Are economists obsessed with Auckland's growth and growing divergence with the rest of NZ actually stuck in the dark ages?

Are economists obsessed with Auckland's growth and growing divergence with the rest of NZ actually stuck in the dark ages?

By Jenée Tibshraeny

Auckland, Auckland, Auckland – it’s what people are talking about, where they’re moving to, and where they’re paying ridiculous amounts of money for houses to live in.

But to what extent does the country’s economic growth hinge on development of the SuperCity?

To an increasingly large extent, according to many economists. The latest one to push this line is BNZ chief economist, Tony Alexander.

In his March edition of the NZ Observer, Alexander says:

“Business growth globally is coming less and less from incremental productivity gains and more and more from good innovation processes. Innovation is driven by talent, talent tends to be attracted to big cities… thus we will need a well performing Auckland to help drive our growth.

“Demographic changes suggest that in the next three decades up to two-thirds of New Zealand’s economic growth will come out of Auckland.

“This substantially reflects projections that Auckland will account for 94% of New Zealand’s working age population growth in the next three decades.

“The share which a region has of the country’s Gross Domestic Product correlates almost exactly with the region’s share of the nation’s working age population. Taranaki has an excess GDP contribution because of energy extraction. Wellington also has a relatively high GDP share with many high paid occupations. Auckland has 35% of GDP and 35% of the working age population.”

Late last year public policy research institute Motu suggested public policy should not overly constrain the size of Auckland, New Zealand’s most productive city, because if it does the risk is growth will be lost to Australia’s four largest cities. And NZIER's Shamubeel Eaqub also cautions that if Auckland is constrained, growth lost will turn up in Australia not Northland.

But despite this obsession with Auckland, there are plenty of examples of successful international New Zealand businesses operating from outside Auckland. Rod Drury's Wellington-based Xero is one obvious example. And given New Zealand's rural heritage, many innovations of the past have come from the provinces such as Bill Gallagher's electric fence.

So what do the businesspeople and entrepreneurs running these businesses think of this Auckland centric outlook, especially in the days of high-speed broadband?

David Turner: Sequal Lumber wood-processing company founder

David Turner's Sequal Lumber produces lumber used for furniture, construction, pallets and packaging, and exports it throughout the Australian, Asian, and Middle Eastern markets. The company kicked into action in 2008, and is based in Kawerau, which edges the largest Radiata Pine plantation in the southern hemisphere.

Turner says the growth we see in Auckland is centred on the services and construction sectors.

“There’s no doubt about the importance of Auckland to New Zealand as a market for consumption, and for construction in the medium term", he says.

“(But) I don’t really buy into the argument that there’s some sort of divide between Auckland the rest of New Zealand, in terms of one can grow and the other can’t. We can all grow.”

Sequal Lumber’s export volumes have doubled over the past three years, and Turner wants these to double again over the next three.

“In the current scenario what we see is wealth created in Auckland, because it is service-driven and fundamentally the people in Auckland are getting wealthy because their home values are going up. But that’s unsustainable wealth creation.

“Real wealth creation is achieved through making things or selling services, and I think the provinces have a tremendous role to play making things to sell to Auckland and global consumers," says Turner.

Turner says the difficulties his business face aren’t related to its location. He hasn’t had trouble sourcing talented staff, with staff numbers growing from 40 to 60.

Despite Kawerau suffering major social deprivation issues, enhanced by more than 100 jobs going when the Norske Skog paper mill halved its production in 2012, he says people are attracted to the lifestyle the Bay of Plenty has to offer.

He says the hurdles his business faces are derived from uncertainty around the NZ dollar, barriers to free trade, the tax system favouring property investors, and New Zealand’s infrastructure and transport favouring large scale raw material producers.

Daniel Radcliffe: International Volunteer HQ executive director and 2014 EY Entrepreneur of the Year

Daniel Radcliffe says, “A big city will attract young people. I don’t know if it will attract innovative young people. I think it’ll attract young people that want to go into your stock standard jobs.

