As previously mentioned there is very little in-depth research on mid-sized communities in Canada (some emerging research here and a great blog here) or the challenges that they face. To small to receive the limelight, media attention and resources of large urban centres; yet they are too big to be highly nimble in a short period of time or able to be reliant on a sole sector . In many ways medium size cities are unique systems stuck in a socio-economic-demographic limbo, with some commentators going so far as to claim that they are doomed.

Windsor-Essex will always remain an “important” due to its geography and proximity to the United State but whether that means that our region will remain competitive or just a “drive through community” remains to be seen.

Gamblers Ruin

So why do mid-sized cities like Windsor struggle? A major missing component  is the lack of private capital, clustering and economies of scale. In 2008 Paul Krugman won the Nobel Prize in Economics for his work on the impacts of economies of scale and trade patterns. Although his work was developed around the modeling of trade flows in the 21st century. As the Nobel Prize committee outlined (underlying mine):

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations. Lower transport costs can trigger a self-reinforcing process whereby a growing metropolitan population gives rise to increased large-scale production, higher real wages and a more diversified supply of goods. This, in turn, stimulates further migration to cities. Krugman’s theories have shown that the outcome of these processes can well be that regions become divided into a high-technology urbanized core and a less developed “periphery”.

Lets be clear, Windsor Essex as a mid-sized community is the periphery in this scenario and in many ways the self-reinforcing process of population, wage growth and economic diversification is struggling to occur here. Transportation costs that emerge from being close to markets are important but the elasticity of these costs are highly variable and those costs are shrinking. This means that as the word continues to get smaller, location, although still important, matters less and less.

Recently, Krugman applied some of his Noble winning theory to some of the challenges that small/medium sized cities face in a NYT op-ed by tying to the concept of Gambler’s Ruin. What is Gambler’s Ruin in the context of mid-sized cities? Imagine two players (two cities – small and large) at a card table with a dealer (global economy) playing to attract new business, investment and talent to their community by betting on the cards that they have been dealt. The large city due to its scale has more cards to play (no one said this game was fair) then the smaller one and every hand there is a cost to play.

For a small community the best play is to actually not to play every hand, all things being equal the smaller city is at a distinct disadvantage when compared to their larger counterparts. Yes there is a cost to be at the table but by sitting out most hands, it can rely its nimbleness or quaintness to exploit a niche to pick its hands to win.  When the perfect hand (opportunity) comes along, the small community faces a handful of possible outcome, it can go all in and potentially be outbid by the larger player and lose its cards, the dealer could win trumping all players with effort being wasted for no gain or it can win the hand (attracting a business/investment).

Unfortunately whether winning a hand or sitting out does come at a cost: the cost the attraction effort, the opportunity cost of other non-explored opportunities, the cost of maintaining a basic level of infrastructure (physical, social, capital) to keep playing the game. Due to the size of the resources available, based on the cost of the effort the return of one hand is almost never large enough to secure their long term future (winning HQ2 or a new OEM plant would be the exception) which is why many smaller communities don’t play this game.

For the large city, their additional cards create additional strategies. They can play many small hands and one by one gobble up small wins (attracting many smaller firms, entrepreneurs and talent due to economies of scale and competitive advantages) much as Krugman describes . Or they can go all in areas of advantage in ways that are beyond the capacity for smaller players to dream of competing (ex. Superclusters). Through their size they can leverage political, geographic and social scale to create future advantages in upcoming hands and to position themselves further ahead as economics centres of gravity, speeding up future amalgamation of resources.

The trap for mid-sized communities/regions is that they are too big to specialized in just one niche, but to small to bully and leverage their economies of scale compared to many rivals. They have to play the game, due to internal market pressures with the big boys, pay to compete with them but in many ways be outclassed. Although niches/competative advantages can be exploited to create a foundation, in the context of a rapidly changing global economy the question is whether or not a handful of niches is enough? Over the long term, the outcome is clear, unless the mid size community is able to create scale or specialization that allows them to compete with global leaders at some point mid-sized communities go bust because the house always wins. This is Gambler’s Ruin (stretched a little).

The Windsor Context

Of course economic development, economic clustering and competition between urban areas is far more complex then this analogy but it does help illustrate the game theory behind where and why businesses/people/investment settle. In the Windsor-Essex context there are a number of identified clusters in our region. To carry the analogy forward the question becomes how many cards does Windsor and Essex County have to play with within these sectors on any given hand? So much of competing in the global economic relies on factors beyond the control of our community. Federal and Provincial incentives/grants, quality of the talent pool and local skills, geographic advantages, quality of life etc many of which are shared with jurisdictions we compete with.

As a mid-sized region (that is decentralized without a regional government – further hindrance), our region doesn’t have enough cards to play every hand, and to be frank we will likely struggle to compete for “game changing” investments. I hope to be proven wrong, but out region has been bidding for the same kinds of investments for a long time and our hand hasn’t come up. On the other side, our chosen niche automotive that allowed our community to grow and prosper to its peak in the early 1990s, appears to be on the downward trend. Given the current climate one has to ask ourselves what does Windsor or even Canada look like without an auto sector? It happened to Australia, and dozens of  rust belt communities just across the border. Given that 20.2% of our local employment is tied to manufacturing, the risk is real and illustrates why mid-sized communities can’t rely only on one sector. Of course, our region has diversified beyond auto but the given the declines in median income, I question if those positions pay as well or employ as many people as our historical manufacturing base. So simply sitting out hands and hoping for the best isn’t an option. We need to play for something, the question is what?

If we are at the global economic card table and playing with limited number of cards, are we betting on the right things that will payoff for the next 20+ years? Are we betting on ensuring that we have a foundation that can keep this region competitive so it can effectively pivot to our future state economy? Are we playing the hands that win us long term social and political capital instead of chasing the short term quick wins? One thing is certain, when you gamble, you eventually go bust. So what we need to ask ourselves is, as a mid-size city do we have the capital (social, economic, political) in the bank the cover the next bust when it comes?