Julian Wood

By Julian Wood - 07/04/2019

Julian Wood

By Julian Wood -

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Spatial Policy | The case for and against

INTRODUCTION

In 2017, the coalition Government announced the $3 billion Provincial Growth Fund (PGF), dramatically changing the New Zealand regional development policy landscape. This was—and still is—a controversial move,[1] with some decrying it as a “slush fund” or 2020 election bribe, and others heralding it as a once-in-a- generation opportunity for our regions.[2] In reality, both sides are right. Spatial policy like the PGF does have great potential, but also introduces the risk of “misallocating resources, creating a dependency culture and favouring rent-seekers over innovators.”[3] The Government, having decided to chart this regional development course, needs to ensure they do it well.

The potential costs of moving quickly in this direction without attempting to minimise the associated risks could be catastrophic. Billions of dollars of tax-payer money could be wasted with the regions no better off than before, and potentially even in some cases, worse off. Not only this but the opportunity cost for this kind of spend is immense—this money could go to our ageing hospital infrastructure, provide better schooling for our children or meet many of our mental health needs. Avoidable failure of this investment would also cast serious doubts on the use of spatial policies in future, leaving New Zealand stuck down a different policy path that has already run its course.

Even small adjustments—a few degrees in a different direction—at the beginning of a journey can make a big difference to the eventual destination. We acknowledge that at the time of writing, the PGF is only in its first year of a three-year programme, so this paper is an attempt to understand the PGF, what New Zealand should be aiming for with interventions like the PGF, and to test, after the first year of operation, if we are heading in the right direction. If not, now is the time to make changes.

The geographic scope of the PGF, for example, needs to broaden to include our largest cities for planning purposes so that leading and lagging areas can learn from each other and collaboratively be part of a wider regional system. All the regions should be encouraged to create or update their Regional Action Plans (RAPs) with a view to this collaboration. Part of this will be ensuring multi-level governance and funding becomes a foundational part of this collaborative effort. Alongside this, all investments by the PGF need to have an appropriate monitoring and evaluation plan in place before they are approved, to ensure that lessons can be learnt about what works, undue risks minimised, and bad investments abandoned.

Like road safety, high risk spatial investment policy is another part of life where “the faster you go, the bigger the mess.” These changes will require the PGF to put on the brakes, slowing down from its current implementation trajectory and make corrections to the course, doing our best to make sure this is a risk worth taking. It would be a shame if the opportunity cost of the PGF was compounded by it being an opportunity lost for our regions.

The Case For (And Against) spatial policy

The PGF dwarfs all recent New Zealand regional development programmes. As a regional development spatial tool it marks a significant shift in programme size, scope and level of funding from the more nation-wide growth focused Regional Growth Programme (RGP) that was part of the Business Growth Agenda (BGA) of the previous Government.[4] As such it becomes a key regional development tool that sits alongside regional research institutes and skills, education, and immigration policies.

Spatial policy tools like the PGF have proven controversial, dividing regional development experts into two opposing camps: those for and against. Proponents of spatial policy argue that unless we intervene in a particular place, geographic and/or institutional failures will become normalised and overall growth will be lower than it needs to be. Opponents argue that compared with nation-wide policies, spatial policy tools are inefficient and prone to rent-seeking and capture which has the potential to lower overall wellbeing. Our analysis will show that there is truth on both sides.

The inherent risks that opponents point out are real and should concern us. The literature also suggests that well-implemented spatial policy that moves beyond using factor mobility as the sole solution to persistent geographic disparities can result in significant wellbeing gains for communities. To simply ignore spatial policy is to accept and normalise unnecessary place-based knowledge or institutional failures. We will now outline the case for spatial policy, contrasting with nation-wide policy where appropriate.

Horizontal policy is good policy[5]

Opponents of spatial policy tools rely on classical economic theories of growth and argue for “horizontal” policy tools as they see these as a pathway to maximise national economic growth. These “horizontal” tools aim to treat all places and people the same so that people and firms feel the effects of and respond to market forces. This model prioritises deregulation as a way to minimise interference with market signals, and emphasises the role of people and firm (or factor) mobility as the primary means of regional economic adjustment. Thus as firms realise they can make higher profits elsewhere potentially due to lower wages, ready access to higher productivity workers, or lower input resource costs, firms will move to take advantage of these gains. Similarly as people realise that better wages or better job opportunities exist elsewhere they will move to take advantage of these gains. At a theoretical level this approach ensures that resources are put to their most efficient economic use and that over time regions’ growth rates should converge.[6] At a practical level however, horizontal policy has distributional outcomes that at the very least need to be understood. It also means by implication that while some places grow and thrive others will decline or even close.

