Agglomeration benefits and Auckland: where are they?

Much has been made of the importance of Auckland's growth to the national economy and the need to find space and land for more housing and businesses to sustain Auckland's growth. As cities get bigger and more intensely developed, agglomeration benefits are supposed to flow. Productivity increases are recorded. Those benefits should be reflected in higher Gross Domestic Product (GDP) for the city.

The draft National Policy Statement on Urban Development Capacity notes:

Urban growth provides an opportunity to improve social and economic outcomes for people and communities.

One of the key methods of improving economic performance is supposed to be agglomeration benefits:

Agglomeration economies describe the productive advantages that arise from the spatial concentration of economic activity. When firms locate in close proximity to each other a number of tangible benefits are thought to emerge, for instance, in the form of increased opportunities for labour market pooling, in the sharing of ‘knowledge’ or technology, in process specialisation within the industry, or in the efficiency of input-output sharing (1).

A number of folk have pointed out that Auckland's recent growth has not seen a significant rise in per capita GDP, which suggests limited or no productivity gains, which in turn may imply not much agglomeration going on. See for example:

 https://croakingcassandra.com/2016/04/12/big-agglomeration-gains-in-a-growing-auckland-or-not/

Figure 1 shows the change in per capita GDP by region, between 2000 and 2015, based on Statistics NZ data.

Figure 1: Change in GDP per Capita, 2000 to 2015

Based on the Statistics NZ data, between 2000 and 2015, Auckland has recorded per capita GDP growth the same as the national average. This means that if anything, Auckland has gone backwards. In 2000, Auckland's per capita GDP was $33,958, compared to a national average of $29,421. Thus Auckland was about 16% ahead of the national figure. Move more people to Auckland, and their income should go up and the country's GDP should go up too!

By 2015, the Auckland figure has increased to $56,997, a 68% increase. But per capita GDP for NZ as a whole has increased by 80%, to $52,953. The Auckland premium is now just 8%, hardly enough to justify the higher house prices.

Figure 2 shows the relationship between Auckland's per capita GDP and NZ's per captia GDP. There is quite a distinct shift in the relationship post the 2008/09 global financial crises.

Figure 2: Auckland's GDP per capita as proportion of NZ per capita GDP, 2000 to 2015

Given that since 2000 Auckland region's population has grown from 1.2 million to close to 1.6 million (a 400,000 increase) while between 2001 and 2015, regional employment has also grown by 33%, or 175,000 jobs, then there must be question mark as to whether any agglomeration benefits are being experienced.

Are there any urban form reasons for this limited response?  Agglomeration is an 'urban thing' . During the period in question, the compact city policy was in vogue (well apparently according to most commentators). Not much urban land got added to the pie. In theory at least, some form of employment intensification should have helped agglomeration along, since agglomeration benefits come from some types of employment (such as business and finance) being proximate. But maybe Auckland just got bigger, rather than more 'agglomerated'.

Certainly the evidence is that the central Isthmus area,  where agglomeration benefits are likely to be the strongest, saw some of the employment growth, but far from all. The following table lists growth in jobs by Ward, between 2001 and 2015. I have highlighted the Wards that have recorded the most growth. There are three distinct 'nodes' - Albany; the central area; and the Penrose to Manukau corridor.

Ward	Employment growth 2001 to 2015 (people employed)
Rodney	3,350
Albany	26,180
Waitakere	7,650
North Shore	6,550
Whau	2,790
Waitemata & gulf	39,990
Albert Eden Roskill	7,030
Orakei	3,020
Maungakiekie-Tamaki	18,510
Howick	18,960
Manukau	20,850
Manurewa-Papakura	10,340
Franklin	3,050

These nodes tend to reflect the geography of the region and the strong north-south axis established by State Highway 1 running through the middle of the region. They also reflect a degree of sub regional sorting.

Some questions arise.

