Keywords: Globalisation & Trade; Governance;
Introduction
The purpose of this note is to bring together various writings of mine about some analytic tools, which the Royal Commission on Auckland Governance may find helpful. There are no specific recommendations other than I commend the use of these tools were relevant.
By way of introduction I am a senior New Zealand economist with a wide range of experience. (A curriculum vitae could be supplied if required.) I have been thinking about regional and urban issues for forty odd years.
However, as I explain below, I recently had a Marsden fellowship to study globalisation, in which regional and the urban issues are central. I draw on the understandings I gained from that study to make the submission. They are further elaborated in the book which came out of the study: Globalisation and the Wealth of Nations.
Additionally, I have been a member of the Growth and Innovation Advisory Board since its founding in 2002. The ‘Auckland problem’ has been a constant concern of the Board and I have learned much from our discussion around the board table. The Board has submitted evidence to the Royal Commission. I fully support that evidence. Indeed this submission elaborates some of the thinking that enabled me to support their submission. However, the views in this submission are fully my own, and neither bind the Board nor necessarily reflect the views of any of its other members.
Auckland as a Global City: The Economics of Agglomeration
My perspective is that New Zealand needs a global city, and that the only possible primary node is Auckland. (However – but I will not elaborate it further – I think Christchurch may become an important secondary global city.) An important consequence of my thinking – some of which is elaborated below – is that not only does Auckland have to be a better functioning urban area, but it needs strong links with the rest of the country. This submission is mainly about the former, but the latter should never be overlooked.
Critical to the understanding is that the world is not flat. It is puzzling that Thomas Friedman , thought otherwise (as he does in his book The World is Flat), especially as he lives in Bosnywash, the Boston-New York-Washington conurbation. Urbanisation is a central feature of globalisation.
Economic activity may be divided into two broad grouping. One grouping is around resources (including potentially sustainable ones like farming and fishing), the initial processing of the resource, and the associated servicing of the communities and production. The other grouping, occurring in urban centres, includes the advanced processing of the resources, sometimes to the point where the actual resource content appears trivial (as in design or computing), and the associated servicing of the communities and production.
The second grouping of activities could, in principle, occur in rural areas, but the effect of the ‘economies of agglomeration’ is to reduce costs in urban areas so they are increasingly located there. I described the economies of agglomeration (once called ‘industry economics of scale’) in Globalisation and the Wealth of Nations (p.35-36) as follows:
The agglomeration of industry – where many businesses produce similar things – seems to derive from economies of scales of industries rather than firms. As the overall industry gets larger, the costs of individual firms fall. Because they are competing against one another, the benefits of these falling costs do not go to the firm, as they could were it a monopoly, but enable the local industry to undercut businesses elsewhere, thus reinforcing its dominant position.
This need not occur in the largest centre. Sometimes, for reasons of history or by accident, an industry will evolve in a smaller centre. Nevertheless, larger centres are likely to have clusters of industries supplying the nation.
Exactly why there are industry economies of scale is a puzzle. The English economist Alfred Marshall (1842–1924) suggested they arose in markets rich in specialised skills (and the benefits from such specialisation), from knowledge spillovers (where individual firms cannot prevent other firms learning their technological innovations), and from backward and forward linkages (where other firms benefit from being close to the core business).
More recently, Masahisa Fujita and Jacques-Francois Thisse identified ‘the relevant externalities for the formation of [industrial] clusters’:
1. Mass production (the internal economies that are identical to scale economies at the firm’s level);
2. Availability of specialised input services;
3. Formation of highly specialised labour force and the production of new ideas, both based on the accumulation of human capital and face-to-face communications;
4. The existence of modern infrastructure.
It is characteristic of economic development that such agglomeration effects are dynamic. They do not all happen instantly, but feed on one another over time.
The industries which benefit are not always obvious. Being a centre of finance increases the likelihood that other businesses will locate their headquarters in the city. They too require lawyers, accountants and other business services. Much of the work of such people involves sophisticated, discretionary decision-making. So while they enjoy a ballgame they are also more likely to go to the theatre or purchase a painting – an effect reinforced by the conspicuous consumption of the rich and the need for venues outside business in which to construct interpersonal networks. Thus finance and headquarters activities generate a group of sophisticated cultural activities that spill over into creative industries such as art, publishing, fashion, design, writing, and music.
Source: M. Fujita and J.-F. Thisse, Economics of Agglomeration: Cities, Industrialisation, and Regional Growth, Cambridge University Press, Cambridge, 2002, p. 8.
The economics of agglomeration are practically illustrated by some research I did on the biotechnology industry. I observed that, overseas, successful biotechnology activities are so concentrated in urban areas that one had to think of the location of biotechnology industries in cities rather than countries. They were there because of the economies of agglomeration.
All of these urban areas were large, partly because of their underpinning by advanced tertiary institutions and specialised centres of the application of advanced medical technologies; partly because their size means an effectively large labour market of the talented individuals with specialised skills who staff the research and development centres and who, in a variety of local venues, share their knowledge; and partly because size enabled the concentration of the specialised services on which the industry is dependent – ranging from particular laboratory applications to experienced business services (such as law, accountancy, investment, patents).
