Cluster of industries for development

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Sunday, April 16, 2017

http://dailyasianage.com/news-category/14/Editorial

Cluster of industries for development M S Siddiqui

The transformation of the economy and rapid urbanization present many challenges to the government. The economy is integrating into the global economy, especially through export-oriented

manufacturing and human resource exports. Cities are becoming more important in diversifying the economy, creating jobs, and attracting FDI. But productivity and competitiveness are low by international standards.

Three factors account for the country's rapid urbanization: The natural increase in the urban population, the territorial extension of urban areas and changes in the definition of urban areas and the migration of people from rural to urban areas.

The social scientists, economist and planners have no disagreement to shift the production and service enterprises from city areas. Government policies to ease congestion and to decentralize investment and employment pushed people and industries to edge or linear cities along major highways. The enterprises also faces congestion, problems with logistics, and restricted access to the skills that kept companies competitive made it more difficult to achieve economies of scale and lower transaction costs as cities grew.

Business enterprises also try to shift to new urban growth poles, new towns, or economic enterprise industrial zones were created on pre-urban areas. Clusters of cities thus became part of city regions, some with spatial concentrations of manufacturing and service industry activities. Growth spilled over into surrounding areas and satellite towns sprang up as production systems in larger cities became more organized and transport systems expanded.

This growth sustained the manufacturing supply chain and consumer demand. Eventually, adjacent towns were absorbed into the larger cities, giving rise to metropolises and polycentric patterns of urban form and economic activity. In some parts of the world, especially in Asia, metropolitan cities have become megacities, or clusters of interlinked cities and economies. Some of these have developed along the major roads connecting cities and towns.

The spatial agglomeration of business activities creates economies of scale, and competitive businesses and markets. Co-located businesses can also take advantage of externalities and shared infrastructure to reduce transaction costs. Many countries have tried to develop agglomeration economies with a range of spatial tools such as the base economy and industry attraction models.

City clusters can offer shared access to common infrastructure, geospatial proximity for supply chains and networks, and concentrations of human resources and skills, and thus help to lower production and transaction costs. Industry clusters are significant drivers of local economic development. Asian megacities have swallowed up surrounding villages and small towns, and linked with other cities to become city clusters or city regions. Dhaka has been extended toward all direction and township of Tongi, Gazipur, Savar, Narayanganj and Narsingdi.

Much of the thinking about industry clusters has grown out of the concept of agglomeration and endogenous growth theory, where knowledge drives innovation. Cities like Bangalore, Seoul, Singapore, and Hong Kong, China have turned away from conventional infrastructure, low labor costs, and low taxes, and toward highly competitive industry clusters, specialized industries, highlevel skills, and innovation, to develop their economies.

The earliest cities were planned, and infrastructure, housing, and public utilities built, to serve the needs of expanding local populations. Later, as roads and shipping improved, cities began to trade with others, and economic activities in urban areas became more specialized and spatially concentrated. Increased specialization in production and in the functions of cities led to a growing trade, which fueled the economic development of most cities before the Industrial Revolution.

In transforming to become more market driven and integrated into global trade systems, cities in Asia have developed somewhat differently from those in the industrialized countries. Asian cities that have been better integrated into the global economy have invested in maintaining and

improving infrastructure services and the environment, and have supported more open information sharing and transparent governance. Industry clusters-like-minded businesses and talents in a specific geographic location or area-have existed for centuries in cities, which became known for their specializations.

But the industry clusters of today, unlike those of the past, are global, highly specialized, and integrated with multinational corporations and dominated by them. For example, cities like Hyderabad and Mumbai have become important global centers of information and communication technology (ICT), finance, and multimedia, Dhaka is among the world's largest readymade garment production centers.

New economic growth theory rests on encouraging the geographic clustering of economic activities and their supply chains in urban areas, giving rise to a whole new area of knowledge on the development of industry clusters. There has been increasing interest in industry clusters among governments intent on making local economies more competitive but not succeeding despite various reforms. Other factors, many of them related to industry agglomeration, have been seen to come into play. But what makes for the successful development of industry clusters, especially in Asia, is not well understood.

