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Forget mining, big cities are the real engine in nation's economy

Date

Ross Gittins

<i>Illustration: Kerrie Leishman.</i>

Illustration: Kerrie Leishman.

Old notions die hard. If you took all the production of goods and services in Australia and plotted on a map where that production took place, what would it look like?

Any farmer could tell you most of the value is created in the bush. A miner, however, would tell you – a bunch of ads have told you – these days most of the wealth is generated in areas like the Pilbara in Western Australia and the Bowen Basin in Queensland.

Then, of course, there are the great manufacturing states of Victoria and South Australia – with most work done in the suburbs of Melbourne and Adelaide, but also regional cities like Geelong.

That make any sense to you? It's completely off beam.

A report issued this week by the Grattan Institute finds that, these days, 80 per cent of the dollar value of all goods and services in Australia is produced on just 0.2 per cent of the nation's land mass. Just about all of that is in our big cities, as close in as possible.

The report, by Jane-Frances Kelly and Paul Donegan, finds that big cities are now the engines of our prosperity. If you take just the central business districts of Sydney and Melbourne – covering a mere 7.1 square kilometres – you have accounted for almost 10 per of Australia's gross domestic product.

What do workers do in all those city offices? Nothing you can touch. That's how much the economy's changed.

To find the economy as many people still imagine it to be, you have to go back 50, even 100 years. About 100 years ago, almost half Australia's population of 4 million lived on rural properties or in small towns of fewer than 3000 people.

Many of these would have been market towns serving the agricultural economy. Agriculture and mining accounted for a third of the workforce. And only about one in three Australians lived in a city of at least 100,000 people.

These days, agriculture employs only 3 per cent of workers and contributes only 2 per cent of GDP. Our two biggest CBDs contribute at least four times that much.

By the end of World War II, manufacturing had become Australia's dominant industry. At its height in 1960, the report reminds us, manufacturing employed more than a quarter of the workforce and accounted for almost 30 per cent of GDP.

The rise of manufacturing shifted much of our economic activity – our prosperity – to the big cities, but mainly to the suburbs. Suburbs away from city centres had lower rents and less congestion.

Postwar growth in car ownership made possible the shift to a manufacturing economy with a strong suburban presence. It also led to the demise of many small towns and the rise of regional centres.

Today, however, manufacturing employs only 9 per cent of the workforce and accounts for just 7 per cent of GDP. The thing to note is that this seeming decline in manufacturing has involved only a small and quite recent fall in the quantity of things we manufacture in Oz.

Similarly, the decline in agriculture's share of employment and GDP has occurred even though the quantity of rural production is higher than ever. The trick is that these industries didn't contract so much as other parts of the economy grew a lot faster than they have, shrinking their share of the total.

One of those other parts is mining, of course. But get this: "While Australia's natural resource deposits are typically in remote areas, workers in cities make a critical contribution to the industry’s success," the report says.

"For instance, in Western Australia, where the most productive mining regions are located, more than one third of people employed in mining work in Perth."

That's partly because of fly-in fly-out, but mainly because many of these workers are highly skilled engineers, scientists, production managers, accountants and administrators.

So what explains the greater and still-growing economic significance of big cities, so that Sydney, Melbourne, Brisbane and Perth now contribute 61 per cent of GDP? The rise of the knowledge economy.

Increasingly, our prosperity rests not on growing, digging up or making things, but on knowing things. Our workforce is more highly educated than ever, and this is the result.

"Knowledge-intensive jobs are vital to the modern economy. They drive innovation and productivity, and are a critical source of employment growth. In the last 15 years there has been much higher growth in high-skilled, compared to low-skilled, employment," the report says.

Knowledge-intensive activities aren't confined to jobs in the services sector, but are also increasing in mining and manufacturing. They often involve coming up with new ideas, solving complex problems or finding better ways of doing things.

But here's the trick: it suits many of the knowledge workers, and the businesses that employ them, for those workers to be crowded into big cities, as close in as possible. When you're all packed in together, there's more scope for the transfers of expertise, new ideas and process improvements known as "knowledge spillovers".

Such spillovers come particularly through face-to-face contact. Large cities offer employers knowledge spillovers and a large potential skilled workforce. They also offer people greater opportunities to get a job, move to a better job, build their skills and bounce back if they lose their job.

Ross Gittins is economics editor.

57 comments

  • Forget mining? Really Ross?

    Perhaps you had better read your own SMH article from June 18 2011 titled 'Resources Boom Has Mined a Rich Seam For Everyone'

    I wonder how much of this city based GDP brings important export income to help Australia's terms of trade?

    Selling each other cups of coffee may contribute to GDP but I doubt it improves the countries wealth.

