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Economic lessons for Adelaide from its US sister city

Analysis

In the final article in his series on economic lessons for Adelaide from comparable US cities, Richard Blandy writes about what we can learn from the extraordinary rise of our sister city, Austin, Texas.

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In my last two articles, I wrote about lessons for Adelaide from the American cities, Phoenix, Arizona, and Denver, Colorado. In today’’s article I am writing about the third American city I visited in May 1996 on behalf of Premier Dean Brown: Adelaide’’s sister city, Austin, the capital of Texas. Austin and Adelaide had become sister cities because Texas and South Australia were both founded in 1836.

Phoenix, Denver and Austin were chosen in 1996 because they were in Fortune magazine’’s top 10 US cities, were relatively small (and, therefore, more comparable with Adelaide), and had development issues that were of broad interest for Adelaide.

Austin and Adelaide have climatic, geographical and topographical similarities. Austin is wetter than Adelaide, with 50 per cent more rain annually. Austin, like Adelaide, also has access to water from a major river,– the Colorado,– which is dammed into a series of splendid lakes, starting with Lake Austin in the city and winding back into the attractive hill country which borders Austin to the north-west. Austin is a 30-minute flight from Dallas and Houston, and an hour-and-a-half by air from Atlanta, Denver and Phoenix.

In 1996, both metro Adelaide and metro Austin had populations of about one million. But, like Phoenix and Denver, Austin has done much better than Adelaide in economic and population growth since then. Austin’s metropolitan area now has two million residents (less than 10 per cent of Texas’’s population), and has doubled in size 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.

Why has Austin done so well over the recent past? The reason, as was the case with Phoenix and Denver, is that it has been a much better business location than Adelaide.

Global Trade Magazine chose Austin in 2012 as the “city most likely to succeed” because of its low tax structure, key incentives and record of growth. In 2016, Forbes rated greater Austin as “No. 1 city of the future”, after rating it as the best city for jobs growth in 2013. It has major technology, software, pharmaceutical, biotechnology and back-office industries. Austin produces more patents than any US city except San Jose.

Companies are said to be able to cut costs by 25% by moving from Silicon Valley to Austin.

Austin is also called the “Live Music Capital of the World”, with more than 100 live music venues. Already in 1996, the music scene in Austin was world class and one of the anchors that attracted well-educated people to Austin.

On the back of its musical vitality, recording studios and sound stages emerged, with the culture and entertainment industry becoming a big employer in Austin in its own right.

Austin and Texas succeeded because they consciously set about building a pro-business climate. There is no state or local corporate income tax in Austin, nor is there state or local personal income tax. Retail sales tax is 8.25 per cent, however.

Texas is also a ““right to work”” state:  union membership in private industry is estimated to be less than 1 per cent. Nearly all private sector employment contracts are individual contracts. There is also a strong entrepreneurial spirit due to Texas’’s history of independence, its strong commitment to individual property rights and low levels of regulation.

Low land, water and power prices – as well as state business tax reductions have also been important in underpinning Austin’’s success, together with a system of subsidised, customised, training, tailor-made to companies’ own specifications (as in Phoenix and Denver).

In 1993, the Texas legislature created a firm-customised “Smart Jobs Fund Program” (subsequently replaced by a “Skills Development Fund”) run by the (new) Texas Workforce Commission. Using these vehicles, Texas 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.

The Skills Development Fund is the state’s premier job-training program providing local customised training opportunities for Texas businesses to increase the skill levels, productivity and wages of the Texas workforce. It is also used by the state government in enterprise attraction, by offering to fund the customised training of a business if it relocates or expands (in Austin, say).

In 1996, there was a single page application form and only three pages of rules for the Skills Development Fund.

Like Denver, by 1996 Austin had declared much of its commercial real estate an “enterprise zone” to enable businesses locating there to qualify for significant investment and job creation tax breaks.

This was an important factor in Samsung and other tech companies,like IBM, AMD, and Intel, locating in Austin, along with hundreds of suppliers of etching equipment, robotics, photo masks, chemicals, and so on, and a large number of companies that design semi-conductors. There are also a large number of software companies, including BMC Software, Evolutionary Technologies and Trilogy Development Group. Computers are also produced in Austin by IBM, Dell and other companies.

