Michael Cullen: Address on the Auckland economy

Michael Cullen: Address on the Auckland economy

Auckland growth in the last decade driven more by population increases than labour productivity increases.

28 April 2004 Speech Notes Address to Business & Economy LaunchAuckland Regional Council, Auckland

It is frequently said that the Auckland region is the engine of the New Zealand economy. So frequently, in fact, that the statement has lost any precise meaning, and become simply an observation that, with a third of the country's population, anything that is not happening in the Auckland region probably isn't happening anywhere else.

The analogy is only partly true. Certainly the Auckland region is what drives consumption in the domestic economy, with a large and growing population, a vibrant retail sector, and in particular a construction sector that has been running at full steam for the best part of half a decade.

If we look at the export sector, however, the analogy begins to break down. The engine of our export economy is spread throughout the country, in our primary industries, such as agriculture, fisheries and forestry; in viticulture and horticulture; in service industries such as tourism and international education; in creative industries such as film and fashion; and in important hi-tech manufacturing centres such as Christchurch.

Nevertheless, the Auckland region is an essential link in the value chain for many of New Zealand's exporters. The port of Auckland handles 33 percent of New Zealand exports by value, as well as large volumes of imported materials - such as farm machinery and manufactured components - which are destined to become inputs for our export industries.

Auckland is also a major centre for manufacturing and for product finishing, whether that is the final assembly of goods sourced from elsewhere in the country, or packaging of products for export through the port and through Auckland International Airport.

So it is probably more accurate to describe the Auckland region as the transmission and drive shaft of the New Zealand export economy. It is a region where a large portion of the energy produced elsewhere in the country makes contact with the rest of the world and generates wealth for New Zealanders.

In this sense, we need that transmission to be as smooth and frictionless as possible. As we are just beginning to realise, in the modern global economy a great deal of value is added towards the end of the process of delivering goods and services to market.

Our future prosperity depends not just upon the ability to produce a quality product, but to tailor it to small niches in the global market and to deliver it on time and in a form that distinguishes it from our competitors' product and creates a positive brand for New Zealand goods.

This is true for kiwifruit as much as for dishwashers; for pinot noir as much for window fittings.

It is important to make it clear that the Auckland region meets the expectations of the nation's exporters pretty well. Many of our best and brightest companies are located here. And the size of the regional economy and the regional labour force provides economies of scale and agglomeration effects, allowing strong clusters of related industries to thrive.

The problem is that the expectations of the nation's exporters are continuing to rise, because of the need to maintain a competitive edge in world markets despite our geographical isolation. As a nation we need Auckland's best to get continually better.

That, we know, is a challenge. For a variety of reasons the Auckland transmission mechanism spends too much time stuck in low gear, or even in neutral.

One of the more telling facts about the Auckland economy is that total growth in output in the last decade has been driven primarily by population growth, rather than by any significant increase in labour productivity. What this means is that - at an aggregate level - Auckland is trading off quality for quantity.

The causes of the problem are relatively easy to identify, although they are much harder to fix.

v First, Auckland is suffering a shortage of key skills - most prominently some of the mid-level skills in sectors such as manufacturing.

v Second, Auckland's infrastructure - whether we think of roading, electricity, or waste water - is overloaded and creaking after a decade of underinvestment.

v Thirdly, the fragmentation of planning and investment at the local authority level has, over a prolonged period, led to some poor decision-making, based on a short term focus where a longer term view was necessary.

v And fourth, like the rest of the country, businesses in the region have not invested the level of capital per worker that prevails amongst some of our major trading partners.

None of these problems is amenable to quick fixes. We have by and large picked all of the low hanging fruit in our economy over the last two decades. The next set of gains to be made are higher up in the tree.

Sustained effort over an extended period is what is needed. And it is unavoidably a partnership between the business community, local authorities and central government.

Raising the level of skills in our workforce is a matter of both importing skilled migrants and educating our own people. My government has engineered a turnaround in immigration policy, whereby we go looking for the specific skill areas that are in short supply domestically, rather than encouraging large numbers of people to come in under the general skills category and then leaving them to their own devices.

As recent figures are showing, that is leading to a slowdown in the volume of migrants, with flow-on effects for the domestic economy of the Auckland region. That is to be expected. The proof of the new policy will be whether it leads to migrants who settle more quickly and more permanently because they find stable employment. The old policy created a concern with a high level of churn, as migrants tested the waters in New Zealand, found that their skills did not in fact match the work available, and in many cases moved on.

We have also placed a high priority on industry training, and adopted a target of getting 150,000 New Zealanders learning on the job by the end of 2005. We are well on the way to achieving that target, as the number of workers participating in industry training has jumped to just under 127,000 trainees. This is a 19 percent increase on the number participating during 2002, and a 56 percent increase over the number in late 1999. Around 29,000 of those trainees are in the greater Auckland region.

The number of employers involved in the industry training programme has also increased substantially, with around 29,000 firms now on board (up from around 25,000 in 2002).

More broadly our tertiary education reforms encourage tertiary institutions to integrate their courses with the needs and priorities of the businesses and communities around them. Some institutions have been doing this for many years. In the Auckland region, Unitec is perhaps the chief example. However, we need a more consistent and disciplined approach across the whole of the tertiary education sector, and that is what the reforms are now delivering.