These horizontal policy tools have been likened to ready- to-wear clothing rather than haute couture in that they are usually more simple by design and cheaper to make and use.[7] Common examples include general R&D tax credits, funding for public research institutions like universities and simple tax policy for businesses so as to lower the administrative and compliance costs[8] of doing business. The previous National-led Government in the regional development policy space largely used horizontal policy tools to lower business compliance costs, and through the use of the BGA to increase the capacity of entrepreneurs and to help local governments plan for the future.[9]

Spatial policy can build on these good foundations

Rather than treating all places the same, spatial regional development policy seeks to make tailored and effective spatial investments. Proponents of this approach argue that this ensures that each place reaches its own growth potential. This in turn theoretically means that national economic growth is maximised. Spatial policy relies on evolutionary economic theory,[10] the economic theory of the effects of firm co-location (agglomeration),[11] and knowledge spillovers.[12] It also often relies on the existence of good horizontal education and skills policy, because spatial policy requires a base level of spatial knowledge and ability within a place before it can be effective.

Spatial policy, for example, when it is able to take the geographical and institutional context of a place into account, can help a place overcome “path dependency,[13] sunk costs, and institutional issues.”[14] An example might include a local training institution that no longer meets the local needs of employers as the area has transitioned from one type of industry to another. Re-tooling the local training institution might require additional transitional funding. Similarly, geographic isolation may mean it costs more for a small or isolated local firm (not part of a national chain) to keep pace with developments in managerial practice, leaving it a priority to provide opportunities for them to keep on top of best practice. Tailored solutions and spatial tools therefore have the potential to assist local places, firms, and institutions to overcome transitional issues and the geographic risks associated with “[u]nderdevelopment traps that limit and inhibit the growth potential of regions or perpetuate social exclusion.”[15]

Using spatial policy tools brings advantages

Complementing nation-wide policy with tailored spatial policy options has four main advantages: it pushes back against unnecessary negative regional outcomes; it acknowledges the importance of place and people; it builds local capacity where it is especially needed; and it can help regions transition from a simple growth focus towards other goals, which is especially important for regions facing demographic, economic, or infrastructure ageing and decline.

First, by understanding the geographic and institutional settings in a particular location it can help push back against normalised but unnecessary local issues by using multi-level governance.[16] This type of co-governance and co-design can leverage off local networks, connections, and social entrepreneurship (including the voluntary sector) to find better local solutions.[17] Some of these unnecessary local issues may have even been exacerbated by the application of blunt national-level policy.[18] Raising the minimum wage to meet the costs of living in a big city, for example, may mean that local businesses are unwilling to employ local youths at the higher wage. Without some form of local adjustment, young people may become hardened over time to expect that there are no job opportunities available locally. Similarly, as employers in the example above shun young workers in favour of more productive workers (or indeed even choose a capital intensive production pathway to automate these jobs) these young people may be unable to learn the soft skills associated with employment which further lowers their future employability.[19]

Second, it acknowledges the reality that for many in New Zealand, a deep connection with “place” likely outweighs market forces. This may well be part of the very complex reason why New Zealand seems to suffer from persistent regional disparities in household income, youth NEET (Not in Employment, Education, or Training) rates, and employment rates.[20]

Third, by taking into account local conditions and institutions and the theory of knowledge spillovers, spatial policy can be used to help build local entrepreneurial and absorptive capacity[21] in places that need it most. Rather than treating everyone the same it actively aims to unlock new opportunities in lagging places by fostering knowledge spillovers and connections through a deliberate policy process that synchronises both national innovation strategies with regional strategies, as well as regional strategies amongst themselves.[22] Alongside this it also bolsters the absorptive capacity of firms by encouraging firms to ask questions like “how much investment will be needed to become a knowledge leader in my industry?”[23] and/or via the resourcing of business organisations or industry groups that engage in building knowledge networks and capability.[24]

Lastly, spatial policy can help regions (and New Zealand) transition from a growth-everywhere focus towards other goals: such as declining well and maximising well- being, to ameliorating the effects of agglomeration, or even shifting to a green economy. To be effective, these overall regional development policy goals—which reflect the kind of future that local communities and New Zealand want to realise—need to be developed at the outset of any spatial planning to provide direction and the foundation for future evaluation and readjustment.[25]

Going beyond a simple “growth-everywhere” model is important, as it enables the heterogenous growth and population dynamics of different regions to be taken into account. As international evidence suggests, simply applying a “growth everywhere” model often exacerbates existing problems rather than delivering the hoped-for growth.[26] Instead, customised spatial policy provides a framework for communities to envision and work towards a different future—one that may well include managing decline.[27] This is particularly important for communities facing demographic ageing and population stagnation, for example, allowing for spending on right-sizing infrastructure, making use of multi-purpose planning tools, and ensuring acceptable levels of healthcare are provided. A spatial approach acknowledges that transition comes at a cost—just as growing places need support to overcome growth-related issues like density, congestion and pollution, declining communities need support to become smaller, better, healthier, and more sustainable. This represents a shift from supporting all places to grow to supporting all places to reach their potential through growth and decline policy options.

