Responding to the crisis
DETAILED COMPARISON OF IMPACTS OF THE RECESSION AND CRISIS
local responses to the economic crises
at a time of declining profit margins, winning business is key to SME survival. By facilitating this process local leaders are very effectively supporting the SME sector.
Birmingham: Local businesses have asked for public sector contracts to be easily available on a web site. In response, BCC advertises all contracts worth over GBP 50 000 on its publicly available website.
Specialist financing arrangements:
to keep SMEs liquid in sparse times new forms of financing are being used by many localities.
The locality is supporting financing of SMEs by subsidising of institutions that offer loans of trust, solidarity loans, and own equity. The municipal team will develop the system ‘Paris Finance Plus’ which will offer an Oséo guarantee for SMEs looking for bank loans. Specialist training: Often lacking formal training and skill building schemes, SMEs benefit considerably from specialist training schemes in suitable environments.
New SME support vehicles:
some localities have created new teams and bodies to support SMEs. This allows such bodies to be populated by talented individuals and it also creates a clear and obvious platform with which SME leaders can engage.
Lille Metropolitan Community has created a sort of one-stop shop where any company facing an economic challenge can apply directly for assistance. The solutions adopted are described as ‘intelligent, pragmatic and very practical.’
Business Rate relief
Similar to citizen tax cuts and freezes, many localities are implementing and communicating tax and rate relief for businesses. Starved of credit and with margins tight, this response is designed to ease the pressure on the business community. By supporting the business community in this way local leaders are breathing oxygen into their economies – the back bone of successful localities.
Localities across the world are attaching greater significance to the need to develop high value added activities in their localities. The support for and promotion of innovative activities underpins successful knowledge based economies world-wide. Such activities include for instance: high tech manufacturing, creative and arts-based industries and bio-medical firms. Though already underway in many localities, attempts to develop innovative activities to differentiate and diversify local economies have been accelerated in the face of the downturn. .
Faced by revenue pressures and with the need to position their local economies for long term recovery and development, local leaders have used their budgets as tools to tackle the recession. More precisely, local governments have increased taxes, altered their priorities, supported strategic sectors and promoted economic diversification as well as social progress.
Long term strategy
Resisting the temptation to respond to the crisis with reactionary, short term measures, which may actually perpetuate the downturn, many local leaders are remaining composed. By focussing on the ingredients of local economic success over many business cycles and crystallising results in the form of a strategy, local leaders are attempting to smooth boom and bust cycles and promote sustainable development.
Instead of formulating short-term plans to mitigate the impacts of the recession, the Aarhus Locality Development Team is currently engaged in the process of preparing a new urban strategy for the local economy to supersede its previous economic development action plan ‘Growth in Aarhus III’.
To position their economies for long term development and investment, many local leaders are rebranding their localities. It is likely that the recession will reorganise traditional urban settlement hierarchies. As a result, those which emerge will a clear vision and brand have the opportunity to reap significant benefits.
Hard infrastructure investment
As a key component to local economic competitivity many local leaders are supporting the construction of new and the modernisation of old infrastructure. Such projects can vary widely in scope but tend to involve massive levels of investment in public transport systems, keynote mixed use developments and communications technology. Though many projects were in train before the crisis, the recession offers the opportunity to instigate new and reenergise old shelved projects. Such projects not only improve long term competitivity, they also provide a vital source of additional employment during the crisis. Most local economic leaders are aware that these initiatives should not provide short term answers but must be sustainable and in line with the longer term development vision of the locality.
Innovative financing and PPPs
With credit and debt financing so difficult to come by and with many development projects planned to counteract the crisis new funding sources and mechanisms are required. Localities have been particularly active here. Central government and well as international institution support has been sought. Popular finance mechanisms include the leveraging of public land, enhanced PPPs, value capture, bond issuing, new taxes and levy and privatisation of public services.
The crisis obliges localities to maximise their earning potentials. Many see tourism as a sector which can be better exploited to generate income for local government, business and citizens. With the reorganisation of the distribution of global capital associated with the crisis, it is likely that the emerging markets will provide significant proportions of the tourists of the future. Promoting tourism is also a means of diversifying local economies and minimising risk.
Helsinki: To attract new visitors, both Helsinki and the neighbouring Espoo have renewed their web sites. Helsinki’s new Traveller’s Guide has been translated into eleven different languages and the new Nordic Oddity guidebook is geared specifically towards the more trend-conscious visitors.
Green sector development
Though easy to ignore during economic crises, many localities are investing in their green sectors. With green technology likely to become more important and demanded into the future local leaders are taking the opportunity to integrate it more directly into local development agendas. Investing in the green economies of localities also fits well with the need to adopt sustainable approaches to urban development towards the future.
