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“It’s the economy stupid” #2 – Economies of scale in NZ

Why are cities growing? We explored some of the answers to this question in last week’s post. The main suggestion was that the growth of cities has hitherto been driven largely by our desire to minimise transport costs and mitigate the effects of fixed costs.

And while the process of urbanisation has thrown up a range of problems, we have generally been able to solve, or at least mitigate, them through good ol’ fashioned human ingenuity. You only have to consider developments in sanitation, elevators, engine technology, and street lighting to see how humans have, over time, found ways to make urban life more bearable. In contrast, the challenges faced by rural areas are inherently more difficult to overcome, because they arise from immutable physical barriers rather than softer socio-economic issues.

This however is not the whole truth and nothing but the truth; there’s several interesting sub-plots to the growth of cities that deserve some more attention. In this post I want to look at one of these in particular: Economies of scale in New Zealand’s population growth. As you’re probably aware, all good economic bed-time stories start with a graph. So in the graph below I’ve plotted the predicted growth of New Zealand’s regions from 2012-31 (%, y-axis) versus their 2012 population (people, x-axis), both of which have been sourced from the Statistics NZ website.

Chocolate fish prize for anyone who spots the trend.

Yes, it seems that the regional population in 2012 is a relatively strong predictor of regional population growth over the next 25 years. Or put more simply, in terms of population the “big are getting bigger”. NB: For those with a statistical nose, when Auckland is removed from the data set the relationship is much weaker (R2 = 29% versus R2 of 70% above) but remains significantly positive nonetheless. So I’d suggest that Auckland is an “extreme value” (in the sense that it’s different from the rest but still useful) rather than an “outlier” (in the sense that it provides no meaningful data).

About now you might be thinking: Surely as a region grows it will become increasingly crowded to the point that further population growth is eventually constrained, e.g. from congestion? While there is no evidence of this at the regional level shown above (i.e. the trend line is linear and does not tail off), that may be because NZ’s regions are pretty large, i.e. the crowding effect occurs more locally.

To check whether population growth does indeed “max out” I replicated the analysis shown above but at the level of territorial authorities, as illustrated below. Here we again find some evidence of positive economies of scale, but these do seem to drop off at higher populations (NB: Again removing Auckland from the analysis makes little difference to the overall trend).

Here the positive relationship is still evident, although much more mixed and, as a result, more interesting. The life of an economist would indeed be very dull if everything followed the trend! The variation in the relationship between population size and (projected) population growth at the level of TAs raises some interesting question. For example, can we explain why some TAs sit far above the trend line and vice versa? How is it that some TAs have managed to escape the tyranny of their small size?

For some there are obvious answers; Queenstown for example, will have benefited from an expanding national tourism industry. Other places may have benefited from a pleasant climate. Or maybe these fast growing smaller TAs happen to be close to large cities, thereby benefiting from the aforementioned population spillover. Other TAs, however, are maybe doing well because their public policies attract people and businesses – and these are the places that we should be really interested in, and which I will look at in more detail in subsequent posts.

But for now the two key takeaway points are:

  • There appears to be a general trend at the regional and local level to indicate that NZ experiences economies of scale in terms of its population growth; and
  • There is enough variation around this relationship to suggest that many other things matter too, particularly at the local level.

The first point presents something of a conundrum: All it really tells us is that regions would grow faster if they had a larger population to begin with. But you obviously can’t influence your initial population so what do you do? The simple relevance of this observation is, I think, that New Zealand should aspire for population growth at the national and regional level because NZ is still sufficiently small to that we experience strong economies of scale.

And that makes intuitive sense to me: As a small remote country we’ve drawn the short (or should it be long?) straw when it comes to economic geography. Basically, New Zealand needs more people. Whether the existing population is prepared to let that happen or not is another question.

