I was participating in a debate the other day with a prominent economist and a leading business person. Both seemed keen on actively growing New Zealand’s population further – the economist in particular calling for a “population policy”, and appearing to argue that a much larger population was a critical element in improving New Zealand’s productivity outcomes. The principal channel that he appeared to have in mind was better physical infrastructure, notably (because he explicitly mentioned them) high speed trains between our major cities. Both my interlocutors seemed keen on a much larger population for Auckland – to which my response was along the lines of “what, and dig an even deeper hole than we’ve already dug”, given the economic underperformance of Auckland relative to the rest of the country over the last 15 years. None of this advocacy for an active policy role in growing population further appeared to give any recognition at all to
- the economic underperformance of Auckland
- the lack of any evidence that countries with smaller populations tend to be smaller or less productive than those with larger populations, and
- the lack of any evidence that small countries have been achieving less productivity growth than large ones.
As far as I can see, the only OECD country where there might – just might – be a strong case for an active government role in trying to grow the population is Israel, surrounded by much more populous hostile states. And even then, Israel’s survival so far – I remain a little sceptical that it will last longer than the Crusader states of earlier centuries – is more down to technology, organisation, institutions, and embedded human capital than to numbers of people.
But what prompted this post was a comment from the economist that not only should Auckland’s population be markedly further increased – and the residents urged into apartments – but that governments should be actively aiming to increase the population of our other cities and regions. The specific aspiration that caught my attention was the suggestion that our second biggest city – at present, Wellington and Christchurch have similar populations – should have a population around half that of Auckland. I was somewhat taken aback and responded “but that isn’t typically how things are in other countries”, to which the confident response was “oh yes it is”. So I thought I had better check the data.
I set aside very large countries, and extremely small ones. Most of Malta, for example, is Valetta. Even among the large countries there is quite a range of experience: Britain, France and Japan have single dominant city, while Germany, Italy, and the United States don’t. But I found 22 advanced (OECD or EU) countries each with a total national population of between 1.3 million (Estonia) and 17 million (Netherlands), and I dug out the data, as best I could, for the populations of the largest and second largest urban areas in each of those 22 countries. 20 of the 22 countries are in Europe, and Israel and New Zealand are also in the sample.
Here is the share of the total national population accounted for by the largest city in each country.
Among these smaller advanced countries, our largest city’s share of total population is a bit above the median, but nowhere near the highest share. Of course, as I have noted previously, except for Israel (Tel Aviv), our largest city has grown faster than any of these countries’ largest cities in the post-war decades.
But what about the specific point at issue: the size of the second largest city relative to the largest city. Here is that chart.
There is huge range of experiences even among this group of relatively small advanced countries – from Latvia and Hungary where the second city is tiny relative to the largest, to the Netherlands and Switzerland at the other end. In those two countries, the largest city is quite small relative to the total population. There isn’t an obvious correlation between economic success and the relative size of the second largest city. Ireland and Denmark are much richer than New Zealand, but so are the Netherlands and Switzerland. And Latvia, Hungary, Slovakia, Portugal and Bulgaria are poorer than us. New Zealand’s number isn’t much different from the median country’s experience.
One thing worth bearing in mind in this sample is that in most of these countries, the largest country is also the capital. That isn’t so in New Zealand, Israel, or Switzerland – or, for practical purposes, the Netherlands. All else equal, one might hypothesise that Wellington would be smaller if it were not the capital – but that might just have left Christchurch as the clear-cut second largest city.
Since there is a wide range of experiences across similarly wealthy countries in the relative size of largest (and second largest) cities, it might be wise to be rather cautious in concluding that government policy should be actively directed to altering the relative size of some or other groups of cities. Patterns across countries are likely to reflect some mix of history, geography, and economic opportunities. In some countries, outward-oriented economic activity is heavily concentrated in big cities (one might think of London), in others it derives largely from non-urban natural resources (one might think of Norway).
As it happens, as a matter of prediction rather than prescription, I do think that a successful reorientation of policy in New Zealand would increase the relative size of second and third tier cities relative to Auckland. But it would do so because (a) Auckland’s population would no longer be supercharged by an aggressive immigration policy, and (b) because, as a result, overall population growth would be lower, there would be less pressure on real interest rates and the real exchange rate, and the outward-oriented economic opportunities, which are at the heart of the provincial economies, would be more attractive, and would see more business investment taking place.
If, instead, governments persist with large non-citizen immigration programmes then, for all the talk of the attractive lifestyle the regions offer, it is a recipe for even more of the same. Why wouldn’t that happen – doing the same thing again and again and expecting a different result doesn’t, to put in mildly, make much sense. For the last few decades, Auckland’s population has grown rapidly relative to that of most of the rest of country. And its relative economic performance appears to have languished – there is certainly lots of activity to keep up (more or less) with the needs of a growing population, but little productivity growth. Indeed, the large productivity margin one might normally expect to see in the data for largest cities is quite small in Auckland, and has been shrinking further. There is no sign of some critical tipping point being reached in which – say – high speed trains are about to transform our economic prospects.
As for the regions, one hears enthusiastic talk from time to time of encouraging migrants to the provinces – and last year the rules were further tweaked in that direction. But that is simply a recipe for further undermining the quality of the migration programme – less able people who are desperate to get in will go to the provinces, to pick up the additional points on offer. We want people to move to Invercargill or Napier – if they do – because the business opportunites there are sufficiently good to attract people, not because the government puts points “subsidies” on offer, which simply mask the serious structural imbalances in the economy. The best path to better provincial performance – not an end in itself, but probably part of a more successful New Zealand – is likely to be the removal of the distortions and policy pressures that have given us such a persistently overvalued real exchange rate for so long. Using policy to simply bring in lots more people won’t do that – any more than it has for the last 25 years.