Recessions and revenue

Just a quick post today, prompted by yesterday afternoon’s about the change in the formulation of the debt target foreshadowed by the Minister of Finance.

My proposition was that, with a target range 10 percentage points wide, governments will be expected to stay within that range (more or less) all the time.  And that will means that in normal times –  proxied by when the output gap (perhaps adjusted for the terms of trade) is around zero –  the government will still have to hold pretty closely to the 20 per cent of GDP target midpoint.  They might be able to safely fluctuate between 19 per cent and 21 per cent (or thereabouts) but anything much beyond that would run a material risk of moving outside the target range –  prompting either procyclical fiscal adjustments or the abandonment of the target – the next time a reasonably significant recession hit.    That risk is compounded by the fact that output gaps –  and detrended terms of trade –  are only really best guesses in the first place.  When we think the output gap is zero, hindsight might reveal it to have been +2 per cent of GDP –  increasing the probable revenue losses when the economy next takes a hit.

I noted in yesterday’s post that New Zealand government tax revenue had fallen by around 6 percentage points of GDP in the period from the peak in the years just prior to the recession to the trough in the years just after.   Not all of that was cyclical –  there were some tax cuts just prior to the recession, and again in late 2010 –  but much of it probably was.  And whether or not the revenue loss was the automatic stabilisers at work or discretionary policy changes, a debt target would have constrained choices (on the tax side) that governments of the day had thought appropriate.    And my more general point was that a couple of years in which taxes/GDP were a couple of percentage points lower than normal –  adding to the debt –  shouldn’t be thought exceptional.

But I thought I should check that, and so I dug out the data on government current revenue (mostly taxes) as a per cent of GDP, to see what had happened in other countries in and around the 2008/09 recession.   Here is the change by country (lowest year just after the recession less highest year just prior).

rev

New Zealand –  which did have a pretty severe recession –  had the fourth biggest reduction in revenue as a share of GDP.  I guess that was exaggerated by the effect of the discretionary changes.

But what really interested me was that I noticed a number for the euro-area as a whole.    Revenue as a share of GDP had barely changed, in aggregate across the whole area.  The whole area, of course, had monetary policy adjustment open to it, but individual countries that are in the euro-area did not.

But the median fall in the share of revenue to GDP for OECD countries not in the euro area was 2.9 percentage points.  On the other hand, the reduction for the median euro-area country was only 0.7 percentage points.   I guess that was a mix of crisis countries, indebted countries, the Maastricht fiscal rules, or whatever.  But given the limitations of monetary policy, it hardly seems like an optimal adjustment: automatic stabilisers (in mostly quite high tax countries) should probably have generated more of a fall just on their own.

Anyway, it left me pretty comfortable that my ad hoc suggestion that the government needs to plan around its fiscal target on the basis that a serious recession could easily knock a couple of percentage points of GDP off revenue for a couple of years at least, which in turn would add to the debt.   If they don’t do so, they could find themselves engaged in pro-cyclical fiscal adjustment, which will be even more problematic in the next recession, given how much closer to the limits of conventional monetary policy we (and other countries) are likely to be.

A useful but modest step forward on fiscal management

A year ago the Minister of Finance gave a pre-Budget speech in which he restated the fiscal rules Labour and the Greens had campaigned on.  Among them

We will reduce the level of net core Crown debt to 20 percent of GDP within five years of taking office.

Here was what I said at the time

In general, debt targets –  with relatively short time horizons to achieve them –  aren’t very sensible as operational rules.   Such a rule can mean that a few fairly small, essentially random, forecasting errors in the same direction can cumulate to produce a need for quite a bit of (perhaps unnecessary) adjustments to spending or revenue.  More seriously, recessions can throw things badly off course for a while, and risk pushing a government into a corner –  either abandon the target just as debt is rising, or fallback on pro-cyclical (recession exacerbating) fiscal adjustments –  even though, in across-the-cycle terms, the government’s finances might be just fine.  No one looks forward to a recession, but governments (and central banks) need to work on the likelihood that another will be along before too long.   Natural disasters –  the other shock the Minister mentioned –  can have the same effect.

I see I omitted to mention that other pro-cyclical fiscal risk that a (point) debt target exacerbates: the temptation to spend up further in good times to keep debt from undershooting the target.

And so I am pleased see reports today of another pre-Budget speech from the (same) Minister of Finance, in which he said

The Government will scrap specific debt targets in favour of moving towards a target range, Finance Minister Grant Robertson has announced.