To alleviate the short term distress of businesses and people caused by the economic crisis, many localities have adopted specific short term anti-recession strategies. Though many take the form of a written document, these strategies can also be informal understandings between key socio-economic stakeholders in the development process.
Warsaw: The locality has not announced an official anti-crisis plan as yet. However it clearly has a strategy. A range of measures have been articulated from enhanced PPPs to SME support. London: The Mayor’s Economic Recovery Action Plan (December 2008). Key pillars include: (1) Helping Businesses; (2) Helping Londoners; (3) Positioning London for long term recovery
Special Purpose Vehicle creation or direction
Creation of new SPVs: Many localities have taken steps to inaugurate specific bodies to deal with the impacts of and build effective responses to the recession. These typically take the form of taskforces, advisory groups or monitoring groups. Glasgow: The locality has set up a taskforce to support the crafting and implementation of local scale policies to combat the downturn. The Glasgow Economic Advisory Board comprises of Sir Tom Hunter, Willie Haughey, Jim McColl, Akmal Khushi and Dr Lesley Sawyers.
Directions to existing SPVS: Other localities have tasked existing special purpose vehicles with tackling specific aspects of the crisis. Typically, development agencies are given instructions to focus on mitigating or preventing negative impacts of the crisis and constructing initiatives to counteract it.
Barcelona: In the face of the recession Barcelona Activa, the local development agency, is particularly important. Formally it has four strategic pillars to its work (1) employment policies, (2) human capital, (3) business creation, (4) business growth. All these pillars are reviewed regularly to ensure the response to the recession is as effective as it can be.
The crisis does offer the opportunity to streamline, economise, rationalise, delay and simplify complex processes, projects and governance structures. This process can potentially save hundreds of thousands of pounds. It also represents a symbol that locality government itself is doing all it can to cost save – something citizens and businesses across the locality are also having to do. It creates a sense of unity and trust.
Cross rail in London likely to be abandoned by a future conservative government
Central and regional government alignment
The economic crisis represents a significant challenge for local, regional and national economies. A coordinate response to its impacts is required for two main reasons: (1) resources and power are pooled at different scales; and (2) the causes and impacts of the recession manifest themselves at various scales. As a result, local leaders need to collaborate and align their recovery agendas with other scales of government. At the same time, networks exist to share best practice and know how.
Similar localities network: Involves a number of logistically similar European localities share experience and strengths to find best practices within many areas.
Cologne locality authorities have based their strategy of fighting with the crisis mainly on obtaining additional funds from the national stimulation package. Cologne received a total of EUR 110.3 million from the national Economic Stimulation Package II.
Description of principle negative local impacts
Reduced fiscal base
Declining tax receipts: As businesses close, people lose their jobs, consumers spend less money on the high streets and house prices fall, local economies suffer from a loss of tax receipts. This can have serious knock on effects for the volume and the quality of local service provision which local economies can provide.
40% of the local tax income is derived from institutions such as UBS, Credit Suisse or Swiss Re and tax incomes from financial service sector were CHF 400 million (around EUR 270 million) lower than budgeted for the last fiscal year. The consequence of such was that although city authorities initially expected a surplus of CHF 59 million, they closed the year with a deficit of CHF 179 million.
Savings wiped out: The collapse of some banking institutions has caused unplanned growing budget deficits in cities which had money deposited in them. UK councils: Following the collapse of the Icelandic banking system, 123 councils in the United Kingdom are owed around GBP 920 million from money deposited in accounts held in the country.
Cross border leasing
Slow-down in economic growth rates
Because urban areas are the fundamental drivers of national economies, a recession, defined as a ‘decline in Gross Domestic Production for two or more consecutive quarters,’ and the decline of local economic growth rates go hand in hand.
Job losses: As firms restructure to mitigate the impact of the recession and close because of it, the most obvious result is the loss of thousands of jobs, e.g. The restructuring of Citigroup has seen it cut 52 000 jobs worldwide and in the closure of Woolworth’s 27 000 jobs were lost UK-wide. The ITUC estimates are that 50 million jobs will be lost globally as a result of this financial crisis.
London: Losses could reach as high as 40 000 in the City of London and around 370 000 jobs London-wide - 7.9% of all jobs in London - by December 2012). Brussels: Particularly severely hit; in March 2009 the unemployment rate increased by 6.5% in comparison to the same month in 2008, this growth represents also a month-to-month increase of 1.1%.how does this compare to cities with already high employment is it a good example
Reduced working hours: Some firms, in the hope of saving the necessity to make large numbers of workers redundant, reduce the numbers of hours worked per week by each employee. This measure has been used in other severe recessions.
Berlin: This has been a popular strategy, with 280 firms declaring this fate for 6 000 of their employees in February.
