Let structural change in the provinces play out says Benje Patterson. This is the best way for the whole country to build flexible competitiveness he says

Market signals will better sustain regional development than subsidies and migrant direction says Benje Patterson. Image sourced from Shutterstock.com

By Benje Patterson*

There has been talk of late that the gap between the economic performances of our provinces and major urban environments is widening.

However, even though these types of comments have been well intentioned, generalised conclusions of this nature are unsubstantiated by economic data and unhelpful from a policy perspective.

Apart from some isolated cases of regional struggles, the majority of provincial economies have outperformed major cities over the past decade.

This article briefly dispels some myths using information from Infometrics’ regional economic database.

Infometrics’ regional economic database provides a consistent framework for comparing the economic performances of all 66 territorial authorities in New Zealand[1]

GDP data in the model is coded to a fine industry level, meaning that headline growth can then be dissected by industry to see what really is driving economic activity in each district.

The data shows that the top ten fastest growing territorial authorities on a GDP per capita basis over the ten years to March 2013 were all in the provincial heartland.

These top performing districts were Buller, Southland District, Waitomo, Waitaki, Grey, Opotiki, Kaikoura, Hurunui, Timaru, and Ashburton – averaging GDP per capita growth of 3.4% pa over the ten year period.

Table 1– ten fastest growing territorial authorities

Glancing through the growth contributions of various industries within these top performing districts reveals a common theme – strong economic performance was almost always driven by the primary sector (mainly agriculture, but also forestry and mining), as well as meat and dairy processing.  Construction activity also often played a supportive role to these industries.

This theme is not surprising when one considers what has happened to primary sector returns over the past decade.  According to ANZ’s Commodity Price Index, the world price of New Zealand’s key export commodities in the March 2013 year was double its average from the March 2003 year.  Export commodity prices have soared in response to rapidly expanding demand for primary goods in emerging nations, particularly for many of the protein rich foods which New Zealand has a comparative advantage at producing.

In fact, so many districts in provincial New Zealand performed well over the past decade that it is not until spot 20 on the list of regional GDP per capita growth that we reach one of the five biggest urban districts.  Despite seismic disruptions, Christchurch City’s GDP per capita grew 20th quickest out of New Zealand’s 66 territorial authorities over the ten years to March 2013[2].  Hamilton City was the next major urban area on the list (taking spot number 44), following by Wellington City (48), Dunedin City (51), and Auckland (52).

Table 2– growth rates in five biggest urban territorial authorities

In contrast to the top performing districts in provincial New Zealand, growth in New Zealand’s five largest urban districts has been more moderate over the past decade.  The key detractors for urban districts were the service sector, health, education, wholesale/retail trade, construction, and logistics.  Although these industries found some support from helping to facilitate the production and trade of primary goods from provincial New Zealand, their overall performances were held down following the Global Financial Crisis and domestic recession by businesses and households (and more recently the government) tightening their belts.

In addition to their strong economic performance, many districts in provincial New Zealand have also had strong wage earnings growth to boot.  An analysis of Linked Employer Employee Data (LEED) from Statistics NZ shows that the ten top performing districts from Table 1 had growth in average wage earnings of 4.5%pa over the ten years to March 2012.  In comparison, wage earnings in the five biggest urban territorial authorities grew by a slightly slower 4.0%pa over the same period.

Furthermore, not only have many provincial districts outperformed their urban peers in terms of economic activity and wage growth over recent years, but housing affordability is markedly better in the provincial environment.  Infometrics’ calculates that the median house in the top ten performing territorial authorities in Table 1 cost on average 5.3 times the average labour market income in 2012, while the typical house in the urban territorial authorities in Table 2 was substantially more expensive – at 7.0 times the median income.  This means that houses are often more easily within reach for those working in provincial New Zealand.

But there are still some struggles in provincial New Zealand

Although this article has so far shown that most of provincial New Zealand has performed well over the past decade, there is still a small subsection of provincial districts that have struggled.  The remainder of this article identifies why this group has struggled and comments on whether a policy response is warranted.