At a national level, does it make sense to continue to reinforce Auckland as a 'growth pole' when it looks like the per capita GDP of people residing in Auckland hasn't grown as much as hoped? But then maybe without the growth, per capita GDP may have go down? Perhaps. Something for Stephen Joyce to contemplate.

Or is Auckland GDP growth being held back in some way? Would per capita GDP have been higher if more businesses had been able to clump together if the regional land use and transport system enabled this? Possibly. The central rail link and continuing upgrades of the rail system should help reinforce the centre. Maybe earlier central government support for the rail link may have helped. Maybe more liberal zonings around the fringe of the CBD.

Or is Auckland just a bit different? More than likely. If anything, the GDP figures suggest to me that Auckland needs careful planning. It is not a rich city, so we need to think carefully about changes and choices. It is a geographically diverse city, so we need to think of the sub regions. It is city where just 'adding things' doesn't seem to help improve the overall situation. If anything the GDP figures suggest a slip towards a service-based economy away from a productive, export focused economy. Is liveability more important than agglomeration?


Others have pointed out that rather than rely upon hoped for agglomeration processes, we need to look more at clusters and the like. Philip McCann in his often quoted report: Geography, Trade and Growth: Problems and Possibilities for the New Zealand Economy(2) noted that while traditional urban agglomeration theories may not hold, there may be ability "to generate some local agglomeration economies in a small number of specific specialist sectors, usually described as ‘localisation’ economies".

He goes on to say that rather than promote agglomeration, we need to promote social networks and interaction:

"New Zealand has both a highly educated labour force and low population level. Potentially, this combination provides for a much higher level of inter-personal connectedness than is possible in high population societies where individuals are largely anonymous. This can allow local economic growth to be fostered via slightly different mechanisms than orthodox agglomeration arguments would imply. In particular, as an analytical and policy framework, we have argued here that the social network model is more applicable to New Zealand’s growth potential than is the agglomeration model".

What role should planning play?

Interestingly, when it comes to economic growth and business land, the Independent Hearings Panel that considered the Proposed Auckland Unitary Plan took quite a different tack to that of its work on housing.  The Panel organised for a report on business land needs to be prepared. In its overview report the Panel notes that "while the (business land) report indicates there is sufficient commercial and industrial capacity in the region for the next seven years (and the Panel’s recommendations add to that capacity), the Panel is cautious about drawing definitive conclusions from this report for the longer term".  So for housing the Panel looks out 30 years using a wide angle, high definition pair of binoculars (base the plan on a high growth projection and get very picky about capacity having to be commercially feasible), but for business and employment, it says "lets see how things go and adjust if need be".

In a review for the Ministry of the Environment, of  planning for business activities (2)  the economic consultancy BERL noted that across the country:

"The conclusion reached is that the overall supply of business land is generally sufficient, and in some areas it is likely that there is an oversupply. In these areas, an oversupply of some types of business land is contributing to a “hollowing out” of the town centre and/or an under-utilisation of infrastructure as development has not eventuated".

For Auckland the review indicated the need for more space for land extensive business activities, a view shared by the council and most others. But further on, the report cautions against addressing this through adopting a simple approach of 'more business land'

"Again, it is pertinent to note that this market-driven change in land use may be appropriate in assisting urban transformation. However, there may be cases where a narrow range of economic activity becoming established results in an unsustainable economic profile in an area".

So, in a round about way, the question of Auckland's per capita growth brings me back to the issues raised in my last blog about the rationale for planning. Is planning just good house keeping, or are there bigger benefits?

Setting aside the issue of GDP not really capturing all the good things about living in Auckland (with planning helping to secure many of these 'non-GDP' good things that help sustain social networks) would more or less planning aid Auckland's per capita GDP growth? Just focus on the spill-overs, or take a wider look?



