Unlocking regional development

Published in the National Business Review (Auckland), 23 February 2018

For cynics, it would be easy to denounce the government’s provincial growth programme as a slush fund. However, I am not cynical about the government’s intentions. Its genuine aim is to close the gap between New Zealand’s growth areas and those other parts of the country once unflatteringly labelled “zombie towns.” Good on it.

Prime Minister Jacinda Ardern and Regional Economic Development Minister Shane Jones are due to launch the fund in Gisborne today.

Meant to kickstart economic activity in the regions, $1 billion has been earmarked for many projects from rail to planting trees. It was one of the big-ticket items in last year’s Coalition agreement.

Narrowing the gap between booming and struggling regions would be an economic achievement. But more than that, it is politically desirable. In the election of Donald Trump, we could see what happens when a country disintegrates socially and geographically. To avoid a similar fracturing of New Zealand is worth the effort.

And yet, I watch the space of regional development with some trepidation. The Regional Development (Provincial Growth) Fund puts Wellington in the driver’s seat. It is a centrally designed plan for how New Zealand should develop. It will define the areas, the recipients and the projects. It will reinforce New Zealand’s already highly centralised political structure.

Of every dollar of government spending, more than 90c is controlled by central government in Wellington. Across the developed world, only Greece and Ireland are more centralised than New Zealand. The OECD average for central government’s share in government spending is only about two thirds – much lower than ours.

The great irony of the Provincial Growth Fund is it wants to make regions stand on their own two feet again. And yet in aiming for this worthy goal, it helps to entrench centralism.

It is understandable that central government tries to solve regional problems with central government programmes. When the only tool you have is a hammer, every problem looks like a nail.

It is also easy to overlook the possibility of decentralised solutions because they are counterintuitive.

The great 19th century French economist Frédéric Bastiat once marvelled at the fact that Paris got fed.

“On coming to Paris for a visit, I said to myself: Here are a million human beings who would all die in a few days if supplies of all sorts did not flow into this great metropolis,” he wrote in 1845. “It staggers the imagination to try to comprehend the vast multiplicity of objects that must pass through its gates tomorrow if its inhabitants are to be preserved from the horrors of famine, insurrection and pillage.”

As Bastiat observed, it was the countless interactions of Parisians that together created a thriving city. The city’s development was not the result of any one central plan.

Now, 21st century Northland is not 19th century Paris. Yet Bastiat’s insights into economic development might well inform our thinking on regional economic development. If the starting point is the realisation that economic growth results from the myriad of individual interactions in the marketplace, what could government do to facilitate them?

One such option is to allow regions to define for themselves in which way they want to develop. People in the regions often have better insights into their most pressing issues than any well-meaning government bureaucrat or minister may have.

In 2015, The New Zealand Initiative recommended the introduction of special economic zones as a means to this end. The proposal would allow regions to craft and trial new versions of national-level policy to fit local needs and create a more growth-friendly environment.

Say a deprived region wanted to make it easier for international investors to set up factories or holiday resorts, that region could opt out of the Overseas Investment Act. It could experiment with a more investment-friendly regime and generate more growth and economic activity in this way.

We also suggested regions going for Special Economic Zones status should be allowed to reap the fiscal rewards of their projects. This could be done by letting them retain some of the extra tax revenues resulting from the extra growth.

What this scheme would create would be more than just extra funding of the kind the Provincial Growth Fund will give to the regions. It would actively encourage the regions to think for themselves about which way they could unlock growth potentials. In this way, special economic zones are an incentive scheme for councils and whole regions.

So far, we do not know enough about how the government will administer its regional fund. But we can at least hope it will be more than just an exercise in distributing money in watering-can style. Regional economic development policy should aim to make use of local knowledge and encourage finding local solutions. It should incentivise economic growth on the ground, and it should not lead into more local dependence on central government.