New Zealand is a long way from the rest of the world. It takes three to four hours to fly from Auckland to the big eastern Australian cities; over half a day to reach the US West Coast or Southeast Asia; and most of a day to reach Europe.
Our geographic isolation has advantages – for instance, it’s easier to manage biosecurity controls to protect our local environment and agricultural exports – but also many economic costs. As the gravity model of trade predicts, countries that are further away from each other tend to trade less. In other words, our distance means that we aren’t selling as many goods and services to Europeans, Asians, Americans, and other people in general as we could, given New Zealanders’ relatively high skill and education levels, propensity to innovate given the right incentives, and generally reasonable policy settings. And, equally, we’re not buying as much from them as we could.
There are two reasons why this is a bad thing for our living standards:
- First, exporting less means that there are fewer opportunities for New Zealand companies to ‘scale up’, which limits their productivity and their ability to successfully innovate. Result: Lower levels of economic productivity and lower incomes.
- Second, importing less means that many New Zealand businesses operate in ‘niches’ with little competition, which limits the pressure they face to lower prices or improve processes. Result: Higher prices that reduce what we can buy with our lower incomes.
We can’t do much about the physical distance – although earthquakes occasionally shift us a few centimeters closer to Australia – but the good news is that it’s never been easier to bridge it. Jet aircraft aren’t getting any faster, but growth in tourism numbers means that there will be more of them arriving and departing to more destinations. Growth in the stock of immigrants – and the number of New Zealanders who have returned from OE or living overseas – will make it easier to forge business and research connections with organisations in other countries. In a world where some countries are retreating from trade agreements, New Zealand’s carrying on trying to make deals that will bring down barriers to importing and exporting. And, as TeleGeography’s submarine cable map shows, the world’s never been more wired up. Talk – and data transfer – is cheap. (And New Zealand is due to get a second cable to the outside world next year.)
However, some of the barriers to trade we face are internal, not external. As economist Phil McCann observed in a great 2009 paper (“Economic geography, globalisation, and New Zealand’s productivity paradox“), not only is New Zealand a long way from the rest of the world, but distances within New Zealand feel too long, and too expensive to bridge:
The fundamental point remains, however, that all of New Zealand’s regions play a critical role in the country’s exports, so anything that limits the accessibility, and therefore the potential global engagement of these regions, damages the economy as a whole. In particular, the role that New Zealand’s monopolies play in increasing spatial transactions costs of accessing New Zealand’s regions need to be reconsidered. Small markets are notorious for the development of monopolies (Sutton, 1991), and in the current era of globalisation, countries such as New Zealand must ensure that existing monopoly positions in transport and communications markets do not undermine overall competitiveness of the economy.
McCann focuses on the cost and difficulty of travelling between New Zealand cities, which is important, but I’d like to look at the challenges of travelling within our cities. In other words, what happens after we arrive at the airport?
Let’s take a look at Tauranga, which is growing and close enough to Auckland to be in its orbit. If I was going down there for a day of work meetings, I could drive, but flying would save quite a bit of time without being too expensive. At the time of writing, I could book a round-trip flight in a week’s time for $218. Driving would take three hours each way, compared to a 40 minute flight.
Tauranga’s bus network is decent, but could I use it to get from the airport to a meeting on Cameron Street, one of Tauranga’s main commercial strips? Computer says… maybe:
The bus route itself is pretty decent – according to Google, it would be almost as fast as a taxi. But look at that 13 minute walk from the airport to the bus stop! Most people would look at that and say: Yeah nah.
Things would get harder if I had multiple destinations within Tauranga. Let’s say I had a second meeting across town, or that I was staying the night at my cousin’s place. Given the way that the city is laid out, walking to all the places I want to go would be a challenge. The bus routes probably don’t go to all the places I need to be. And while cycling could be an option, with safe cycling facilities, I probably won’t be able to hire a bike.
These are all things that I normally do in other cities that have made it easy. I’m sure other people are the same.
Basically, my options are probably to take (comparatively expensive) taxis everywhere or rent a car. That will get me to my destinations, but it means that I won’t see much of the city or have many opportunities to talk to anyone but (a) the people I’m scheduled to meet and (b) the taxi driver. So I’ll probably leave Tauranga without having much of a chance to develop an appreciation or interest in the place, or any opportunities for fortuitous unplanned interactions. That has an invisible cost to the economy: it means less potential for ‘repeat business’ over time.
To be clear, I’m not writing this to single out Tauranga. In the New Zealand context, there is nothing unusual about Tauranga, which is precisely the problem.
I would argue that New Zealand suffers economically from a lack of scale and connectivity across multiple geographical scales. Shortcomings at one level exacerbate our weaknesses at other levels. As McCann pointed out, New Zealand’s long distance from the rest of the world is exacerbated by the high cost of travelling between New Zealand towns and cities. But it’s also exacerbated by:
- The cost and difficulty of travel within cities once you arrive – especially by public transport, walking, and cycling
- The lack of critical mass and walkability in most commercial centres.
Fixing some of these problems without addressing the others is likely to lead to disappointing results. Take proposals for commuter rail between Auckland and Hamilton. I would happily take the train to Hamilton if it was competitive for travel times – in fact, I’ve taken the bus there before. But if I wasn’t able to get around Hamilton without a car once I arrived, I would probably choose to just drive down instead. This would limit the usefulness of commuter rail and limit the degree to which our economy can benefit from it.
As a result, if we want to unlock the benefits of agglomeration economies and international trade for New Zealand, we have to fix problems at various geographical scales, as shown in the following diagram:
What do you think about New Zealand’s spatial challenges to achieving higher productivity?