Opinion article

Cities are Australia’s superpower

How do we make our cities more productive? The economies of our cities have transformed markedly over the past 20 years and are increasingly dominated by ‘knowledge’ industries. To improve productivity in our knowledge industries, the core challenge is to ensure we fill our cities with talented people and that we create the conditions that enable them to be at their best, writes City Economist at the City of Melbourne Andrew Wear.

Australia’s national identity may be rooted in the bush, but cities are Australia’s superpower. With 72 per cent of its population living in major cities, Australia is one of the most urbanised countries in the world and that’s no bad thing.

Cities are how Australia connects to the world. The most popular destinations for international visitors are Sydney, Melbourne and Brisbane. About nine in ten international students live in capital cities, along with 87 per cent of permanent migrants.

Australia’s six main cities (Melbourne, Sydney, Brisbane, Perth, Adelaide and Canberra) are home to 64 per cent of Australia’s population and produce two thirds of Australia’s economic output. Over the past 30 years, these cities have generated 69 per cent of Australia’s economic growth.

The centres of our cities are the most productive patches of land in the country. The municipalities of the City of Sydney and the City of Melbourne together occupy just 64 square kilometres. Yet in 2021/22, they added more value to the economy than the combined efforts of Australia’s agriculture, manufacturing and wholesale trade sectors.

The economies of our cities have transformed markedly over the past 20 years and are increasingly dominated by ‘knowledge’ industries. For example, 40 per cent of Greater Sydney’s economic output is generated by ‘knowledge services’ and another 11 per cent by health and education. The largest categories of exports coming from cities are all knowledge-dependent and mostly services: international education; professional services; ICT/telecommunications; technical/business services; financial services; and pharmaceuticals.

Productivity in this context is less about the production and movement of goods, and more about how cities support the generation, sharing and leveraging of knowledge. Unlike goods, knowledge doesn’t travel up and down highways on trucks. It is produced and passed on by people connecting with other people. 

So, how do we make our cities more productive? Transport networks are undoubtedly still important, enabling people to get to jobs, and goods to move throughout the city. But to improve productivity in our knowledge industries, the core challenge is to ensure we fill our cities with talented people and that we create the conditions that enable them to be at their best. 

Improving the educational attainment of the population and encouraging lifelong learning will help workers obtain the skills they need for a modern economy. The skilled migration system needs to ensure that Australia is able to attract the most talented people from elsewhere in the world.

Development concentrated in the central city tends to lead to more productivity benefits than more dispersed forms of urban development. A recent report by Infrastructure Victoria found this is because a more compact city enhances the size of the labour force available to employers (as employees can more easily travel to a central location). 

A compact city also enables businesses and workers to cluster together. This ‘knowledge agglomeration’ generates several valuable benefits: it enables businesses to share infrastructure, facilities, suppliers and workers; it enables firms and employees to easily find each other; and face-to-face interaction enables knowledge to be easily shared and generated. It’s likely for this reason that more than 80 per cent of Melbourne’s top tier innovation firms are headquartered within 3km of the city centre

The pandemic led to more people working from home, and the normalisation of ‘hybrid’ work. It’s too early to tell what this might mean for the long-run productivity of knowledge work, but early signs are that face-to-face engagement is just as important as ever, even if it is only three days per week.

Innovative knowledge businesses do not thrive within a vacuum. They emerge from – and are supported by – dense ‘ecosystems’. These consist of elements ranging from world-leading academic research to incubators and accelerators that support new start-ups, to the presence of investors willing to invest at different stages of the innovation journey. This is a complex mix that does not always emerge organically. Governments need to work closely with industry participants to identify and address ecosystem areas that require strengthening.

The steady shift of our city economies towards knowledge-based activity is reflected in the evolving focus of the Productivity Commission. ‘Australia’s economy has changed,’ former Chair, Michael Brennan said recently. ‘Almost 90 per cent of Australians now work in service industries.’ 

The Productivity Commission’s 2017 report, ‘Shifting the Dial,’ emphasised ‘better functioning towns and cities’ via a focus on infrastructure provision and roads. It’s most recent ‘Advancing Prosperity’ report, while not neglecting roads entirely, instead concentrates much of its attention on support for the knowledge economy, with reform directives focused on improving education, diffusion of innovation and the encouragement of entrepreneurialism.

Despite the importance of cities to our national economy, planning for economic activity in cities is often neglected. It falls between the cracks of different tiers of government – local, state and federal. And it’s not yet clear that governments have adjusted policy settings fast enough to respond to our rapidly transforming city economies. Yet, the complexity of our evolving economy requires that governments prioritise cities. What happens in cities will greatly influence Australia’s future. Australia cannot thrive unless its cities prosper.  

About the authors

Andrew Wear

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Andrew Wear is City Economist at the City of Melbourne and a member of CEDA’s Advisory Council for Victoria/Tasmania.

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