Economic development is geographically uneven; incomes differ widely across places. After a long period during which incomes tended to become more even across cities and regions within developed countries, they are now diverging again. In 1970, the San Francisco Bay Area and Greater Los Angeles regions had very similar per capita incomes; in 2012, Los Angeles was almost 30 percent lower than the Bay Area. Understanding this process of divergence, which is widespread among metropolitan regions around the world, is a window on understanding economic development more generally.
Innumerable forces influence economic development, and research on it uses many different methods and comes from several disciplines. Four theoretical fields that contribute to understanding divergent economic development of city regions are development theory, regional science and urban economics, the new economic geography, and the social science of institutions. Together, they provide a robust framework for understanding convergence and divergence in economic development.
The specialization of urban regions in different tradable industries is the source of significant differences in wages and income levels. Los Angeles was more specialized than San Francisco in 1970 but considerably less specialized in 2010. During this period, San Francisco consolidated its specialization in activities related to information technology, and Los Angeles consolidated its hold on the entertainment industries, but Los Angeles lost many other high-wage specializations it formerly contained, replacing them with low-wage specializations. Los Angeles also lost its lead over San Francisco in innovative sectors, as the latter soared in its per capita patenting rate. All in all, Los Angeles's economy came to have less overall focus and sophistication, while San Francisco's came to have more.
Differences in average regional wages between San Francisco and Los Angeles increased from 5 percent in 1970 to 35 percent in 2010. Wage gaps are due partially to increasing differences in the skills of the labor force but are proportionally greater than the increase in skills gaps. Skills gaps themselves must also be explained. Do they emerge as different kinds of people migrate or stay according to different kinds of jobs created in the two regions? Or is it the reverse: people go to the two regions in search of lifestyle amenities and housing, and the two economies diverge by absorbing different kinds of people? This is the key debate in urban labor economics. This chapter shows that the key force in drawing different kinds of labor was an increasing gap in the types of employment available, itself driven by differences in regional economic specialization.
Industries, firms, and entrepreneurs in the Bay Area and Los Angeles did not plan the economic divergence of their regions. They faced challenges from the restructuring of the Old Economy and benefited from the opportunities of the New Economy. Their successes and failures widened the income gap between the two regions. This chapter presents comparative case studies of entertainment, aerospace, information technology, logistics, and biotechnology in San Francisco and Los Angeles, showing how they developed differently and shaped specialization, wages, and income divergence in the two regions.
Regional economic development is shaped by many policies, which are implemented by national governments, regional and state governments, and local governments. But local economic development policies in Greater Los Angeles and the San Francisco Bay Area since 1970 had little to do with the economic divergence of these two regions. In reality, many so-called economic development policies have little to do with economic development as such, instead emphasizing land use changes and competition for sales tax revenue rather than industry and job development. Many of the problems with local planning and development policies in the United States in general are exemplified by the comparison of the San Francisco Bay Area and Greater Los Angeles.
Dominant beliefs—those of political and economic entrepreneurs in a position to make policies—over time result in the accretion of an elaborate structure of institutions that determine economic and political performance. This chapter documents the worldviews and beliefs of regional leaders in the San Francisco Bay Area and Greater Los Angeles since 1970. In Los Angeles, leaders never developed a consistent vision of the new economy or the region's role in it; in San Francisco, this vision emerged early in the 1980s and was reinforced over time and diffused throughout the region's leadership institutions. Moreover, San Francisco's leadership institutions are stronger and more interconnected than those of Greater Los Angeles, and its political majorities are more consistent over time, leading to more consistent regional policy agendas.
Networks of people and organizations create "invisible colleges" in labor markets, industries, communities, and political leadership. They influence who gets access to other people and hence to implementing ideas and finding resources. This chapter measures the corporate, philanthropic, and leadership networks of the San Francisco Bay Area and Greater Los Angeles since 1980. It shows that they had similar starting points in terms of their structure of connections, but that they diverged. Principal firms and industries in Los Angeles became less connected, while in San Francisco they become more closely intertied, with broader and deeper connections among their boards of directors. Networks among scientists, researchers, entrepreneurs, and firms are much denser in San Francisco than in Greater Los Angeles. There are more industry-building dealmakers in the Bay Area than in Los Angeles. The relational infrastructures of the two regions have become more and more different over time.
The sources of economic divergence lie in their divergent levels and types of economic specialization. Specialization is caused by many forces, including lucky breakthroughs in technology, particular powerful individuals, decisions of key firms at critical turning points, and lock-in effects from initial advantages. Most of these forces cannot be predicted or created. But they must find fertile ground, and this ground is prepared by the ability of the regional economy's firms, leaders, and workers to create and absorb the organizational change that is key to new, high-wage industries. Los Angeles and San Francisco are a striking contrast in these abilities, with Los Angeles's firms and leaders persistently returning to Old Economy organizational forms and San Francisco's firms and leaders consistently inventing the organizational forms of the New Economy that become models for the American and world economies as a whole.
High-wage specialization comes from a complex sequence involving entrepreneurship, encouragement by local robust actors or leaders, breakthrough innovations, new organizational practices, the emergence of supportive overall relational infrastructure and networks, the proliferation of new specialized brokers and dealmakers, the diffusion of conventions or rules of thumb for doing business in new ways, and ultimately the consolidation of major firms. What is common to all processes of successful respecialization of a region's economy is the emergence of the right kinds of networks, organizational practices, worldviews, and beliefs for the region's evolving economic specializations. It is crucial to align understandings and change expectations so as to change policy agendas and to open up new forms of private action. When regional conversations are outdated, the process of organizational adjustment is stymied, as it has been in Los Angeles for 40 years. Old conversations must not crowd out new ones.
The chapter assesses the contributions of regional science and urban economics, the new economic geography, and the institutional approaches found in economics, sociology, and political science to the analysis of urban economic development. The concept of development clubs should guide empirical identification of city-regions that are in different structural categories and their different constraints and opportunities. Each theory has additional empirical and methodological gaps that can be improved on. If this is done, then the field of comparative regional economic analysis will be able to offer more robust insights into economic development.