Tuesday, August 23, 2011

Regional Impacts of the Global Financial Crisis: the New Zealand Example

Economic blip or structural flip – cyclical downturn or sea change?
Business cycle, downturn, recession, L-shape, double dip – it doesn’t matter how we describe it, economies the world over are in trouble.  Capitalism has a habit of doing this, long periods of more or less continuous growth followed by a major shake out.  Call it a Kondratiev wave, creative destruction, deep downturn, global correction, bubble bursting, whatever; right now are in the middle of a major economic adjustment.
Out of such moments capitalism has a habit of reinventing itself.  From the turmoil, deprivation, and conflict, a new path emerges, a major structural adjustment potentially very different from what went before.  Relationships among industries, institutions, countries, and regions change.  Economic influence and political power shift; governments start doing things differently. 
So what comes next in the global economy?
There are no easy answers to this question.
Perhaps we are moving on path away from oil dependence which will change the way we all live.  Maybe we are seeing the beginning of the end of American hegemony, the sun rising in the east as it sets in the west.
The current crunch could lead to greater interdependence as trans-national governance becomes more pervasive.  Or we could see the opposite: an unravelling of existing economic blocs.  (This is the dilemma facing the EC as it struggles with distortions created by currency union: how far can it risk economic collapse to achieve greater political unity in the fight against fiscal contagion?)
Perhaps the boundary between public and private sectors will blur further – the Chinese and Singaporean versions of mixed economies have stood up to the GFC so far.  Western governments are still experimenting with public-private models of service delivery.  Or, maybe governments will again temper their ambitions to control economies, allowing the balance to shift further towards market regulation.
And what can we say about regional outcomes?
Given the range of possibilities and complexity governments face, we can only guess at what might happen to the distribution of activity within nations.
On the face of it, economies seem likely to consolidate and activity concentrate geographically.
On the business front, the weaker firms that fail under tough conditions tend to be located in lower order centres.  And rarely do head offices take voluntary redundancy before trimming regional operations, selling or merging them, or closing branches.
In government, public sector cuts happen in the regions rather than at the centre where institutional power and decision-making sit. [1]
At the same time drift of the unemployed and new entrants in tight labour markets might favour larger centres as people move in search of work, training, and education.
There may be decentralising influences, though.  Large cities may be too expensive to live or do business in.  Lower cost housing and opportunities for a self-sufficient lifestyle may make smaller centres more appealing.  Slowing migration might reduce the gains of major urban destinations.
Some New Zealand Evidence
The Global Financial Crisis took hold in 2007.  I have looked at a labour market and construction indicators in New Zealand since to assess its impact on regional performance. 
This is an interim exercise, looking at short-term changes at the margin.  It may be some time before we understand the full spatial consequences of the GFC.  Nevertheless, it may have already impacted on regional indicators, giving clues about how this recession will affect our economic geography in the long run. 
The box below outlines the regionalisation used for this purpose.  More about New Zealand’s regional population growth is contained in an earlier posting.
1.       Auckland –the dominant commercial and population centre;
2.       Wellington – the capital city in a highly urbanised region;
3.       Canterbury – containing Christchurch the largest South Island city and several rapidly growing small settlements in a prosperous hinterland;
4.       The Northern North Island (NNI) excluding Auckland –  including fast growing secondary cities and extensive horticulture, agriculture, and forestry;
5.       The Southern North Island (SNI) excluding Wellington –six slower growing provincial cities, small towns, and extensive farming and forestry;
6.       Otago, a small stable provincial city (Dunedin) and growing resort area (Queenstown), plus horticulture, viticulture, and high country farming;
7.       The Rest of the South Island (RSI) – generally sparsely populated with small service centres.

If recession leads to consolidation, Auckland, Wellington, and Canterbury should experience more growth (or less decline) than the rest of the country.  (In Canterbury, though, the earthquakes of the past year will distort trends).
The labour market
National employment peaked in December 2007 and has eased slightly since.  Consequently, 3.2% growth in the workforce since has been absorbed by unemployment, not employment.  Wellington shows this: the workforce was up 8,000 in June quarter 2011 compared with 2007, but unemployment was up 10,000.
Labour market Indicators, December 2007-June 2011

Labour Force
Rest Northern NI
Rest Southern SI
Rest South Island
New Zealand
Source: Quarterly Employment Survey, Statistics New Zealand
The only exception was Otago.  Here, in the lower South Island,  the momentum of a lifestyle and tourist boom maintained some economic momentum.
The distribution of investment
The following charts use building consent data to show where new investment has taken place.
The area of housing consented in YE June 2011 was just half that consented in 2007.  Auckland’s share of the market dropped from 31% to 24% in 2009, although recovered to 27% in 2011.  But this was in a sharp downturn; new housing consented in Auckland in 2011 was just 45% of the 2005 figure.  Even though the pain is widespread, Auckland has clearly  led the way down.
Office, administration and public services
Office and public service building also fell sharply, although that happened later (2009-2010). The area consented nationally in 2011 was down 36% on 2007.  Again, the main centres lost share even as the market fell; Auckland at 33% (down from 42% in 2007) and Wellington at 9% (24% in 2007).
Much the same goes for industrial building.  Nationally, the area consented in 2011 was 58% of the 2007 figure.  Auckland’s share dropped from 32% to 26%.  The RNI, which had previously picked up much of Auckland’s overspill, fell from 27% to 25%, offset by bigger shares in the SNI and Wellington.  All this happened, though, in a sharply contracting market.