Poor business conditions
The crisis in the banking sector has resulted in many businesses finding it increasingly difficult to obtain credit, or the conditions offered are out of their capacity to meet. Cologne: Around 25% of surveyed companies declared that they suffer more difficult financing conditions. Furthermore, the number of firms that have been declined credit recently increased to 3.8%, compared to 1% the year before. Construction/investment reduction/pause
As credit dries up and infrastructure and the property market stall many previously organised construction projects are cancelled or significantly delayed. This is a significant issue in many of the localities investigated.
Property market decline
The principal cause of the global downturn was the failure of many American’s to keep up mortgage payments, a process which gathered speed since the summer of 2007. The very same banks which gambled by offering home-owners mortgage loans they could not afford began to repossess more and more homes. The knock-on effect of this process and of the downturn in general has been that the house price increase bubble has burst. In the worst hit local economies, reports of significant depreciations in the value of the housing stock have been reported as the market readjusts. This process is also being fuelled by people unable to keep up with mortgage repayments as a result of the downturn.
Edinburgh: house prices plunged by 10% in the last quarter of 2008. Paris: prices are expected to fall by approximately 7% over 2009 with worse falls expected in some neighbourhoods London: One impact of such a readjustment For means many elderly Londoners who had planned to release house price equity for their retirements now cannot.
Already, there have been a number of high profile financial victims of the present global downturn. With the recession originating and gaining speed initially within the financial services sector, this was the first area to be hit hard with firms downsizing and bankruptcies. Many types of firms are now beginning to close however, and whereas in many localities only small firms were affected, this is no longer the case and medium and large firms enter administration. Barcelona: Japanese car maker Nissan recently temporarily closed its factory in Barcelona because of poor demand, particularly for vans and 4×4 models. . Lyon: During the first quarter of 2009, 2 926 employees were affected by bankruptcy procedures; an increase of 213.95% over the first quarter of 2008.
Financial sector turmoil
The financial sector was the first sector to be hit by the effect of the financial crisis and the sector’s activities continue to drive the economy of many localities The degree of severity at which local economies’ financial sectors were affected varies greatly, depending on, for example their global connectivity and previous lending conditions.
Protests: As the recession deepens in local economies worldwide the likelihood of civil unrest increases as residents and workers take to the streets to air their grievances with the way the recession is being handled or to scapegoat certain minority groups, for instance. Paris: On the 29 January 2009 Parisians took to the streets in a Trade Union organised general strike.
Crime: As citizens’ access to capital, through employment, credit etc. declines some are forced to turn to crime to obtain an income. Helsinki: The number of people involved in the illegal drugs trade has increased, as those who used to work in the grey zone on the construction business have moved into the drugs trade. Last year drug police in Helsinki confiscated nearly 43 kilos of amphetamine - about one third more than in 2007.
Changes in the global macro-economic environment can have important implications for local economies. For instance, fluctuations in the value of currencies can impact on important sectors which make up a city economy such as trade. Those reliant on exports and foreign visitors have gained a price advantage whilst those relying on imports have lost out.
The economic crisis has hit France's biggest port – Marselle-Fos with full force and it threatens social unrest. Traffic at the port has fell by 21% year-on-year since the beginning of 2009. Such drop in activity has been in part been explained by the crisis in the steel industry and a decrease in shipping between Asia and Europe, which represents 60% of the container traffic at the port.
Alongside changes in the value of currencies, with populations having decreased disposable income and becoming more cautious with their spending, many local economies are experiencing a decrease in the numbers of tourists visiting and furthermore a decrease in the revenue from each tourist in the city. Prague: Already struggling as the Czech crown's rapid appreciation last year made Prague a considerably more expensive destination, a recent survey of restaurants, hotels, souvenir shops, and travel agencies by the Association of Czech Tourism Offices and Agencies reported that in Prague in the first two months of 2009, revenues were 35% lower than in the same period of 2008.
Locality identity worsened
The onset of this recession marks the end of an economic and urban settlement hierarchy orthodoxy which has prevailed since the last recession in the early 1990s. Indeed, with the emergence of the Chinese economy, there are those who argue this downturn could mark the watershed between the hegemony of western nations and a new and emerging hegemony in the East. Whatever the precise case, the prevailing global urban settlement hierarchy, and each individual locality’s role within it, is undoubtedly evolving. London Confident local economies such as London, whose economies were defined by their financial services cluster and high levels of global connectivity, now question the inevitability of these perceived strengths. The very identity and future of so-called global cities is now in question in the light of the global downturn.
Business confidence reduction
Stung by the impact of unsuccessful speculation either by themselves or others, financiers at the current moment are tending to sit on, rather than invest their funds. As with a decline in consumer spending, a reduction in investment dries up important capital liquidity in the local economy and can create an investment gap between where the locality wants to be and what the locality can achieve given the funds available.
