Last week, I took a look at the question of whether Auckland is too big. (Answer: Probably not.) However, there’s also another, related question that I didn’t discuss: Are other New Zealand towns and cities too small?
“Too small” is obviously a subjective concept – what’s just right for one person will be painful for another. So I’m going to return, briefly, to the theoretical model I discussed in the last post, which analysed city size as an interplay between agglomeration economies and congestion/crowding costs.
Most New Zealand towns and cities are not large enough to be congested or crowded in any meaningful way. They are more likely to face challenges with the sustainability of local businesses and the affordability of maintaining infrastructure. Even a reasonably-sized growing city like Hamilton has experienced struggles in this area. Fortunately, it seems to be improving, but it could still do with more customers within walking distance and more people starting up businesses
But it’s not just about the number of people – productivity also matters. When businesses are more productive, they tend to pay higher wages, which increases demand for local goods and services and strengthens the local tax base. This also makes it easier to address the challenges faced by many regional towns and cities.
Unfortunately, New Zealand has a lot of issues with poor productivity, and, as Motu Institute economist Dave Maré has shown, these issues are worse in smaller towns and cities even after controlling for differences in firm and worker characteristics:
Population growth in smaller towns and cities can enhance their productivity performance, if it’s managed well. Agglomeration economies also apply in smaller places. For instance, a town with a large enough population to sustain three restaurants rather than two will also tend to have better restaurants, as increased competition forces them to raise their game.
However, towns and cities also trade with each other. A factory in Hamilton may buy parts from an importer in Tauranga. A family living in Dunedin might take a day-trip to Oamaru to check out their steampunk society. And so on and so forth. When this happens, it expands the market available to firms in each location, giving them more opportunities to benefit from agglomeration economies.
In other words, good transport links between towns and cities can enable increased productivity (and in doing so, make them more desirable for new residents and businesses). There is some evidence that this process isn’t occurring in New Zealand towns and cities. In a new research paper from the Productivity Commission, economist Guanyu Zheng investigates “geographic proximity and productivity convergence across New Zealand firms“. It offers some important insights on what’s happening at the ground level of the NZ economy.
Zheng’s key conclusion is that:
The speed of convergence to the local frontier is greater than the speed of convergence to the national frontier. This indicates that geographic proximity is important in the diffusion of technology. One possible reason is that much information and technical know-how is tacit and non-codifiable. Geographic proximity facilitates information exchange between firms and enhances the capability of firms to absorb tacit technology.
Shorn of the economese, this means that firms in Wellington tend to compete with (and catch up with) other firms in Wellington, and firms in Nelson tend to compete with other firms in Nelson. There’s less competition and catch-up between firms in different cities, which impedes New Zealand’s productivity performance. However, there are a few industries, like agriculture and professional services, where convergence happens more rapidly. These industries differ in a lot of ways, but they are both relatively knowledge-intensive, with high returns for adopting new ideas, with outputs that are relatively easy to trade across distance.
What can we do to address this?
The first step is correctly diagnosing the cause of the problem. Aside from New Zealand’s long and hilly geography, the main reason that it’s so difficult to trade between cities in NZ is the perverse legacy of the 1930s-1980s approach to industrial and transport planning. As I’ve written before, this had two main components:
- First, there was a deliberate policy of making freight transport between regions costly and difficult. The Transport Licensing Act 1931 banned trucks from moving goods more than 150 kilometres until its repeal in 1982, while the Railways Department had all sorts of obscure rules about train loading and unloading to guarantee employment in rural depots.
- Second, industry location was regulated and subsidised to ensure a stable and “equitable” distribution of economic activities throughout the country. For instance, there were regulations that virtually prohibited the opening or closing of meatworks and other rural processing plants between the 1930s and 1980s.
These policies appear to have a long-lasting negative legacy. Firms that were required to locate in small towns, paying high transport costs to sell to the rest of New Zealand, have been at a disadvantage since then. They don’t have scale in their local market, and it’s excessively costly to ship freight to the rest of NZ. As a result, they’ve struggled to stay alive, let alone to grow.
Overcoming high costs to distance within New Zealand could potentially have large economic benefits by enabling faster productivity convergence between local towns and cities as well as between them. The problem is that there is no single “Think Big-esque” thing that we can do in order to sort these problems out.
Viewed from a certain angle, the Roads of National Significance were an attempt to reduce high costs to distance between regions. They’re likely to be successful in some cases – for instance, the Waikato Expressway will make travel between Auckland and the Waikato considerably faster, and boost the Waikato in the process. However, as a strategy for addressing a system-wide issue they are likely to fall short for two reasons:
- First, too much money has been spent on urban and urban fringe motorways that will have minimal impact on inter-regional connectivity. Puhoi to Warkworth and Transmission Gully motorways are prime examples.
- Second, they leave a whole bunch of other problems unsolved. For every kilometre of RONS, there are probably twenty kilometres of roads with dangerous curves, a lack of passing lanes, or other issues. And there are also opportunities to improve the speed and reliability of the freight rail network.
In other words, we can’t rely upon the RONS to sort out our problems with geography. In some locations, they may contribute to the solution, but in others they may crowd it out.
By way of illustration, the following chart shows the last decade’s worth of spending on new and improved roads in the Northland Region. This is an area where better internal road links could be quite beneficial, as travel speeds are slow. Between 2007 and 2016 a total of around $420 million was spent within the region. This is only around half of the cost of the Puhoi to Warkworth motorway, which means that you could cancel that, double funding on road links within Northland, and still have money to spare.
So, returning to the question that I started the post with: New Zealand’s towns and cities could benefit from more agglomeration and higher productivity levels. Population growth would help, in many places, but an equally important priority is to improve connectivity between towns and cities to enable more competition between places.
What do you think about the cost of distance within New Zealand?