Time to wake up to the California dream

The golden state has been hugely successful at creating jobs in the high-tech sector. That it has done so largely without government interference offers lessons to the UK on the limitations of the role to be played by politicians

THE CHANCELLOR wants to boost high-technology industries in Britain (see Diane Coyle, page 4), but what could he learn from the high-technology capital of the world, California? A brief visit to Los Angeles last week has convinced me of two things. First, that generating new high-tech industries is the best hope not just for job creation but for general economic growth. The second is that boosting high-tech industries is a complex, subtle process in which governments have a role - but not necessarily a very direct one.

The starting point is the extent to which the high-tech sector has become the engine now driving US economic growth. There has been some interesting work on this by the Milken Institute, the LA-based economic research group founded by the controversial American financier Michael Milken but run as an independent not-for-profit organisation.

The institute has split GDP growth into that generated by high-tech activities and that by low-tech ones and come up with the results shown in the graph. As you can see, seven years ago high-tech accounted for only a tiny part of the growth in the economy. Now it is generating three-quarters of the growth. Indeed were it not for the high-tech sector the US economy would have been bumbling along at less than 1.5 per cent growth instead of reaching nearly 4 per cent.

Information technology now accounts from more than 50 per cent of capital spending and in addition some low-tech spending has a high-tech element to it. Further, the US leads the world in the proportion of GDP accounted for by information technology: more than 6 per cent, compared with 4 per cent in Japan, 3 per cent in France, 2.7 per cent in the UK and 2.2 per cent in Germany.

The biggest single beneficiary of this boom has been California. The economy is enormous: were California a country it would qualify as a member of the G7, displacing Canada, and is not far behind Italy in size. The state suffered a serious economic setback in the early and middle 1990s with the rapid downsizing of the aerospace and defence industries. In 1993, 1994 and 1995 there was net outward migration: the number of Californians leaving was larger than the flow of immigrants from abroad. But thanks to the high-tech boom that has been reversed and California and Texas are joint second in new jobs created as a percentage of total employment. (Nevada is way out on top - clearly gambling is a better business even than high-technology.)

Looking ahead at future job creation the same message emerges. Out of the top 10 occupations that are expected by the Bureau of Labor to show the fastest growth in the years to 2006, the top three - computer scientists, computer engineers, and systems analysts - are all related to technology.

So it is surely abundantly clear just how important high-technology has been in the US in general and in California in particular. It is a simple story and an enormously important one. However, when you turn to the second point - whether governments can do much about it - the tale becomes much more tangled.

Take education. Those new jobs for computer scientists and engineers will need graduate qualifications, which in turn requires good basic schooling first. But California has lagged behind the rest of the US in the quality of its basic public sector education. The professional classes have flocked to private schools. There has been the particular problem of trying to cope with Spanish-speaking immigrants, and it has been a hot political issue as to whether these children should be taught in Spanish or English. (Voters have recently decided that it should be English.)

At the conference I attended (organised by the Milken Institute) both the state governor and the mayor of Los Angeles cited public education as a state failure, an area in which they had to do better. Apparently many of these new jobs the economy is creating go to incomers because the education system is not delivering sufficiently well-educated local employees.

But the fact remains that despite poor education, the economy was still generating the high-tech jobs. So it would seem that while good public sector education is essential to train the people to fill the jobs, poor education has not hampered job creation as such.

I suspect this is because the Californian elite is wonderfully educated and educated with that combination of mental agility and "can-do" that is necessary to create the new giant businesses of tomorrow. But that is a general point about the US: the best are terrific and can pull along the rest. What seems clear is that government, either at a state or a national level, has not had a lot to do with the successes of the US education system.

What has government done then? Well as far as Los Angeles is concerned I was told that the great success of local government has come after the LA earthquake. You may recall those pictures of the collapsed freeways and stories about the speed at which they were repaired. I was told that the city, which had had a rough time in the middle 1990s, suddenly pulled together again. Good governance at a local level is arguably more important than any national policies.

If that is right, then the message for a more centrally-governed country like Britain is quite subtle. It is that by all means try and improve the education system. There are all sorts of social and economic reasons for doing so, not least that if you are successful at creating economic growth, you will need well-educated people to fill the new jobs. But the impetus for growth will be bottom-up, not top-down. I always have the impression that people in LA work very hard. Governance there has been very good at not placing obstacles in the path of people who want to work hard. This has resulted in a generally pro-business environment, but also in one which seems to foster the creative chaos which, to the outsider, seems to characterise California. This may seem a rather negative view of the role of government - first, do no harm - but it is not a bad starting point.

This somewhat chaotic Californian model for a high-tech growth economy may not be naturally transportable elsewhere, and there are costs to it. But if you want growth, it is hard to argue with a region that has gone from a starting start to the world's seventh largest economy in three generations, and will, on present trends overtake Italy to become the sixth largest within the next one.