2. Auckland's Economic Performance
It is unsurprising that Auckland's productivity and economic performance is higher than elsewhere in New Zealand. There is a clear positive relationship between urban density and good economic performance the world over – a relationship that is captured in the phrase "agglomeration effects". The causes of these effects are, however, still the subject of much research and debate. Recent reviews of the theoretical foundations of agglomeration effects (Duranton and Puga (2004)) and empirical evidence (Rosenthal and Strange (2004)) draw attention to the wide range of potential mechanisms through which agglomeration effects can operate, and the many different dimensions of economic performance that are subject to agglomeration economies.
As New Zealand's largest and densest city, Auckland should be expected to perform well. In addition, recent public discussions have emphasised the role that Auckland is expected to play in raising New Zealand's overall economic performance. There is a widely accepted perception that Auckland is not reaping the benefits that it should from agglomeration, and that it is consequently not delivering the economy-wide dividends that are expected of it, as illustrated in the following text from the Ministry of Economic Development's Strategy and Priorities for economic development:
"International evidence highlights the importance of having at least one outward facing, global city to lead a nation's economic development. A globally competitive city attracts world-class firms and highly skilled workers, which have significant flow-on effects throughout the economy. The concentration of activity will allow both employers and employees to benefit from specialised labour markets, allow for greater tacit knowledge flows between and within firms and research organisations, and provide the right platform for growing off a critical mass of innovation. Auckland doesn't yet play this role to the extent that major cities do in other economies."
Ministry of Economic Development (2008)
The evidence for Auckland's underperformance as a city is mixed. On many indicators, Auckland is performing well relative to other regions of New Zealand, and even relative to other cities internationally. Lewis and Stillman (2005) compare Auckland's labour market performance with that of other regions and conclude that ". . . Auckland appears to be a relatively good performer and this is consistent with agglomeration economies being at work in New Zealand's largest urban concentration." For international comparisons, Ministry of Economic Development (2007) presents a range of indicators, showing Auckland's relatively good performance in areas such as quality of living, employment rate, population growth, and broadband penetration. Two prominent exceptions are Auckland's relatively poor productivity (GDP per capita) level, and low proportion of population with tertiary qualifications.
A challenge for any comparison of Auckland with international cities is the choice of comparators. Ideally, comparison should be made with cities that are of similar size and density, and that fill a similar position in the national or larger regional urban settlement system. Auckland's size and employment density are similar to a mid-sized US city4, although comparable cities are part of a denser network of similar sized and larger cities.
New Zealand has a relatively high degree of urbanisation, with 86 percent of the population living in urban areas, compared with 74 percent (in 2005) in ‘more developed' countries.5 The proportion of New Zealand's urban population that is located in the Auckland urban area ("urban primacy"), at around 34 percent, is somewhat high for a developed country, although Henderson (2000) classifies New Zealand as having "satisfactory urban concentration".6 Auckland's place within the New Zealand or Australasian city-size distribution roughly fits the rank-size rule (Zipf's Law) found in most urban systems (Soo (2005) Gabaix (1999a)), or is slightly larger than predicted by this relationship.7
A priori, there appears to be little evidence that Auckland is significantly under-sized, or that agglomeration effects are abnormally weak in Auckland, given the structure of the urban settlement system of which it is a part. Nevertheless, as suggested by the quotation above, national and regional economic development policies have emphasised the need to promote the concentration of economic activity in Auckland, and the operation of agglomeration economies. It is clearly envisaged that there will be productivity gains through thicker labour markets, innovation and knowledge flows that will raise not only Auckland's economic performance but also that of New Zealand as a whole.
The argument that raising concentration in Auckland could plausibly raise New Zealand's economic performance has been eloquently asserted in a range of policy and discussion documents (e.g.: Skilling (2006), Auckland Regional Council (2007), Metro Project (2007) Committee for Auckland (2006)), although the presentation is often more aspirational and motivational than it is evidence-based, which may reflect the severe challenges of getting clear evidence on the future potential for Auckland. Much progress has been made in developing a region-wide strategy and action plan for promoting Auckland's economic development (Metro Project (2007), Auckland Regional Council (2008))8.
Against this background of a broad acceptance of the potential for stronger agglomeration economies in Auckland, and a practical commitment to actively promoting Auckland's growth, the objective of the current paper is to contribute to the evidence base on the strength and nature of agglomeration effects in Auckland and on patterns within Auckland.
Existing studies have analysed proximate indicators of productivity in Auckland, such as land prices (Grimes and Liang (2007)) and wages (Lewis and Stillman (2005), Paling et al (2007)). Few studies have looked directly at firm productivity measures as is done in the current paper. An exception is Maré and Timmins (2006), which looked at the overall relationship between concentration and firm productivity within New Zealand using a related data source, without a particular focus on Auckland.
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