Reduced international communication costs will trigger the offshoring of middle skilled activities from industrialised to developing countries, leading some developing world cities to attain a more sophisticated and skill-intensive activity mix than many developed country locations. That is the conclusion of research by Andrei Potlogea to be presented at the Royal Economic Society''s 2015 annual conference.
Cities with a high share of university graduates in their population, which the author calls ''skilled'' cities, already outperform other urban areas in their respective countries. This research implies that, over time, more medium-skilled tasks will relocate to these skilled cites. As many of these middle skill activities were previously located in the relatively unskilled cities and regions of rich countries, these locations suffer gradual economic decline.
The process is accelerated because the skilled locations tend to draw in an increasing share of their nations'' highly qualified workers, leading to what the author calls ''skill sorting'' into some cities and allowing skills in the world economy to operate at higher levels of efficiency, leading to global economic growth.
The process may prompt long-term decline in cities without sufficient human capital, such as Detroit or Newcastle, the author suggests: ''Should the process of offshoring proceed on a sufficient scale, it is possible that some developing world cities attain a more sophisticated and skill-intensive activity mix than many developed country locations.''
The last five decades have witnessed dramatic shifts in the location of economic activity across and within countries. Rapid (and often export-led) growth in a set of large developing countries, particularly China and India has led to a somewhat more dispersed cross-country economic geography. By contrast, within countries, economic geography has grown more unequal, with some cities (such as London, New York and Beijing) experiencing rapid growth in population, output and land prices while others (such as Detroit or Newcastle) suffered stagnation or even decline.
This divergence in urban fortunes can be related to the emergence of a strong association between human capital and urban success. Mounting evidence from both developing and industrialised nations suggests that ''skilled'' cities (cities with a high share of university graduates in their population) have tended to outperform their skill-scarce counterparts along a battery of measures of urban success. Moreover these skilled locations have tended to draw in an increasing share of their nations'' highly qualified workers, a phenomenon that has been described as skill sorting across space.
This study aims to provide a unified explanation for these recent shifts in economic geography across and within countries. The author argues that these developments are consequences of globalisation brought about by technological progress. In particular, he puts forward a theory in which reductions in communication costs lead to a reorganisation of global supply chains across and within countries that can account for the facts outlined above.
In the model, reduced international communication costs trigger the offshoring of middle skilled activities (for example, middle-skill manufacturing) from industrialised to developing countries. This is because these activities can now be easily managed and coordinated over great distances by headquarters that largely remain in advanced nations.
As many of these middle skill activities were previously located in the relatively unskilled cities and regions of rich countries, these locations suffer gradual economic decline. But this re-location of middle skill activities to developing countries allows the world economy to operate at higher levels of efficiency, leading to global economic growth.
Moreover, as skilled cities in industrialised nations largely retain their comparative advantage in advanced services (such as financial and professional services) and can now sell these services to a larger world economy, they are beneficiaries of globalisation and experience rapid growth.
In the global South, relocation of activities from the North is associated with rapid economic growth and urbanisation. But this development process does not occur evenly across space, as activities relocating from the North tend to congregate in the more advanced cities and regions of developing countries to benefit from access to adequate infrastructure.
As a result, the relatively skilled cities of the South tend to benefit disproportionately from globalisation and grow faster than the rest of their countries. Moreover, in both rich and poor countries, it is the more skilled that are more drawn to their nations growing advanced cities, helping explain the phenomenon of skill sorting across space.
The theory also produces a novel prediction: should the process of offshoring proceed on a sufficient scale, it is possible that some developing world cities attain a more sophisticated and skill-intensive activity mix than many developed country locations, a process called ''urban overtaking'' along global value chains.
The main contribution of the study is to highlight how economic integration can lead to substantial spatial reallocation of economic activity within countries. This process should be of substantial interest to policy-makers as any frictions affecting this reallocation may lead to increases in inequality and may limit the extent to which gains from trade are realised.
''Globalization and the Skilled City'' – Andrei Potlogea