Tuesday, November 9, 2010

Is bigger better? Trying to reshape Auckland’s lagging economy

Getting Auckland growing – a national policy imperative
It has become conventional wisdom that New Zealand’s performance depends on Auckland’s economy, and that this in turn depends on agglomeration – the supposed economic advantages associated with large cities. 
But is Auckland really the driver of New Zealand’s growth?  It would be nice if it was, if innovation and investment in urban business was the main source of our prosperity.  And hopefully it will be a major contributor one day.  But the truth is, as I pointed out earlier, the country remains dependent on the fortunes of our non-urban sector. 
So how are we going to wind Auckland up from being a place where consumption and income redistribution are concentrated, to be the focus of national economic growth?
Promoting agglomeration to promote economic development
 Policy advisors make much of the virtues of agglomeration – sheer city size – as a driver of growth. [1] By concentrating in our largest urban area, businesses are presumed to reap productivity benefits.  Is this right?  And is it sufficient to drive national economic performance?
The benefits to firms of locating in large urban areas were first discussed late in the 19th century by economist Alfred Marshall. The low cost of transactions with nearby businesses, shared access to specialised services and suppliers, a common labour market, and information sharing explain the advantages enjoyed by firms in big cities.
Arguments underpinning agglomeration economies are firmly rooted in the industrial age.  So they are questionable when wealth is associated with services as much as goods, logistics companies integrate international transport, communications are seamless, and capital moves easily to most places in the world.

There is still some statistical evidence to suggest that firms in bigger cities (or states) might grow faster than in smaller ones.
  The difficulty, though, is in separating differences in performance from differences in the fine mix of products, services, and occupations that naturaly concentrate in larger cities in response to the larger markets there in a cumlative process that is not necessarily economically rational. 
But does it lend itself to policy?
Despite this, agglomeration theory has been adopted by policy makers in two areas. First, has been promotion of concentrations or clusters of businesses as a growth policy.  Second, compact city advocates argue that a higher density of employment in large cities is a path to higher productivity. 
Leaving aside possible flaws in data, methods, and assumptions, the statistical evidence reveals at most 10% gain in aggregate productivity for a 100% increase in employment density.  More commonly the estimated gain is half that.  Anyway, any estimate is so influenced by method and measurement as to undermine any confidence in policy based on it, as demonstrated in a recent report by Motu Research for the New Zealand Transport Agency. 
Surely there are easier, less costly ways to gain a few percentage points in productivity and output: to do with the quality of the labour force, for example, the quality of investment, or commitment to research and development?
Living in policy dreamland
As far as I can see from reading many international studies on agglomeration, the cost of lifting the capacity of ageing infrastructure within existing urban areas rarely gets a mention.  In trying to reveal cause and effect from within a tangled web of associations, the studies assume away the actual costs of increasing land use densities.  They ignore the quite different circumstances and histories of the cities and states bundled into their samples.  And they often mistakenly infer investor and firm behaviour on the basis of trends among cities. [2]
Transforming the buildings and infrastructure that make up a city to increase land use densities in the hope that businesses will screw more out of their investments is a very costly exercise.  The impact on the quality of urban life is also likely to be unacceptable.  Crowding and congestion, the unreliability of over-capacity and dated infrastructure and network services, and increased risk of service disruption mean that significant increases in density are unlikely to be sustainable even if they can be achieved without a fiscal blow-out.
Quite apart from the economic and political naivety of jumping from quantitative analysis to policy prescription, is bigger better anyway?  A simple look at recent history does not show that it is.
Auckland is already bigger – but is its performance better?
A focus on Auckland’s growth presumes that it is our only city big enough to have an international presence, so that we should focus policy and plans on reaping agglomeration benefits there. 
To explore this presumption we look at how well Auckland has done recently.  In 2000 the region had 32.6% of New Zealand’s employees, nearly two and half times Canterbury’s employment. [3] Surely this spectacular concentration of economic activity would become apparent in Auckland’s superior performance?  if agglomeration economies are to be evident anywhere, they would show up here.
Well, no.  Look at the graph.