“I believe young people who think outside the square and are looking for something else are drawn to places like Taranaki and the Hawke’s Bay – the provinces.”

Radcliffe founded International Volunteer HQ (IVHQ), a world leading travel company that connects people with volunteer projects around the world, in 2007.

He employs 24 staff who work out of New Plymouth, organising trips mainly for customers in the US, UK and Australia. The company also employs 300 people to help facilitate programmes around the world.

Radcliffe admits a downside to running a business from a smaller place, is that you have a smaller pool of staff to choose from. Yet with nearly all his New Plymouth staff under the age of 35, he says this hasn’t been a problem for him.

Furthermore, he says technology means the business can operate from virtually anywhere in the world.

“The idea of working remotely is becoming more popular… in the next few years, with the way technology’s going; it’s going to allow people to work anywhere. Even if you can’t get the staff you want, you’re going to be able to hire remotely.”

IVHQ’s head of risk and sustainability is the company’s only employee based in Auckland. Radcliffe says he needed someone with a certain skill set to fill this position, and they happened to live in Auckland.

BNZ’s Alexander suggests, “Just as Auckland has representatives in London, San Francisco and Melbourne, regions should consider how they effectively connect with Auckland and Christchurch and feed off their growth and superior global connectivity”.

Radcliffe says the nature of his business means it can connect to the world direct.

His staff members are frequent travellers, who stay connected to the global business community.

He says Auckland’s size puts it in a difficult position on the global stage.

“If you’re looking for pure business services it’s pretty hard to compare Auckland to the likes to London or New York or Sydney. For a company like ours, it would be hard to justify moving to Auckland over moving somewhere else abroad.”

And then there’s lifestyle. Radcliffe admits this is ultimately what’s kept him in New Zealand.

“As Auckland gets bigger, it’s only going to lose some of that lifestyle appeal, which will make the provinces more attractive as a result.”

Ian Taylor: Animation Research Limited chief executive, 2014 Sports Emmy Award Winner

Technology has underpinned Ian Taylor’s successes on a number of levels.

Animation Research Limited (ARL) won the 35th Sports Emmy for developing the official America’s Cup App for Apple and Android phones.

The company is one of Australasia’s leading computer graphics producers, that’s worked on graphics for a number of major international sporting events, as well as corporate and government projects.

Taylor and many of his 30-strong team are based in Dunedin.

“The age of the Internet has given us all the ability to live and work where we choose,” says Taylor.

ARL’s America’s Cup App was made by a team scattered around the world. The majority of the team worked from San Francisco, where the event was taking place, while other specialists made their contributions from the depths of Dunedin, Oamaru and Queenstown.

Taylor says this group of people built an Emmy award-winning App without even really meeting.

“While creating business in the regions once meant you had to physically freight your goods to the market, this no longer makes sense. The “Information superhighway” means the cost of moving products designed for that highway is the same wherever you live.

“Given that is the case, why do we still have economists stuck in the dark ages believing that we need to be in large cities to be viable in this new world?

“A world class city needs a positive and vibrant country around it.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Transport blog had an interesting debate on this question last month based on NZ Statistics figures. The hub of the debate in the comment section was whether NZ wants one or two cities of international size. 

February 27, 2015 at 10:22 am · Reply
I think the interesting thing about the graphs is what happens in Canterbury? Does it keep up with Auckland and growth in NZ is an Auckland and Canterbury story or does it fall back once the rebuild effect dies off? There is a massive difference between the high and low projection.
I believe if NZ invests in Canterbury, for example if Canterbury received a fast passenger rail service from Ashburton to Amberley then Canterbury would keep up with Auckland as advocated by Christchurch’s Mayor Lianne Dalziel http://www.stuff.co.nz/the-press/news/65378638/Canterbury-with-a-population-of-2-million
Christchurch would be the clear second biggest city in NZ, becoming something like Adelaide. I doubt we will ever get to 2 million people -I think 3/4 million for Christchurch and 1 million for Canterbury though is possible.
Like investing in Auckland has national benefits the same goes for Canterbury. It would add diversity and strength to NZ for the country to have two cities of an international size. It would take some of the infrastructure and housing stress off Auckland.