There were nine territorial authorities in New Zealand where GDP per capita fell over the ten years to March 2013.  These places were South Taranaki, Ruapehu, Central Hawke’s Bay, South Waikato, Stratford, Western Bay of Plenty, Otorohanga, Thames-Coromandel, and Waikato District.

Table 3– the slowest growing territorial authorities

Glancing through the growth contributions of various industries within these districts shows that the key detractors were generally wood/pulp manufacturing, manufacturing of equipment and metals, mining, and gas supply.

The issues driving the decline of all of these industries are structural rather than cyclical.

This means that the industries have been enduring a painful adjustment to a permanent reduction in demand or resource availability, rather than something cyclical which will eventually work its way out.

Drivers of structural change within these industries have been outside of the local authorities’ and central government’s control.  For example, wood/pulp manufacturing has been unable to compete with the significant expansion of low-cost, high-volume, wood product manufacturing capacity in Southeast Asia, while the gas industry in Taranaki has faced declining production as the sun slowly sets on the Maui gas field. 

From a policy perspective, little can be done to counteract these structural changes, apart from the subsidisation of the industries - but that is not a policy that should be endorsed.

I have an inherent distrust for industry subsidies, as policies which artificially distort the flow of capital outside of usual market signals tend to lead to less efficient resource allocations and weaken overall economic returns in New Zealand.

The best response for New Zealand as a whole is to let structural changes in this small subset of provincial districts play out.

Structural change is a natural, albeit painful, period of rebalancing away from industries in which districts no longer have a comparative advantage.

During this process, the government’s only role should be providing short-term financial support via its benefits system and helping people into new careers by funding training or assisting in finding work in other industries.

Over the long-run, this approach allows the New Zealand economy the flexibility to realign itself towards industries in which we have a comparative advantage compared to the rest of the world.

--------------------------------------------------------------------------------------------

[1] Excluding Chatham Islands and area outside of territory authority

[2] The earthquakes actually boosted GDP per capita in Christchurch as the resilience and innovation of businesses ensured the decline in GDP immediately following the earthquakes was smaller than the population exodus.  More recently GDP in Christchurch has boomed as work to replace the city’s damaged infrastructure and buildings gathers pace.  If one looks at the period before the first earthquake in September 2010, Christchurch performed in the middle of the group of the five big urban territorial authorities.

--------------------------------------------------------------------------------------------

Benje Patterson is an economist at Infometrics. You can contact him here »

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?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

10 Comments

The best response for New Zealand as a whole is to let structural changes in this small subset of provincial districts play out.
How have you evaluated that Benje? 
All these rural economies that have performed well (Table 1) , is great, so why are we continuing to invest huge dollops of $$ into the cities (Table 2) if they are so unproductive? Or is the government just stripping out the investment from the the Table 1 councils to level the playing field?

Interesting and not unexpected, however I question whether GDP is the best measure of the value to the ecconomy, something closer to export$ per capita might be better.  We can all sit arround in cities like Auckland building houses for each other, warehousing imports and making coffee for each other at inflated salaries, and this would be positive from the GDP measurement standpoint.  In reality however this contributes little or nothing to the ecconomy and must be supported by the regions who in reality do all the heavy lifting.  How well is high productivity reflected by GDP?  Not well I suspect for similar reasons to above.
What we measure is generally what we control, and ultimately what we get.

Using percentages skews your model.
you're playing the penny stock game...

Just look at median wage differentials, or weighted average salary differences,  the pay to staff more clearly represents the cash available to both staff (for spending power) and to businesses (for margins to pay good wages).

Can you manage ok on a $5-6 payout?   We need to take back Fed Farmers.

I'm near the point where I don't see why I should bother.

The model being used has handed power from suppliers to corporate.  Corporate are making profit but not interested in tying it back to NZ farmers or supplier owners.

Why should I continue to support a model that can only return the same value as 10-15 yrs ago?

Petrol and bread (two benchmark item) and even rents have risen since then.  If the current model can't do more than $6 minimum then it has failed against inflation.