    Commenter
    Rae
    Location
    NSW
    Date and time
    July 23, 2014, 5:26AM
    • Education is one of Australia's major exports. That's almost exclusively centred in big cities.

      Commenter
      Education
      Date and time
      July 23, 2014, 7:45AM
    • The big city service model that Gittins exposes is great in theory, it is just that the Australian version of the model is highly dependent on Asset Inflation for the underlying revenue stream flowing to those "services".

      That's right, the Finance, Insurance and Real Estate and industries, as service industries don't actually generate revenue, they import offshore capital for the "services" they provide, running up our debt and inflating existing assets in the process. True the real estate industry may build the odd new apartment block, but fact is we're still constructing dwellings at half the rate per population as we were doing 40 years ago - most of our Real Estate industry is focused on selling existing houses at a slightly more inflated price than they were previously sold for/

      The ultimate end game of this financial construct of the Big City that Ross is celebrating, is impoverishment of new and young Australians, while providing the Boomers and our economic leaders with a cushy exit from their working life, living off the proceeds of assets that they've inflated beyond all reason, with a legacy of the worlds highest private debt load.

      Thanks for the model Ross - but it is broken, it's not the magic pudding and there is nothing there to celebrate, unless your getting set to retire.

      Commenter
      Stewie Griffin
      Date and time
      July 23, 2014, 8:08AM
    • Ross you've written a good article and answered a lot of questions I've had for a while. Manufacturing has gone, banks and offices have modernised, lots of jobs have been sent overseas, family farms have gone, our towns are dying and labour-intensive mines are no more. Where do people find employment? It seems providing services for population growth through immigration is the way we have gone. We are rebuilding our cities to house the huge increase in people coming to our shores - who bring a lot of wealth with them.
      What the government has failed to do is provide the infrastructure needed for this population increase and we have all suffered: Crowded hospitals, schools, roads and transport. Our lifestyle has gone backwards - our children can no longer afford a family home, our environment is polluted, our leisure areas are crowded, we spend a lot of time in traffic going nowhere. Our governments have let us down - all the grand plans never seem to eventuate!

      Commenter
      Darcy
      Location
      Sydney
      Date and time
      July 23, 2014, 8:29AM
    • Clearly didn't read (or didn't understand) the point of Ross' article.

      He notes the importance of mining, citing this extract from the report "For instance, in Western Australia, where the most productive mining regions are located, more than one third of people employed in mining work in Perth." The difference is that Ross is saying not all of 'production' from mining is generated in the mines.

      Ross' point is just that most of our production comes from big cities. The fact that they might piggy back off industries which aren't in the city has no bearing what so ever on his argument. A well argued point by Ross that too many people seem to have misunderstood.

      Just because you can't see the physical manifestation of someone's labour does not in any way diminish the value of what they have created.

      Commenter
      Are you a miner?
      Date and time
      July 23, 2014, 9:12AM
    • Stewie Griffin, please note that retirement is no bed of roses for the many Boomers who were forced into redundancy and lost a large part of their life savings in the Global Financial Crisis.
      In effect, they were robbed by the wonderful world of finance, real estate and speculation which now constitutes the bulk of our economy. Sorry Ross, but it's a house of cards which can only lead to further instability and disaster for small savers.

      Commenter
      saladdaze
      Date and time
      July 23, 2014, 9:47AM
    • Well....all i get from this gov is that they want us to be the poor sick dumb unemployed country with all the cutting they want.....no science, with education an health cut, how can a country survive this and be innovative with a safe functional society?

      Commenter
      strudel
      Date and time
      July 23, 2014, 9:54AM
    • My heart bleeds for a generation of home owners who stood by and cheered as their houses appreciate from 3.5 times median income to over 8 times median income.... to be paid for by the next generation of aspiring home owners.

      Oh, and BTW - which generation loosened all the financial regulation and overseeing bodies that lead directly to the GFC?

      Commenter
      Stewie Griffin
      Date and time
      July 23, 2014, 10:10AM
    • Now the mining boom is over and manufacturing has shrunk, the government has to fan the dying embers of the economy with housing construction. Like throwing petrol on dying embers, the fire will burn bright and fierce for a short time and then go out.

      People forget that a lot of the education industry was built in selling and sharing our engineering and manufacturing knowledge. As manufacturing shrinks so does our number of educators with practical knowledge. How can we grow a knowledge-intensive based economy when there will be practically nobody with practical experience?

      Commenter
      Gradually getting poorer
      Location
      Sydney
      Date and time
      July 23, 2014, 11:22AM
    • Good article Ross (and Grattan Institute). Anything like this helps us to understand what is going on in the economy.

      Commenter
      Pollyho
      Date and time
      July 23, 2014, 1:40PM

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