Note, only 3 regions are ahead of the national growth average in the high projection range -Auckland, Canterbury and Waikato respectively. Only two in the medium projection range -Auckland and Canterbury.

  • Greg N

    February 27, 2015 at 10:33 am · Reply
    Canterbury needs to ask itself [and the Government], is it better to “farm cows” or “farm people” over the longer term for the best economic growth outcomes for the region and the country.
    Both types of growth come with a swag of related issues like transport, water usage, effluent disposal/treatment, and land use changes.
    But which path is taken now will set the agenda for the next 50 or so years.

  •  

    If anyone is wondering how Canterbury can fund the infrastructure to become an international sized city and province. Then a look at Regional equity in transport funding shows Canterbury is due a fair suck of the sav.

    It cant.  Just dont think in terms of  "fund" as that makes you think paper money which can be infinitely printed even if as an IOU it cant be honoured, think in energy.  So with less energy it in the future it cant be "funded"  
    On top of that I just dont see how Govn can force the growth of a city, look at China, huge empty cities.   It will grow because of the businesses growing in size and number of them. It also needs to suck the population from somewhere and SI  just seems too small.
     
     
     

    There is a mysterious law that accurately predicts the size of the world's biggest cities. Zipf''s law in most countries and economic regions has held true for the last century. The biggest city is double the size of the 2nd biggest city. Triple the size of the 3rd biggest city and so on.
     
    There is an interesting debate about why this might be true in the above link.  

     

    There is also one for predicting the size and number of oil fields that sounds very similar.  
     
     

    Interesting article and comments.
     
    Based on Zipf's Law, we should see (City, Expected, Actual)
    - Auckland 1.42M 1.42M
    - Christchurch 0.71M 0.37M
    - Wellington 0.47M 0.35M
    - Hamilton 0.36M 0.22M
    - Tauranga 0.28M 0.13M
    - Dunedin 0.20M 0.12M
     
    Clearly Auckland is overly large for the country by this measure and to increase productivity, we need to grow the remaning cities
     

    Thanks Kiwimm I was wondering if anyone noticed my 'interesting' article.
     
    I think if you took the 'greater ' urban areas for Wellington and Christchurch. Greater Christchurch is still the larger urban area at just under 1/2 million and Greater Wellington is quite close to the 0.47M figure that should be expected for the 3rd biggest city.
     
    My thought is that if regions like Canterbury, Waikato and the Bay of Plenty could retain more of their taxes and decision making power then they could allocate resources such as transport infrastructure and affordable land for housing and commercial development etc in such a way to promote their key cities -Christchurch, Hamilton and Tauranga to grow to the size expected from Zipf's Law.
     
    This sort of devolution of local governance is typical in other OECD countries and I think we could expect the same outcomes -cities to develop the same ranking size structure. 
     
    The lesson from Zipf's Law for New Zealand is it explains why Auckland is the biggest city but it also cautions against overweighting development resources like new transport funding to Auckland and Welington our 1st and 3rd biggest cities when there is growth potential in our 2nd , 4th and 5th.... sized cities too. 

    I too would like to see NZ with more competitive cities. Give the cities more autonomy and watch them grow. For example, if Christchurch had more freedom in its planning process, it could build enough houses and infrastructure to drop its land prices leading to cheaper housing costs (=more disposable income), lower rents for business (=incentives to relocate from Auckland) and lower commuting times.
     
    This would be a good vent for Auckland which is struggling.
     
    None of the political parties seem to understand this so unlikely to happen soon. National had the perfect opportunity with the earthquakes and failed to seize it.