 

33 comments to “It’s the economy stupid” #2 – Economies of scale in NZ

  • Mr Plod

    Hi Stu,

    Great post and predicts the real problem for local and national politicians; this really is a game of two halves. We are seeing Aucklanders crying out for Govt support for infrastructure to support ‘extreme value’ growth (the CRL) while we have aGovt intent on supporting the aspirations of the many down the other end of the graph. Quite rightly Len & his team, this Blog and even Granny Herald must fight for Auckland’s corner and the Mayors of Hamilton, Tauranga & the Manawatu fight for theirs. What the current Govt just doesn’t seem to get is that in good times the “genius of the and” works and they can deliver for both but when things are tight they must deliver to where the growth is going to come from and for me that’s at that’s with the ‘extreme value’.

    • Stu Donovan

      Completely agree. The best thing for other regions in NZ is if Auckland keeps growing – because eventually that will a) drag the national economy up with it and b) fill Auckland up to the point where people start spilling over into other cities. That’s already happened to some degree, is to be expected in the future, and is not necessarily a bad thing if it happens naturally.

      But it won’t happen yet, because Auckland has still not yet (from what I can tell) reached its optimal size whereby further economies of scale are balanced out by loss of amenity and increased congestion. You only have to look at the growth potential in Upper Harbour area to see that Auckland is not done yet.

  • The other big issue is that most of this “population growth” is going to be immigration and it is certainly clear that migrants from different countries/regions have different values with regard to location,

    i.e I think it is safe to say that asian migrants have a stronger pull to large cities ( particularly auckland), whereas those from the “anglo countries” to also have an affinity for smaller regional centres,

    So the mix of migrants locations could have an impact of future growth

    • Stu Donovan

      I think it is safe to say that migrants’ origins will impact on population settlement patterns here yes. And yes, if you’re migrating from Asia then Auckland is the place where you can get direct flights back when you need to visit Mum and Dad, so provides a real advantage in that respect.

    • Most of the population growth in Auckland at least is not coming from immigration but from natural means (more births than deaths).

      • It’s a touch more complex than that, because a lot of the natural growth comes from high birth rates among first and second generation migrants. So direct migration isn’t driving much of the growth, but much of the growth is the result of migration.

  • Stu Donovan

    Update: I just had a question from a friend about the use of population projections in this analysis. He’s correct in that it’s certainly not ideal to draw conclusions based on projections rather than actual data, because you risk just finding the relationships that the projections were themselves based on (in this case I think it’s OK, because SNZ’s projections tend to be based on assumptions around natural increase versus immigration.

    Anyway, just to check I replicated these analyses using actual census data from 1996 to 2006 and found very similar relationships, i.e. the population in 1996 was a relatively strong predictor of growth from 1996-2006.

  • Ash

    Yes, I do think that some substantial growth in population is on the cards for NZ (more wealthy Asians; more Europeans looking for a better climate; perhaps even climate change refugees in decades to come). It is likely to see some resistance, and probably largely along ethnic lines, predictably. However, I think the influx of motivated people (emigrating is something for those with drive and initiative) with different experiences and conceptions of urban environments and mobility will be a big positive for NZ’s urban centres, and will help to offset our insular and somewhat narrow ways of thinking about these issues.

    And we all know that the roading networks in our major centres will not scale to support this growth, which, combined with increasing attention to emissions and the urban revival should make for some very desirable outcomes.

  • SteveWest

    “Basically, New Zealand needs more people”. Really? Sure, population growth is used to prop up the economy here at present, but if a “true” export based economy was developed not sure that this point applies. Also, given technological improvements in the near future, distance will not be so much of a factor in company locational decisions. Countries with low population growth rates (Switzerland, Norway etc) have higher GDP growth and are likely to be even more desirable places to live in the future due to lack of overcrowding etc.

    • What technological improvements are imagining exactly?

      • SteveWest

        Improvements in telecommunications technology, meaning service sectors such as film, IT, finance and insurance will be even less location dependent. Ireland for example has a growing IT industry hosting global servers etc, yet is further in distance from Hong Kong say than NZ etc. Flight times are forecast to reduce significantly by around 2040 too…New Zealand was one of the wealthiest countries in the world when the population was less than 3 million, so to argue that population is necessary for economic growth is false.

