The Divergent Development of Urban Regions

FOR THE FIRST TIME IN HUMAN HISTORY, MORE THAN HALF of the world's population lives in urban areas. Eighty-five million people per year are moving to cities worldwide, most of them in the developing world. The most populated six hundred urban areas, or metropolitan regions, concentrate about a fifth of the world's population and about half of world economic output; these proportions will rise to a quarter of the population and more than 60 percent of output in just the next fifteen years (McKinsey, 2011). Indeed, the concentration of economic output in cities is even starker: just 23 mega city-regions (with ten million people or more) produce about a quarter of world economic output. This is not just due to the rapid urbanization in the developing world. Fully 90 percent of U.S. economic growth since 1978 has come from 254 large cities and 50 percent from the 30 largest metropolitan regions. About half of U.S. employment is located on 1.5 percent of its land area.

Even though the world is urbanizing, cities continue to have very different levels of economic development. Within the United States, for example, large metropolitan regions (with more than 1 million people) have average per capita incomes that are 40 percent higher than the rest of the country. On a world scale, residents of larger cities earn incomes that are about four times the global average. Incomes in large urban areas range from about $2,000 per year in Cairo to about $75,000 in cities such as San Francisco, Oslo, and Hartford, Connecticut. Finally, significant differences remain in income levels among metropolitan regions within single countries; in the United States, per capita income in Brownsville, Texas, is $23,000 per year compared to about $75,000 in the San Francisco Bay Area or Washington, D.C., or about a one-to-three ratio.

Economies have forces that sometimes allow development levels to become more similar and others that sometimes pull them apart. The income levels of U.S. states converged from 1880 to 1980, where the richest state (Connecticut) went from being 4.5 times as rich as the poorest (Mississippi) to just 1.76 times. But such convergence came to a stop around 1980 (Ganong and Shoag, 2012). Over the course of that century, U.S. city-regions went up and down the income rankings, fluctuating much more than states. Intermetropolitan per capita income convergence also came to a halt sometime in the 1980s (Moretti, 2012; Drennan and Lobo, 1999; Yamamoto, 2007).

The pattern of income differences between countries and cities changes over time. For countries, economic historians refer to a Great Divergence: China was by far the richest nation in the world in 1492 and still had a higher per capita income than Spain or Britain in 1750. It spent the next two and a half centuries falling behind the West before beginning its climb back up the income ladder in recent years (Pomeranz, 2000; O'Rourke and Williamson, 1999). We now speak of a new "great divergence" in development between city-regions within countries (Moretti, 2012). This means that while it will be essential to promote and sustain urbanization as a key basis for prosperity in the twenty-first century, urbanization alone will not ensure prosperity for every city-region. In the United States, Detroit was the sixth richest metropolitan region in in 1970; it is now 52nd on the list. Boston is now one of the top five American metropolitan regions in income, but it has had many ups and downs in its four-century history and it was down and out as recently as 1980 (Glaeser, 2003).

In this book, we study the divergent fates of two great California city-regions, Los Angeles and San Francisco. In 1970, they had similar levels of per capita income and were fourth and first, respectively, among U.S. metropolitan regions. In 2010, they had almost a one third difference in per capita income and Los Angeles had slipped to 25th place. Throughout history, these kinds of changes in fortune have occurred in the world's great city-regions, often due to war or political change. But in the case at hand, they occurred because of the way that two wealthy, highly developed city-regions entered the New Economy.

In typical lore about these two cities, Los Angeles is said to have fallen on hard times because of the loss of much of its aerospace sector after the end of the Cold War, a flood of low-skilled immigrants from Latin America, and governmental failure. San Francisco won the information age lottery, becoming the world center of that technological revolution and hosting highly skilled immigrants. But none of these factors explain why these two cities diverged from similar starting points, and we will demonstrate in this book that the divergent process of change was principally due to the different ways the two economies reshaped their social and economic networks, the practices of their firms, and the overall ecology of organizations in their economies.

Two Great City-Regions: Los Angeles and San Francisco

By any standard, the Los Angeles and San Francisco metropolitan regions are large, wealthy, and dynamic. Los Angeles, in this context, means the Greater Los Angeles metropolitan region (known officially as the Combined Statistical Area [CSA] encompassing five adjacent, continuously urbanized counties (Los Angeles, Orange and Ventura, and parts of San Bernardino and Riverside). Los Angeles is one of the largest economies in the world. In 2011, its nominal gross metropolitan product was $897 billion, which would make it the world's 16th largest economy, after Mexico (112 million inhabitants) and before Indonesia (220 million). Los Angeles had 18.08 million residents in 2011, making it the second most populous metropolitan area in the United States. Meanwhile, the San Francisco Bay Area generated a gross metropolitan economic output of $575 million, with a population of 7.5 million, making it the world's 22nd largest economy, just after Argentina (35 million) and before Sweden, with 9.6 million people.

Los Angeles is perhaps best known for Hollywood's entertainment industry, though it has a highly diversified economy. Its icons are the palm-lined streets of Beverly Hills and the mansions of Malibu, the hundred-mile string of wide sandy beaches along Santa Monica Bay and the Orange County coastline, its car-and-freeway landscape, and a way of life shaped by its year-round sunny, temperate...