Regional differences and economic underperformance

I noticed Bernard Hickey drawing attention to the chart in this tweet, observing “New Zealand third worst on the list”.

I think that (the Hickey take) is almost totally the wrong way to look at things.

Here is a chart of GDP per capita by regional council area (the only subnational data there is here) for New Zealand in the year to March 2015 (ie basically the same period as the OECD chart).  GVA per worker is a different measure than GDP per capita, but they are related and the difference doesn’t particularly matter for the point I wanted to make.

regional GDP

Average GDP per capita in Taranaki is a great deal higher than the national average.   But only 115000 people lived in Taranaki in 2014/15, about 2.5 per cent of the population.   GDP per capita in Taranaki is so high, relative to the rest of the country, because of the oil/gas production (much of the benefit of which accrues to the providers of capital to develop/maintain those fields, rather than to the citizens/workers of Taranaki).

By contrast, in most of the countries in the OECD chart, the city with the highest GVA per worker (or GDP per capita) is the biggest city.   That is true of Britain, France and Poland (to take countries at the left of the chart) and of (say) Finland, Denmark, and Austria (at the right of the chart).    I’ve shown a chart making a similar point in an earlier post.

gdp pc cross EU city margins

Particularly in the smaller countries, the largest city/region makes up a large share of the total national population, which (mechanically) reduces the difference between the richest/most productive city and the average for the country as a whole.  But even in the relatively larger countries like Britain and France, the biggest city accounts for a much much larger share of the workforce than is the situation in Taranaki.

So the issue here isn’t why there is such a big gap between Taranaki and the country as a whole (or even between Taranaki and the laggards) –  oil and gas and a small population will do that – but why Auckland (far and away our biggest city/region) does so badly, and what the implications of that might be.  (And, of course, why the whole country does so poorly.)

I’ve argued that it is because, given constraints of distance etc (at least as real as ever) the global income-earning opportunities in New Zealand are mostly about natural resources (and getting better at getting more from a fixed resource).  That makes it a very different economy to those of the UK or the Netherlands (although quite similar in that respect to Australia.)   And yet policymakers –  National and Labour, Greens and New Zealand First –  just insist on pulling more and more people into Auckland (primarily) every year, where there aren’t many really high-yielding opportunities.  The natural resources aren’t there, even if they were we aren’t getting any more of them, and the process of keeping on driving up the population (in a modest savings economy) continues to skew the real exchange rate, making it harder for the more outward-oriented regions to succeed.

Meanwhile policymakers –  and National and Labour, Greens and New Zealand First are all about equally guilty –  keep on trying to do patches and quick-fixes, subsidies and similar intervention, trying to steer people to the regions (we saw another example just this week with the post-study work rights policy) without really understanding (or deliberately avoiding the implication of realising) that the problem lies with the insane (not fit for New Zealand purpose) economically damaging immigration policy they insist on pursuing.  Revise that policy along the lines I’ve advocated and (a) the regions would probably make up a larger share of the population, and (b) both the regions and Auckland would probably be materially better off economically.

(None of which means I have any sympathy with the Prime Minister welcoming the latest fall in the exchange rate –  and despite the headlines it is a fairly modest fall (and was about this level three years ago).  It is beyond nonsensical to claim (emphasis added) that

The lower New Zealand dollar is good for exporters and a sign the economy is heading in a more productive direction, says Prime Minister Jacinda Ardern.

when the exchange is falling because markets increasingly think the economy isn’t doing that well, and the prospects for OCR cuts are rising.    The delusion that cyclical falls in the exchange rate are the start of something structural and permanent has afflicted politicians and central bankers for decades –  actually I recall Adrian Orr and I trying to persuade Don Brash to the contrary in 1999/2000.  You need to change structural fundamentals to change (helpfully) the structural level of the real exchange rate.  So far, this government –  like its predecessor –  has consciously chosen to avoid doing so.)