Minimising the risks of spatial policy

While the above benefits bring hope of change in both growing and struggling regions, the use of spatial policies will introduce the risk of rent-seeking (inefficiencies associated with political, local community, and firm capture of the policy) potentially resulting in the misallocation of resources, and the creation of dependencies. Done poorly, spatial policy can result in the proverbial lolly scramble, where politicians use public money to gain votes in particular places by providing place-based handouts to communities and firms. These communities and firms can then find it easier to rely on these handouts than to find innovative solutions, likely becoming dependent on the handouts over time. Overall, if used unwisely, spatial regional development tools run the serious risk of lowering long-term economic output, making New Zealand worse off.

These concerns are well-illustrated within New Zealand and more comprehensively covered in our previous work.[28] They occurred most notably within the Muldoon “Think Big” era where activity aimed at rebalancing growth across the country and making New Zealand less dependent on imports often meant that “import substituting industries congregated near the main port and largest market of Auckland, distorting the regional balance of the country.”[29]

As outlined in our previous research, good spatial regional development policy can minimise these risks by following four principles:[30]

  • having clear, ranked and prioritised goals that both enable evaluation and limit political rent seeking;
  • making use of multi-level governance as part of smart specialisation to overcome knowledge silos and maximise growth wherever possible;
  • having funding that supports multi-level governance and limits the creation of dependencies via the use of time-limited support; and,
  • having a focus that makes use of both growth and decline policy options in order to assist communities and politicians to overcome the growth-only policy narrative thereby minimising misallocation problems.[31]

 


This is an extract from Julian’s research paper “A Risk Worth Taking | Ensuring the Provincial Growth Fund is Fit For Purpose” Policy Paper. (Released 2019) 