        • Steve the changes you describe are historic, the internet already exists and it looks like much of the efficiencies from that technology have been banked. Ireland’s Celtic Tiger you might have noticed has died and anyway had much more to do with low tax and subsidies, english speaking workforce, and being within the EU than with the tech revolution per see. What is the web 3.0 anyhow and how will it save us?

          International flight times are going to reduce significantly, really? How? No airline is flying supersonic anymore and none have any real plans to do so again. The Atlantic, for example, is wider now than in the 1970s for air travellers, and air travel more of a hassle. High speed trains are where the passenger growth is, and even not very fast ones [US's sleepy old Amtrak keeps breaking pax records year after year this century].

          Sorry if I sound a little tough but this faith in magic technology coming to save us is a common but unsupportable argument for not investing better in our cities now. Investing for current and near term real technology is what is need, not belief in magic.

          And your last line is just silly; you take two unrelated ideas, one a fact [NZ pop has grown over time from 3m to 4.4m] and the other a myth [NZ fabled past 'wealth'] and decide the the former killed the later. Silly.

          • SteveWest

            Who said anything about not investing in cities? The point was whether large levels of population growth are necessary for economic growth. In relation to the rest of your reply, have you not heard of ZEHST in development by EADS, expected completion 2050? Did New Zealand not have one of the highest levels of GDP per capita historically, which was attributed to exports rather than simply population changes? So despite the “death” of the Celtic Tiger, did ICT in Ireland not create over 4,000 new jobs in 2012? Do you not think New Zealand could replicate low tax, research and development subsidies and a highly skilled english speaking workforce? So 5G will not result in faster and potentially minimal traffic fees? etc etc.

          • Well not without joining the EU to gain x billion in subsidies and access to a market orders of magnitudes greater than is available to us….. Fran O’Sullivan always used to write in the Herald that all we had to do was wipe out corporate tax and watch the zillions pour in and was nonsense then and nonsense now [although she has gone totally and suddenly silent on the Irish example]. The thing is you cannot take Ireland’s history of the the few decades in isolation from the EU. Without the EU, including the UK, there is no market for those outsourced tech jobs and without the EU there were no vast bribes to the mainly US corporations to set up their operations there. So:

            A. That model is dead.
            B. It was never repeatable here.

            And you’re welcome to your faith in any number of acronyms promised to save us in 40 years time, that is a time scale that can remain stubbornly out of reach. Remember fusion? That has been 40 years away for about 80 years and remains so…. Best to remain sceptical; that was always science’s best idea.

        • Stu Donovan

          SteveWest that’s a real strawman argument. I did not argue that population, or scale, was necessary for economic growth. I am however suggesting that scale is a contributor to growth, as are many other things. And we can grow without having scale, but it will be that much harder.

          • SteveWest

            “Basically, New Zealand needs more people” and “NZ is still sufficiently small to that we experience strong economies of scale” could be interpreted that way! Given the incompetence of previous/current administrations to plan for the current levels of population, to argue that more people are required is somewhat deluded and counter-intuitive. People move here for the lifestyle – once that goes then the inverse relationship alluded to would be much stronger than your data represents. Also, given the prevalence of online shopping and migrant stores for example, the previous agglomeration economic benefits are not as great as they once were!

    • Stu Donovan

      Yes, I’m pretty sure we need more people, especially outside of Auckland. Difference between us and the countries you mention is purely access to markets on your door step. So in lieu of not having much market access we’d be better off growing our domestic market. Remember that when you export you are incurring transport costs, such that you’re always better off selling domestically all other factors, such as price, remaining equal.

      • Timaru has just had the second year in a row of more deaths than births, flight from the south and countryside is becoming a real issue. As noted upstream Ak’s growth is natural increase and not immigration, remember we have an outflow, especially of young educated people.