Agglomeration economies have enabled Japanese industries to play the role of "lead goose" in Asia, blazing new trails in finding locations in the region that offer a competitive advantage to companies setting up manufacturing facilities offshore. Many of the cities that have been highly successful in attracting companies from Japan, and later from the Republic of Korea and Taipei, China, especially cities in the coastal regions of China, have strong spatial and economic agglomeration characteristics. This suggests that foreign and local businesses co-locate in those cities to gain advantage from sharing the costs of infrastructure and utilities, collaborating with competitors in purchasing and transport, and networking with competitors to share information and acquire knowledge.

Most businesses in the region recognize the benefits of agglomeration but tend to think of themselves as competitors rather than collaborators. Since industry clusters and agglomerated cities offer opportunities for competitive advantage to competitor companies in the same geographic area, a deeper look into how they function would provide important clues as to how businesses and governments in Asia could become more competitive, productive, and sustainable in support of economic development.

Pursuing the investigation of the economic aspects, two important concepts regarding the planning and transformation cities through clusters have emerged. The first has to do with developing infrastructure, land, and government services and utilities to stimulate economic development. The second concept, a recent one that has gained prevalence because of the effects of globalization and integration of economies, is concerned with creating an enabling business environment in which businesses and governments can stimulate, create, and respond to opportunities and changes in consumer markets and purchaser needs.

Supply-side development tries to create comparative advantage for cities and towns by filling the gaps in basic urban infrastructure and services. Demand-side development, in contrast, recognizes that the means of production and demand for goods and services are dynamic and change very rapidly, so local economies and businesses must respond quickly and manage risks. The second concept is based on keeping the factor costs of production, basic services, taxes, and materials lower than those of competitors. Both approaches are linked to local economic development and to cluster development in cities and city regions as a mechanism for economic sustainability and urban development. Supply-side development views spatial planning and infrastructure as the primary drivers of development.

For demand-side development, on the other hand, the economic factors of competitiveness and governance are the primary drivers. Making Asian cities more sustainable in response to globalization and climate change issues requires a balanced effort that combines both supply- and demand-side development.

The Custer-based City Economic Development (CCED) designed and promoted by Asian Development Bank for sustainable economic growth and development in cities by fostering agglomeration, innovation, integration, and clustering of productive economic activity and land-use activities. The ultimate aim is to create more jobs and income opportunities in cluster cities or city regions. The framework to improve understanding of the factors associated with localized, concentrated patterns of employment and economic activities in cities. Satellite township concentrations of companies in those townships engage in similar types of activities and are often linked by networks of economic activities into larger urban clusters.

The cluster approach to industry economic development and analysis focuses on the cluster actors that think and act together for their individual and collective benefit. Collective gains transcend the sum of the individual gains, because collective thinking, action, and unity, coupled with higher visibility and consequent attention by markets and institutions, lead to exponential returns.

The much talked Detailed Area Plan of Dhaka has a note on Industrial Development only to restrict industrial developments related to ship building and cold storage go down only in the river levee, to ensure environmental requirements for brick manufacturing units and to provide essential support facilities for effective functioning of the industries.

CCED approach provides a systematic methodology to understand the major drivers of local economic development, and to assess strengths and deficiency gaps in advancing the competitiveness of industrial clusters and city-regions. This approach connects knowledge with practice, provides strategic entry points of public-private partnership, and can be a good decisionmaking tool for policy makers (or private sector investors) to have better-informed decisions on investments. Importantly, understanding the anatomy of key competitiveness drivers of urban economies can frame the most effective ways of reducing poverty through the creation of sustainable jobs, best utilizing and building on the skill sets available in the city. Most of this economic growth has been fueled by industrialization in Dhaka and other urban centers. Bangladesh must develop cluster of industries to make the production competitive and to compete with other cities of the region.

The writer is a legal economist