It makes no long-term economic sense for the South Australian Government to subsidise wages using taxpayer’s’ money.

Austin’’s high-tech industry grew because the University of Texas developed a major role in computing, electronics and software, servicing the Johnson Space Centre at Houston thanks to the organising capability of a brilliant academic, Professor George Kozmetsky. In 1977, Kozmetsky founded the IC² (Innovation, Creativity and Capital) Institute at The University of Texas at Austin, while he was Dean of the College of Business Administration and the Graduate School of Business.

IC²’s focus was (and is) the effective commercialisation of science and technology. It teaches a Master of Science Degree in Science and Technology Commercialisation. It runs a Centre for Commercialisation and Enterprise (C2E), the Austin Technology Incubator (ATI), and the Texas Capital Network (TCN) – matching entrepreneurial ventures with investors. – It was also a main force behind the establishment of the Austin Software Council.

C2E has developed commercialisation strategies for universities, government laboratories and research consortia, as well as the R&D departments of major corporations. Over the past decade, ATI companies have added nearly $1 billion in economic value to the Austin area, creating approximately 7,000 jobs and generating more than $20 million in local tax revenue.

Quality of life and superb infrastructure, as well as lower costs, and leadership by IC², are reasons why Austin has been successful in persistently raiding Silicon Valley. Companies are said to be able to cut costs by 25 per cent by moving from Silicon Valley to Austin. As in Phoenix and Denver, providing a high quality of life for executives, professionals and employees generally has also been regarded as a very important aspect of industry attraction in Austin.

As in Phoenix and Denver, back offices have been a large and rapidly-growing employer in Austin. Back offices are customer support and telemarketing operations. Technical support for computing and IT communications have been, of course, very fast-growing activities over the last 20 years.

Austin-Bergstrom International Airport, opened in 1999 on the site of the former Bergstrom Airforce Base, has played a strong role in Austin’’s rapid economic development. The airport’s 16 commercial airlines and their regional partners serve 48 destinations in North America and Europe carrying a total of 12 million passengers in 2015. The airport is the 34th busiest airport for total passengers in the United States.

Adelaide, like Austin, 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, a strong music and arts scene, and many other attributes that mirror Austin’’s. So why hasn’’t Adelaide grown at anything like the very fast rate of Austin?

The answer is that we have not built a sufficiently pro-business political climate. Our costs are too high relative to our productivity.

State Treasurer Tom Koutsantonis implicitly admitted this in last year’’s State Budget when he introduced a $10,000-a-job State Government subsidy for new, full-time employees, aiming to create an extra 14,000 jobs over two years. The scheme is exceeding its targets, according to a news release by the Treasurer on January 22. This scheme is similar in intention to the effective enterprise zone schemes that operated in Phoenix, Denver and Austin, when I visited in 1996.

The State Government now has evidence from its own Jobs Accelerator Grants scheme to make a case before the Fair Work Commission that, until some target rate of unemployment is reached, new, full-time employees should be paid $10,000 less than their Award or Enterprise Agreement wage over their first two years with an employer. It makes no long-term economic sense for the South Australian Government to subsidise wages using taxpayer’s’ money.

As I have argued persistently in this column, the appropriate, general, economic development strategy for South Australia is for the state and federal governments to cut business costs in South Australia (including wage costs), and to cut business taxes and business regulations in this state to induce investment in a spread of prospects across many sectors. This strategy underpinned the rapid economic development of Phoenix, Denver and Austin over the past 20 years.

Our resulting economic development prospects will not only be in exports of goods and services to interstate and overseas markets, but in replacing imports of goods and services from interstate and overseas with locally-produced goods and services. Businesses selling to the South Australian market will benefit as well as exporters.

Back-office activity will be stimulated, in particular, mopping up underutilised real estate assets as well as providing flexible working arrangements for many people in South Australia struggling to supplement their incomes.

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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