The current target, part of Labour’s Budget Responsibility Rules, is to reduce net debt to 20 percent of GDP by 2021/22. When that target is achieved, it will be replaced with a debt range.

Robertson did not specify what this was, but said Treasury had provided him with advice.

“At this point we are looking at a range of 15-25 percent of GDP, based on advice from the Treasury,” Robertson said.

Does it create risks?  Yes, it does, and that is why I would still favour dropping debt targets altogether.  There will be increased pressure for more spending up front.  But, operated responsibly, the proposed new debt-range provides only trivially greater amounts of flexibility.    Why?  Because no one ever expects the government will keep debt/GDP at a constant point every single year, but if they take the new range seriously people will expect them to keep within the sort of range all the time.  It is wide enough, it should be able to encompass the effects of most booms and busts, but only if in normal times debt/GDP is kept close to the midpoint of the range.  You probably give yourself a degree of freedom to have debt fluctuate between 19 and 21 per cent in normal times, but you always have to remember that a recession could be along any time.  A couple of years in which revenue is 2 percentage points of GDP below average and you will be on course for the top of the debt target range pretty quickly if your starting point is anything much higher than 21 per cent.  Tax revenue as a share of GDP fell from 31 per cent in the year to March 2006 to 25 per cent in the year to March 2011, and (a) while the economy started from a materially positive output gap, and (b) there were some tax cuts, a fall of a couple of percentage points of GDP is easy to envisage, and necessary to plan around.

My own preferred approach, without a debt target, is as I outlined it last year.

Personally, I would be much more comfortable with only two key quantitative fiscal rules:

  • a commitment to maintaining the operating balance in modest surplus, once allowance is made for the state of the economic cycle (cyclical adjustment in other words) and for extraordinary one-off items (eg serious natural disasters), and
  • something about size of government.    Simply as an economist I don’t have a strong view on what the number should be, although as I’ve noted previously it is curious that the current left-wing government, arguing all sorts of past underspends, was elected on a fiscal plan that promised spending as a share of GDP that undershot their own medium-term benchmark (that around 30 per cent of GDP).

The suggested fiscal surplus rule isn’t an ironclad protection (any more than a real-world inflation target in a Policy Targets Agreement is).  There are uncertainties about the state of the cycle and how best to do the cyclical adjustment, and incentives to try to game what might be counted as an “extraordinary one-off”.   That is why the fiscal numbers and Budget plans will always need scrutinising and challenging.  But if followed, more or less, such a rule would be sufficient to see debt/GDP ratios typically falling in normal times, and to avoid things going badly wrong over a period of several decades.  That is probably about as much as one can realistically hope for.

The focus would be on the first of those, the structural balance rule.

Part of the necessary scrutiny and challenge would be provided by that fiscal council the government consulted on last year, but about which nothing has been heard for months.

The PRC, trade, foreign investment etc

Parliament’s Justice Committee today has the second (and final?) public hearing of submissions on their foreign interference inquiry.  The first such session was described to me by someone who watched it all as “just hopeless”, and accounts I’ve read don’t suggest any reason to doubt that take.  If there were signs of seriousness about the process, they seemed to be about trying to play down, or pretend there was nothing to, concerns around the PRC.   The acting chair had introduced the hearing by suggesting she would prefer not to hear names.     Her party, earlier this week, launched a foreign affairs discussion document in which they talked of their “friends in Beijing”.  What hope for a serious investigation.

Reports this morning suggest the Committee is just about to have another acting chair, with previous acting chair Maggie Barry deciding to leave the committee, and substantive chair Raymond Huo (who initially opposed any public submissions, claiming government departments could say all there was to be said) having belatedly recused himself, as someone about whom concerns had been raised, notably in Anne-Marie Brady’s paper.  In another sign of the unseriousness of the exercise, a senior National MP on the Justice Committee told the committee two weeks ago, when Brady appeared, that he hadn’t even read the paper.  I might not have expected all MPs to have done so –  although all should –  but a senior MP, actually sitting on the committee, part of National’s international affairs team…..

It is reported that National MP Chris Bishop is to be the new acting chair.   As I happened I was engaged with Bishop briefly on this issue on Twitter yesterday, when he politely took exception to my suggestion that the inquiry, especially around the PRC, was really a faux inquiry.   His claim was that

bish.png

and went on to ask the basis for my concern.   240 characters really isn’t the length for such discussions, so I simply pointed him to my submission to the inquiry, and in addition to some of the points above noted the Jian Yang situation.  Perhaps he was in earnest.  Perhaps his acting chairmanship will really mark some sort of turning point in the inquiry.  It would be great if it did, but it is hard to have any optimism given how deeply entrenched, especially in the two main parties, the wish to pretend there are no problems, and to just get on treating the PRC as a normal country (“our friends”) has become, from Jacinda Ardern and Simon Bridges down.

