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The position of Montreal and its regional economy in the economic space of North America, and indeed the world, has experienced considerable change during the past three decades. This is the result of: 1) a series of events in the evolution of the global economy and 2) specific policy initiatives. The most recent and powerful of these has been the advent of the process of globalization, that is, of trade liberalization and changes in the technologies of production, transportation and communication. Montreal has lost its historic position of primacy in the Canadian economy and has become a second-tier urban economy in North America. All cities have been affected by these changes and the result has been a competitive struggle as each city tries to discover a role or function for it in the global hierarchy of cities.
Since almost all cities are going through a similar process of discovering their most effective vocation in this new environment, Montreal will face considerable competition in its efforts. For this reason the metropolitan leadership, in both the public and the private sectors, will have to be clear on the city’s real advantages and handicaps, on what is realistically possible, and on what specific policy steps should be take so as to ensure success.
1. The contemporary context of urban economic development.
In explaining the contributory factors in the process of urban economic development we must take into account several important elements, both internal and external to the city that is the subject of the experience.
Developments in the technology of communication (satellite and fiber optic communication as well as the use of computers) enable the effective coordination of economic activity to be accomplished from every greater distance. This allows for he separation of command and production sites and a reconsideration of the location of decision-making centers. A city, such as Montreal, that is rich in the urban amenities that are attractive to skilled professionals and senior management can make this work to its advantage.
Finally, developments of cheap air and sea transportation, computer coordination of rail traffic, expansion of truck transportation, and effective inter-modal shipping have greatly reduced the 'cost-distance' between urban economies. In terms of the cost of shipping one ton of goods, Montreal may be equally positioned between London, England and London, Ontario. Again, a new set of opportunities, threats, and challenges for all cities and their economies.
• Third, deregulation of financial and other markets has destroyed the existing hierarchy of financial cities and opened this sector to an aggressive form of competition. In the United States, Chicago's largest banks have been purchased by banks and financial holding companies in Montreal and other cities in the United States. Cities such as Charlotte, North Carolina have come from nowhere to be among the financial centers of the country. Wilmington, Delaware, has become the center of the credit card sector of the industry. New York still reigns supreme as a global financial center but below it the rankings have been in a stage of flux for a decade. While the Montreal Stock Exchange was Canada’s first, having been established 125 years ago, the MSE has been losing business to Toronto and it now trade less than ten per cent of Canada’s total. It is likely that Montreal will give up stock trading entirely and move into other financial products.
• Fourth, is changes in the balance of power, responsibility, and decision-making authority between the national and urban levels of government. Throughout the industrialized world, national governments have chosen to give up some of their powers. In part this has been the result of negotiated agreements to open markets to foreign competition; in essence a process whereby the national government gives up its capacity to intervene in economic outcomes in response to pressure from negatively affected constituents. A second reason for devolution has been the desire of central governments to reduce budget deficits and national debts and to introduce neo-liberal strategies to reduce the role of government in general. In many countries central governments have mandated programs but left the financing to sub-national levels of government. In North America, the term for this, when applied to state/provincial governments, used to be “fiscal federalism;” in the European Union the term “subsidiarity” is now used to the allocation of tasks among all levels of government, with the emphasis being placed on tasks being accomplished by the lowest level of government that can effectively accomplish the task.
In Canada a variety of political and ideological issues have dominated discussions between the federal and provincial governments. Each of these issues, in addition to relating to a superior level of government, is far too complex to be examined in this paper, but they do provide a context for discussion of the emerging role of metropolitan governments in economic matters.
• Fifth, in this context we can witness the emergence, throughout the global economy of a new municipal activism. This is effectively captured in the title of a 1994 conference of the Organization for Economic Cooperation and Development, “Cities in the New Global Economy.” Formation of the Euro-Cities movement in the 1980’s gave municipal governments throughout Europe a structure through which they could meet to discuss common problems, seek solutions to them, and develop a lobbying effort in both national capitals and the agencies of the European Union. A similar but somewhat less politically active organization, Metropolis, was formed in Montreal about that same time for large cities throughout the world. In the United States, cities tend to be competitors rather than participants in cooperative ventures, but organizations such as the National League of Cities and the Conference of U.S. Mayors have become somewhat more engaged and active in recent years, as has, in Canada, the Federation of Canadian Municipalities and, in Quebec, l’Union des municipalitiés du Québec and l’Union des municipalités régionales de comté et des municipalités locales du Québec.1
All of these institutions have experienced increased activism by their member municipal governments because of the transfer of responsibilities from the national to municipal level. Cities have become much more engaged in “municipal diplomacy,”2 in strategic planning, and in joint problem discussion and solving as they have come to recognize that the economic future of their residents in increasingly in their hands.
