What, exactly, does Auckland do to pay its way?

Last year, I took a look at the geography of the New Zealand economy, finding that New Zealand’s three main cities accounted for at least 56% of GDP. Auckland alone accounted for at least 34% of economic activity – considerably more than the entirety of rural New Zealand:

City share of NZ GDP map v2

(By the way, these figures are likely to under-estimate the size and productivity of the Auckland economy. Dave Maré’s 2008 paper on the Auckland productivity premium used firm micro-data to get a more accurate estimate, finding that Auckland accounts for around 40% of New Zealand’s market economy. See page 15 for figures.)

So Auckland’s economy is large. But are Aucklanders doing anything especially productive, or are we just selling houses to each other? (Or worse, to Johnny Foreigner!)

As New Zealand is a small, open economy, we have a tendency to focus on exports as a key measure of economic success. This makes sense – we can’t make everything locally, so we need to earn foreign exchange to pay for all the cars and oil and smartphones and bicycles that we want to buy.

At a national level, we export around 30% of GDP, which is low by the standard of other small open economies and worrisomely concentrated in a few undifferentiated primary commodities:

Source: World Bank
Source: World Bank

By comparison, a 2010 study commissioned by Auckland Council found that exports of goods and services accounted for around 14-16% of Auckland’s GDP:

The value of Auckland region’s exports has increased relatively steadily over recent years, with an average annual growth rate of around 2 percent recorded for both commodity and services exports for the period 2001-2008. The economic impact undertaken as part of this study suggests, however, that there has been a small decline in the relative importance of export sales to the Auckland region economy over this period. First in terms of commodities, it is estimated that the direct and indirect value added impact produced by commodity exports as a percentage of Auckland’s GDP has fallen slightly from 9 percent in 2001, to 8 percent in 2008…

Measured in value added terms, the direct and indirect contribution of service exports to the regional economy has remained fairly constant over the last decade at around 6-7 percent of GDP.

So Auckland’s not exactly an export powerhouse. What, then, are we doing to afford the food that we’re buying from rural New Zealand and the manufactured goods we’re buying from offshore?

Last year, the Productivity Commission published some new research that points towards an answer. Their report, which has the attention-grabbing title of “Trade over distance for New Zealand firms: measurement and implications“, looks at the degree to which firms in different industries are co-located with their domestic customers. They put together some nifty measures showing how likely different industries are to “trade” across New Zealand regions.

The Productivity Commission researchers concluded that:

In New Zealand, firms producing highly tradable services tend to locate in the main urban centres (Figure 8a). Wellington has the highest employment share in high and medium tradable service industries, reflecting the concentration of government in the capital. Market-based services that are tradable over distance tend to concentrate in Auckland – there is a positive and significant correlation between tradability in market-based service industries and their Auckland-based employment share (Figure 9). As such, around 40% of total employment in market-based service industries in the medium to high tradability category is Auckland-based (Figure 10). For services in the low-tradability category, the share of employment based in Auckland is 32%.

In other words, Auckland has a comparative advantage in producing services that it can “export” to other New Zealand regions. Here’s a key chart from the report, which compares tradability (y axis) with Auckland employment share (x axis) across high-level industries:

PC tradability and Auckland share chart

If you look at the service industries (orange dots), excluding public administration, you can see the clear correlation between tradability and Auckland share of employment. Industries that have to be very close to their customers, like retail and health, aren’t concentrated in Auckland.

On the other hand, four especially tradable service industries – finance and insurance; information, media and communications; professional, scientific, and technical services; and wholesale trade – are highly concentrated in Auckland. (Interestingly, these industries span both blue-collar and white-collar work.)

So perhaps the story is that Auckland “pays its way” by producing services that the rest of New Zealand buys. The work that Auckland does for the rest of the country isn’t always visible – we’re not trucking boxes of it south from Auckland to the Waikato – but it is very real.

Furthermore, Auckland’s “exports” of services to other New Zealand regions have implications for the national trade balance. If Auckland wasn’t doing the banking, engineering, accounting, and wholesaling, we’d probably have to purchase those services from Australian cities instead. (Jane Jacobs would observe that Auckland is following the typical path to urban success – “import-competing” economic growth.)

By way of illustration, consider where Fonterra, New Zealand’s largest exporter of dairy products, chooses to locate its headquarters. They’re not based in Hamilton or Christchurch, closest to the cows and dairy factories. No: Fonterra is in Auckland, which doesn’t produce much milk but does offer the best access to skilled labour, professional services (accounting, legal advice, advertising, etc), and international connections (i.e. the country’s main international airport). They value those services, and recognise that they can’t get as many of them outside of Auckland.

What do you make of Auckland’s role in the New Zealand economy?

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31 comments

    1. I would think it would be mostly allocated to regions. But perhaps there is some element of added-value that the Fonterra HQ adds to the raw processed milk products.

