Melbourne is a ‘poster child’ for the globalization consensus that held sway in public policy from 1989 till Brexit/Trump 1.

A once proud manufacturing city, Melbourne transformed seemingly overnight into a professional services, health and education powerhouse, fully leveraging Victoria’s comparative advantage in the free trade hegemony of the times.

The fuel of this transformation was urban agglomeration.

There is a well-documented relationship between economic density – the number of jobs within, and readily accessible to, a particular location – and worker productivity.  On average across all sectors a doubling of economic density leads to an 8% increase in labour productivity. This productivity lift is much higher for Professional Services.

Melbourne’s CBD is Australia most economically dense location, measured by an index called Effective Job Density (EJD).  Economic density in Melbourne’s CBD is three times greater than that for a typical middle-ring suburb in the metropolis and six times greater than for outer areas. Looking further afield, the Sydney CBD has a slightly lower EJD score than the Melbourne CBD, while Brisbane’s EJD score is almost 30% lower.

Central Melbourne thus provides superior access to specialised skills within Victoria, and its network of streets, laneways and public spaces provide high levels of interconnectivity. Consequently, its competitive advantage as a knowledge cluster that supports highly skilled and productive work is, arguably, unparallelled in Victoria, and indeed across Australia. Gross Value Added (GVA) per hour worked in Business Services in the City of Melbourne is around $118 on average, while it is $114 in the City of Sydney.

This explains the powerful in-board shift of the best paying jobs that was experienced in metropolitan Melbourne from the early 1990s as the economy shifted from making things to trading in know-how.   Firms moved into central Melbourne to take advantage of the economies of scale and scope attaching to urban agglomeration.

Today, it could be argued that Melbourne exemplifies the post globalization malaise that is afflicting most OECD countries.  While the city is comparatively affordable when set against other State capitals, house prices historically ballooned in part because of the escalating premium on inner city land values.  Outer suburban households, which in previous generations enjoyed both affordable home ownership and local well paid jobs in manufacturing and linked industries, are now shut off from the full depth of opportunities offered by the metropolis.  This is building grievance.

Consensus around economic policy is evaporating.  This will damage Victoria’s prosperity and cohesion if left unaddressed.

Is there a case for dusting off a long discarded idea in urban planning – proactive policy to decentralise jobs, especially in the professional services, to suburban areas?

Given the potency of agglomeration in boosting productivity, ham fisted decentralisation will undoubtedly come at a heavy cost.  SGS modelling suggests that diverting around 100,000 jobs from central Melbourne to suburban locations over the next two decades would put an annual dent into Victoria’s GVA of over $4 billion.

Other SGS modelling points to the possibility that the losses from diluting agglomeration in the central city may be offset by savings in congestion costs, better use of the human capital available in the suburbs and gains in social cohesion.

Policy makers have a tough balancing act to perform.

In tackling this challenge, history and international practice can teach us a lot.  Scatter-gun decentralisation is unlikely to provide much by way of transport cost savings and local uplift in productivity.  If decentralization is to occur it needs to be focused into very few suburban hubs which need to be backed with appropriate public transport and other infrastructure to build autonomous momentum.  Paramatta is a good example of this.

Indeed, there are wider lessons here about using transport investment to proactively shape the city, and the regional economy, rather than slavishly applying a ‘predict and provide’ approach to these projects.  The stated aim of Melbourne’s ambitious Suburban Rail Loop is to reshape the pattern of accessibility so that a poly-centric metropolis – where access to opportunity is more equitable – emerges through market driven decentralisation.

Evidence also tells us that administrative decentralization should be accompanied by strategies and investments to deepen the specialization of the central city.  By decanting jobs that gain only modest productivity gains from being in the CBD, room can be created for bigger productivity gains in niche, high value sectors that need access to the broadest labour market.  A win-win outcome is in store, if astute policy design can be applied.

Authors:

Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

William Boadle, Associate, SGS Economics & Planning Pty Ltd