• Sixth, one cannot overemphasize the importance for the process of urban economic development of the development of and shift to the tertiary or service sector. The earlier evolution from agriculture to manufacturing had powerful impacts on all aspects of society and the economy; the next step, currently underway, from manufacturing to services promises to be equally disruptive. Each of these transitions has given rise to new demands for labor skills, housing, transportation and communications infrastructure, and so forth. Manufacturing focussed activity not just on urban agglomerations, but on cities situated near ports or rail centers, crucial inputs and markets. This was certainly beneficial to Montreal and it rose to industrial dominance during the nineteenth century and well into the Post-World War Two period.
In a services dominated economy, these traditional sites of economic activity will no longer be privileged. The importance of distance will have to be reconsidered, flexibility in all aspects of economic and social in institutions will become essential, and cities will have to ascertain their new competitive advantages and the niches in which they can find success. Due to the needs of the service sector for personal contact between buyer and seller and among individuals in all aspects of the industry (the city as “center of interaction”), the positive labor market aspects of agglomeration, and the need for the highly skilled elements in the working force for urban amenities, the provision of higher order services will probably always be an urban function.
2. The positioning of Montreal.
The economy of Montreal has evolved substantially during the post-W.W.II period. In this section of the paper we will examine those aspects of this development that can be related to the discussion thus far. This examination will be composed of two distinct elements: exogenous factors (policy decisions and geo-structural changes) and strategic decisions.
A phenomenon over which it was not possible to exercise any control was the substantial shift of economic activity to the west and the south in the Canada-US economic space. Toronto, Calgary and Vancouver have all experienced significant growth since the 1970's and the US south and west have benefited at the expense, at least during the 1970’s and 1980’s, of the industrial triangle - Boston-Milwaukee-St. Louis. The primary consequences of this shift have been: relatively lower rates of population growth, personal incomes and manufacturing employment, and the development of new financial centers in the newly deregulated environment. All of these regions have had their share of expansion and contraction so this does not mean the secular decline of the industrial triangle regional economy, but rather it forces metropolitan and state/provincial governments to consider their future and to implement strategic plans to restructure their economic activity.
For Montreal this has brought a deterioration in status as Canada's national center of financial and corporate activity and decision-making and the city has been forced to accept a redefinition of its role to that of a second-tier regional economic and financial center. As data in the next section shows, Montreal has slipped to second place, behind Toronto, as a corporate headquarters location. The Bank of Montreal and the Royal Bank have transferred their senior executive offices and many functions from Montreal to Toronto. This pattern is replicated in many other areas of economic activity.
The single most significant policy initiative to affect Montreal's economy has been the decision to implement a free trade agreement with the United States. One of the most powerful impacts has been that of making it clear that Montreal's economic future lies in a north-south rather than an east-west orientation of its trade and other economic linkages. We will discuss this in greater detail below, but it must be recognized that this has come at the expense of aspirations to be a "bridge between North America and Europe" and of its economic connections with the markets of Ontario and other Canadian provinces.
From the perspective of the developments that are transforming the economic context in which the city must function today, the logical place to begin is with the reports of the Quebec government in 1979 and the early 1980’s that sought to put the provincial economy on the path toward the innovation and technology-intensive economy.3 At this date, two decades after the fact, a summary of the objectives of these reports will suffice. Three specific objectives were identified: 1) the need to overcome the economic stagnation and lagging productivity growth that were afflicting so many of the industrialized economies, as a result of the shocks of the petroleum price hikes of 1973 and 1979, 2) the need to effect a restructuring of Quebec output away from producing the wrong goods in outmoded facilities and toward goods that are characterized by “high technology” and high income elasticities of demand, and 3) the need to develop the capacity of this French-speaking society to participate fully in the “new” globalized and technology-intensive economy.