There was another example of the establishment approach in this area in the Herald yesterday, in a column by lobbyist and former trade negotiator Charles Finny, offering to “make sense of the US-China dispute”.  Par for the course for the Herald, general readers would not have any idea that Finny serves on the Advisory Board of the (largely taxpayer-funded) New Zealand China Council, set up to champion closer ties with the PRC (and never known to have said anything critical of the regime), and he is also chair of Education NZ, the government body charged with promoting export education, much of it to the PRC.   On a good day, Finny appears to be alive to some of the risks around the PRC –  he did after all go on national TV and suggest that he was always careful what he said around Jian Yang and Raymond Huo given their apparent close ties to the PRC embassy – and I suspect he is mostly a true-believer in the mantra of the “rules-based order” and of the ever-increasing web of preferential trade agreements New Zealand is party to.

But his “making sense of the US-China dispute” column didn’t make sense of it at all, because it totally failed to place the rising tensions in a wider strategic or political context.  It was, on his telling, all the fault of the Americans (“the Trump Administration’s ‘America First’ mentality), and not at all about choices made by the PRC.  Later in the article, Finny does actually note first that some of the approaches that bother him began under Obama (judges for the WTO), and that there isn’t necessarily much difference between the approach being adopted by Trump and that by Democratic Party contenders, which you would think might matter.  But instead all we get is a worry that New Zealand could see

enormous pressure on New Zealand to stop buying Chinese technology or to co-operate with Chinese universities or research entities,

(Shouldn’t any decent media outlet have thought at that point that Finny should have to disclose his Education NZ and China Council involvements?)

Finny’s approach seems to be that no matter the character of the regime, we should simply keeping on doing more trade, buying more technology, allowing more investment.  There seems to be no sense at all of anything around security risks –  be it Huawei, Hikvision or whoever –  no sense that, however the New Zealand government labelled it in a treaty, the PRC is no market-economy, but one with an ever-increasing role for a state with totalitarian aspirations and abilities.   Simply no recognition of the way the PRC has sought to inject its pernicious influence –  and don’t pretend it is just another state – into the affairs of all sorts of other countries, including our own, including our own ethnic Chinese New Zealand citizens.   Now, you might think Trump is going about tackling these challenges in a poor way – or perhaps won’t even follow through –  but that is a quite different matter from whether there is a real issue that needs addressing.   Finny –  and the New Zealand political establishment –  would, it appears, prefer to pretend otherwise.  And don’t pretend –  as some try to –  that this is just about another big country getting richer and stronger.   There would be nothing like the level of concern there now is across the US political spectrum if China were opening up, reducing the power of the state, reducing the power of the Party, stopping the threats to Taiwan, stopping corroding freedom in Hong Kong, demolishing artificial islands in the South China Sea, not engaging in state-sponsored intellectual property theft, not imprisoning a million Uighurs, not attempting to exert control over diasporas and foreign Chinese-language media, and so on.    Those are the sorts of things that should be concerning our MPs and ministers, but not one will utter a word.      (And by contrast I listened to an interview yesterday with Pete Buttigieg, one of the fairly left-wing Democratic contenders.  I can’t imagine he agrees with Donald Trump on almost anything, and yet on China and the risk and threats he was fluent and serious.  I was impressed.)

As it happened, a reader this morning posted a link to a column from the New York Times by the (often rather breathlessly enthusiastic) champion of globalisation Tom Friedman on the US/China issue.  I don’t suppose he is generally much of a Trump fan either, and yet

A U.S. businessman friend of mine who works in China remarked to me recently that Donald Trump is not the American president America deserves, but he sure is the American president China deserves.

and, for example,

But when Huawei is competing on the next generation of 5G telecom with Qualcomm, AT&T and Verizon — and 5G will become the new backbone of digital commerce, communication, health care, transportation and education — values matter, differences in values matters, a modicum of trust matters and the rule of law matters. This is especially true when 5G technologies and standards, once embedded in a country, become very hard to displace.

