Wednesday, 12 July 2017 09:07

Connecting cities: it’s a matter of scale

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New Zealand is a long way from the rest of the world. It takes three to four hours to fly from Auckland to the big eastern Australian cities; over half a day to reach the US West Coast or Southeast Asia; and most of a day to reach Europe.

Our geographic isolation has advantages – for instance, it’s easier to manage biosecurity controls to protect our local environment and agricultural exports – but also many economic costs. As the gravity model of trade predicts, countries that are further away from each other tend to trade less. In other words, our distance means that we aren’t selling as many goods and services to Europeans, Asians, Americans, and other people in general as we could, given New Zealanders’ relatively high skill and education levels, propensity to innovate given the right incentives, and generally reasonable policy settings. And, equally, we’re not buying as much from them as we could.

There are two reasons why this is a bad thing for our living standards:

First, exporting less means that there are fewer opportunities for New Zealand companies to ‘scale up’, which limits their productivity and their ability to successfully innovate. Result: Lower levels of economic productivity and lower incomes.
Second, importing less means that many New Zealand businesses operate in ‘niches’ with little competition, which limits the pressure they face to lower prices or improve processes. Result: Higher prices that reduce what we can buy with our lower incomes.

We can’t do much about the physical distance – although . . .

Continue reading the full article with images and supporting material on Greater Auckland  ||  July 12,  2017   |||