        • Which tells me the towns like Timaru (As an example. There are many towns like this in NZ) are failing to provide something. Is it just employment or are the young, with the opening up of the world through the internet, just not that happy with what they see as dreary old towns any more? The older generation in Timaru would probably laugh if you suggested terrace housing in the town centre but maybe that’s the kind of development it needs to keep the new generation there? It’s worth a shot isn’t it? After all, it cannot cost too much to build in Timaru? Maybe it’s Dunedin that needs to be the local hub with pedestrianized streets and a decent PT system? Dare I say light rail? People may say we cannot afford it. I say we cannot afford to ignore these kind of issues.

  • And that makes intuitive sense to me: As a small remote country we’ve drawn the short (or should it be long?) straw when it comes to economic geography. Basically, New Zealand needs more people.

    And would you happen to know what the sustainable carrying capacity of NZ is?

    The country is not unlimited and we do need to consider those limits before we go round increasing population.

    • Stu Donovan

      The last analysis I heard about suggested that the sustainable population of NZ was about 6 million, based on current technologies. And current population trends we won’t surpass 6 million even in several decades time. You would also expect that number to increase as technologies improve.

      But maybe you have another more recent number in mind?

      • I haven’t seen any analysis about population but I have seen an analysis about the number of farms we could have using present technologies. That analysis ignored the fact that most of our streams. rivers, lakes and estuaries are polluted but said that we could increase the source of pollution. It’s probably the cynic in me but I wouldn’t be surprised if the analysis you mention made the same mistakes – assuming if we did more of the same then everything would still work while ignoring that fact that we are polluting our land beyond its ability to clean up after us already.

        We are dependent upon the natural services of the land and we’ve cut down most of them.

        • Yes the economy is a subset of the environment; a wholly owned subsidiary if you like. Broken environment: Broken Economy. Exactly why I hate dumbass sprawl. Up not out.

          But also why this government’s sneaky division of all analysis between these two is so terrifyingly short term. Especially when the former is deemed ‘a necessity’ but the later only a ‘nice to have’. A healthy functioning biosphere is not only nice to have but a complete pre-condition for everything else. FFS.

        • Stu Donovan

          The analysis I’m referring to was (I think) undertaken by the Green Party, but don’t quote me on that.

  • I have to concur with Draco…

    The main issue of concern I have is the sustainability of trebling or population. That would entail a trebling of demand for resources; services; and problems surrounding increasing demand for land, water, and waste disposal.

    Considering the very real problems currently facing this country with regards to water allocation; pressures on private and public transport; housing; jobs and downward pressures on wages; etc – I can see very little benefit in increasing our population. Especially to the figure of 15 million advocated by ExportNZ and NZIER.

    It seems to be advocated that a population of 15 million would offer us “economies of scale”. Is that what was postulated back in the 1960s when our population was only 2 million? Did we gain any benefits from “economies of scale”?

    Or are we ending up chasing our tale for an illusory gain that we will never achieve?

    If we concede that our resources, services, etc, are finite, then it mustg follow that the capacity for our land to carry ‘X’ number of human beings (along with all their demands for housing, electricity, transport, food, clean water, waste disposal, employment, healthcare, social welfare and superannuation, etc, etc) is also limited.

    And once we reach 15 million by 2060 – what next?

    30 million by 2100?

  • Josh

    Matt l.. Population mate! That pop that gave you nz and that navy base that launched rockets from the heads… oh i mean the heads of nz, whoaa, aucklandndevonport, the first meaningfull capital expenditure of ak, warfare and all those stupid little ps3 games you play, Word! And boy please Hendersonvalleytabithacres, I thought you knew love was a givin, I thought you had a job with a indefinite salary increase.. Don’t ask Me how. I just know

    If you Don’t spend money on jobs then don’t expect cheap holidays. If only our dollar rose everytime. oh wait it DOES!.. real growth means national.. Well, because I’m seeing it.

  • Josh

    Almost Ash, I’ve been on the merry-go-round CRL all night.. Headspin. just wanted to go home….WoW

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