Auckland’s employment growth lagged Canterbury’s through to 2010. It lagged non-metropolitan New Zealand (areas outside Auckland, Canterbury and Wellington).  And when the global financial crisis hit in 2007, Auckland’s employment fell faster.  Even Wellington, trailing early in the decade, was not hit as hard, down just 0.7% from 2007 to 2010 compared with Auckland’s negative 2.8%.
Naturally Auckland still dominated national employment in 2010 (32.4% of the total), but according to the theory that dominance should have increased not diminished.
So how do we explain this?
First, maybe the economic benefits of agglomeration are overstated.  Tthe empirical evidence tends to be generalised and static.  Despite the growing complexity and apparent precision of analyses, the causal impact on firm performance of lifting urban densities remains fuzzy and trivial. They are a weak foundation for policy.
Second, I suspect that all those factors assumed away in the analyses are actually important in the real world.  We cannot exclude the physical environment of individual cities, their history, the condition of sunk capital (public and private), different regulatory environments firms, and stocks of human capital, skills, and experience. To assume that proximity and density have a predominant influence over the investment and operation of firms seems naive.  And we cannot ignore the external costs of over-concentration.
Third, what if it really works? What if the secret of economic growth is simply being the biggest city? And at the sam time, what if breaking down economic barriers means that the advantage of size is measured across nations, not just within them?  Where does this leave Auckland?
New Zealand economy’s is increasingly integrated with Australia’s. Labour, capital, goods and services move relatively easily between the two countries.  Where does New Zealand stand in an Australasian urban system?  The second graph gives us some clues. Look at where Auckland stands in the bigger picture.
Australia’s metropolitan areas outperformed their New Zealand counterparts between 2000 and 2007. [4] In percentage terms, Sydney was a bit of a laggard.  But this simply confirms that being biggest is no guarantee of top performance.  Melbourne outstripped both Auckland and Sydney. 
More interesting were the second tier cities, Brisbane and Perth. With just 12% of Australasian metropolitan employment in 2000, Brisbane accounted for 18% of its growth!  Compare this with Sydney: with 29% of employees in 2000, it accounted for just 22% of subsequent growth.
Auckland had 7.8% of Australasian metropolitan employment in 2000 but accounted for only 7.1% of growth, significantly less than Perth (11.8%) and a little more than Adelaide (6.8%). 
Two simple conclusions 
One, in a global economy we cannot reap greater economic benefits from urban agglomeration than our Australian (or, especially, our Asian) neighbours. Being the biggest city in New Zealand offers no particular advantage in an international economy.  We have to find a different way.
Two, in both Australia and New Zealand, being biggest does not guarantee topping the economic performance tables.  Let’s do what needs to be done to make Auckland a great place to do business.  But size is certainly not everything in these stakes.
Sure, these are broad comparisons based on general data, but if we think that promoting agglomeration holds the policy key to Auckland’s – and New Zealand’s – economic performance, we need to think again.

[1]        E.g., Ascari Partners (2007) Assessing Agglomeration Impacts in Auckland: Linkages with Regional Strategies, Report to Auckland Regional Council

[2]           It is a mistake to infer the behaviour of individuals from the behaviour of populations, the so-called ecological fallacy. There are exceptions, e.g., David Mare’s Labour Productivity in Auckland Firms deals with micro-level data in an attempt to reveal the impact on individual firms of locating in Auckland

[3]           Based on employment data from the Statistics New Zealand Business Directory. 
[4]           Labour market data is for the major statistical regions in February so that the figures are broadly comparable with the New Zealand Business Directory figures.


Andrew Atkin said...


Sorry for being a bit of a go-hard on your blog, but I want to comment on the Brisbane employment growth finding.

My best guess (only a guess!) is that the employment growth in Brisbane is primarily a reaction to (higher?) population growth...and where the population growth is primarily a reaction to the attractive liveability of this (apparently) particularly beautiful and sunny city.

So, my thinking is that with more population growth you more-saturate the job market with labour, and that in turn allows established businesses to make more money and also employ people to work the night-shift etc (more productive output per capital), and in turn that would attract more capital, creating higher "growth momentum"...

I don't really know. But I think you have to determine the [economic operational] value of city-size in terms of the development of economic output per-capita per-hour of work (the ultimate efficiency of "the machine"), not just employment growth as such.

And yeah, there must be so many other factors depending on the context that it must be hard to measure the value of size on much other than a crude level - if not impossible(?).

-And to say, maybe the key to long-term prosperity is just to first give people a nice home in a really nice location? In my view, as consumer items like cars and dishwashers become ever easier to come by, the raw liveability of a city will become an ever more critical determinant to the competitiveness and success of any given city.

Phil McDermott said...

I want to explore the drivers of urban growth more in future postings, Andrew. But, yes, much of our recent growth has been driven by consumption and this has favoured Brisbane.
This is one reason why migration works - it pushes up final demand ahead of natural population growth. Exporting also increases final demand beyond what would be sustained by the local population and hence is a source of income which should favour the exporting community.
The other argument for promoting inward migration is to lift skill levels and the pool of experience and entrepreneurship in a city or region. I am sure this has played a role in Brisbane where high tech industry, for example, has performed well.
This is one area where a good spatial plan might just help the economy - if it promotes or is consistent with a quality lifestyle. Unfortunately, there is a risk that plans that simply repackage old compact city policies or focus just on where infrastructure goes may reduce the quality of life, or at least diminish those things that make our cities in Australasia

anandhi said...

Thank you for the info. It sounds pretty user friendly. I guess I’ll pick one up for fun. thank u.

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