This provincial policy thrust at the beginning of the 1980’s is important because it set the tone for much of the program development and expenditure decisions that followed and because it focused on several things that most economists would argue are beneficial. With regard to the latter there was, first, recognition that Quebec must seek out its comparative advantage in the new technology-intensive economy rather than force development into areas in which the likelihood of success would be slight. Second, there was explicit recognition of the importance of the rapidly emerging service sector. Third, it was recognized that protection of declining sectors would not do. Beyond these general notions, three specific general industrial priorities were identified: some “mega” projects, the service sector and new technologies. To assist in realization of these objectives new institutions, such as the Department of Science and Technology and the Department of External Trade, were established, special tax treatment was introduced that would encourage expansion of the privileged sectors and activities, and the provincial budget made commitments to these activities. These actions by the provincial government were of great importance to both Montreal and Quebec, since most of the supported activities would be situated in these two cities.
Not all strategic thinking about Montreal’s economic future has been so willing to recognize the fundamental structural changes that have been taking place and the need to position the city in a new economic geography. A few examples will suffice to make this point. In 1986 the Government of Canada issued the so-called ‘Picard Report.’4 This study by a ministerial committee on the development of the Montreal region is reported to have become ‘the bible’ for planners. To its credit it sought to articulate an international vocation for Montreal, but it gave short shrift to any linkages with the United States, or the North-East regional economy. It stressed the limitations on access to the US market for defense production, argued the need to concentrate on getting international organizations to locate their headquarters in Montreal, and urged that Montreal become “un véritable carrefour international,” with no attention being paid to ensuring that one of those roads that would connect with the United States. In the context of Quebec’s focus on advancing its high technology sectors, the report argued that only Japanese and European firms took a long enough view to include research as a major activity. Indeed the focus was on the need to diversify away from the United States market.5 This was the culmination of pre-free trade agreement thinking, and the meeting of Prime Minister Mulroney and President Reagan in Quebec City undermined the foundations of its thinking.
How powerfully this meeting affected thinking is captured by two documents issued by the Montreal Chamber of Commerce in 1985 and 1987, one year before and one year after it took place. In the first report, it was stated that “Montreal will distinguish itself by becoming the bridge between Europe and North America…the Montreal of Tomorrow will affirm itself as a Euro-American city of the first rank.”6 Two years later, in a report by consultant Marcel Coté put a slightly different twist on this, arguing that this was possible “thanks to the unique co-existence of a French-speaking community in communication with France and with Europe and an English-speaking community more oriented toward the United States.” Finally, in a report in 1989, the Communauté urbaine de Montréal wrote that the FTA created a “new emphasis on north-south trade flows (which) will also reduce the importance of Toronto as the logical site to serve the Canadian market, since markets will increasingly be defined in a continental context.”7 In spite of their different pre- and post-FTA thinking, what is common to all of these studies is the emphasis placed on Montreal’s international and extra-Quebec vocation. Having lost its position as the corporate and financial center of Canada, Montreal’s urban leadership sought to re-position the city in a new globalized context.
A 1986 report by researchers at the Institut national de la recherche scientifique gave support to the basic thrust of public sector thinking in this regard. They stressed the need to go beyond the Quebec market and argued this could only be done by production aimed at innovative products and at the upper end of the market. With international markets opening up and with international investment becoming more important, Quebec would have to recognize that its economic activity was going to be affected increasingly by demands in foreign markets, decisions taken by companies headquartered elsewhere, and by procurement plans by entities such as the US Department of Defense.8
The most explicitly international initiative for Montreal has been the establishment of Montréal International. It is supported by about 100 companies with operations in the city and the federal, provincial and local municipal governments. Its includes among its objectives “promotion of Greater Montreal on the world scene” and “soliciting foreign investment,” in addition to providing a set of other services of use to international and local firms. It is currently struggling with the difficult task of keeping all of the local governments in the organization, even as the provincial government and the municipalities of the greater Montreal region discuss fundamental changes in governance structures. Generating an allocation of plant locations and investments that will seem to be just to each of the participating municipalities is an inherent problem for such a metropolitan area-wide organization, although such an allocation is not in the mandate of Montreal International. Rather the organization seeks to draw investor interest to the Montreal region and to then rely on investor and individual municipalities to make a match. The objective is to have a result, in terms of inflow of investment that exceeds the sum of what could be accomplished by the individual municipalities acting alone.
