This article was originally posted on Making Christchurch, a group blog set up by Barnaby Bennett in the wake of the 2011 Canterbury Earthquake, at the invitation of Transportblog commenter Brendon Harre. While it’s focused on Christchurch, many of the ideas in the article apply everywhere.

The paradox of the New Zealand economy, to many, is that we are a highly urbanised nation that specialises in trading agricultural commodities. This isn’t a new phenomenon. According to Statistics NZ, New Zealanders have mostly lived in cities for roughly a century:

Stats NZ historical urbanisation rate chart

Economic activity has followed the balance of the population, with the result that the majority of New Zealand’s economic activity is now concentrated in its three main cities. Based on some conservative estimates, the Auckland urban area accounted for 34% of the country’s gross domestic product (GDP), Wellington accounted for 12%, and Christchurch for 10% in 2013.

This has important policy implications. New Zealand’s future economic success will increasingly depend upon what happens in its large cities, Christchurch included. A robust rural economy, while important, is not sufficient to raise our living standards. And, increasingly, the drivers of economic growth in cities are different than the drivers of growth outside cities. Urban economic growth is less about the physical quantity of things being extracted or processed, and more about productivity growth and innovation – doing more different things with fewer inputs.

Agglomeration economies in theory and practice

How does this work?

Economists have used the term “agglomeration economies” as a catch-all description for the economic forces that shape and sustain cities. It describes the productivity gains that arise as a result of urban scale and density. However, the term may conceal as much as it reveals.

Agglomeration is not a single process, but a variety of different types of processes that occur in cities, e.g.:

  • Geographical concentration allows firms to reduce supply chain costs and access more specialised inputs
  • Increased accessibility between firms and workers allows better skill matching and growth prospects
  • Proximity facilitates knowledge spillovers between people with clever ideas to share.

Economies seldom stand still, and agglomeration economies seem to enable them to move forwards faster. That’s backed up by the empirical literature. For example, Graham and Maré (2009) find that when places in New Zealand experience increasing density of employment, they subsequently become more productive. (Other research has also found evidence of bidirectional causality – i.e. productive places also tend to attract more jobs.)

How do cities trade?

A well functioning urban economy – one in which firms can trade with each other, workers can access jobs, and everybody has spaces where they meet and share ideas – will generate new goods and services and proliferate successful innovations widely.

In doing so, cities also rely upon inputs from rural areas and other cities – food, energy, consumer products, investment goods, and so on and so forth. Consequently, they must trade with the outside world. So what do New Zealand cities sell?

One answer is that they export things that are difficult to measure properly. Service exports, for example, tend to be difficult to measure as they leave through fibre optic cables or in the heads of business travellers rather than on container ships. But even acknowledging the measurement difficulties, New Zealand cities don’t seem to directly export that many services. The available data for Auckland suggests that it exports goods and services at about half of the rate of the overall New Zealand economy. Christchurch probably performs similarly.

However, overseas trade is only part of the picture. As the Productivity Commission highlighted in a recent inquiry, urban service firms can play an important role in goods exporters’ value chains. In other words, the cities pay their way in part by “exporting” services to the countryside:

PC dairy industry supply chain diagram

In a related report, entitled “Trade over distance for New Zealand firms: measurement and implications“, Productivity Commission researchers took a closer look at the location of domestically tradable service industries. Among other things, they found that Auckland had specialised in tradable services. Is Christchurch similar?

Here’s a quick look at the issue based on the Productivity Commission’s data. Among the service industries, there is a negative correlation between tradability and Christchurch’s share of national employment. Christchurch has a below-average share of employment in highly tradable service industries like finance and insurance and information, media, and telecommunications. On the other hand, it does have an above-average share of employment in manufacturing, a relatively tradable sector.

PC tradability and Christchurch employment share chart

How is the Christchurch economy evolving?

This is high level industry data and undoubtedly does not capture many of Christchurch’s particular areas of specialisation. But it does suggest that the city may still be working on finding a strong niche in national and international markets. There is definitely a risk that Christchurch remains a large “market town” for the Canterbury Plains.