(1) Agglomeration elasticities in New Zealand. David C. Maré Motu Economic and Public Policy Research Trust Daniel J. Graham Centre for Transport Studies, Imperial College, London

(2) Geography, Trade and Growth: Problems and Possibilities for the New Zealand Economy. New Zealand Treasury Working Paper 03/03. Author: Philip McCann.

(3) Business land: Problems and causes. Research to support a proposed NPS on urban planning. April 2016.  www.berl.co.nz

Market failure is more than just spillovers

In my last blog, I looked at the Productivity Commission's recent take on the rationale for urban planning. I questioned the Commission's well founded rationale for urban planning being based on the three areas of spill-over effects (externalities); provision of public goods; and land use and infrastructure co-ordination.  I said that I found the Commission's take on planning pretty limited, particularly given it is supposed to be a first principles review. 

First up, it is necessary to distinguish between planning that aims to control something, versus planning that seeks to enable, promote or encourage something through non-regulatory means. I get the feeling that the Commission sees any controlling aspect of planning limited to managing spill-over effects, with their second and third rationales more on the positive, enabling side of things.

In this blog I want to discuss whether there are reasons for planning intervention that go beyond 'spill-over' effects before looking at the enabling, positive role of planning in a later blog. 

Generally it is commonly held that a reason for public intervention can be to address a market failure. Market failure  includes spill-over effects, but are far from limited to this. Market failures are often associated with:

• ·        time-inconsistent preferences,
• ·        information asymmetries,
• ·        non-competitive markets,
• ·        principal–agent problems,
• ·        externalities (spill-overs),
• ·        managing public goods.

These days you might add 'equity' or 'increasing inequality' into the list.  You could also add a tendency towards boom and bust. While neither are matters directly addressed by the RMA, other urban planning approaches more clearly define equity as an important reason for action, while urban planning is often implicitly supported as it can bring a degree of  stability to the urban land market, particularly the residential market.  More on these two points below.

Looking at the listed bullet points above, the Productivity Commission seem to have gone no further than the last two points. Their discussion of infrastructure provision could possibly be listed under the heading of principal-agent problems (there are different drivers for developers and infrastructure providers which often mean inefficient outcomes arise), but it is not clear.

Under all of the above bullet points there are reasons for planning:

• time inconsistent preference:  Think of short term benefits versus long term costs, or conversely long term benefits and short term costs.
• information asymetrics:  Think about developing a site if there was no zoning and so there is no idea of what may go on next door or around the corner.
• non-competitive markets:  Think of the difficulty of redeveloping existing suburban areas due to land fragmentation, or where there is a 'first mover disadvantage' rather than a first mover advantage in a greenfield area.
• principal-agent problems: Think of the issues of trying to co-ordinate infrastructure across different providers.

I'm not an economist, so I may have miss-interpreted these failures in some way. But I think the point is clear enough. 

For my other two market failures, as our egalitarian heritage steadily gets eroded I think spatial equity issues will grow and if we don't address them, then cities as a whole will suffer. Smoothing out local booms and busts - is that also a role?  If we are talking about residential environments - people's homes and neighbourhoods - then stability is an important aspect of social and economic well being. Now, neither reason means 'no more housing' in an area; in fact addressing equity and equitable access to resources like housing, jobs, open spaces, transport and other infrastructure may mean more housing in many areas (as well as more investment in other areas) and deliberately requiring a mix of housing.  So too with evening out booms and busts. Some change and development that keeps housing choices relevant in all neighbourhoods will help to reduce the chance of 'booms' in some areas and 'busts' in others.  Too much one-sided development in the urban system can be a bad thing - many of us would have witnessed the disinvestment that can occur in neighbourhoods in American cities and the associated problems for the people that get 'stuck behind' We have the first hints of this in some of our provincial cities. 

The point is that the government (and Commission) seems intent on a stronger role for market forces in urban development. And its main tactic to get there seems to be reducing regulatory barriers.  No problem with that, but it is often an unmentioned fact that a greater role for market forces is also accompanied (over time) by the need for an expanded and more sophisticated set of regulatory tools. So the end result can be both more market and more rules.