Thus it is these economies of agglomeration by lowering costs concentrate economic activities in urban areas,. They are the reason why the globalised world is not flat.
Applying the Theory to New Zealand
New Zealand has a strong resource base, around which it could develop, without those activities which require agglomeration. It would be a less populated New Zealand with the (smaller) Auckland as the primary point of connection with the rest of the world via its seaport and its airport (and it is also the terminal for some of the electronic connections).
The disadvantage of such a strategy (other than the population would be smaller) is that it would not offer opportunities for many New Zealanders to apply their talents in relevant industries which depend upon the economies of agglomeration. Most would have to migrate off-shore to apply their talents with serious consequences for families and the nation.
Thus I support the strategy of New Zealand promoting those activities which are subject to the economies of agglomeration. To do so, it needs at least one urban area big enough to reap them.
The required size depends upon the particular industry. When I looked at Auckland, I observed that it was a little smaller than the successful biotechnology centres overseas. But there is no alternative urban centre in New Zealand. Perhaps Auckland is large to succeed enough if Hamilton could be treated as a part of the total biotechnology region, while other centres – such as Wellington and Dunedin – have smaller biotechnology industries with which the Auckland one interacts, and which adds to the effective size and richness of variety which is critical to the successful biotechnology industry.
The conclusion then, is if New Zealand wants to have a successful biotechnology industry, then it is going to have to be based in Auckland, although reaching out to other centres of New Zealand, while those other centres can only succeed if there is a thriving Auckland based biotechnology industry.
Not all the advanced knowledge-based industries depending on the economics of agglomeration will be based in Auckland, but a higher proportion of them will be there than the size of Auckland’s population and its contribution to GDP might indicate. Moreover unless those industries are based there, they are unlikely to occur successfully anywhere else in New Zealand with the consequence that many New Zealanders who would work in them will migrate off shore.
I conclude then that success for a New Zealand which has a wider industry range than just resource based industries requires a thriving Auckland. There is no other conurbation large enough to sustain most of the additional industries, and even then Auckland will have to be linked closely with the rest of New Zealand.
The Governance Problem in Auckland
It is generally accepted that Auckland does not function as well as it could, and that this is handicapping its realisation of its full economic potential. There seems to be two major reasons:
– there has been an under-investment in infrastructure;
– the governance arrangements of Auckland.
Much of the infrastructure backlog is being addressed, although it will take at least a decade for the program to be completed. However, while the backlog is in part a funding failure, it also reflects the failure of the governance arrangements of Auckland which in the past has meant it has not been able to as vigorously pursue infrastructural development as demands rose.
Thus the failure of governance has been integral to the relatively poor performance of Auckland and the unnecessary difficulties that its people and businesses are facing.
The Royal Commission will receive considerable detailed evidence about this failure, such is the frustration that current arrangements generate. I would add a couple of further examples.
The Proposed International Convention Centre
The proposed international convention centre nicely illustrates both the importance of the Auckland to the national economy and the possibility that the governance arrangements will delay and frustrate the project.
Existing convention centres are not able to comfortably deal with 1000-1500 delegates. There seems to be a national acceptance – even by other New Zealand cities’ convention centres – that a large one should be placed in Auckland (in part because only it has the capacity in terms of other facilities, such as hotels). This nicely illustrates the role of Auckland in providing New Zealand with industries which would not otherwise succeed here.
However the sponsor of the convention centre is Auckland City Council, that is one of the seven territorial local authorities (TLAs) which make up the Auckland region. Thus while the case for the international convention centre is a regional one, it is being promoted by only a part of the region (and indeed by a council which by itself is smaller than the Christchurch City Council, which concluded that it was not large enough to promote such a centre).
In due course the proposal will go to the entire Auckland region but, if past experience is any indication, it will get involved in a confused and complicated decision-making processes which will delay its implementation and add to its costs. If this occurs it would be a typical experience of many other infrastructural and region-wide projects the result of which has been to reduce the economic effectiveness of Auckland to the detriment of the peoples and businesses of the region and of New Zealand.
The Arts in Auckland
On occasions there is an outbreak of public lamentation among some Aucklanders that their cultural life is not sufficiently rich, pointing enviously to the greater success of Wellington. In fact there are cultural activities where Auckland is superior to Wellington, including fashion design, painting, publishing and the Polynesian arts. In others, such as classical theatre and music, they are less successful.
This outsider observes a major reason for such failure is the inability of the Auckland region to act collectively to promote such activities. (I have also argued that difficulties of commuting limits the audience – the infrastructure again).
The Auckland debate likes to claim that Wellington is privileged by the central government. Perhaps it is to some extent, but its success is also, in part anyway, because Wellington is more organised for its artistic activity, making up for its deficiency in relative size by coherent commitment. One expects that if Auckland were to show the same commitment a larger share of the (hopefully increasing) public budget would go to Auckland.
Again governance arrangements are hampering Auckland’s development,.
In making this illustration it is important to observe that such artistic activities are not superficial to the effective global city. Its quality of life is critical to attracting talent that its industries require.
