Led by Professor Caroline Saunders and Professor Paul Dalziel, Agribusiness and Economics Research Unit, Lincoln University

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Transport innovation and investment influence economic growth

Historically, innovations in transport have had significant effects on the levels of economic growth in regions, nations and internationally. In New Zealand, investment in railways opened up new areas of the country for the primary industries. The advent of the refrigerated container and steam shipping provided New Zealand with access to new international markets for our meat and dairy products, and passenger airplanes provided the basis for a thriving tourist industry that now represents 17 percent of New Zealand’s export earnings.

Investment in transport drives economic growth through four key routes. It:

  • unlocks new sites for development, such as accessing logging opportunities
  • provides access to new, better quality, or cheaper resources, as businesses tap into international supply chains to source lower cost inputs for goods manufactured in New Zealand
  • allows access to a wider labour market to allow better suited and potentially lower cost labour
  • opens up new and larger markets, allowing economies of scale, specialisation and increasing competition
  • makes New Zealand a more attractive place for highly skilled and creative people to live and work.

These benefits are largely seen when an economy is developing, as a country puts in place the necessary transport systems to support a modern economy. Once the networks are in place the focus shifts to reducing the costs of doing business along these routes to maintain the relative competitiveness of a place for business.

Transport can have a significant impact on the location of economic activity. The Auckland harbour bridge is a good example of this, as it opened up significant opportunities for economic development and activity north of the Auckland CBD. There are many illustrations of this throughout history, for example, canal location in the United Kingdom affected the location of economic activity and the development of cities around that activity.

Decisions on the location of transport infrastructure can also have a negative effect on some locations. As the use of the highway has increased, we have seen the relative decline of many small towns which were located next to railways which had previously been the source of market opportunities.

We know from a wider look at economic development that businesses seek to increase their access to resources and markets by locating closer together. This effect is driving the development of cities worldwide and is often referred to as “agglomeration”.

The challenge with agglomeration is that as the attractiveness of a city increases so do the land and housing costs, driving up the costs for the businesses located there. Two countervailing forces are then at play – agglomeration as businesses seek to get as close as possible to labour and markets, tempered by the rising costs of being located in these “prime” areas.

Two factors play key roles in the net result of these two forces on the shape of the cities and regions surrounding those cities – decisions taken on the form of the city, and the level of investment in transport and type of transport infrastructure provided. If little attention is given to making the right investment decisions on design and matching transport, the relative costs of operating in the city increase, reducing the attractiveness of the city for businesses. Investment in transport will help to maintain the attractiveness of a city and good design of the city will minimise the costs of that investment.

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Economic development and transport

In the project we modelled the impact of agglomeration and a range of other factors on the location of economic activity in New Zealand. We modelled seven different possible futures and in all but one of them the relative share of economic activity in Auckland increased from 33 percent today, to more than 40 percent. Figure 1 shows this growth using our baseline data, sourced from Statistics NZ (on population growth) and Treasury predictions (on productivity gains). The decisions we take on the future form of Auckland and the transport services to match will either accelerate or moderate this trend.

Pie graphs comparing regional economic share 2014 to projected 2042

Figure 1: Projected share of the national economy 2014 and 2042 under the baseline assumptions

It is important to note that agglomeration is not simply a question of absolute scale. Businesses want to locate where they will have a good source of labour, and where buyers will come to look for services. Thus, similar types of businesses will often cluster together, as we have seen in Christchurch and Wellington.

Transport investments that connect regions to other markets can have a two way effect. New connections can allow the development of economic activity in a region or they can allow that economic activity to be drawn away from a region. The impact is dependent on the competitiveness of the regions being connected. In regions which are growing, investing in the transport system can reduce costs and increase relative competitiveness. However, in regions which are declining, investment in new transport systems on their own is unlikely to reverse that decline. While local transport investments might help to create jobs in the short term, in the medium term their maintenance costs may become an additional burden for a declining region. To successfully support declining regions transport investments need to be part of a package of measures aimed at creating the local economic ecosystem necessary to support growth.

Given the relationship between economic activity and transport, it is not surprising that there has been a correlation in the patterns between vehicle kilometres travelled and gross domestic product (GDP), nor that commentators have created the ‘truckometer’ (with vehicle kilometres travelled by heavy trucks used as an early indicator of GDP momentum). However, the relationship seems to be changing – overall levels of light and heavy vehicle kilometres travelled have remained relatively flat for the last eight years, while we have at the same time seen economic growth. A range of factors may have altered this relationship. One is a shift in the shape of the economy as the share of service activity has increased. In addition, alternative ways of access, such as virtual access, may be altering the relationship.

Finally, we need to recognise that transport is an economic activity in its own right, representing more than five percent of New Zealand’s economy. As a sector, it is also unusual that government owns and runs much of the infrastructure of the land transport system. Our literature review noted that governments across the world have used investment in transport infrastructure as an economic stabiliser. As an economy has gone into decline governments have increased the amount that they are investing in transport infrastructure as a mechanism to stimulate the economy. The problem with this has been timing. Typically governments announce major programmes of investment as an economy goes into decline. But, by the time the new investments are through the necessary planning phases the economy is again growing so the investment as a consequence ends up creating inflationary pressures when they are least needed.

The key insights from our work were that:

  • as a developed nation our focus is on responding to the transport pressures created by economic growth
  • the decisions we take on transport investments will affect the location of economic activity in New Zealand
  • investment in transport in areas of economic decline will not on their own support growth
  • while transport remains important, it is important we look at access not just mobility
  • as we are in a time of growth we need to ensure we do not add to inflationary pressures through our approach to investment in transport infrastructure.

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