Yes, government failure (or perhaps in this case planning failure) can and does occur. Just because there is market failure doesn't mean that there is a rock solid case for intervention. Under each of the above reasons for urban planning , there are also potential for planning to go wrong. But equally, planning can help grease the wheels if done right. 

Case in point is the current concern that planning - through restrictive zonings - heightens non-competitive land markets, pushing up land and house prices. So more competition is needed, and to get there we need fewer rules. But has the Commission really looked into what constitutes a competitive land market? Maybe land markets are different from other markets. Maybe planning actually helps provide confidence to urban investment and development markets because of their complexity and abundance of players. This idea seems an anathema, but it may be the biggest benefit of planning. Generating these benefits means better planning tools and techniques, not less. 

Where is the proof? Good question and  I don't have the answer. The point that I'm trying to make is that the Commission have taken the soft option and have, for a first principles review, not really looked at the issue in a very compelling way. 

Better urban planning - or is that better house keeping?

The Productivity Commission has released their draft report on Better Urban Planning[1]. This report follows their earlier investigations into Affordable Housing and Land for Housing. Reading the Better Urban Planning report, you get the feeling that the Commission is running out of puff. Not surprising given that the three investigations cover much the same ground. Has one profession ever received so much attention in such a short time span? On the positive side, the number of investigations does suggest that what planners (and communities) do does make a difference, even if that difference may not always be what some people might hope it to be. 

The response of the Government to the Commission's other two investigations does not inspire confidence that much will happen in response to the current investigation. In reply to the Land for Housing report - which identified 70 recommendations - the Government recently issued a press release[2] saying that they were doing three things:

• The development of a National Policy Statement on Urban Development Capacity (NPS) which will require local councils to ensure land supply for housing keeps ahead of population and economic growth. A draft was released in June 2016.
• The creation of the Housing Infrastructure Fund which will address constraints faced by high growth councils by providing access to finance for core infrastructure needed to unlock residential development.
• The development of urban development legislation for designated large-scale developments anywhere in New Zealand.

Apparently they are doing more than this, with a detailed response to the Commission available on the Treasury web site[3].

Of course the proposed Urban Development Capacity NPS gets the headline, as that requires someone other than the government to do something. How you keep ahead of population growth when migration runs cold then hot is not explained, apart from the obvious need to have lots of spare capacity available 'just-in-case'.

The Land for Housing report had quite a bit to say about the funding and taxing of urban growth and infrastructure in a way that would support better urban planning, but what pops out is an interest free loan to fund infrastructure. But that loan has to be paid back using current funding tools that are generally recognised as not being very good.   The bigger issue of the financial risks to communities of providing for infrastructure in anticipation of  growth (and the need to have on top of that heaps of spare capacity available should things suddenly hot up), but that growth not eventuating is not addressed.

The third action listed by the Government is a curious one. The Land for Housing report (re)floated the idea of Urban Development Agencies (UDAs) as being a helpful tool. This is not a new idea of course, with publicly funded and run UDAs common in many countries. It was an idea that the fourth Labour-led government toyed with.  In the Government's reply to the Commission's call for UDAs to have compulsory acquisition powers and enhanced planning powers, the response kind of goes sideways with the statement that  "The Government agrees that granting different powers, consenting processes and land use rules to designated developments warrants further consideration. The Government has directed officials to develop urban development legislation to enable fast-track development of high quality, at-scale projects that meet certain criteria".

So rather than public UDAs, it may be any 'designated' private development that gets the extra powers? But it has to be high quality.

That last qualifier - high quality - leads us back to the current Better Urban Planning inquiry. In this blog I want to look at the Commission's take on the rationale for planning. The investigation was supposed to be a first principles review, and so what the Commission thinks the purpose of planning is, is perhaps one of the more important matters it has reported on.