Too early to tell?
It seems that the forces of decentralisation have prevailed as employment growth falters and investment in housing, industry and commerce falls.  Most of the country is suffering, but areas with resource and perhaps production cost advantages seem to have done better than the main centres.  They may be where the best prospects for grass roots recovery lie.
This may change of course, as the government’s preoccupation with Auckland as the driver of the national economy has ramped up (although its strategy of major investments there may be undermined by suddenly urgent demands for spending on recovery and rebuilding in Canterbury).
But it must be asked whether a strategy that concentrates economic initiatives in dominant centres will be appropriate for any new economic order that might emerge from the GFC. 
Might we be looking instead at more dispersed or distributed forms of development internationally and regionally than currently assumed?  This possibility is suggested by the figures to date, which belie expectations of further concentration.  Or is all that they really show that in  today's world there are few certainties about the future shape of the spatial economy?

[1]        The recent streamlining of the tax office in New Zealand promise more of the same, with through two tranches of job cuts focused on the regions. This was justified by the Minister because “back room functions don’t need to be performed there”.  


Anonymous said...

(Dushko Bogunovich, Unitec)

Since your (quasi)conclusion is that "in today's world there are few certainties about the future shape of the spatial economy", could it be that the best strategy to attempt doing both - invest in centres, but invest in the periphery too?
And even if we weren't 'in the middle of a major economic adjustment', but just in the 'normal' times and still going on about our business of seeing our best-return spatial strategy - why do they have to be this-OR-that; why can't they be this-AND-that? Why are so wedded to the black&white, binary thinking?
The seemingly paradoxical strategy I am hinting at, has two sub-alternatives. One might be called 'dispersed concentration' - many centres in one region, forming a regional cluster. The other would be 'concentrated dispersion' - lots of peppering, but only within a clearly delineated region (and not necessarily with an even density).
Whichever it is, we might ask - but where? Where in NZ?
There is no better place, in my view, to do either of the two sub-models above then in the Auckland region (and by 'Auckland region' I do not mean just the new 'super-city'; I mean some areas to the north, south and east of the new Auckland Council boundary).
In Auckland, there are some strong arguments for enticing a centripetal urban economy - creative industries and tourism especially. And the council seems to get that. There are however some strong arguments for a centrifugal economy as well - lifestyle; resilience; weightless economy; intensive farming. This part the Council, in its present obsession with the CBD, Waterfront and 'intensification', does not seem to get. And I fear neither does the central government - even though it does not seem particularly impressed by the Council's current 'compact city' trip.

Phil said...

Thanks, Dushko.
I suspect the centripetal-centrifugal arguments work at several levels, and that they vary according to the rate of growth. A priori the tendency to dispersal may be associated with faster growth as opportunities are distributed more widely, while the tendency towards centralisation is associated with slow growth, as contraction prevails on the periphery.

But the evidence in this post suggests a tendency towards dispersal even in the current tough economic times. Perhaps there stronger underlying forces are prevailing, to do with mature, post-industrial economies; with advanced consumerism in which material goods are of diminishing importance in some households' consumption profiles; and with the rise of the service economy, backed today by the capacity to deliver many services more or less anywhere at any time.

Your reply also raises a question of scale - at what level might we see these contrasting centrpetal and centrifugal influences at work? Certainly in terms of a metropolitan region (and its hinterland), we see both decentralisation, especially of housing and to a lesser extent (perhaps) investment and jobs; offset by a heavy public investment programme in restoration of the centre and its infrastructure. Creating an attractive CBD is good for some fo the people some of the time; but should not be at the cost of the quality of where and how the majority live - which maybe somewhere quite different (see my blog on sustaining suburbia).

At the inter-regional level, the possiblity I am raising is of a reduction in the influence of the dominant or primate cities, and an increasing role for smaller centres with therir lower costs and more accessible amenities.

These questions are probably most relevant to developed rather than developing nations and their cities.

So there are plenty of ambiguities in current thinking and observations about the spatial distribuion of people and their activities. But I agree with you - we need to have policies that cater for both and don't become overbalanced towards one tendency or the other. The risk of the current compact city is that it does not lead to a balance and therefore equitable or efficient outcome. Smart urban development does not depend upon fitting more into less. And if decentralising becomes stronger, the attempt to do so could incur high long term costs.