Turning to the question of Auckland's infrastructure, one immediately thinks of the labours of Hercules; and particularly the second one, in which the hero confronts the Hydra, a monster with many snake-like heads and the ability to grow new and more menacing ones whenever another one is lopped off.

The task is a slow one, and fraught with danger; but we are making good progress. We recently made an important step forward with the confirmation of a $1.62 billion investment in Auckland's transport system.

This package delivers an unparalleled, long-term investment by central government. But equally important is the resolution of the confused and inefficient lines of responsibility which have long inhibited Auckland's transport development. The establishment of ARTA, as a single 'business-like' transport organisation for the Auckland region, is not only the right solution for transport, but also a potential model for dealing with other Auckland infrastructure issues.

Let me make it plain that central government is committed to a long term plan of investment in infrastructure in the Auckland region. But we cannot plan that investment with a silo mentality. Transport, housing, water, electricity supply, land use and so on, are interrelated. And we need to learn better ways of dealing with the issues simultaneously on a regional as well as a local level.

Making gains in infrastructure is crucial to improving the productivity of the Auckland economy. As I mentioned before, Auckland has competitive advantages in terms of size, agglomeration effects, and a large and many-layered labour supply. A planned approach to infrastructure - which balances community input, transparent, democratic processes, and a clear business-like mandate for delivery agencies - is an essential prop for capitalising on these advantages.

This has brought me to my third problem in need of a solution: the fragmentation of planning and investment at the local authority level. I have to say that there is no enthusiasm within the government for structural change within local government. Some have argued for a shift in power away from Auckland's local authorities towards the regional level. While this may act as a circuit breaker, it would not change the underlying tensions of a growing population with needs that are a mix of regional and local concerns.

As I have said, ARTA represents a way forward within the current structure. It indicates that cooperation and commitment to joint ventures is possible, so long as all parties concerned stay at the table long enough to work out a solution.

How Auckland interacts with central government is also something that needs to be thought through. The reality is that the more central government invests directly in Auckland, the more say it will want to have in the outcomes of local decision making. This is not a matter of meddling, but is simply the reality in an accountable system of parliamentary government. There are no blank cheques.

This raises a number of questions. How, for example, can Auckland learn from the experience of the transport package and develop a better model for addressing infrastructure issues that impact across the region? Can we identify and reinforce the behaviours that lead to better decisions, fewer hold-ups and smoother processes?

There are also questions to be faced around the funding mix for major projects, and for the activities of local government more generally. Can we identify what costs are best met by local rates as opposed to central taxation, so that we can take a principled approach to long-term funding needs?

The fourth problem area - the relatively low rate of business investment per worker - is a more complex question. First of all, our industrial structure is different from, say, Australia, which has some very capital-intensive industries like mining. So we would expect our level of capital investment to be somewhat less than theirs.

Another possibility is that our low investment rate has been a response to our relatively business-friendly labour laws compared to Australia and to economies like Europe, and to a relatively accessible pool of labour.

Most indicators suggest, however, that we are reaching the limits of a low-investment strategy. Increasing the technological component of our exports - whether it be through biotechnology or more sophisticated marketing and distribution - is the major strategy in many export industries for sustaining our competitive advantage. Certainly, the future for low-tech is looking bleak.

Moreover, our labour force is pretty fully engaged, as shown by the current low rate of unemployment, so the options for simply adding more labour inputs are decreasing. This is certainly the case in the Auckland region, given the high cost of housing and of living more generally.

The future, in my view, demands more sophisticated skills and greater investment in capital per worker. Indeed, while it is early days yet, recent indicators suggest we are seeing an increasing rate of investment by firms in New Zealand.

Looking ahead - as the document being launched today points out - the prospects for economic growth in Auckland look good, beyond the short term slowdown in export incomes that has been with us for several months now.

Evidence is accumulating of broadly based growth in the US economy and in Japan. And commodity prices are looking extremely good compared to last year. Indeed the ANZ World Commodity Price Index, which measures New Zealand's main export commodities in world prices, is 11.5 percent higher than a year ago, and is at its highest point since April 1995.

Meanwhile the May budget - as was signalled in December's Budget Policy Statement - will include some significant new expenditure focussed on supporting exporters, raising the living standards of low to middle income families, widening the gap between earned income and benefits, and building capacity in key areas of the public sector and the armed forces. The effect will be mildly stimulatory, and will place something of a floor under economic growth in the domestic economy for several years into the future.

The Auckland region will benefit from these developments; although the larger question is whether Auckland as a region will become more pro-active and strategic about shaping its long term future.

The Auckland Regional Economic Development Strategy (AREDS) is an important initiative in this regard. It is comprehensive in scope and has a focus on long-term strategies and issues; and I would urge the business community and all of the local authorities to give it their full support and energy. I say this not simply because the strategy is an initiative of the Ministry of Economic Development; but primarily because good strategic planning has a cumulative benefit and a compelling logic.

Strategies that are well researched and multi-dimensional are more likely to gain the support of stakeholders such as central government and local communities. That support in turn creates a more stable environment in which businesses can plan and invest.

There are, in short, opportunities ahead for creating a virtuous cycle to restore confidence in the Auckland economy and raise it to new levels. I trust that Auckland's business and community leaders will be able to seize those opportunities in the months and years to come.

Thank you.