Strong provinces, mediocre cities

A recent article in The Economist highlighted the wide gap between rich and poor regions in many developed countries.   The gap is so wide in Britain, and is widening, it has encouraged the British government to introduce policies to support vulnerable regions. How does New Zealand compare and how concerned should we be about regional inequality?

The Economist correctly points out that regional data comes with health warnings.   Comparing regions across countries is difficult due to differences in sizes of regions.   The Economist mainly uses themed small areas of which there are more than 100 in Britain with an average population of about 600,000.   These ‘small areas’ are somewhat comparable with New Zealand’s Regional Council Areas which enable a rough comparison.

By comparison to the countries featured in The Economist Article New Zealand has the lowest level of regional inequality. GDP per head in New Zealand’s wealthiest region is only slightly more than double than the poorest region (see the chart below).   Britain has the widest disparity, with average GDP per head in central London more than nine times larger than in parts of Wales. Italy and Germany have the smallest regional spread, yet incomes in their most affluent areas are still almost three times those of the poorest.

Northland is New Zealand’s poorest region with a range of indicators showing it is at or near the bottom of the pile.   At about $21,000 its GDP per capita is the lowest among New Zealand’s 16 regions. It has low levels of educational attainment and life expectancy and has the highest rate of unemployment.   At the other end of the spectrum is Wellington with GDP per capita of nearly $43,000.  

Why is the gap so narrow in New Zealand relative to other countries? New Zealand lacks the typical struggling-rural and wealthy-urban divide with strongly performing rural areas and mediocre cities.

New Zealand’s rural areas are supported by a strong agricultural sector and have benefitted from very high productivity growth in the agricultural sector. Indeed, over the last twenty years the agricultural sector has achieved productivity growth only exceeded by the communications industry which was driven by very rapid technological advances in telecommunications.

In contrast to very rapid productivity growth in the agricultural based rural areas New Zealand’s cities have struggled relative to their international comparators.   Productivity growth in business services, a major contributor to growth of New Zealand’s cities, has been disappointing. Two New Zealand cities have recently fallen out of the top 50 global city rankings.   In terms of GDP per capita Auckland is far behind its comparator cities in the Asia-Pacific region.  

New Zealand’s cities lack the scale of the Australian and Asian Pacific cities and have consequently not been able to sufficiently capitalise on the benefits of agglomeration. New Zealand’s largest city, Auckland, can only compete with second-tier Asia-Pacific cities such as Brisbane and Adelaide and has lost financial institutions, corporate headquarters and a number of promising IT firms to Sydney and Melbourne.

A further contributor to low regional disparities is a mobile workforce which can move from areas of high unemployment to low unemployment thus evening out unemployment and its contribution to low GDP per capita.  Southland experienced some hard economic times during the 1990s and as a consequence many of its residents moved out in search of employment in other parts of the country and around the world.   Labour mobility has kept its unemployment down and GDP per capita up despite its below average economic performance.

However, some of New Zealand’s regions have less mobile workforces which do not respond to the lack of local economic opportunities.   A significant contributor to Northland’s low GDP per capita is the low participation of its residents in economic activity.   Slightly more than 4 out of 10 of Northland’s residents are in employment compared with close to 6 out of 10 in Wellington. Part of Northland’s low participation is due to its relatively large young and old populations but a significant proportion of its working population are not actively seeking work or are unemployed.

There are multiple candidates for why Northland’s labour force lacks mobility. It may be an active choice to forego the economic benefits of working in a different part of the country for the lifestyle that Northland can offer.   There may however be significant barriers to mobility. Northland has near the lowest levels of educational attainment among regions and their lack of skills may constrain its workforce from finding employment in the more sophisticated economies of Auckland and Wellington where economic opportunities are more plentiful. Or the causality could be in reverse, a lack of willingness to move to work, reduces the incentive to upskill.

A strong agricultural sector, interregional migration and the equalisation of educational attainment are all factors that can reduce regional inequality. The last two factors are probably interrelated and a lack of skills of the population in the poorer regions hinders their ability to find employment in other parts of the country. Upskilling in the poorest regions is vital to their economic progress, reducing inequality among regions and indeed among all New Zealanders.

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