Finance Finance News Why the gap between Australia’s rich and poor towns keeps growing

Why the gap between Australia’s rich and poor towns keeps growing

reserve bank coronavirus
The RBA has announced a range of measures to boost the amount of money in the economy. Photo: Getty
Twitter Facebook Reddit Pinterest Email

Regional Australia is falling behind the country’s major cities in economic terms, with stagnating population sizes fuelling the problem.

New research from the International Monetary Fund found economic activity within a country vastly differs by location, and the inequality between town and country is a trend that has continued globally since the 1980s.

The research measured regions’ prosperity by comparing real GDP per capita, which indicates how much individuals each contribute to the overall economy.

In advanced economies like Australia, the top 10 per cent of regions have a real GDP per capita 70 per cent higher than the bottom 10 per cent.

That “wide disparity” suggests that in some countries, the gap between the most and least wealthy regions is larger than the difference in prosperity between separate countries.

Perhaps worryingly, the research also found the speed of regional convergence (essentially the rate at which a country’s separate regions catch up with one another economically) has slowed since the early 2000s.

“More generally, a recurring theme in the latest economic research is that local conditions play an essential role in shaping individual opportunities and social mobility – in other words, place can be primal,” the report said.

Population and proximity playing a role

Speaking to The New Daily, Grattan Institute budget policy and institutional reform program director Danielle Wood said part of the problem is that high-productivity, high-paying jobs tend to cluster together in major cities.

“When we looked at incomes, we expected that income growth would be lagging in regional Australia, but what we actually found is that wages are growing at about the same pace as cities,” Ms Wood said.

“Per-person incomes were growing at a pace consistent with the cities, but the populations weren’t growing as quickly, and in some cases they were actually shrinking as people moved away. So even though wages per person are growing at the same speed, the amount of money in those regions really does lag.”

That’s been driven by a shift in Australia’s economic make-up, with eight in 10 people now employed within the services industry rather than manufacturing.

Businesses that provide services rather than goods often see a “productivity benefit” by being geographically close to other service providers, Ms Wood said.

This additional productivity allows those businesses to keep wages and profits high, and drives many businesses to operate in close proximity to each other – a phenomenon economists call agglomeration.

Unfortunately, this phenomenon also makes it difficult to reverse the trend of widening gaps between Australia’s various towns.

“There will always be concerns about large and persistent inequality, wherever it is, but this is how economies have evolved and changed over time,” she said.

“It’s really hard to fight that gravitational pull.”

View Comments