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:
(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:
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:
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?