But how is the Christchurch economy evolving? Is it moving into relatively tradable or knowledge-based industries that may foster stronger agglomeration economies?

We can use detailed industry- and location-specific employment data published by Statistics NZ to examine how local economies have evolved in recent years. While there have been some other broader shifts taking place – manufacturing job losses starting in the mid-2000s and slow growth in retail and distribution sectors – I want to focus on two industries that have experienced significant amounts of change.

The following chart compares employment growth in construction and in professional, scientific, and technical services with overall employment growth in Christchurch. Both have generally grown more rapidly than average over the last decade, and experienced further growth following the Canterbury Earthquakes.

Christchurch employment growth in selected industries chart

The construction industry plays an important part in cities: it builds (or rebuilds) urban places. Building jobs have doubled in number since the earthquakes, as people migrate in or enter the workforce. But this is a temporary phenomenon – construction employment will subside once the insurance payouts and anchor projects stop.

Professional service firms also play a role in building cities. They provide architectural and planning advice, design transport networks, and assist people in thinking about where and how to invest in the built environment. Furthermore, these firms tend to benefit strongly from agglomeration economies as they often rely upon proximity to customers, competitors, and collaborators. A well-built city is a good place for an innovative professional service firm to be.

What are Christchurch’s future prospects?

Ultimately, it is hard to tell where a city is going from a distance. Individual residents and entrepreneurs are better placed to understand which opportunities are being grasped and which are slipping away.

That being said, it is worth talking about the nature of the opportunities created by the Canterbury Earthquake. The common assumption is that the rebuild will benefit the city in two ways: first, by providing a short-term injection of economic activity; and second, by leaving the city with a set of buildings and places that it can enjoy in the future.

However, the real long-term benefits may lie elsewhere. Rebuilding a city is hard. Not many cities have the capability to manage it themselves: they must import materials and people and ideas from elsewhere to get the job done well. This creates a valuable opportunity for “learning by doing”, as local firms acquire knowledge and test it out themselves.

As the great urbanist Jane Jacobs argued, this process is integral to urban economic growth. Innovation often begins when cities import new goods and services – and then figure out how to make them locally or adapt them to the local context. As she says, “economic life develops by grace of innovating; it expands by grace of import-replacing.”

The rebuild has the potential to encourage this process in Christchurch. So we might ask: what are the builders and professional service firms learning in the process? Are they figuring out how to adapt other cities’ ideas and shape them to fit in the New Zealand context? And when the road works end and the cranes clear out, what will they do next?

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  1. This is a good illustration of how cities contribute to the economy even if they don’t ‘export’ much – Figure 4.1 is a keeper.

    On the ‘tradeability’ point, I’d say Christchurch may be more tradeable than it looks. Agriculture and mining are typically tiny in cities, and manufacturing is quite large – that sector is 11% of nationwide employment, so it’s a lot bigger than many of the small industries in the graph. If you excluded the primary sector and focused on the other data points, and weighted them for employment, Christchurch would be looking quite good I think.

  2. But this is a temporary phenomenon – construction employment will subside once the insurance payouts and anchor projects stop.

    Maybe not.

    There is a construction investment boom occurring in all Australasia. All million plus of the cities of the region (except one) are experiencing record construction numbers. Brisbane, Sydney, Melbourne, Adelaide, Perth are having high apartment and office space builds. This is part of an Asian Pacific trend that has seen a lot of direct investment into construction. Even without the earthquakes Christchurch would be in the middle of a construction boom right now and still have more construction to come.

  3. Peter big cities have consumptive agglomerations as well as productive ones. Is that a factor for Christchurch? Being the largest urban area in the South Island some people must be attracted to Christchurch because they can consume things there that are not available in other parts of the Island.

    I am thinking of places such as the new Science Alive rebuild

    And the proposed Christchurch Adventure Park -Attractions at the Christchurch Adventure Park will include a 4-seater high-speed chairlift, world class mountain bike trails to suit all levels of rider, an exhilarating mountain coaster, zipline (flying fox) canopy tour, sightseeing, lodging, bike rental, retail facilities and a bar/restaurant at the base of the chairlift.