And then add one more thing: The gap in values and trust between us and China is widening, not narrowing. For decades, America and Europe tolerated a certain amount of cheating from China on trade, because they assumed that as China became more prosperous — thanks to trade and capitalist reforms — it would also become more open politically. That was happening until about a decade ago.

But, as he goes on to note, it simply isn’t now.  And New Zealand politicians seem to refuse to confront the implications of that, accentuating local issues that were already building (as one small but prominent example, Jian Yang was already in country –  told by Beijing to lie about his past –  and in Parliament before Xi Jinping took the top job).

In somewhat the same vein the government has a consultation open at present (submissions close tomorrow) on possible changes to the overseas investment regime.  I took the opportunity to make a short submission for two reasons:

  • first, I generally favour greater openness to foreign investment, but
  • second, the discussion document dealt (rather superficially) with national security issues and how the rules might best handle those.

These days, New Zealand does not get much foreign direct investment –  and especially not much in the way of greenfields new developments.  I don’t think the screening etc regime is the main reason –  mostly, I suspect, we don’t have that much foreign investment because (a) there are few opportunities here, and (b) for the same sorts of reasons business investment generally has been weak for decades (high cost of capital, high real exchange rate, high taxes on business profits –  in that case, especially for foreign investors).  But I’d generally favour a more liberal environment, for almost all industries and for investors of almost all countries.

It is also worth recognising that most of any benefit (to productivity in New Zealand for example) from foreign investment will come from investment by firms based in rich and advanced countries.  Of course, there might be rare exceptions –  a firm based in Zambia, Laos or El Salvador –  but they will be exceptionally rare (the best ideas, technologies, management systems etc) will be in the rich countries –  part of why they got, and stay, rich.  So I’d favour a pretty-much open slather approach to foreign investment –  existing assets or new –  for investors based in rich countries (the OECD membership might be a decent starting point, and one could add in places like Singapore and Taiwan.

For most of the poorer or smaller countries, I really don’t care much what the rules are.  Probabilistically, there is almost nothing at stake (at least in economic terms) in maintaining restrictions on Zambia, Laos, El Salvador (or 100 others) if that is what the political process demands.  But, equally, there isn’t much risk or downside to opening up to them either, especially if one is focused on the benefit of New Zealanders being (generally) able to sell to the highest bidder.

There are various odious regimes in the world.  Most them don’t matter much to New Zealand at all (thinking places like Equatorial Guinea).  But the PRC does and in my view we should –  while the regime remains as it is – be treating investment from there quite differently, for various reasons.    One is a straightforward economic one.  Almost any large PRC firm is either an SOE or has a significant element of state/Party control to it.  We spent years here trying to reduce the hand of the state in direct business operations in New Zealand.  State entities typically don’t run businesses well, don’t allocate investment efficiently, and so on.  There is no more likelihood (to put it mildly) that PRC state-controlled companies will do so than the New Zealand government ones will –  and at least the New Zealand government ones are ultimately answerable to New Zealanders.  Such investment is likely to be a net negative for New Zealand even if the price paid to the initial New Zealand vendor is higher than that vendor could have got from another –  private –  purchaser, whether from New Zealand or another country.

But the deeper reason is that the PRC is a big and powerful totalitarian state, that has repeatedly displayed aggressive intent, which has values antithetical to those of most New Zealanders.   Individual PRC buyers may well be perfectly decent well-intentioned people –  as plenty of 1930s Germans were too –  but a totalitarian state has, and repeatedly demonstrated, its leverage over its own people, by fair means and (too often) foul.  We would simply be ill-advised to allow PRC-associated interests to have significant investments in many sectors in New Zealand.  One could think of media or telecom companies, or tech firms.    The PRC banks operating here should be a matter of concern, especially if they get materially larger than they are now.   But the concern should range wider.  For example, the greater the control PRC interests have of elements of the dairy industry, the more difficult New Zealand might find it to be handle the sort of economic coercion the PRC has attempted to engage in re various countries in recent years.

And, of course, to circle back to my earlier point, it is not as if the PRC is one of the world’s advanced economies.  Productivity levels languish far behind even New Zealand’s modest levels, and everyone recognises the dependence the regime has had on industrial espionage.  Deep pockets aside –  with a mix of market and non-market motives –  how much genuine benefit to New Zealanders is there likely to be from PRC foreign investment over time?

It is possible that this sort of restrictive regime could come at some economic cost, in terms of lost productivity opportunities for New Zealand. My sense is that it would probably be quite a small cost, but we can’t be sure.  Perhaps more importantly, many precautions have a cost –  whether it be a national defence force, Police, anti-virus software, or a lock on your front door.  The PRC is a threat to New Zealand and countries like us, and we need to be willing to spend some resources (perhaps sacrifice some short-term opportunities) to establish some resilience to those threats.

