Do Regions Matter?

If we really are serious about regional wellbeing, we may be pursuing it in the wrong way.

Economic theory is not strong on spatial issues. There have been the occasional brilliant contributions – those by Paul Krugman and Gunnar Myrdal come immediately to mind – but most economists are trained with little attention to spatial relations. Which may explain why regional economic policy is so inept.

It is easy to dismiss any policy as ‘political’; just an attempt to win votes in the regions (as if policies benefiting the big cities are not political). Certainly that is often true, but that does not mean that all regional policies are equally political and ineffective.

I illustrate the difficulties with the broadband rollout. It was obvious that the introduction of ultra-fast cables should start with the big cities, who therefore benefited earlier from the rollout. Not only were their existing businesses advantaged but in addition other businesses would start up or be attracted to the centres. Of course there would also be additional congestion so that central government infrastructural resources – such as roading – would have to be directed to the city centres.

And so the regions missed out. By the time they got (or get) their broadband connectivity the cities will be established as growth nodes. The logic is not to have done the broadband rollout in the regions first, but there is a case for the regions to be compensated for their disadvantage. Perhaps that is the economic justification for the Provincial Growth Fund (PGC).

So the underlying economics is redistributional effects coupled with the facts that scale adds to overall urban productivity – the economies of agglomeration (Krugman) – and that growth reinforces more growth – cumulative causation (Myrdal).

But is the PGF being spent wisely? Of course the answer is ‘it is too soon to tell’. Even so, from what I have seen, the best I can offer is a ‘maybe’. Many of its projects seem to be one-off efforts which give a temporary boost to a locality, but do not contribute to sustainable growth. If I am right, that reflects our poor understanding of regional economics.

To make a couple of analytic points. The tendency is to see each region as isolated, a bit like the approach we often take with New Zealand as a whole. The fact is that New Zealand’s success will not be as an isolated stand-alone economy, but as an economy integrated into the globalised world.

Critical here is international connectivity. Much will be generated by the private sector – better shipping, improved air connections, more broadband cables offshore – but the government has a role too. Basically a trade deal is to improve connectivity – overtly when it reduces trade barriers, often covertly when it improves border facilitation or makes regulation consistent across boundaries.

Sometimes we get into a right proper muddle. Were one to design from a clean slate a port configuration for the north of the North Island, we can be reasonably sure that the Port of Auckland would be less prominent than it is today, with more goods going through Whangarei and Tauranga. However, the more rational configuration is not acceptable to the citizens of Auckland, who are politically powerful enough to prevent (or slow down) any rationalisation. Observe that the power of Auckland comes from earlier policy decisions such as those mentioned in the third paragraph  above.

(Personally, if I were an Aucklander I’d be glad to get rid of the traffic congestion surrounding the port. The port at Wellington is in decline – cruise ships aside – but Wellingtonians have benefited from an enviable leisure area on their waterfront.)

My conclusion is that a part of a regional strategy is to improve a region’s connectivity with the rest of New Zealand. It would make sense for the PGF to chip in funds to improve the road (and sometimes rail) connections, possibly the airports and to hasten the broadband connection.

The strategy of using the PGF to supplement other central government spending may be deployed elsewhere. DoC recently had to choose from three walking track proposals which would have benefited environmental amenities and tourism in each region. The PGF could have funded at least one of those that missed out.

The second feature which needs to be addressed is the consequence of the centralisation of government which is part the effect of economies of scale but also of the way we think about New Zealand.

Before illustrating the problem I need to say something about the difference between economic structure and social structure. The typical declining region loses workers faster than non-workers (especially the retired and the unemployed). So the dependency ratio rises, which undermines regional funding because rates are more affordable for workers. In any case, because there are regional economies of scale the declining region will find it harder to fund local services.

In my experience, many workers would like to go back to their region of origin but know there may not be jobs and are also concerned with the lack of regional facilities (which may be especially important if there is any disability in the household or they are concerned for their children’s education).

Take hospitals. There is no way a small region is going to have a hospital of the quality and scope of those in the big centres. Scale and specialisation improves healthcare performance (economies of agglomeration again). You may feel comfortable having a hospital building in your local town, but the reality is that the care they can give is not going to be comparable to Auckland’s.

The government, recognising this, provides extra funding to District Health Boards in the regions. The rural adjustment fund amounts to just 1.2 percent of the total DHB budget (less than 0.1 percent is for inter-hospital transfers – chopper rides to Intensive Care Units).

Is that enough? I dont know, but I would be astonished if it offsets the lower productivity of healthcare in a smaller region which arise from its smaller scale. It is probably an acknowledgement of a problem rather than a resolution. That it is insufficient response would be because of the political power held by the main cities. (Is there a similar funding deficit in rural education?)

So the PGF is dealing with only a part of the regional deficit. One way and another it may not be dealing with the parts of regional development which make a bigger difference. It is specifically excluded from funding, housing, water and large scale irrigation and social infrastructure such as hospitals and schools. Moreover, hived off in one part of the vast government bureaucracy (MoBIE), the fund may not have the interaction to lead a national strategy for regional wellbeing. Nobody in the government has.


PS. For the case for improving the administration of regional policy see here.