Finally, the provincial government has recently announced a general strategy for improving the employment situation that should have a positive impact on the ability of Montreal to meet its metropolization objectives.9 It consists of three areas of initiative: first, an effort to improve the quality of public services and infrastructure, and to introduce a more competitive fiscal regime for companies, second, an effort to improve the quality of the work force through improvements in education and training, and to make labor markets more flexible and efficient, and third, a recognition that this strategy must be introduced in the context of sustainable development and intergenerational equity.
The pubic policy discussion of Montreal’s economic development has changed considerably during the past fifteen years. In response to the emerging forces of globalization the city has been forced to recognize that it must accept that it can no longer escape its economic geography. While there is a potential for more substantial relations with Europe, the dominant market for Montreal is the United States. This north-south connection has, of course, also come at the expense of Montreal’s economic ties with the rest of Canada. The question then becomes how best to relate to this dominant market in the new technology oriented economy.
3. Cities and the technology-intensive economy.
We have just discussed the importance of large cities for innovation and the generation of new technologies; the natural follow-up question is how individual cities can succeed in developing an economy based on this activity. Corporate leaders only occasionally site their facilities according to a sentimental preference of the founder or CEO; location is usually the result of an analysis of what competing cities have to offer. The exception is for the start-up of new firms for which the residence of the founder is the most important determinant. This has been shown for high technology districts in Israel by Shachar and Felsenstein and for Washington State by Haug.10 Normally, however, long-term maximization of profit is the guiding principle, but the interesting question relates to what determines this. Friedman, Gerlowski and Silberman find that access to markets, labor market conditions, and state promotional efforts attract foreign investment, with Japanese firms stressing labor markets conditions and European firms finding market access to be more important. James Markusen states that "multinational firms are closely associated with knowledge-based assets rather than physical capital.”11 Once these factors have been evaluated, the specific locational decision can be affected by state and local personal taxes.
Duffy found markets and labor to be the primary determinants of regional growth in manufacturing.12 So for any urban economy the question then becomes that of creating a situation in which corporate leaders will find it desirable to locate a facility there. Finally, after reviewing both the academic literature and the actual criteria utilized by firms that consult on plant location, Proulx concluded that "markets, the quality of the work force, and the availability and costs of transport are the most important factors in site selection."13 Other considerations taken into account include: an innovative milieu, effective intra- and inter-urban synergies and networking, information about markets, infrastructure, and urban amenities.
In both North America and the European Union, regional trade liberalization has had a significant impact on inward foreign investment due to the market access effect. This is particularly true for cities such as Montreal whose access to a market many times that of its national market was truncated by various tariff and non-tariff barriers that were reduced or removed by the trade agreement. Montreal’s leaders have been quick to note that they were the earliest and unambiguously strongest supporters of the Canada-U.S. Free Trade Agreement. Proulx has noted that while Quebec's interprovincial exports and imports amounted to 116 per cent and 93 per cent of its international trade in 1981, by 1995 these figures had dropped, respectively, to 64 per cent and 60 per cent.14 Since in excess of 80 per cent of Quebec's trade is with the United States, he argues this is indication of the development of a north-south orientation of trade following implementation of the Canada-U.S. Free Trade Agreement and its impact on transnational firm locational decisions. Intra-industry and intra-firm trade is especially important in this relationship as corporate leaders have chosen site facilities according to the cost advantages of each location throughout the cross-border region. Ricci shows that in an integrated regional economy a smaller market can gain productive facilities if it can offer productivity advantages that off-set the market size disadvantage; this is particularly true in the presence of limitations on factor mobility.15 This is of particular importance to Montreal given both its proximity to the far larger US market as well as its linguistic and cultural distinctiveness that discourages the crucial inward labor mobility.
In making a city attractive to corporate decision-makers in a technology-intensive economy, municipal authorities must give attention to the concept of the milieu innovateur, or technology district. This does not refer specifically to an entity such as a science-park, but rather to a collection of production and research institutions that is conducive to development of new products and production processes and to functional linkages among firms and research institutions. Camagni stresses that it is not sufficient to have all of the pieces assembled but that synergies must be created that link them together so as to ensure that mutually beneficial interaction will occur.16 Garnsey, and van Geenhuizen and Nijkamp also emphasize the need for synergies and for networking among firms and skilled workers.17 In the case of Montreal, skilled workers tend to remain in the region in part because of the linguistic and cultural character of the city. This has the tendency to facilitate development of longer term working relationships, and of course of the synergies that are found to be so important.