But, of course, our elected “leaders” and business establishment figures have no interest in any of this.  For them, it seems, the character of the regime matters not a jot, it demonstrated track record at home, abroad, and in New Zealand matter not a jot.  There are deals to be done, donations to be collected, and  –  if there are any risks –  well that will be someone else’s problem another day.  And in the process they’ve allowed our political system to become corrupted, indifferent to the character of the regime, indifferent to the values of New Zealanders.  But their “friends in Beijing” are no doubt happy.

 

(Un)successful public policy

Yesterday afternoon I saw this in my Twitter feed

My first thought was along the lines of “well, I guess there is nothing about New Zealand economic policy”, (a) so poor has our long-term performance been, and (b) because surely outcomes matter?.   But I’m a policy geek sort of person, ANZSOG is chaired by our very own State Services Commissioner, and ANU is the top-ranked university in Australasia, so I clicked the link to see what examples of successful policymaking in New Zealand they’d found. To my surprise I found this

New Zealand’s economic turnaround: How public policy innovation catalysed economic growth (PDF, 0.2MB)Michael Mintrom and Madeline Thomas

(Downloads of all the individual chapters appear to be free, and there are pieces on ACC, early childhood education, Kiwisaver, nuclear-free New Zealand, and so on, some of which may interest some readers.)

But I was a bit flummoxed even by the title of this economic chapter.  I recognised the “public policy innovation” –  thirty years on I still support most of it –  but the idea of an “economic turnaround” or “catalysed economic growth” seemed, to say the least, at odds with the data.

Mintrom is a public policy academic, now at Monash University in Melbourne. He worked for The Treasury for a few years in the late 1980s before heading off to do his PhD.  But, from the look of his publications, he seems to know a lot about public policy processes, but not necessarily a great deal about economic growth or overall economic performance.  Thomas is his research assistant, with a psychology degree and some experience working on social policy with local governments.

When I got into the chapter itself it turned out the authors were focusing on a handful of specific initiatives undertaken in the late 1980s and early 1990s:

  • reduction of market interventions (controls, subsidies, import restrictions etc),
  • creation of SOEs and subsequent privatisations,
  • simplification of the tax system and introduction of GST, and
  • passing responsibility for monetary policy to an independent Reserve Bank.

And they lay out early on how they define success.  Their first criterion is endurance, and thus they argue that “these policy innovations have now remained in place for decades. Thus, judged by endurance, they have been highly successful.”

There, it would appear, speaks someone more interested in processes than outcomes.  After all, the broad range of policies the 1980s and 90s reforms replaced –  exchange controls, heavy import protection, monetary policy set by ministers – also lasted for decades, and were generally not accounted a success.   The Soviet Union managed 70 years.

But the authors offer three other perspectives from which to view the success of the policy programme.  There was something called the “programmatic perspective”, which seems to be encapsulated in these two sentences:

A highly coherent theory of change guided the development of these policy innovations.  After a relatively short time, it was clear the changes were producing beneficial outcomes.

Then there is the “process perspective”, where they claim (and I mostly wouldn’t disagree) that “the policy innovations were well designed and generally well managed”.

And, thirdly, there is the political perspective, which they describe as “more complicated”.  That, presumably, does duty not only for the deep divisions that opened up in the Labour Party, Jim Anderton’s breakaway, and the divisions that opened up in National, culminating in the founding of New Zealand First, to all of which one could add the public sense that politicians hadn’t been straight with them (many readers will be too young to recall that in 1987 Labour published its manifesto the week after the election) and the replacement of FPP by MMP (you may think that change good, but it simply wouldn’t have happened without the ructions of the previous few years).

Remarkably, in a chapter focused on economic policy and –  at least according to the title –  economic growth, the authors take as their “starting point” several very positive assessments of the reforms written from 1994 to 1996.    Some of those articles are valuable, but each was written with the benefit of almost no distance or perspective, and were written a quarter of a century ago.  I found it remarkable that in a chapter about New Zealand’s economic growth, there were no references at all to the literature over at least the last decade about New Zealand’s disappointing productivity performance (sometimes, but quite wrongly, characterised as the New Zealand “productivity paradox”).    Those concerns, from extremely orthodox sources, have been around much longer than that: I happened to be dipping into the OECD’s 2000 report on New Zealand yesterday and found explicit concerns there about the failure of the New Zealand economy to converge, highlighting in particular the disappointing productivity growth.

