A few weeks ago, when the annual regional GDP data were released, I used them as the basis for a post casting some doubt on whether we were seeing the widely-touted economic gains from the large and rapidly growing population in Auckland.
The data aren’t ideal by any means. Among the other issues, they are only nominal, they only go back to 2000, and there are no regional hours worked data. But they are what we have. Since 2000, Auckland’s population – already far and away the largest in New Zealand – had grown rapidly, up 30 per cent, while the population in the rest of the country had increased by 13 per cent.
And yet, allowing for all the limitations of the data, GDP growth per capita in Auckland over that period had been among the lowest in any of the regional council areas in New Zealand. Average GDP per capita in Auckland was still higher than in much of the rest of the country, but the gap had been narrowing.
On the face of it, it wasn’t a great advert for the success of immigration and other domestic policies centred on the belief that the growth of Auckland was the foundation of our future prosperity.
In the last few days, Peter Nunns, an Auckland transport economist, writing on the widely-read, and often stimulating, centre-left Transportblog, also used the regional GDP data, but in a post, “The contribution of agglomeration to economic growth in Auckland”, that drew quite the opposite conclusion. His focus is on job density which, on the measure he uses, had also increased by 30 per cent since 2000. Applying some estimates developed previously by Dave Mare and Daniel Graham (references in the Nunns post), he estimates that just over a tenth of all the (real) productivity growth in Auckland since 2000 is down to increased job density.
Nunns derives that share by estimating a real GDP per employee series for Auckland. As he notes, the precise numbers are purely illustrative, since we don’t have regional GDP deflators. And we also don’t regional hours worked data, and GDP per hour worked is typically a better measure of productivity.
Nunns doesn’t give any attention to how Auckland has done relative to the rest of the country of the period since 2000. The chart above shows that nominal GDP per capita has grown less rapidly in Auckland than in most places. Nunns focuses on GDP per employee. Unfortunately, the HLFS employment data groupings are slightly different from those used for the regional GDP data, leaving us a smaller number of regions to compare with.
The hard to read label is Nelson/Tasman/Marlborough/West Coast combined.
Once again, Auckland has been among the more poorly-performing regions. There may have been real and material gains from greater job density in Auckland – as Nunns suggests – but, if so, they must have had to offset really really weak other influences on economic performance in Auckland.
One of the commenters on Nunns’s article asked him how he responded to my earlier post, including the chart above. This was his response (omitting the gratuitous slur on my motives etc)
Reddell’s confusing the signal with the noise. The signal is that agglomeration economies do enhance productivity. That’s an empirical fact, backed by lots of research from many places.
However, the “noise” is everything else that’s going on in the economy. That can make it hard to read the signal by looking at statistical aggregates like regional GDP. As I point out in the post, agglomeration economies account for perhaps 11-12% of Auckland’s recent economic growth – roughly one-tenth of a percentage point a year. While small gains compounded over long time periods add up to large numbers, they are often difficult to observe in the short term.
Finally, Reddell knows very well that productivity gains happen at the margin. Enabling agglomeration economies is one such “margin”, but there are a myriad of other “margins” that we should pursue. For example, New Zealand’s poor management practices inhibit productivity, as do its weak international connections and low investment in knowledge-based capital and R&D.
I don’t find that remotely persuasive. This isn’t a single year’s data we are both looking at, but 15 years of data. It would be great if we had a longer run of data but we don’t. The more recent years data will no doubt be revised, but again for now this is what we have. Over that period, in some years Auckland has done better than other places in New Zealand, and in others worse, but over 15 years there has been a non-trivial worsening in Auckland’s relative position (whether GDP per capita or per employee), despite that rapid growth in population and job density. Frankly, his response seems (perhaps unfairly?) to amount to “agglomeration effects are real and important, so it doesn’t really matter what the bottom line is, or how the top-down data look, I believe my model”.
And, of course, I agree with him that wealthier places tend to be denser (but equally, as cities get wealthier they have tended to become less dense). The issue isn’t whether the phenomenon of agglomeration economies is real, but whether those economic gains have existed in the specific instance of Auckland over the last 15 years. There is simply no necessary reason why they should. Density is typically an outcome of market processes (people finding it worthwhile to bunch together), but that doesn’t mean that simply pulling more people into an area by policy (which is effectively what our immigration policy does) , and then regulatorily constraining its physical footprint, will make the people in that area more productive. If the longer-term economic opportunities in Auckland aren’t particularly good – if, say, New Zealand impaired by distance can really only hope to compete strongly on natural resource based exports – simply attracting more people into the confined space of Auckland could quite easily result in underperformance. A couple of observations over 15 years isn’t remotely enough to prove the case one way or the other, but given Auckland’s underperformance over that period I think there is some responsibility on the champions of actively pursuing fast population growth and higher job density (central governments, MBIE officials, local councils, economists) to offer a good explanation for Auckland’s underperformance, not simply assert that “my model says the agglomeration effects matter in general, and hence they must have mattered here specifically”. Perhaps there is such a good alternative story. I would be very interested to look at it.
And, of course, there is no dispute that lots of good policies (or, typically, avoiding lots of bad policies) go into making a successful prosperous economy. I wouldn’t agree with the Nunns list, but that is a debate for another day.
NB: The rise in the terms of trade over the previous 15 years will explain part of the regional GDP differences, with more heavily export-oriented regions having benefited at the expense of the other regions, although much of the trend improvement in the terms of trade has been a result of falling world import prices, the effects of which should have been fairly evenly spread across the country. Whether differential terms of trade effects are enough to reverse the rankings is another question.