1. Introduction
The intention of this paper is to highlight some of the potential impacts of the geographical location of New Zealand and its low population levels on the future trade patterns and growth performance of the New Zealand economy. The approach of this paper is slightly different to some of the existing literature on the subject (Skilling 2001 a,b; Hansen 2002) in that we adopt a transactions-costs perspective in order to unpick many of the complex interrelationships which exist between these issues. This approach then allows us to identify which particular aspects of this debate are relevant to the New Zealand economy and New Zealand public policy.
Over the last two decades there have been various analytical breakthroughs within the fields of economic growth, trade and economic geography which have forced analysts to reconsider how these phenomena are related. Within the growth literature, the work of Romer (1986, 1987) and Lucas (1988) has re-focussed our attention on the role which the effects of ‘learning-by-doing’ (Arrow 1962) and human capital acquisition can play in improving the productivity of factor inputs. It is argued that differences in these learning effects can allow for differential shifts in the relative long-term equilibrium growth rates of different economies. For example, between any two economies with equivalent factor stocks, the economy which benefits from strong learning effects will be expected to exhibit a relatively higher equilibrium growth rate than the economy without such strong learning effects. On the basis of this argument, it would appear on face value that countries with a highly educated labour force, such as New Zealand, ought to be expected to maintain a high equilibrium growth rate over a long period. However, the argument implicit in these models is rather more subtle than this. This is because many technological changes are seen to embody certain features (Arthur 1989) which may (Lewin 2002) have implications for not only the levels, but also the patterns and characteristics, of long-term investment. There may be differences in the extent to which such learning processes take place even between advanced OECD economies, and understanding the reasons for these differences across countries brings us to the question of the relationships between growth, trade and geography. What is it about geography and geographical trade patterns which determines the extent to which growth processes take place locally?
Since the late 1980s there has been a widespread revival of both academic and public policy interest in the links between geography, trade and economic growth. This interest is not confined to any particular part of the world, although the major emphasis of these discussions has tended to take place among OECD countries. There are several reasons for the recent renewed interest in the role which geography plays in determining economic growth; one reason is technological, a second reason is institutional, and a third reason is analytical.
The primary technological development which has contributed to the renewed interest in the economic impacts of geography, has been the rapid improvement in information, communications and transportation technologies. These technological advances have improved the ability of corporate and government decision-makers to coordinate either market or organizational activities across progressively larger geographical areas. This is because the new technologies provide for the better planning and control of activities across multiple locations, resulting in an improved ability to exploit intra-marginal differences in international and interregional rates of return. It is not clear, however, whether these developments will alter the spatial distribution of economic benefits on a global basis, in comparison with the existing patterns determined by previous technological regimes. Yet, where any such changes do actually occur, these changes will be generated by changes in the geographical patterns of trade and growth.
At the same time as these technological changes have taken place, there have also been widespread institutional changes within the global and regional trade frameworks. The movements towards free-trade and integrated market areas such as EU, NAFTA, ASEAN and MERCOSUR, have meant that the tariff structures associated with national borders may be becoming progressively less important in terms of their effects in shaping a nation’s economic performance (Clement et al. 1999; Yeung 1999). These issues tend to be more relevant to the secondary manufacturing and tertiary service sectors rather than the primary agricultural and extraction sectors, many of which are still highly protected. In particular, reduced trade barriers may lead to both quantitative and qualitative changes in the spatial patterns of investment both within and between countries. Any such changes may lead to differential growth impacts between different geographical areas, and once again, such issues require us to ask questions about the relationship between geography, trade and growth.
The combination of these technological changes and institutional changes has encouraged widespread discussions about the supposed economic and social impacts of globalisation on the gap between rich and poor countries. Of particular interest to the case of New Zealand, however, is whether any changes in the spatial patterns of trade and growth, associated with either changes in communications technology or trade barriers, will tend to favour geographically central or peripheral countries, irrespective of their levels of development.
In these discussions, the question of whether or not there are any adverse consequences associated with geographical peripherality, depends primarily on whether or not economic integration is seen as a universal equilibrating growth mechanism. Evidence from common trade areas suggests that lower tariffs, trade barriers and communication tend to favour low wage peripheral economies, primarily via inflows of capital. The results of this equilibrating process imply a convergence in incomes across spatially differentiated markets (Barro and Sala-i-Martin 1992), and this process may benefit peripheral economies such as New Zealand. Yet the robustness of these convergence observations appears to be very dependent both on the time scales of analysis (Fingleton and McCombie 1998; Armstrong 1995) and also on the individual spatial units chosen for the analysis (Cheshire and Carbonaro 1995).
On the other hand, there is much analytical evidence to suggest that the growth effects of continuing economic integration may be quite different between different areas. In particular the work of two key commentators, Paul Krugman (1991) and Michael Porter (1990), has opened up discussions of the role which geography plays in economics and business matters, to a much wider academic and policy-making audience than was previously the case. The work of Krugman (1991) has lead to the development of the so-called ‘new economic geography’ literature, which argues that the uneven distribution of industrial activities across space is a natural result of market processes. Meanwhile the work of Porter (1990) has fostered the literature promoting the importance of industrial ‘clusters’. The primary lessons from these two literatures are that geography really does matter in determining economic performance, and geographic peripherality can have adverse consequences. In particular, there are strong reasons to expect systematic growth advantages accruing to central areas in which there are concentrations or ‘clusters’ of industrial activity (Porter 1990) over geographically peripheral regions (Krugman and Venables 1990; Overman et al. 2001).
Such ‘new economic geography’ and ‘clustering’ arguments may be of real concern to countries such as New Zealand, because they imply that many of the previous advantages of New Zealand may become continuously eroded relative to other areas. This has given rise to a debate within New Zealand concerning the consequences of geography and scale for New Zealand’ long-run growth prospects (Skilling 2001a,b; Hansen 2002) However, the validity of these various arguments and conclusions, not only in the case of New Zealand but also more generally, depends largely on the specific assumptions we make concerning the characteristics which are ascribed to geographical transactions costs.
Information communications costs, transportation costs and institutional tariff barriers, can all be considered to be just different forms of market transactions costs. Yet, each of these various types of transactions costs are explicitly geographical both in nature and impact. Any changes in the levels or structure of these spatial transactions in any particular geographical region, will have profound impacts for the patterns of international and interregional trade in that region, and also between that region and any other region. Therefore, in order to understand the possible economic growth impacts of possible changes in the international and interregional transactions costs faced by New Zealand firms, it is necessary to consider both the nature of these transactions costs and also the nature of the New Zealand economy.
As we will see in this paper, interpreting the lessons and possible implications of these debates for the economy of New Zealand economy is rather complex because of the rather unusual geographical and structural characteristics of the New Zealand economy. From the perspective of economic geography the two dominant features of New Zealand are firstly, extreme geographical peripherality with respect to its major OECD trading partners, and secondly, very low absolute levels of urban concentration. Both of these features will have significant implications for the performance of the New Zealand economy in the newly-emerging institutional, technological and global trading environment.
In order to explain how each of these geographical economic characteristics of New Zealand may influence New Zealand’s future growth and performance, we will initially deal with each of these issues separately. Firstly, we will discuss changes in the nature and structure of international transactions costs faced by New Zealand firms, and then secondly we will discuss the transactions costs issues associated with intra-national urban population levels. Subsequently we will attempt to provide an integrated approach to the discussion of these inter- and intra-national transactions costs phenomena in the context of the New Zealand economy. Finally, we will consider possible New Zealand government policy options associated with these various institutional and technological developments.
