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Economic lessons for Adelaide from the Phoenix rise

Analysis

Twenty years ago, in the wake of the State Bank disaster, economist Richard Blandy was sent on a mission to the United States to discover the economic secrets of cities of similar size to Adelaide. Here, he revisits his trip to Phoenix, Arizona, and the lessons that have not been heeded in South Australia.

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In an earlier incarnation I was director of the South Australian Development Council, advising Premier Dean Brown when the South Australian economy was going through a rough patch following the State Bank disaster.

Clearing out papers over the Christmas break, I came across the first half of a report of a visit that I made to the USA in May 1996 to see what economic policy lessons could be learned from American states with capital cities about the size of Adelaide.

The states/cities covered in this half of the report were Arizona/Phoenix, Colorado/Denver and Texas/Austin. Others visited were Memphis, Tennessee, and Columbia, South Carolina.

The visit was programmed and coordinated by the US Information Agency in Washington under its Official (Private) International Visitors Program. The effort put in on my behalf by the Americans was immense, including by a large number of private citizens. The service was provided free by the US Government. The Americans I met were hugely supportive of my program,including providing volunteer drivers and guides. I was invited to people’s’ homes for hospitality.

Phoenix, Denver and Austin were chosen because they were in Fortune magazine’’s top 10 US cities, relatively small (and, therefore, more comparable with Adelaide), and had development issues that were of broad interest for Adelaide.

Today’’s article discusses economic development lessons for Adelaide and South Australia flowing from my visit to Phoenix, Arizona.

Phoenix and Adelaide have climatic, geographical and topographical similarities. Phoenix is even drier than Adelaide with half of our annual rainfall. Like Adelaide, it is dependent for water supply on a major river -– the Colorado. Like Adelaide, it is surrounded by hills. It is about a 90-minute flight from Los Angeles; Adelaide is an hour from Melbourne.

But Phoenix has done much better than Adelaide in economic and population growth since 1996. The Phoenix metropolitan area now has 4.6 million residents (two thirds of Arizona’’s population). It has gained about two million residents since I was there 20 years ago. By comparison, the Adelaide metropolitan area now has about 1.3 million residents (three quarters of South Australia’’s population), and has gained about 200,000 residents over the past 20 years – one tenth of Phoenix’’s increase.

Why has Phoenix done so well, relatively, over the past 20 years? The reason is that it has been a much better business location than Adelaide.

World Trade Magazine chose Phoenix as one of 1994’’s 10 most attractive cities as headquarters for global companies, while Forbes rated greater Phoenix among the top 10 US cities in which to start and nurture a business. Adelaide is not in the same league as Phoenix as a location where businesses can thrive.

Phoenix and Arizona consciously set about building a pro-business climate. An important strategy in building such a climate was co-opting private sector people to head the Department of Commerce and other business regulatory agencies (shades of what President-elect Trump is doing in his Cabinet).

Instead of cutting the costs of businesses that are independent of government, the South Australian government has built a “company town” that supports businesses that are dependent on it.

Arizona introduced laws that required state agencies to establish timeframes for granting or denying licences and permits. It then imposed fines on agencies that failed to meet these timeframes. Arizona Business Connection also developed software enabling it to respond instantly with precisely customised sets of forms for every business enquiry dealing with regulations. Business regulation has stuck closely to minimums required by Congress, in any event.

Low land, water and power prices – as well as state business tax reductions  have also been important in underpinning Phoenix’’s success, together with a system of subsidised and customised  training, tailor-made to companies’’ own specifications. Arizona has funded the training costs of firms that created extra jobs, including the cost of using a firm’’s own supervisors to train people in the firm’s’ own plants.

Phoenix’’s economic surge was built, in the first instance, on a big influx of export-oriented manufacturing activity in computer chips, including Motorola and Intel, which have been important in attracting other companies as suppliers. As a result, costs were low. Arizona State University was seen as important in attracting and retaining computer chip manufacturers.

Back offices, including American Express, for example, have been a large and rapidly-growing employer in Phoenix. The back offices were essentially phone and computer banks that provide customer services, advice, telemarketing, claims and billing information, data processing, reservations, order processing and warranty registration across America and the world. Many of the employees were college students in Phoenix, as well as retirees. Such workers have the necessary degree of skill to do the work. While pay was relatively low, it was higher than at fast food outlets.

Providing a high quality of life for executives, professionals and employees generally has also been an important aspect of industry attraction to Phoenix. The rationale for this is that firms will only invest in places where the highly educated and skilled employees that they want to hire are willing to live. Affordable housing, an appealing climate, and cultural and sporting activities (Phoenix Symphony, dance, theatre and music, museum and “events”) are regarded as important parts of this package.

Other factors that have underpinned Phoenix’’s substantial growth have included an early oversupply of office space, little unionisation (with most people employed on individual contracts), a neutral American accent, satellite access to the Pacific Rim and Europe, and online ease of access.

The quality of Phoenix’’s Sky Harbor International Airport has played a particularly strong role in the city’s rapid economic development, because of Sky Harbor’’s shuttle services to Southern California (Los Angeles in particular). In 1996, Phoenix was the 18th busiest airport in the world.

The reason for this intense shuttle activity has been the location of the headquarters of many of Phoenix’’s businesses in Southern California, as well as a “”refugee”” movement of professionals from Los Angeles, who now commute to work in Southern California from Phoenix. This two-way traffic of executives meant that Sky Harbor had to be “liveable,” –which it certainly was in 1996 when I passed through it.

Fostering tourism has also been seen as a principal development strategy for Phoenix and Arizona, more generally. Tourism was seen as having added value because it could advertise the desirable lifestyle offered by Phoenix. Events and conventions can have this sort of spin-off effect. Business group travel was targeted by the state and city governments.

Small businesses rated the following factors as important in a decision whether to locate in Phoenix/Arizona or not:

Adelaide, like Phoenix, provides a very high quality of life, affordable housing, quality health care, a ready supply of commercial property for lease or purchase, friendly people, a well-educated work force, and many other attributes that mirror Phoenix’’s attributes. The countryside is very attractive, tourism is targeted and events are significantly supported.

Adelaide Airport has improved dramatically. Adelaide Oval is a world class venue. So why haven’’t we grown at a rate anything like Phoenix?

The answer is that we have not built a sufficiently pro-business political climate. Instead of cutting the costs of businesses that are independent of government, the South Australian government has built a “company town” that supports businesses that are dependent on it. Woe betide a business that has the temerity to bite the hand that feeds it!

The South Australian Government picks “winners”, calling this “industry attraction”. Nobody is clever enough to do this without picking a large number of “losers” as well. Life picks winners and losers from a spread of options. Competition leads to some firms failing and some firms succeeding. The economy expands because resources are transferred from the failing activities to the expanding ones. We become generally better off as a result. The only sensible share investment strategy is to invest in a spread of prospects, therefore, not to “pick winners” as the South Australian Government likes to do, supporting its choices with preferential treatment if necessary.

The right strategy is to maximise the number of businesses attempting to be successful by making the overall business environment low cost and competitive. This will maximise the number of (often surprising) triers and, therefore, the number of winning businesses, underpinning a rapidly evolving and growing economy – exactly what has happened in Phoenix.

Richard Blandy is an Adjunct Professor of Economics at the University of South Australia, an Emeritus Professor of Economics at Flinders University, and a contributor to InDaily.

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