Storper shows that technology districts, dominated by "production based technology learning," generate quasi-rents, similar to the steel and automobile industries decades ago, and that they offer the combination of specialization and flexibility that seems to be of such importance. Industrial areas lacking this milieu, such as those in France and Germany, can offer high wages to those workers who are employed but do not generate high rates of employment.18 The urban economy that effectively supports development of a technology district is clearly one that is attractive to firms seeking to maximize profits in the long run.
Kohler examines firms in the high technology sector and concludes that "a sufficiently strong dependence of industries on human capital renders firms footloose and they tend to follow the workers towards amenable locations."19 Furthermore, he argues that firms prefer locations where the level of amenities is changing rapidly in relation to neighboring areas and that these locations will gain both skilled labor and capital. This suggests another area of public infrastructure policy that must be pursued by local authorities seeking to enhance their status as a metropole. Cultural and other urban amenities not only attract high skilled workers and high level activities; they also have important expenditure and employment impacts of their own. Thus a policy to promote them makes economic sense for more than one reason.
The research referred to in this section gives clear indication as to what is important for a city seeking to enhance its competitive position. Rather than summarize these finding we will simply note that the newly emerging technology, information and communication economy refocuses attention on the attractions of large internationally engaged cities. In itself this is encouraging for Montrealers; the findings should help in designing a strategy for realizing the city's economic potential. This will be further developed in the section that follows.
4. What recent research tells us about Montreal’s economic situation.
In an effort to capture some of the current reality of Montreal's position in what is commonly referred to as the "global urban hierarchy," we will place Montreal in several recent classifications or evaluations of cities. Here we will refer only to studies using data for the United States, to the exclusion of studies of European cities, since Montreal is, after all, in the North American or, to be more specific, the North-Eastern regional economy. It is also the case that data sources regarding metropolitan areas are far richer for the United States than for any other part of the world, so it is possible for researchers to do work there that is both comparative and quantitative work in methodology that could not be done elsewhere.
We will begin by noting what some researchers have concluded with regard to the future of traditional industrial urban economies, such as Montreal. While it has become fashionable to lament the decline of this category of city, not all analysis gives support to this view. Typical of the writers who are very pessimistic with regard to the older manufacturing centers throughout the industrial world, is Randall Barnett who argues that without a major multi-faceted effort to address housing, transportation, labor skills, and other urban problems the core of our major cities can only deteriorate.20 For others the evolution to a post-Fordist mode of production, emphasizing smaller more flexible facilities, and recent developments in the technologies of transportation, production and communication, allowing a re-evaluation of location and economic space mean the end of dominance by large cities and huge units of production. The literature on this process of de-industrialization and global restructuring is extensive and very well known, so we will not take the time to review it here.21 Recently, however, there has been a reexamination of the fortunes of older industrial centers and it is from this literature that Montreal should gain some optimism about its future.
The condition of the U.S. Mid-west economy is key to this discussion because its resurgence during the past decade has triggered much of this revisionist thinking. In their empirical examination of urban competitiveness in the United States at the beginning of the period, Kresl and Singh found that while the cities of the both coasts and the South had lost competitiveness, the cities of the industrial heartland and the center of the country were strong gainers.22 Richard Florida argues this has been the result of a regional economic transformation, which entails adoption of new forms of production organization.23 The cause of this transformation has been the impact of globalization on an older Fordist production system with the agent being the transplant of manufacturing facilities by Asian and European firms. These foreign transplants "have played a key role in the transfer of state-of-the-art manufacturing technology and production organization to the Midwest locations, accelerated the diffusion of these practices through supplier complexes, and created powerful demonstration and learning effects for local companies."24 This leads him to conclude that "(O)lder regions can become focal points for new production systems. This contradicts the widely accepted belief, advanced in the huge body of literature, that older regions are inexorably doomed to disinvestment, deindustrialization, and decline."25
Further guidance to Montreal can be found in a study done of twelve US cities for the period 1977-1987 by Pollard and Storper.26 They found that in addition to the strong increase in service sector employment, roughly equal gains were experienced in "intellectual capital industries" (those with high proportions of high-wage, nonproduction occupations) and "innovation-based industries (those employing high proportions of highly skilled, technical labor). In the former category were products such as industrial chemicals, electronics, financial services and research activities; in the latter were biological products, aircraft, engineering and office equipment. Declines in employment were found in "variety-based industries" (those marked by the diversity of their products) such as food processing, printing, chemicals and construction equipment, and routine manufacturing. Their conclusion is that "the most consistent pattern we detect is the link between specialization in innovation-based employment and overall regional employment growth."27 While the strongest growth areas were generally in the Sunbelt, Boston and Minneapolis-St. Paul were also in the high growth category. Boston specialized in both intellectual and innovation-based industries, but Minneapolis-St. Paul showed that strong growth could be realized by a city with no outstanding specialization and above national average growth in variety-based and routine manufacturing production.
