2.  Thinking about Regional Differences

2.1  There are differences in economic and social indicators across regions

People and activity are not evenly distributed across space. Neither are indicators of well-being. This section discusses the extent to which differences in economic and social indicators across regions constitute problems. We find that some differences are neutral, some are positive, and some are cause for concern.

2.2  Many of these differences are not problems

There are many reasons we would expect to see differences across space. Regions have different characteristics. Land and natural resources are immobile and areas differ in their endowment of features such as soil fertility, topography, climate, proximity to harbours, surf, beaches, history, etc. Furthermore, at any point in time areas have certain population levels, demographics, industry structures, infrastructure, labour markets, housing markets etc.

People choose where they will live based on their preferences for these features along with other factors such as location of family and friends, historical or cultural attachment to specific places, and where they already happen to live. Not all apparently deprived individuals and families are in fact deprived, or see themselves as deprived – their preferences may be such that they enjoy low income/low cost lifestyles in remote areas. Firms also choose where they will locate their business activities; considerations include proximity to markets, the availability of inputs such as raw materials and supply of skilled workers, as well as other factors such as where the entrepreneur happens to live. Variation in regional characteristics along with variation in preferences of people and firms will inevitably make some places more popular than others.

Differences arising from these fundamental factors are just the aggregate of many individual decisions made by people and firms in a free society. They are positive rather than negative, since they reflect people doing what they want for economic and non-economic reasons.

Furthermore, the picture of location choice is a dynamic one – decisions by people and firms are being made continually in response to changing preferences and regional conditions. From time to time region-specific shocks, both positive and negative, occur which change the relative attractiveness of certain areas to people and/or firms. People and firms will move gradually in response to changes in economic and social opportunities. There are costs to moving location (for example; sunk costs invested in plant and equipment, moving costs, emotional costs associated with change and dislocation) so adjustment does not occur immediately. International research shows that most adjustment takes an average of five years to work through, although the nature of the adjustment varies across countries.[2] At any point in time differences in well-being between regions may be transitory, as a process of adjustment works itself through.

Adjustment is a necessary and desirable process; it is what allowed people and economic activity to move from former West Coast gold rush towns to areas with greater opportunities, for example, or from one gold field to another. Migration is an important way of overcoming regional unemployment. It is not desirable in general to interfere with this process of adjustment, although it may be desirable to ease the adjustment process.

2.3  Some differences are positive – cities are important for growth

Some regional differences provide positive benefits for New Zealand. Cities are centres of economic growth. People and firms are attracted to dense urban areas by such things as lower transport costs, economies of scale and scope, greater specialisation, better labour markets for both firms and workers, information networks and contacts which promote knowledge flows and learning, better human capital accumulation and consumption benefits.[3] Cities are good places to be for both producers and consumers. Generally, productivity is higher and people earn more in cities. US evidence has shown that if the population density of an area doubles, labour productivity increases by 6% and total factor productivity by 4%.[4] Furthermore, there is a wage premium of over 20% in US cities and there is evidence that this is related to higher human capital accumulation.[5]

At certain density levels cities can also become less attractive. Higher costs of living especially for housing, higher costs of labour, pressure on infrastructure, congestion, pollution, crime and other social problems can all encourage some people and firms to disperse and choose less populated locations. Some will choose adjacent suburbs – ability to commute can mitigate these dispersing forces. Others will locate further afield.

On balance we are seeing a global trend toward increasing agglomeration. Although there are forces encouraging some level of, and types of, activity to locate in rural areas and small towns and cities, there is a strong pull of people and firms to major centres. The international evidence suggests that increasing agglomeration has positive benefits up to a city size well in excess of Auckland’s.

Increasing agglomeration could also be important for our smaller cities – if for example there are industry-specific factors associated with New Zealand’s relatively high reliance on primary production. Some industries, such as agriculture and tourism, are by their nature tied to location. They are therefore unlikely to experience agglomeration in the same way as manufacturing industries with more mobile factors. Productivity improvements in agriculture will necessarily occur across dispersed locations, but even here agglomeration may be important. Concentration of agricultural research in particular centres for example, may deliver agglomeration benefits to a dispersed production base. Overall we conclude from the international literature that the larger cities, and Auckland in particular, are likely to be a critical force in New Zealand’s long-term economic development[6].

The force of agglomeration is felt even more keenly when we take an international perspective. The menu of location options for New Zealanders includes regions outside New Zealand. Agglomeration forces can operate across national boundaries: many New Zealand firms and people are drawn to Sydney, for example.[7] As the world becomes more integrated it may not only be some New Zealand regions, but New Zealand as a whole, which faces the challenge of attracting skilled people and viable economic activity.

The message here is that, not only is agglomeration a powerful trend, it is not one we would want to tamper with. Growth is of key importance to well-being and cities are vital for growth. The costs of assisting struggling non-urban regions may be to limit the positive impacts of agglomeration in Auckland and other centres. Furthermore, policies that divert resources from our major cities to more rural regions may, in effect, be promoting Sydney. Whatever their other objectives, policy makers need to think carefully before putting sand in the wheels of agglomerating forces.

Regional differences, however, are of particular concern for two reasons: the existence of neighbourhood effects, and high costs of adjustment.