      1. I’d have thought a significant amount will be allocated to Auckland. That is where a large proportion of the employees are and therefore where a large proportion of the work gets done. The Auckland offices don’t just do “value-add”. They actually do the work of running the organisation, sales, managing exports and logistics, administration etc. Just as key as actually processing the milk.

      2. As Ari and Nick say, only the value added in Auckland will be counted there. Work done by farmers, and by Fonterra operations (dairy factories, etc) will be allocated to the appropriate regions.

    2. Fonterra’s earnings are largely allocated to the farms where the primary products are produced. Such as the Kumeu-Huapai area, for example.

  1. Yes, Auckland contributes to the national economy in terms of the vital services it provides to the rest of the country, and it makes up a large chunk of GDP. But if it only makes up roughly 1/3 of the economy and roughly 1/3 of the population then it really isn’t an argument for agglomeration of benefits is it? Ok so maybe it is 30% of population and 40% of GDP that’s a better argument. But overall doesn’t it just mean a lot of productive people and a lot of unproductive people live in Auckland and that on average roughly matches the rest of rural nz? Yes I know calculating GDP is really difficult and prone to many assumptions, but I don’t think its really is a question of rural/urban and which performs better. Isn’t 10% of our GDP from tourism, the vast majority of which is because we have some trees and hills and mud pools and stuff somewhere outside of Auckland?

    Is Auckland a net importer or net exporter of goods? Does Auckland just borrow lots of money from overseas to keep the housing market going? Does Auckland make the trade deficit worse? If we removed Auckland from the equation would our trade imbalance disappear over night? Auckland has lots of people so lots of government spending(and employment) happens in Auckland as well. All these may be a bit more difficult to tell.

    My point is that I agree Auckland is a key part of the economy and has many specialities, but is not necessarily superior in terms of its contribution to the economy. Overall I don’t think it is a drain, but when Auckland stuffs up, the rest of the country feels it.

    1. If AKL is low EXPORT producing and still does 34% of GDP, then I would say it’s providing quite a lot. Especially if what it is providing is effectively increasing exports in other parts of the country.

    2. I was just looking at tourism stats yesterday, actually. About 37% of spending by international visitors to NZ is made in Auckland, according to Regional Tourism Estimates published by MBIE. That doesn’t include international airfares, and of course most tourists also arrive and leave via Auckland (85% or so, from memory)

        1. That’s a bit of a harsh stereotype. We’ve got a lot of major visitor markets, of which Australia is the largest by far. Tourists spend a lot on retail, accommodation, food & beverage, all areas where a lot of value is added, and then they do the other activities as well. We’re often unfairly harsh on Auckland as a tourism spot, but it’s actually pretty successful and a desirable place to visit. Sure we don’t have the flash museums or buildings, and there are lots of gaps in our offering, but there are some pretty special things in there as well.

        2. Auckland tourism is huge, there is actually quite a lot to do in our city, the natural landscape and city life combined into a pretty good mix. Then as everyone does when on holiday, there is shopping, something where a bit of density gives you a big advantage over more rural locations.

        3. Not to dump on Auckland – I quite like it – but I don’t think all that many people come to NZ to see Auckland – Aussies excepted, maybe. We know that average length of stay is pretty short. So I am wondering what other tourism spending is attributable to Auckland because this may be where visitors begin and end their visits but spend more elsewhere. Airfares are netted out, fine. How about domestic fares, rental cars, travel services, et al. Is the Auckland share skewed (in a way) by cruise ship passengers who spend their only time in NZ in a couple big cities? I really don’t know. Depends on how data is collected, too. It’s all very interesting, though.

    3. Auckland is important, and so is rural NZ. Neither is more important than the other. If we get Auckland running efficiently, it’s going to benefit the rest of the country as a result.

    4. Doing some very rough calculations, the three centres account for just under 70% of NZ’s population, but only contributing 56% of GDP. Therefore on a per capita basis, the regions are actually the bigger contributors to the economy.

        1. You are correct – had an error when I copied the Wellington region numbers which gave an incorrect result. Thanks for picking this up.

  2. Provincial NZ prefers to deal with big city experts the way the big cities like overseas experts. From experience there is a perception that if you are requiring professional services in this case design and planning you have to engage an Auckland or Wellington consultant. Catch 22 for anyone thinking of moving to the provinces. Maybe keep a po box in Auckland.

    1. That’s an interesting observation. Being based in ‘provincial’ NZ here, we do look to the local market first for professional services (in our case instructional design, computer software developers and testers, etc) but often ending up having to advertise to Auckland or Wellington (and putting up with the difficulties of working from multiple different locations) simply because there isn’t the expertise located locally (or if there is, it isn’t always available when needed). So while there can be a catch-22, it works both ways too.

      1. The thing is, if the service you need would be in a provincial town, it would probably be in another small town.

        So if a company would move from Auckland to a small town, then most of their customers would still come from out of town. At least in Auckland, a lot of your customers are in Auckland as well.

        And hiring people plays a role too. Being able to choose from all the people looking for a job in, say, central Auckland, rather than the (comparatively) few of people looking for a job in a small town, is a big advantage for those firms.