My own cost structure breaks even around $4.50 providing I personally moderately subsidise labour* and don't do any development or brand-orientated upgrades (ie stuff that Fonterra and MPI want but aren't prepared to pay for).     But $2.00 of that is rent.

* ie do emergency work, training, repairs, research, extra maintenance, forecasting, meetings, and catching up on paperwork and compliance, in my own time.

Cowboy a few years ago I came to grips with the realisation that as a farmer I was never going to make my fortune. A property developer might do well out of farming though. But as for farmers we have to feed the masses, and the masses arent rich, so neither will we be. The days of building a new woolshed out of the years woolclip are well and truly past. I struggle to do maintenance on mine. I pity the dairy farmers who have borrowed the millions to build their structures. At least the sheep farmers did it on the back of money in the bank. Plus there were better tax incentives way back.  I feel it will all slowly fall to bits from lack of profits reinvested. The tax pressures ie tax payable on stock, is just ridiculous and further restricts our ability to spend money on farm. I dont see why I should be paying ACC based on how many bulls I am running. Jeez I copped over 6k in ACC a couple of years back based on stock number changes. Does a market gardener pay ACC on the number of cabbages he has planted. Doubt it. 

I didnt mean for this to be a whinge, as I strongly believe we need to get back to paying for productive value of a property. That would sort a lot of problems. Counting stock as your income really pisses me off. Maybe different with a milking cow, you are making money out of her as you go. (well from 2 years old) Bit difficult to make money out of a meat animal till its dead. Tax us when its dead I say! Try getting together a herd of beef cows, and your tax is paid on something you wont get anything out of for 4 years. If those grappling to be in charge moan about dairy cows everywhere perhaps they could think long and hard about that.

If payout drops to $5 the banks will be having a lot of sleepless nights Aj. ;-) Fonterra guaranteed payout for June GMP this season is $7/kg. A lot of farmers will survive, in varying degrees, on $6.  But a sustained $6 payout would cause stress, but then again the dollar may drop if that happened.
As a dairy farmer, I believe we have too many 'organisations' speaking on my behalf.  Take regional councils for example, Fonterra, DairyNZ and Feds all speak to them 'representing' dairy farmers.  They all don't sing of the same song sheet.  No wonder our RC is starting to set up local (ie catchment) farmer groups to give them feedback.
Fonterra speaks without a real mandate from the local suppliers - that is, when they speak, they speak the corporate line.  
I do however have tremendous respect for DairyNZ and what it has done/does on behalf of farmers in Southland.  At least they communicate with the local farmers.  
Feds here (Southland) take a more political line and are good at times of keeping everyone honest.  Feds is a voluntary organisation, and as such can struggle to get people to take on leadership roles.  In order to take something back you have to be prepared to be part of the group 'taking it back'. ;-)
 
I read the Q & A interview with Bruce Wills and Mike Joy.  Couldn't help thinking if Willy was there instead of Bruce it would have been a more interesting interview.  It can be very hard for a non dairy farmer to get the message across as to the changes happening down on the dairy farm - especially in relation to technology.

One (non-farm related) leading voice in the "farmer representative" meetings criticised that those farmer representatives tended to sit on the chairs and be told what to do, and he said they had to get up and actually do so work.   He was reported as criticising farmers for lack of speaking up, so I emailed him personally I point out real farmers were actually too busy farming much of the time... which is when he admitted that he was talking about "farmer representatives" -because- they didn't actually see farmers for that reason.

I have zero time for Mike Joy, not after he tripped down the Mangatainoka river to prove "the damage of dairy" ... when there aren't any dairy farms on the stretch that he went down.

I recently talked to someone who actually did know stuff.  He was saying it would take around 80 years for leachate to reach waterways.  so whatever "tests" mike and crowd are doing, the observed leaching data can't relate to today's pasture management.  (of course that also means for every year it's put off, then any damaging effects will last twice as many years in the far future. :(  )

As for DairyNZ.... less respect than I have for mike.  Although the OAD conference in Masterton was a corker.

Don't worry guys someone from auckland/wellington is telling us that we are doing just fine out here.