After looking across various ideas and principles, the Commission made the following findings:

The three main and well-founded rationales for urban planning are to:

1. regulate negative spillovers when people build structures, work and live near each other;
2. make decisions about the provision and funding of local public goods to best meet the needs of residents; and
3. invest in and run local and regional infrastructure to provide essential services for local residents and businesses; and to coordinate different infrastructure investments with land development.

Hardly an exciting list, but then you get the feeling that the purpose of the inquiry is to put planning 'back in its box'. 

The Commission is not very clear as to why these are 'well-founded' rationales.

The first rationale to regulate negative spillover effects is the classic economic rationale for planning and something most people would agree with. The question is: what is a spillover? I have got no idea if Section 6 of the RMA fits into this category.  Elsewhere the Commission does refer to "environmental bottom lines" as being an important aspect of any planning system, so maybe Section 6 sits above or under or outside the urban planning realm. But then maybe not. According to the Commission, heritage protection may be best achieved by non-regulatory means as it is not really a spill-over; rather it is a nice to have so we should pay for it rather than regulate for it.  Are Outstanding Natural Landscapes a spill-over matter?

But what about Crime Prevention Through Environmental Design, to take a different example. This is a government initiative that seeks the review of developments to improve public and private safety. Is that a rationale for urban planning? Apparently not as it may lead to too much "spill-over" behaviour from planners themselves, spilling over into non spill-over matters.

Then there is urban design - remember the Government's response to the Land for Housing report saying that high quality developments should get a helping hand -well urban design is not really spillover material either. In fact it is another "spill-in" type matter as urban designers meddle in non-spill-over matters  The point that urban design is a means of managing the spillover effects of intensification, density and mixed uses (all those good things that create positive spillovers) seems to have got lost.

The second rationale is core local body stuff, although the report says 'make decisions about' local goods, not provide local goods. Is there another door opening here in terms of greater 'contracting out' of local public goods?

The third rationale is perhaps a step forward from a very narrow interpretation of urban planning ("just stick to the externalities"). At least it mentions co-ordination of different infrastructure investments with land development.  This implies at least some role for the staging and sequencing of growth, but that is a tentative conclusion at best. Again there is a useful list of recommendations relating to infrastructure funding. But you get the feeling that like the previous reports, these ideas will not progress very far.

What irks is that the Commission's 'three main and well-founded rationales for urban planning' are such an impoverished view of planning. They are the classic neo liberal take on the role of government, roles which seem increasingly out of date with the challenges faced by 21st century communities: Think climate change, rising inequality, natural hazards, growing debt, the financialization of housing, demographic shifts, the impact of information technology. 

The benefits from thinking (and acting) in relation to the longer term, of looking across social, economic and environmental factors, of having reference to the distributional aspects of growth and development all get swept away on the basis of planning being no more than spill-over control.

There seems to be a big irony here. The RMA was often seen as a tool to keep planning focused on the spill-overs and no more. For 20 years the arguments have raged that planning hasn't stuck to the house keeping as intended; that urban planning  should work within the neo-liberal paradigm of 'more market, less government' . Finally a strong push over the last few years on the back of the housing crises to clarify the purpose of planning to this end. But this push is just as the world takes another turn and the gloss falls off the neo-liberal agenda post the global financial crises.

I am not calling for a return to some sort of modernist, Keynesian, post war approach to town and country planning; of new towns, greenbelts and bulldozing of whole suburbs in the name of regeneration . Urban planning has to find its feet in the new world, and this includes being much more aware of market processes,
but I do not think the Commission has found that place to stand.  

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[1] http://www.productivity.govt.nz/inquiry-content/2682?stage=3

[2] https://www.beehive.govt.nz/release/govt-responds-land-supply-inquiry

[3] http://www.treasury.govt.nz/publications/informationreleases/housing/land/pdfs/landforhousing-detailed-response.pdf