Mr. Rudd’s Unproductive Ideas on Urban Productivity

For urban planners, the compact city is a central dogma. All else hangs off it. There can be no planning without urban growth boundaries, the iron curtains beyond which urbanisation must cease.
More to be dreaded than George Orwell’s nightmare vision, in Nineteen Eighty-Four, of “a boot stamping on a human face - forever” is the prospect of “a footprint stamped on a patch of earth - forever”. So much has the concept of “footprint”, in its “ecological”, “carbon”, “human” and other manifestations come to pervade the thinking of activists and planners, that all greenfield
development is considered a violation of mother earth. They oppose it at any cost, endlessly recycling their stock of arguments.

If environmental alarmism starts to pall, they will fret over the prospect of social alienation. If this falls flat, they turn to an economic angle. We’re told, increasingly, that compact planning will boost the economy’s productive capacity.

“To … lift our urban productivity”, proclaimed Kevin Rudd in his famous “BigAustralia” speech, “we must establish new frameworks for how the different levels of government, along with businesses and the community, work together to build better cities and suburbs.”

The argument runs along familiar lines. Traffic congestion is costing the economy around $10 billion dollars a year in delays and inefficiencies. The answer is to shift as many commuters and as much freight as possible from cars, vans and trucks and onto off-road modes like rail. In the case of commuters, many more of them should be using public transport. But the massive capital costs of constructing rail lines can only be justified if population densities are high enough to underpin acceptable rates of use. So people and firms should be concentrated in more compact centres and corridors serviced by fewer roads and more rail lines. Hey presto! Productivity gets a boost.

Despite a degree of surface plausibility, the argument it wilts under closer scrutiny.

Let’s consider the version presented by Mr. Rudd. His starting premises are that “road congestion by 2005 was contributing an avoidable cost of $9.4 billion”, that “if we fail to act, that cost will double in the next decade”, and, citing Sir Rod Eddington’s 2006 UK Transport Study, that “cutting travel time in Britain by just 10 percent could raise national productivity by as much as 1.2 percent.”

Having noted that “one of the factors driving the increased reliance on road usage is the long-term underinvestment in public transport networks”, Mr. Rudd suggests some remedies. “[I]ncreasing density in cities is part of the solution to urban growth”, he says, and “forms of development need to be fully integrated with current and future transport networks.”

So far, so typical. But the resort to Eddington’s study raises questions about context. Do his findings translate to Australian conditions? Eddington’s source for the productivity estimate is, in the words of Mr. Rudd, “leading British economist Professor Tony Venables”. More precisely, an analysis by Venables and Patricia Rice of the spatial causes of productivity in “the regions of Great Britain”. Essentially, they set out to measure how distances fro areas of high “economic mass” (or high economic density) interrelat with productivity levels. The analysis is static, and doesn’t addres the productivity impacts of measures to raise densities over time.

Before coming to the estimate, Eddington is at pains to lay the contextual groundwork. Unlike Mr. Rudd, he concedes, on the role transport can play in lifting productivity, that “the literature has been largely unsuccessful in answering this question”. In a footnote, he says the work of Venables and Rice is “usefully beginning to inform debate”. No more.

Eddington’s most telling observation, from an Australian perspective, is that “the contribution that transport can make to productivity is dependent on … the existing density of the area”. He says “not al firms and areas are equally agglomerated, and will therefore no benefit equally from a particular transport improvement”. Eddingto explains that “transport alone cannot generate clusters, it can play an important role in facilitating their expansion by reducing travel time and costs …”

In other words, the extent to which transport infrastructure can boost productivity depends on existing densities, not target densities. This is the crucial point: Australian cities are much less dense than European, including British, cities. According to the City Mayors ranking of 125 cities by population density, London ranks 43rd with 5,100 people per square kilometre, Leeds/Bradford 57th with 4,050, Manchester 58th with 4,000 and Birmingham 64th with 3,800. Sydney ranks 113rd with 2,100 and other Australian cities don’t even make the list. Our cities also have some of the most dispersed commercial and industrial structures in the world, with relatively small CBDs accounting for around 12 to 20 per cent of urban jobs.

British cities are denser for several reasons: a more compact land mass, a colder climate, a longer history of settlement stretching deep into the era before modern transportation, and, particularly in the case of South-East England and London, an economy dominated by business services and information technology, which thrive on “agglomeration effects”. These do feature prominently in Sydney’s economic mix, but nowhere near the scale of London, the world’s mecca of banking, finance and investment. Until recently, the London Stock Exchange was the largest in the world, accounting for 32 per cent of global turnover.

The contrasts between British and Australian conditions are manifest, even if Sir Rod has lost sight of them since his appointment as Mr. Rudd’s infrastructure czar in 2008.

Still, the heralded boosts to national productivity aren’t likely to materialize. In low density environments, transport projects have limited economy-wide impacts. A smaller proportion of individuals and firms are placed to exploit them. This is especially so in the case of rail infrastructure (of course, freight rail lines servicing particular port and production facilities warrant special consideration). At the same time, measures to raise densities could wipe out such productivity gains as there are. Zoning controls and urban growth boundaries, for instance, raise land values and rents, with knock-on effects for prices, the cost of capital, and wage and
salary expectations.

It makes little sense to trumpet new efficiencies in transport, if other costs have been jacked up to achieve them. That’s why the key concept in economic thinking about productivity is “total factor productivity” (TFP), the portion of output not explained by all the inputs used in production. Mr. Rudd wrongly isolates transport costs from the myriad other costs bearing on urban productivity, and accords them overblown status.

The true path to urban productivity lies in empowering firms to choose their optimal location, taking account of their individual mix of costs and benefits. This means watering down regulations which restrict these choices, and improving access to as many points on th urban landscape as possible. Rail infrastructure is the least flexible option. There’s no way that planning bureaucrats, brandishing a few large-scale projects, can make better location decisions for thousands of businesses than the firms themselves.

Perhaps Mr. Rudd should imitate one of his own team. Out of a soundly-based concern for the impact of planning and zoning laws on competition, particularly in the retail sector, small business minister Craig Emerson has launched an enquiry by the Productivity Commission. They can be expected to know what they’re talking about.

This article first apeared at The New City Journal