The Post-COVID Economy 5 — Decentralization

The 3D phenomenon of the post-COVID economy has begun. Among them, Deglobalization and the U.S.-China Decoupling have already been discussed in-depth earlier in Yiu (2020a, 2020b). This time, I will discuss on De-centralization.

In fact, the concentration of industries in certain centers has many advantages. The entire foundation of urban economics is based on the word “agglomeration” (Yiu, 2020c). The reason why cities have economic value is that people and industries want to agglomerate in the city, it can reduce transportation cost, enhances specialization and scale economies; it also helps networking, knowledge spillover and idea sharing (Glaeser, 2011). Therefore, in the past few decades, there are more and more large cities in the world, some even have more than 10 million people, and many studies have pointed out that the size of the city is positively correlated with per capita economic output (Yiu, 2020c).

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Figure 1 Edward Glaeser (2011) Triumph of the City

However, the theory about risk-return is also applicable here. When industry and population are highly concentrated in certain places, once these places are in danger, it will cause disruptions to the whole country, or even to the whole world. The recent pandemic of COVID-19 is a case in point that reflects the excessive concentration of global production in certain countries in the past few decades, especially of medical equipment and medicine. Once an epidemic occurs, the production chain stops, the world faces a major crisis; coupled with the gradual loss of mutual trust among trading partners, the retaliatory behavior in the trade wars between trading partners, production sites have to be decentralized and removed from untrusted countries .

Just like the Portfolio Theory in Finance, the concept is that it is risky to put all eggs in the same basket. The risk must be diversified by a portfolio. Even if the overall return may be reduced, a portfolio can avoid all-or-nothing! For the same reason, in terms of geographical distributions, the production of a good or services should not be concentrated in one place. In fact, since the US-China trade war, some US companies have begun to decentralize and diversify their production to other countries, but at a slow pace and of a very small scale. However, after this pandemic, the decentralization process is sped up. Coupled with the fact that companies are paid to relocate or are ordered to move out, the process will inevitably be accelerated. It will result in a new wave of a global restructuring of production chains.

I have published a paper titled “Spatial Portfolio Theory” (Yiu, 2011). It puts forward a theory that people trying to reduce the cost of uncertainties, they would choose a geographical balance point to decentralize. The theory can also apply to the decentralization process of the production chain. I believe that with the relocation of the industry, the flow of funds will also follow, it may also cause a shift in financial centers.

Recently, I have often heard of suggestions about setting up new international organizations, such as a new World Trade Organization and a new World Health Organization among trustworthy countries. These discussions involve international talks. But the relocation of companies and production lines and the change in procurement policies can proceed without any discussions. The decentralization process may take many years to finish, so as to avoid unnecessary impacts on the production process.

Many Hong Kong people had experience in managing and relocating production chains. In the 1980s, many factories were moved northward from Hong Kong to the Mainland, and a large number of production lines and technologies were relocated. During the process, different problems were often encountered, so the relocation process was normally taken place gradually with a period of a parallel run of the two production lines until the new production plant is stable. Sometimes it takes years to finish. I believe that this time the decentralization process will also take a long time to finish. But during the process of decentralization, many cities may be unwittingly changed.

References
Glaeser, E. (2011) Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier, The Penguin Press.

Yiu, C.Y. (2011) A Spatial Portfolio Theory of Household Location Choice, Journal of Transport Geography, 19 (4), 584–590.

Yiu, C.Y. (2020a) The Post-COVID Economy 3-Deglobalization, Medium, April 20. https://medium.com/discourse/the-post-covid-economy-3-deglobalization-a6aa1cda6fb

Yiu, C.Y. (2020b) The Post-COVID Economy 4 — U.S.-China Decoupling, Medium, April 26. https://medium.com/discourse/the-post-covid-economy-4-u-s-china-decoupling-dc512b855b7e

Yiu, C.Y. (2020c) COVID-19 Switches Up Online Demand and Switches Down Real Estate Demand, Medium, May 7.https://medium.com/discourse/covid-19-switches-up-online-demand-and-switches-down-real-estate-demand-77b729e18590

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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