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ENDNOTES

[1] Jami-Lee Ross and Paul Goldsmith, ‘Gisborne Road Plans Reveal Murky Money-Go-Round’, Scoop, 7 September 2018, sec. Parliament, http://www.scoop.co.nz/ stories/PA1809/S00101/gisborne-road-plans-reveal-murky-money-go-round.htm.
[2] Ross and Goldsmith.
[3] Fabrizio Barca, Agenda for a Reformed Cohesion Policy (European Communities, 2009), 11.
[4] Etienne Nel and Teresa Stevenson, ‘The Catalysts of Small Town Economic Development in a Free Market Economy: A Case Study of New Zealand’, Local Economy 29, no. 4–5 (June 2014): 488–91, https://doi.org/10.1177/0269094214535022.
[5] Manuel Trajtenberg, ‘Can the Nelson-Arrow Paradigm Still Be the Beacon of Innovation Policy?’, in The Rate and Direction of Inventive Activity Revisited (University of Chicago Press, 2012), 679–84, http://www.nber.org/chapters/c12379.
[6] As highlighted in Julian Wood, ‘Growing beyond Growth: Rethinking the Goals of Regional Development in New Zealand’ (Maxim Institute, February 2017), 17-19, https://www.maxim.org.nz/growing-beyond-growth/ the first major shift away from this place neutral policy occurred in the early 2000’s with the desire to turn Auckland into a global economic hub or growth pole.
[7] Dominique Foray, ‘On the Policy Space of Smart Specialization Strategies’, European Planning Studies 24, no. 8 (2 August 2016): 1431, https://doi.org/10.1080/096 54313.2016.1176126.
[8] Compliance costs are the costs of complying with government regulations, for example the costs of meeting tax regulations or statistical reporting requirements from Statistics New Zealand.
[9] The previous National-led Government also, however, made some use of spatial regional development policy through the Regional Growth Programme, with the overall focus being on improving local knowledge through the generation of regional growth studies and regional action plans. In addition it created a number of regional research institutes and used the immigration points system to encourage regional migration.
[10] The theoretical groundwork for these models has been outlined in Julian Wood, ‘Growing beyond Growth: Rethinking the Goals of Regional Development in New Zealand’ These “Circular and Cumulative Causation (CCC) models of regional growth were formalised by Dixon and Thirlwall in 1975 following on from earlier work of Kaldor in 1970 and Myrdal in 1957. See Robert J. Dixon and Anthony P. Thirlwall, ‘A Model of Regional Growth-Rate Differences on Kaldorian Lines’ Oxford Economic Papers 27, no. 2 (1975): 201-14; Nicholas Kaldor, ‘The case for regional Policies,’ Scottish Journal of Political Economy 17, no. 3 (1970): 337-348; and Gunnar Myrdal, Economic Theory and the Underdeveloped Regions, (London: 1957).”
[11] Agglomeration is the effect that firm and worker concentration has on output; for more information see Stuart S. Rosenthal and William C. Strange, ‘Evidence on the Nature and Sources of Agglomeration Economies’, in Handbook of Urban And Regional Economics, vol. 4 (North Holland, 2002), 1082.
[12] OECD, ‘Innovation-Driven Growth in Regions: The Role of Smart Specialisation’ (OECD, 2013), 18, https://www.oecd.org/innovation/inno/smart-specialisation.pdf.
[13] Ron Martin and Peter Sunley, ‘Path Dependence and Regional Economic Development’, Journal of Economic Geography 6, no. 4 (2006): 399; Julian Wood, Taking
the Right Risks: Working Together to Revitalise Our Regions, 2018, 4.
[14] Fabrizio Barca, Philip McCann, and Andrés Rodríguez-Pose, ‘The Case for Regional Development Intervention: Place-Based versus Place-Neutral Approaches’,
Journal of Regional Science 52, no. 1 (February 2012): 141, https://doi.org/10.1111/j.1467-9787.2011.00756.x.
[15] Barca, McCann, and Rodríguez-Pose, 139“whereby context here is understood in terms of its social, cultural, and institutional characteristics” .
[16] See also the section on smart specialisation for a discussion of the role and benefits of multi-level governance within spatial regional development.
[17] A potential example of this type of multi-level governance occurring in New Zealand came to light via personal discussions held within the review process for this paper with local and central government officials. The Canterbury Mayoral Forum initiative, supported by all South Island Mayors and Chairs, is to work together to develop a South Island Destination Management Plan that aligns with national tourism strategy. The interregional steering group includes senior central government officials and will work with a wide range of central government agencies including the: Department of Conversation; Ministry of Business Innovation and Employment; New Zealand Transport Agency; Tourism New Zealand; and Department of Internal Affairs.
[18] Barca, McCann, and Rodríguez-Pose, ‘The Case for Regional Development Intervention: Place-Based versus Place-Neutral Approaches’. Another example as outlined above may simply be that the local training institution has become disconnected from local employment opportunities and needs some additional transitional funding (that is not available via a simple per-student funding model).
[19] This is not to say that raising the minimum wage so that employers to invest in more capital intensive production techniques is not a good thing, as this may actually improve local productivity and provide future employment resilience to a community over the longer term.
[20] See Findings of MBIE Regional Economic Activity Reports cited in Julian Wood, ‘Growing beyond Growth: Rethinking the Goals of Regional Development in New Zealand’, 21.
[21]‘Absorptive capacity is generally defined as a firm’s ability to internalise external knowledge’; see Richard Harris and Trinh Le, ‘Absorptive Capacity in New Zealand Firms: Measurement and Importance’, Motu Working Paper 18-01, February 2018, 1.
[22] OECD, ‘Innovation-Driven Growth in Regions: The Role of Smart Specialisation’, 13.
[23] For more information on building firm capabilities see David Johnston, ‘Transforming Capabilities: Preparing to Succeed in New Initiatives’, 9 January 2018, https://www.linkedin.com/pulse/transforming-capabilities-preparing-succeed-new-david-johnston.
[24] Richard Harris and Trinh Le, ‘Absorptive Capacity in New Zealand Firms: Measurement and Importance’, 28–30.
[25] This wider discussion over the goals of regional development policy in New Zealand is still largely missing in action as New Zealand’s attention has refocused on the delivery of the PGF.
[26] Wood, Taking the Right Risks, 33.
[27] Julian Wood, ‘Growing beyond Growth: Rethinking the Goals of Regional Development in New Zealand’, 25; P. Matanle and Y. Sato, ‘Coming Soon to a City Near You! Learning to Live “Beyond Growth” in Japan’s Shrinking Regions’, Social Science Japan Journal 13, no. 2 (1 December 2010): 187–210, https://doi.org/10.1093/ ssjj/jyq013; P. Matanle, ‘Introduction: A Special Focus on Shrinking Regions’, Social Science Japan Journal 13, no. 2 (1 December 2010): 183–85, https://doi. org/10.1093/ssjj/jyq064; Peter Matanle, ‘The Great East Japan Earthquake, Tsunami, and Nuclear Meltdown: Towards the (Re)Construction of a Safe, Sustainable, and Compassionate Society in Japan’s Shrinking Regions’, Local Environment 16, no. 9 (October 2011): 823–47, https://doi.org/10.1080/13549839.2011.607160.
[28] Julian Wood, ‘Growing beyond Growth: Rethinking the Goals of Regional Development in New Zealand’, 29–30.
[29] Brian Easton, ‘National Development Strategy – Where Do the Regions Fit In?’ (New Zealand Institute of Economic Research, 23 February 1983), 2.
[30] Wood, Taking the Right Risks.
[31] This last point is important in moving the local narrative from a future that is “bigger, better, faster, cheaper” toward one that is “smaller, better, healthier and more sustainable”.

 

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