Principles for Designing Better Governance: Subsidiarity
The notion of ‘subsidiarity’ is that decisions should be taken at the lowest effective level. Often that level is at that of the household or business. However the key term here is ‘effective’ Sometimes in Auckland’s case, decision-making has been devolved to too low a level to be effective.
This is a result of faulty design of governance. Often the delegated level for a responsibility is to below the effective level of implementation. In particular the TLAs have ended up with responsibility for regional decisions involving activities which occur partly outside their boundaries. But there are no ongoing institutional arrangements which enables the TLAs to jointly make regional decisions, while the existence of the Auckland Regional Council (which has responsibility for some but no all regional or cross-boundary decisions) further complicates the decision process. As a result outcomes are delayed or deferred, and are not always taken in the best interests of the region as a whole.
A further complication is that the lack of an effective regional-wide decision process often results in the Central Government getting involved in matters which the principle of subsidiarity suggests should be made at a more local level. (We saw this with the demand by Auckland that the Central Government should solve their failures in the arts.)
Without strong and effective regional government which can take effective responsibility for such region wide matters as infrastructure – including transport, water and wastewater, (and even international convention centres) – Auckland will continue to function poorly in some important ways, and will not contribute as much to nation’s economic progress nor to its citizen’s lives as it is capable of.
Principles for Designing Better Governance: Structure
The following discussion on governance structure is derived from the analysis presented in Globalisation and the Wealth of Nations. Rather than simply apply it to the Auckland situation, of which I have insufficient detailed knowledge, I have kept the economic framework. It identifies three general forms:
1. The Free Trade Area: In a free trade area, individual states fiercely maintain their political autonomy except for cross-boundary commercial/trade transactions. (The developing East Asian Economic Community might be an example.) In many ways that best describes the current situation in Auckland in which TLAs (often effectively) meet their citizens local needs and where generally business and people cross the local body boundaries without hindrance. However, the effectiveness of the system breaks down where cross-boundary transactions are not commercial or private, such as those involving infrastructure. It is the governance of these non-market transactions which are at the heart of the Auckland problem.
2. The Federation: At the other extreme there is a very centralised government, where the states have not much autonomy. (The best example is the United States of America.) My impression is that many citizens of Auckland are fearful of such a solution because they think it will take away local discretion on local matters. The American experience shows that it need not, although the approach probably relies on market solutions and distance between local decision-makers which are not practical in the New Zealand situation.
3. The Confederation: In a confederation, the states maintain considerable autonomy but make collective agreements to carry out non-market decisions, usually by a super-majority of the individual states. (The USA was originally going to be a confederation, but a better example is the European Union, except that sometimes the super-majority is unanimity, which can stall coherent decision-making.)
The third ‘confederation’ option – the middle way – could work like this. The territorial local authorities would sign an agreement with the Auckland Regional Council that, on all matters where they agreed with a super-majority, the ARC (or whomever) would implement the agreement. The super-majority would not be unanimity. For instance if might be where there was two thirds of the TLCs by population plus two thirds of the TLCs by rating base.
Such a system could be implemented tomorrow (i.e. without the Royal Commission or a statute). That such an option has not, or has not even been explored, indicates the depth of the deficiencies in Auckland’s governance at a regional level.
I put this three-part abstraction to clarify options. They are intended to assist the Commission in thinking about the options, subject to the application of the principle of subsidiarity, which might lead to a better governance structure.
Auckland and the Quality of life
An economist, such as the one making this submission, needs always to recall that the purpose of government interventions is to lift the sustainable quality of life. Insofar as it leads to better regional decisions, improving the governance of Auckland will contribute to this improvement.
I am struck by the paradox that while the Mercer Worldwide Quality of Living Survey rated Auckland fifth among the cities is evaluated, that would not be the impression I obtain from talking to Aucklanders.
Some confirmation of this perception comes from the New Zealand Quality of Life Survey which looked at the subjective wellbeing to inhabitants in 12 TLAs in 2004. After adjusting for various personal characteristics, Professor Phillip Morrison found that among the cities with the lowest wellbeing were Auckland (12th, Manukau 11th, and North Shore 10th – although Rodney and Waitakere were the two highest).1
The implication is that at the moment perhaps the biggest regional gains to improving the quality of life in New Zealand are to be made in parts of Auckland. Moreover such gains will attract to the region more of the talented people on whom the Auckland contribution to economic progress depends. I am also is also mindful that a lift in Auckland’s wellbeing will have benefits for the rest of New Zealand and raise their wellbeing too.
Conclusion
Solving Auckland’s governance problems will not solve all its difficulties, but could be a major step to resolving some. The fact is the governance structure of Auckland has been cobbled together over the years without a lot of consideration of its functioning and operations or to a coherence of design. What is needed, both for the benefit of the people of Auckland and for the New Zealand economy as a whole, is an overall review which leads to a coherent design for the governance of Auckland.
That is why I welcome the Royal Commission on Auckland Governance and hope this submission will assist it in thinking through the redesigning of Auckland’s governance.