Sunk Investment Sinks Strategy

Posted by on Oct 31, 2014 in Uncategorized | No Comments

Decentralising jobs away from existing agglomerations of activity is expensive and unproductive.

A common response to the perceived negative impacts of sprawl is to seek to shift jobs to the urban fringes assuming that, by strengthening the relationship between where residents live and work, issues such as congestion and dormitory suburbs can be more effectively tackled.

Despite such goals being common across nearly all major Australian cities there are few success stories. This is in part due to a failure to properly value the sunk public and private investment that has allowed enterprises to develop comparative advantages over the preceding decades. The presence of this historical investment means that:

  • Facilitating the creation of jobs away from existing agglomerations of activity is comparatively very expensive (benchmark projects assessed by Pracsys suggest that a decentralised job may require up to five times the net new public expenditure of a comparable job within existing clusters of activity)
  • There is a time-lag in the productivity of comparative jobs on the urban fringes as the infrastructure and networks required for agglomerations to form are developed. This results in an overall opportunity cost in the productivity and output of the urban economy

To account for this, any economic development strategy that seeks to decentralise employment should clearly justify the scale of intervention required against the opportunity cost of this investment. Unfortunately many don’t, assuming instead that an unidentified source at an unidentified point in the future will invest away from the fruits of previous decisions without reason. This dooms many economic development strategies to remain just well-intentioned stories.