s a surplus, these goods and services can be traded with other communities, towns and cities. Economies arise when similar producers and businesses cluster together.
Moreover, there are benefits to buyers when similar types of businesses are located near each other, which we see in retail. Clusters that are highly technology oriented are well adapted to the knowledge economy, and typically have as a core of renowned universities and research centers like Silicon Valley.
The more people open businesses in these clusters, the more valuable the commercial district is to each client. This creates a positive externality because a business may set up without intending to create value for other players, but does so in any case by helping to draw more clients into the precinct and everybody benefits.
In spatial economic terms, online social networks work in the same way with platforms like Twitter and Facebook becoming more useful as more users join.
Workers with skills relevant to a particular industry locate and settle in towns and cities where those industries are located. Manufacturers, service providers and their suppliers benefit by being in close proximity to each other. As the saying goes, ‘birds of a feather flock together’.
How far trade and economic relationships develop between and within clusters, towns and cities, depends on the available communications and transport infrastructure e.g. the NBN network.
Competing in a global market place
The increasing global mobility of products, people, capital, enterprises and the Internet of everything has lead to significant competitive challenges to service providers, producers and workers in the advanced economies of Europe, North America and Australia.
These producers can compete in one of two ways:
- By lobbying for subsidies and protection from their governments (a form of hidden tax).
- By becoming more innovative and increasing productivity and the specialisation of the goods and services they produce.
They can also draw on cheap imports or outsource non-core activities to produce end products competitively for domestic and world markets.
Big cities for knowledge industries
Though a large emphasis is placed on resources and agricultural products, 80% of the value of all goods and services produced in Australia is generated on just 0.2% of the nation’s landmass – mostly in cities.
The Grattan Institute report highlights, “There is a reason intense economic activity is concentrating in CBDs and inner suburbs. Many businesses in these areas provide highly knowledge-intensive and specialised services such as funds management, insurance, design, engineering and international education”.
It’s these high value knowledge-based industries that create the highest levels of prosperity within the economy and offer the most potential for their future growth and development.
“These businesses depend on highly skilled workers, and locating in the heart of large cities gives them access to the largest possible pools of them. Proximity to suppliers, customers and partners also helps businesses to work efficiently, to generate opportunities and to come up with new ideas and ways of working,” say Kelly and Donegan.
The CBD’s within Australia’s major cities are the engine rooms of the economy and are vital to the nation’s future prosperity. It reflects the economy’s evolution from one based on primary industry and agriculture, then manufacturing, then increasingly on knowledge based industries.
“Ultimately, as Australia’s economy becomes more knowledge intensive, location will continue to be an important enabler of productivity for many businesses. A better understanding of the spatial dimensions of Australia’s economy will help governments make better infrastructure investments and policy decisions,” Kelly and Paul Donegan write.
If our cities continue to sprawl outwards, where workers have constricting access to jobs, it will have a detrimental effect on the productivity of the economy and the general prosperity of the population. Evidence of this can be seen in the almost gridlock traffic in modern cities making commute time a major financial and unproductive disincentive for workers trying to get to jobs.
Businesses and industry need to rely less on government support or regulations to maintain competitive advantage, but look for ways to innovate and specialise in high value goods and services. This needs to be the central thrust of Australian businesses looking to grow.
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