    I agree completely Kiwimm, a massive missed opportunity. 
     
    Look at this data here showing the rorting of some regions transport funding, especially Canterbury's which for the last decade has sent half its transport taxes elsewhere. Both National and before it Helen Clark's Labour party are to be blamed for this legalised theft. 
     
    Canterbury was in a poor position to (re)develope when the earthquakes hit and National has done nothing to improve the process. 

    Corollary to this is that you should expect more Auckland news stories than average :)

    Clearly Auckland is the biggest.  And it will grow.
    Is it productive ?  Not bad but not good.
    Is it innovative?  Comment above about it attracting people who are seeking standard type jobs. Innovators are elsewhere. Interesting idea to think about that.
    Is it a ticket clipper.  Yes.  And does ticket clipping have a future.  No.  Provincial towns were ticket clippers then got bypassed.  It will not stop at Auckland.   Already I hear the anecdotes of customers moving out of Auckland.  eg if you want to sell print the ad agency head offices are moving offshore.
    Do Aucklanders have money.  No, compared to peers in the rest of New Zealand.  (money disappears into mortgages and commuting).  And lets not mention the dirt poor zombie suburbs. 

    If it was a BAU scenario, cities super-scale ie become better and better as they grow and this seems self "feeding". So I'd tend to agree, it isnt a BAU grow for ever future though.
     

    You would think that Auckland exists in a vaccum the way people talk about it, but it wouldn't exist at all without the rest of NZ supporting (subsidising) it and visa versa.
    My son is presently going to college in central Auckland, which we contribute hundreds of $ a week and his student loan the balance. There are many thousands NZers sending money to Auckland every week.
    Let's not forget that most of NZ's population is NOT in Auckland, but supplies Auckland with services which if are ring fenced as costs outside Auckland, and yet also send money to support Auckland (as it my sons case) always make cities look more productive than they really are.
     

    Meh 35% of the working age population, 35% of GDP, orkers in Orcs are no more productive then workers anywhere else in NZ.  Obviously the real estate industry is having a far greater then average influence, I'm not impressed.  It should be obvious given that the rest of NZ is subsidising Aucklands development with roads and public transport, through extra taxes on fuel and RUC, that Auckland isn't actually as propserous as the mugs would have us all believe.
     
    If Auckland is so great why does the rest of NZ have to pay the price for all their shit?  It's just idealogical BS, big is good etc.

    Indeed. If Auckland is such a powerhouse then its GDP should be greater than its working population. Given that Auckland salaries are higher, this would make Auckland less competitive than the rest of the country

    There is a confusion here between cause and effect. NZs largest contributors to GDP are agriculture and tourism, most of which are produced and consumed elsewhere, but a disproportionate number of the merchants and organising classes choose to share the same piece of office carpet in Auckland; one could think of it as a Mayan temple compound. Once all the rural water has been poisoned by dairy, all the foreigners have been pulled from their cars and lynched, and the concentration of wealth in fetishist status symbols like housing has crumbled, we should see a restoration of the natural balance, the thing that this country really does have the greatest wealth in, and is most recognised for internationally; its ecosystems and natural biodiversity.
     

    Tony A often cites 'agglomeration effect' for auckland outperfomance as far as population growth goes. 
    The problem is, the basis of this effect is LOWER production costs when companies are clustered together. 
    Yup, I buy that, provided all else is equal, i.e transport, lease/rent costs, wage costs etc.
    Problem is, auckland is now 2-3 times more expensive to do just about anything in than a smaller city. 
    The best cure for high prices, is high prices

    Admittedly Auckland is a beautiful city to live but an expensive one to survive. One of those contributing factors is its top heavy city council!  I still don’t understand why Auckland council needs over 1700 staffs earning over $100,000, while another city similar size to Auckland, Brisbane city council only has about 70 staffs on over 100K and it is running its city way way better than Auckland.
     
    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11324634