Big agglomeration gains in a growing Auckland? Or not.

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.

nom gdp pc by region

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.

nominal gdp per employee growth

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.

 

 

15 thoughts on “Big agglomeration gains in a growing Auckland? Or not.

  1. Seems a bit like ‘agglomeration economics’ v ‘diminishing marginal product’. Not sure it will make the big screen like ‘Superman v Batman’ but the debate about the superior force is kind of similar I guess….

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  2. is their any way of splitting out productivity growth of NZ native workers vs immigrants. If immigrant productivity per hour is lower it might be dragging down Auckland’s stats. Many appear to be foreign students.

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  3. It can be approached indirectly. There is evidence that it takes immigrant Asian workers a long time to earn the same pay rates as native NZers, while Pacific immigrants never do (S Africa and UK workers converge pretty quickly). I don’t have the underlying reference at my fingertips, but the results are cited in Julie Fry’s 2014 Treasury paper on immigration.

    Of course, the latest really sharp rise in foreign students only dates to the last year of this data, and the trends were there before that.

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    • It actually boils down largely to speaking the english language clearly. I have spoken to many international students that push on to completing their honors and masters studies that the key to their career advancement in NZ is not higher qualifications but being able to speak english clearly and to write in simple and precise and in short sentences. Our educational institutions could do better in teaching english for career advancement rather than higher qualifications for career advancement.

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  4. Auckland performing poorly? If what you are suggesting that the booming Auckland economy is poorly performing, I would say lets have more of this poor performance because it is unbelievably fantastic. The city is vibrant, full of activity and businesses are thriving. Our problem now is not enough people to get the jobs done.

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      • Canterbury at the top of the productivity table does not cost in the pollution costs in our farming export community. The dirty waterways, the ozone layer depletion due methane gasses from dairy cows. The acres and acres of grassland from removing trees and forests. The irrigation depletion of our natural springs. Farmers should pay a fart tax and also the cost of cleaning up rivers and streams polluted by nitrates from cow dung.

        I was watching one of these clean water advocates the other day and when asked if farmers should pay, her reply was that the government should pay. What utter nonsense, it is her farming community that has created the mess, why should the rest of us in Auckland pay for a cleanup mess created in Canterbury by the farming community so that their kids can swim in rivers that they themselves messed up?

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  5. Michael
    I read your article and the follow-up one on the terms of trade effect. I’m quite confused as to the facts and the conclusions. The statistics in particular are odd (as you noted).
    A couple of observations.
    Densification and Wealth Generation
    I presume Nunns is referring to Edward Glaser as a source of “empirical” justification. Glaser largely jumbles facts together, identifies correlations and then just assumes that dense city living is causal of wealth creation.
    If Glaser is illustrative of the quality of the empirical case for dense is good, then there is no case.
    Education and Wealth Generation
    Shamubeel Eaqub’s book “Growing Apart” made a much more persuasive case (at least to me) that education and income highly correlate and his book showed (at least I felt it did) that the income gap between smarter areas (Wellington) and less-educated ones (Northland) were widening.
    But that would be directly the opposite of your regional GDP graphs??
    Different Sorts of Wealth
    As you mentioned, without regional GDP deflaters its not possible to see if an additional dollar of income in Auckland is the same as an additional dollar in Invercargill. Another uncertainty is presumably the effect of debt and home prices. Aucklanders may now be much richer than the rest of us, but they also have much more debt.
    Clearly there is a bit more debt-funded consumption going on up there than down here, and they could sell their homes and buy our entire neighbourhood. Does that flow into the income/GDP figures?
    Comparing Cities
    Another area of stimulation in Auckland (which I recall you have written about in the context of NZ’s poor return on capital) is Council spend in infrastructure. It feels good when Council is ploughing $$$ into a road or a tunnel, but after the hole has been dug, the debt has to be repaid and the economic efficiency gains may be negligible (I recall reading that Auckland’s long commute times cut into people’s leisure time not their working time).
    I thought you may find the following comparisons interesting (see below). I was curious about Wellington City’s ability to fund all its growth projects (convention centre, runway extension, etc) and as it happened I used Auckland City finances as a benchmark to measure Wellington City’s (I used S&P reports to provide data). (NB. I know they are not directly comparable as Wellington ratepayers also have the burden of the regional council’s debt).
    Excuse the top line which is in US$ (as provided by S&P), but it is still helpful as regards relativity.
    Auckland’s growth rate was (in 2014, the reports came out in 2015) higher than Wellington’s, but not on a per capital basis. When looking at debt burdens you have to look at growth rates as well as quantities as a lot of debt will quickly shrink as a problem if the economy is growing (and vice versa).
    The S&P projections for 2017 include the cut back in Auckland Council capex which occurred a year or so ago when they identified that their debt funded spending was not sustainable. Personally I’m sceptical they will stay within their boundaries, but even if they do the Auckland Council interest bill is projected to average $900 per household in 2017. Wellington gets to $350 per household at the same time. The number of rate payers and the average rate are from other sources, otherwise all the figures are from S&P.
    I hope the following table retains a legible format. It isn’t of course a problem per sa if an average Auckland household is having to meet $900 a year in Council interest costs from 2017, but it does show that it isn’t enough to just look at incomes, you have to look at disposable income.
    Tim

    Auckland Wellington
    GDP per Capita 2014 US$43,700 US$70,000
    Economic growth 2.6%pa. 2.4%pa.
    Population 1,529,000 206,000
    Rate payers 518,784 75,613
    Average rate $2,636 $2,163
    Operating surplus/revenue 13.6% 17%
    Opex+capex deficit/rev2011-2015 (29%) (2.8%)
    Rates forecast 2017 $1,598m $283m
    Total revenue forecast 2017 $3,217m $416m
    Debt forecast 2017 $8,176m $446m
    Debt/Revenue 2017 257% 107%
    Interest/Revenue 2017 14.5% 6.4%

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    • Thanks TIm. Interesting comments

      I’m having increasing doubts about the regional GDP data. I have asked SNZ for comment on some specifics and they have promised to get back to me shortly. When they do I will come back to the issue.