While comparable data is not readily available for Canadian and American metropolitan areas we have managed to gather enough information so we can suggest where Montreal appears to fit into the Pollard and Storper typology. Montreal is the location of about 50 per cent of Canada’s aerospace and bio-pharmaceuticals industries, and the country’s largest concentration of engineering consultancies. Pollard and Storper consider these industries to be in the “Innovation-Based Industries” category. It has additional strengths in telecommunications, financial services and informatics/multimedia, each of which is in the “Intellectual Capital Industries” category. Food, and pulp and paper are considered “Variety-Based Industries. “ While not conclusive, this would suggest that Montreal should be placed, in the Pollard and Storper typology, in the “High Growth, Multiple Specializations: The Older High-Skill, High-Technology Centers” category, along with Los Angeles, San Francisco and Boston, with the latter two cities also specializing in Intellectual Capital and Variety-Based industries.
A third rather optimistic position is taken by Ann Markusen in her examination of why, in the supposed context of de-industrialization, some industrial areas are able to retain their attractiveness to both capital and labor. In her terms, why are some locations, "'sticky places,' that have demonstrated resiliency in the postwar period in advanced industrialized countries."28 Rejecting the traditional Marshallian and Italianate industrial districts as inappropriate to the North American situation (due to their reliance on many small firms in highly interactive local networks), except for Silicon Valley and Orange County (California), she examines three forms she finds more relevant to metropolitan areas in the United States that experienced rapid growth during the period 1970-80: the hub-and-spoke district, the satellite industrial platform and the state-anchored industrial district. Essentially, the hub-and-spoke district is based on a small number of key firms and/or facilities that act as anchors to the regional economy, with suppliers spread out around them. With Boeing, Weyerhauser and Microsoft as such anchors, Seattle is an example of this type of district. The satellite platform is "a congregation of branch facilities of externally based multiplant firms," and the state-anchored district has as its base an entity such as a military base, one or more universities, the state/provincial capital, or other facilities supported by the pubic sector. Each has its own implications for the nature of the corporate culture, the distribution of income, the political climate, relations with other regions, and so forth. After examining almost 20 such areas, Markusen finds that most districts are combinations or more than one of the models. She finds the American version of the Italianate district to be suspect on both growth/stability and equity grounds. Her advice to municipal authorities is that they "assess their existing district structure accurately and design a strategy around them, rather than committing to a fashionable strategy of small firm networking within the region."29 Linkages to entities outside the region may be especially worthwhile, with smaller firms serving as specialized producers linked to larger firms.
Regarding Montreal's position in the Markusen framework, Table 1 indicates that the city is one of Canada's two primary sites for corporate headquarters locations. Thus the satellite platform model seems not to describe Montreal's situation. It is safe to say that Montreal is a combination of the hub-and-spoke and, with its sizeable publicly supported university, research and cultural institutions, state-anchored district models. Of US cities, Markusen puts Seattle, northern New Jersey, and Detroit in the hub-and-spoke category. The state-anchored category
includes both cities where defense procurement is important, such as San Diego, Los Angeles, Seattle and Silicon Valley, and university-research dependent cities, such as Madison, Ann
Arbor, Austin and Boulder. In her detailing of each of the models it is clear that these two models