According to global property consultant Cushman & Wakefield: ‘The ramifications of the credit crunch continue to depress the Central London commercial property investment markets. A total of GBP 1.244 billion of transactions took place during the 3rd quarter. This was 40% down on Q2 and represented approximately 20% of the total turnover of Q3 2007, according to the latest Central London investment market figures.’
A study conducted by Cologne Chamber of Commerce and Trade at the beginning of 2009 showed that the confidence index has dropped by 23 points and reached a historic low level of 77.7 points. 50.8% percent of entrepreneurs participating in the survey did not believe that their firm’s performance would increase over the next six months.
Consumer confidence reduction
In part driven by the tangible effects above and in part fuelling them, consumer confidence is integral to the health of local economies. By feeling comfortable enough to purchase (from local businesses), which leads to employment, profits and reinvestment, consumers can create a bottom up stimulus for the economy. However, with the threat of job losses around (which can be a disproportionate fear created by the media and by a general climate of concern) and the requirement of individuals to keep up mortgage repayments, many prefer to save than spend, which sucks the oxygen out of the local economy. This loss of consumer confidence is the key factor in completing the vicious cycle that could hold local economies under recessional conditions until 2011.
With fears heightened by memories of the last recession, consumers in Helsinki are becoming more cautious. According to Heidi Holmberg, an economist at Sampo Bank, ‘people are trying to rearrange their loans, asking for non-amortizing months, while some difficulties have already emerged with credit cards and general-purpose consumer loans.’
With an increase in real and perceived pressures associated with the risk of failure, there is a tendency for leaders at all levels in the public and private sectors to lose their way to some extent.
At the other end of the scale, leadership in the SME sector is also critical, particularly because many businesses in this sector sometimes lack the strategic thinking required to remain profitable through troublesome times. This subject is tackled head-on by the Lyon Chamber of Commerce and Industry, which suggests it to be a problem.
Decline in civic pride
A product of the tangible impacts outlined above and reinforced by a loss of civic identity and lack of purposeful leadership, declining civic pride is an intangible sentiment amongst city residents and workers which sees them less proud about their locality than they once were. It involves a climate of self-depreciating malaise descending on a locality. Fingers are pointed, scapegoats are sought and tensions rise.
The city’s overall success has been closely linked to the impressive financial sector. It contributed to the city’s wealth and architecture, attracted a highly educated workforce and helped create a cosmopolitan feel. With the sector’s demise and its accompanying damming publicity, many London residents have become ashamed of a city and its residents, on which the blame for the global economic downturn is often laid.
Description of the positive impacts .
Improvement in locality identity
Though the transformation of the current urban hierarchy is potentially damaging for established local economies, it presents an opportunity for local economies with less of a global presence which will look to emerge from the recession with a clear and confident identity. Some relatively unknown localities have been exemplified for their success throughout the recession and previous policies which are responsible for this position. Localities can in turn use this new found confidence and attention to attract a talented workforce, businesses and investments.
Improvement in workforce composition
As workers lose their jobs or are no longer incentivised to work overseas because of declining remuneration packages, the attraction of a particular locality for many will disappear. Consequently we are seeing migration between localities as workers move to those with more promising prospects of employment. Alternatively, with a global economic decline, other factors begin to take president for some, for example, proximity to family. As a consequence, many localities are seeing an improved composition in their workface in terms of education and skill. Warsaw: There has, as a result of the financial crisis, been a flux of skilled workers back into Poland and particularly Warsaw from Western Europe where they were occupying low-skilled jobs at the bottom of the labour market, and with no protection from contracts. Many over-qualified Poles ended up working long hours in poor conditions. Now however, booming wages have meant that some workers are paid more in Warsaw than in parts of western Europe, analysts say. Paris: The locality has witnessed the return of considerable numbers of talented finance professionals from London.
Financial sector performing well
In past years, when certain locality’s financial sectors were lending and investing freely without foresight, others were more pursuing conservative investment strategies. These how now served them well as the sector and locality is consequently less exposed to the recession. Within a global hierarchy the locality’s banks have risen, further attracting investors who are looking for safe havens for their money.
Investments carried out more cheaply
In some localities, officials are finding that the economic downturn is helping complete planned public investments at lower cast with firms participating in the public investments demanding significantly lower prices.
Because of firms demanding lower costs, the locality has so far saved PLN 80 million. The economic downturn may also help in the job of preparing for Euro 2012 as demand for unrelated construction eases and prices drop. Marcin Herra, who heads the PL.2012 agency preparing for the event, said the global slowdown in investment increased developers' interest in key infrastructure projects, while falling prices of building materials should make the final price-tag lower. Furthermore, the migration of workers to other EU countries that left Poland short-handed is reversing as construction labourer’s return to their homeland because of the recession.