    Peter should Christchurch be working harder on making itself attractive on the consumptive agglomeration side too?

    1. Hi Brendon – good point to highlight agglomeration economies in consumption! I was thinking about saying some words on the subject in my next Making Christchurch guest post.

      I’d agree that this is an important area to focus on for Christchurch and other medium-sized cities. Good consumption opportunities are important to attracting and retaining people through the ups and downs of business cycles. Furthermore, sustainable advantages in consumption are probably easier to engineer with policy than advantages in production, as they rely more on the supply of genuine public goods – parks, art galleries, schools, etc – that are easier to fund in larger cities.

  4. I guess someone living in Lawrence buying property for $20 per square metre is a sucker for not reaping the benefits of the big city scale of economy and paying $12,000 per square metre to live in a small box high up off the street with not a blade of grass in sight.

    Agglomeration economies benefit business, not the people. It’s actually a bad thing, not a good thing. Auckland is proof of that – where agglomeration benefits are maximised, is also where it’s the hardest to live, and by far, the most expensive to live. You pay dozens and even hundreds of times more for your space than you will in suburbia, due to the induced demand of cramming so many jobs into a small area, leaving workers there with no choice but to choose between an ultra-expensive living location or an expensive commute.

    Economists love it – thus the continuing portrayal here of agglomeration benefits as being a good thing when they are not. I would even say they are a con.

    1. Geoff I get where you are coming from. What you describe is a problem that has challenged economists since at least Henry George’s time if not earlier.

      In my mind agglomeration benefits is something created by the community -it is their combined numbers, their businesses, their public works which have created this highly desirable mass. But often we see it is not the community which benefits, it is a lucky individual with ownership title in the heart of that mass who gets to capitalise on the efforts and presence of others….

      Henry George was in favour in land value taxes. This has been hard to implement and not as effective when implemented. NZ has had periods when rates were only on unimproved values (i.e. the land) and it hasn’t produced nirvana.

      I think greater competition both within a city -so more areas can built up -and more ability to build out would help. also competition from other cities. I wonder once this Australaisan commodity boom/bust super cycle passes if we will see more genuine competition between the cities of New Zealand and Australia?

    2. Auckland is proof of that – where agglomeration benefits are maximised, is also where it’s the hardest to live, and by far, the most expensive to live.

      Auckland is not priced to agglomeration value.

      Auckland is a city of 1.45 million. Melbourne is a city of 4.3 million. The workers in Melbourne earn more and have lower debt level per capita. Melbourne is building new dwellings at about twice the rate of Auckland (on a per capita basis). In every discernible way the agglomeration values of Melbourne massively exceed that of Auckland.

      The median land price in Auckland is about double that in Melbourne.

      1. Angus another way of saying that is that Auckland capitalises more of its agglomeration benefits into private ownership leaving less of the benefit to the community. As you point out this means Auckland is less competitive than it should be against the likes of Melbourne. Given that Melbourne property prices are high like other Australian State capitals compared to cities in Asia, the Americas and Europe this means the whole region is not competitive. And the whole region has some adjusting to do -especially Auckland.

        I would hope that over time all our cities become more competitive and as part of that Christchurch becomes a recognised international city -bigger than Hobart and Canberra, smaller than Adelaide but comparable in its attractiveness.

        1. Or an investment bubble is currently active in these markets. Deflation of the bubble will return the market to an approximation of agglomeration value, with Melbourne falling a little and Auckland falling a lot.

    3. I don’t think that business activity is invariably good – some of it produces negative externalities, which I do not like – but it genuinely bewilders me when people decry productivity increases as a plutocratic scheme. Productivity simply means producing more with less – i.e. fewer inputs of labour and energy per unit of output. Isn’t that the essence of sustainable management?

      As Brendon and Angus point out, other policy factors – in particular, regulations aimed at preventing the city from growing up beyond some imagined village idyll – play a more important role in affordability issues.

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