  3. Interesting. I am not surprised at the decline in exports from Auckland and I wonder if it has declined further. I have some sympathy with the view that the high OCR was having a seriously negative impact on Auckland manufacturing in the few years before the GFC. Trade unions started hearing about redundancies in ‘ones and twos’ (workers), perhaps too widely spread to be noticed, and then the number of redundancies picked up, with some becoming closures later on. There have been significant closures in the years since then.

    There is a certain amount of hype that goes with the move to an economy based on services that does not appreciate how manufacturing itself creates demand for services. When the manufacturing goes, sometimes the services and key functions of the head office will ultimately follow. One wonders if Auckland service industries have obtained more national business as the Auckland manufacturing base shrunk.

    1. Just to clarify, the _value_ of overseas exports from Auckland increased from 2000 to 2008, but the rest of the Auckland economy grew more rapidly. Exports probably took a hit during the GFC, though.

      You’re right that there are linkages between manufacturing industries and service industries, although it’s a bit difficult to make firm predictions about outcomes resulting from a decline in manufacturing. In Detroit, the decline of manufacturing clearly killed off ancillary activities. But in New York, manufacturing (e.g. the garment trade) declined but service industries (mainly finance and business services) actually increased. Auckland doesn’t obviously fit either of those narratives, though.

  4. Was the large spike in AKLs export earning between 1999 – 2002 was linked to higher numbers of overseas students?

  5. As New Zealand is a small, open economy, we have a tendency to focus on exports as a key measure of economic success. This makes sense – we can’t make everything locally, so we need to earn foreign exchange to pay for all the cars and oil and smartphones and bicycles that we want to buy.

    Actually, we can make everything locally from local resources. It’s an outright delusion to think that we can’t.

    If we want to produce micro/nano chips here we can. All it takes is to build the infrastructure – we already have the people with the skills to run it and probably to build it. <A href="http://www.hoovers.com/company-information/cs/revenue-financial.SONY_CORPORATION.1ea4f109cc465528.html"Sony produces about a third of our entire GDP with less people than we have unemployed.

    We have the resources available to do so, we just choose not to as we focus on less valuable tasks like farming and, in the cities, retail services.

    1. Got a 404 error on that link. It’s really not so simple in a globalised competitive marketplace. NZ is a small, slow-growth market, and a high-labour-cost market. That makes it extremely difficult to manufacture goods here that can compete on price because the domestic market isn’t big enough to give the economies of scale to help your margins, and the cost of inputs is so much higher than in China. Throw in cheap ocean transport – or air freight for high-value goods that can get anywhere in the world in 24 hours – and you have a pretty dire set of conditions for NZ firms to compete.

      1. Yet the majority of the money spent on manufacturing an iPhone goes to Germany. Because they have concentrated on providing good quality education and invested heavily in productive, extremely high quality infrastructure, all funded by high taxes.

        So despite the high cost of labour in Germany, the quality of the work is so exceptional that it is worth paying it.

        NZ has chosen a strategy of racing the developing world to the bottom in wages and taxes.

        And aren’t we doing well!

          1. No the iPhone is assembled in China from components made in Japan and Germany because of the quality of product those countries can produce. China just can’t produce that quality of components but is a cheap place to put them all together into the phone.

            http://www.upworthy.com/that-iphone-in-your-pocket-youd-be-surprised-where-the-money-goes-when-you-buy-it
            http://venturebeat.com/2013/07/31/iphone-manufacturing-graphic/
            http://robertreich.org/post/111210323485

      2. Just to make things clear: NZ has a LOW labour cost and very little employee protection. If you aee comparing it with China or other third world countries than NZ has a high slavery cost.

      3. Got a 404 error on that link.

        Sony

        Sorry. Should be fixed now.

        because the domestic market isn’t big enough to give the economies of scale

        Economies of scale is a different argument from can’t. Not that I believe in economies of scale either. A factory in NZ will be just as efficient as a factory in China and costs as much to run (or should do).

        and the cost of inputs is so much higher than in China.

        And that is also BS. China pretty much imports most of the raw materials that it uses to produce anything. In fact, it imports a lot of raw material from us and the exports it back to us once value has been added to it. Value that we could have added ourselves and so,d it into the NZ market cheaper, in real terms, that the dual export model that we have now.

        In fact, IMO, the only reason why it appears cheaper to by Chinese is because of our delusional financial system that makes using more resources seem to cost less.

  6. One of the problems with splitting GDP by area is how you allocate spending. For example in Air NZ spends money all around the country but accounts for it in Auckland then which region do you claim it should be allocated to. Similarly government spending given that GDP is consumption, investment, government spending and net exports (GDP=C+I+G+Nx) the G is spent in Wellington then becomes transfer payments elsewhere which don’t get counted. GDP as a measure of a whole nation’s income or spending isn’t bothered with that sort of detail but regional GDP is and those regional numbers are often inaccurate.

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