      In defence of Glaeser, I heard him speak in NZ a few years ago and he was a quite adamant that the economics of agglomeration do not lead to any sort of policy agenda, and certainly not one of actively trying to drive up populations of big cities (at most, it is a level the playing field , and allow activity to locate where the returns are best prescription).

      Re consumption, we don’t have national accounts consumption figures on a regional basis (the regional GDP numbers are done from the production side). I’d be surprised if Akld’s consumption is much boosted by house prices: nationally over 25 years the ratio of consumption to GDP has been largely flat even as house prices have skyrocketed. I think the Akld issue is a really big distributional one: some people are much better off (the almost-dead and their heirs) but many are much worse (those priced out of the market) and most are indifferent – the price tag on the house doesn’t matter much if you have to live in it.

      On the rates capacity etc, just remember that AKld has a fast-growing rates base (population/houses), which Wgtn doesn’t to the same extent, Any sort of comparative debt capacity analysis would need to take account of that.

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  6. Michael there is a common theme running through your analysis of New Zealand hasn’t done well in the last few decades -the reason must be we are so far away -the only thing we can export is raw materials -then your bit about immigration distorting/diluting that economy.

    But what if the problem is that perfect competition is an ideal that doesn’t exist in the real world. All markets need a myriad of supports and regulations -which are built up over generations of evolutions.

    An example would be the saying a ‘pig in a poke’. https://en.wikipedia.org/wiki/Pig_in_a_poke
    -a saying that is in a dozen plus languages -it addresses the problem of there being no price discovery if consumers cannot accurately determine what they are buying -their will be a partial market failure -imperfect competition. What follows from that is laws on weights and measures, consumer protection, fair advertising and so on.

    What if New Zealand’s problem is that we haven’t evolved these mechanisms to address the myriad of imperfections as well some other places have? Especially imperfections related to cities and diversifying our economy?

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  7. Brendon

    I’d certainly be open to exploring the idea, but it is not as if we’ve had hands-off governments over the (many decades). One could go all the way back to Vogel, but we could just start from 1935 – active govt involvement in dairy, and then the whole protective structure, built a vision that the govt needed to be active etc. Add in the heavy financial regulation of that era. Think of the large (assisted) post-war immigration programme. Or export incentives, to diversify the economy and ease the “foreign exchange constraint”. Or Think Big. And so on, coming forward – Kiwibank, Kiwisaver, smart active govt ideas, R&D support, the legislative support for the formation of Fonterra (rather than a competitive model), the export-education growth strategy, subsidized convention centres and so on. We still have quite large state-ownership of major firms (by OECD stds) and our messed up land supply market doesn’t look much different to that in many other Anglo places.

    I’m not saying there is nothing to your argument – in fact, I’m quite sure one could find things we’ve done worse than others (altho if one looks as conventional assessments of our regulatory structure etc it mostly looks middling by oECD stds, and not out of line with other small countries).

    But even if you are right, why does it make sense to bring in actively so many new people when we haven’t got things right to enable those already here to prosper?

    Happy to explore all this further tho.

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    • Michael I have my doubts if we need more activist governments in the form of top-down statist governments of the 1930s onwards. What I am thinking of is a pluralistic society which recognises that the imperfections of both free markets and government provision systems and endeavours through rational debate chart a course through these realities.

      NZ distance and immigration rates are both factors which set it apart from the crowd, so are worthy of questioning. But there are other unique factors which set NZ apart -the centralised tax based -NZ is an outlier in how little fiscal power and responsibility it gives to regional or local government.

      The lack of a constitutional and genuine independent political entities that can verbalise/act on a different viewpoint from the executive is also unique to NZ. Perhaps contributing to the lack of rational debate in society.

      NZ goes through periods of dramatic top down change in response to stressors -The Long Depression -The First Liberal government with its democratic agrarian reforms. The Great Depression – The first Labour government Statist reforms. Britain abandoning our economic relationship -the 1980s/90s -Neoliberal reforms. Between these periods NZ characteristically goes through ‘tight’ periods where non-conformity to the status quo is rejected.

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      • Hi Brendon

        Sorry, it took me a while to get to this and your interesting Rupture note.

        I’m not unsympathetic to your general point, esp as it has to do with robust rational debate.

        As a factual point, I wonder if we are unusual for a country of 5m in how centralized our govt is? I was fairly appalled at the temporary usurpation of democracy around ECAN (and the powers given to the govt following the earthquakes. Then again, whereas I used to be sympathetic to local bodies having powers of general competence, the more I see of the Wellington City Council, the more I suspect it should be limited to street lights, roads, rubbish collection etc, rather than ill-considered (and unaccountable) forays into “economic development” with public money.

        I suspect that rather more important for quality debate etc is the strength of “civil society”, broadly defined to include universities, news media and so on. There I suspect we suffer a little from being English speaking: there is probably much less that is distinctively NZ culture (at least European NZ, which is my background) than say Norwegian or Finnish culture, where language is a more distinct marker. Even if most of them now speak English, there is something different about your first language being different. For us, it is both good and bad that we can take so easily debates and issues from the UK and US and apply them here, or just ignore here and relocate ourselves easily into those countrie/cultures.,

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