The first part of the chapter is devoted to rehearsing some of the political and economic context for the reforms –  with which I mostly have only relatively minor quibbles – before they move on to focus on the four areas of reform (listed above).  Again, as pure description, it isn’t too bad –  with the odd annoying mistake (eg the exchange rate was not pegged to the US dollar in 1984, the price freeze had been lifted before the 1984 election), but whenever there is any sort of evaluative tone it is almost always very upbeat.  And perhaps only a young Treasury official from those days could describe, with a straight face, the Treasury’s approach to other departments as “Treasury analysts showed a great desire to….seek insight from colleagues in other departments”.

There is a variety of odd claims.  Thus,

The move to a more independent Reserve Bank came after several years of a floating New Zealand dollar, which was also viewed as a key element of market liberalisation; it was therefore uncontroversial.

Where did they get that from?  The Reserve Bank Act was intensely controversial at the time, with considerable opposition (wrongheadly in my view, but it was there nonetheless) from most prominent academic economists in New Zealand and some vocal business lobby groups.  The authors talk up the legislation passing Parliament unanimously (perhaps so if Jim Anderton was away that day), but if they’d done even the slightest refreshing of memories, they’d have been aware that the legislation divided both major party caucuses.  National – in Opposition – voted for the legislation, but Ruth Richardson’s former economic adviser recorded later that the vote in favour at caucus secured a majority of only one: Sir Robert Muldoon (opposed) was away seriously ill, and Winston Peters (opposed) for some reason skipped the meeting.   And I’ve perhaps mentioned before that in every subsequent election –  down to and including 2017 – one or other political party was campaigning on a platform of changing the Policy Targets Agreement or the Reserve Bank Act.

There are other odd claims.   The authors are mildly circumspect about aspects of the privatisation programme (“some sales were poorly managed”), but then cite as evidence of the “policy success” of the Labour government’s privatisation programme, that the succeeding National government did more privatisations.

The authors begin their Analysis and Conclusions section suggesting that in the early 80s New Zealand was heading towards “economic collapse”, but that is simply overblown political rhetoric for a process of stagnation, fairly high and variable inflation, and rising debt.  The broad direction of policy was still towards liberalisation, but it was a halting, half-hearted, and inconsistent process.  A crisis it wasn’t –  even if forced devaluations make good headlines.  Thus, the authors note that “unemployment grew” and yet the historical backdating of the HLFS suggests that the unemployment rate in June 1984 was 4.4 per cent, almost identical to the current rate.

What else struck me?  There was the claim –  about the 80s period –  that “through listening and working with others – even those who might have strong objections to a proposals –  it is possible for advocates of change to improve policy design and build a strong colation to support change”.  No doubt that is true generally, but it bears very resemblance to anyone else’s impressions of 1980s/90s reform period –  it was. after all, Roger Douglas, who championed the approach of “crash through or crash”.

Our authors carry this lesson forward:

“subsequent New Zealand governments have achieved important reforms while moving more slowly and working to ensure implementation is well managed. For example, the National Party-led coalition of 2009-17 [wasn’t a coalition, and it was 2008-17, but I guess those are details] established a new program of privatisation of government assets. Important work was done that drew on lessons from hre past and met considerable success.”

You might –  as I did –  have supported those more recent partial privatisations, but lets remember how small they were.  One of the companies involved was already market-listed (Air New Zealand) and all are still majority state-owned.    And the list of “important reforms” undertaken by that more recent government was limited, to say the very least.

The very final (short) paragraph begins this way.

In sum,we judge New Zealand’s economic turnaround to have been a major public policy success. Innovative public policy changes catalysed economic growth.

And yet, remarkably, in the entire chapter there is not a single number or chart or even a discussion of the specifics of economic growth. Not one.  And despite (rightly) lauding the removal of protection and subsidies, no mention of the fact that foreign trade as a share of GDP is no higher now than it was in 1984.   Absent evidence of this “catalysed economic growth”, perhaps we are just supposed to imagine it, and somehow feel better for the thought?   But I hope this isn’t how ANZSOG helps train our public servants.

My own take on the reform and stabilisation effort of the 1980s/90s is roughly as follows:

  • stabilisation was a major success.  We have low and stable inflation, low and fairly stable government debt.  We also have a considerable measure of financial stability.  For all that, we should be truly grateful.  But we should also recognise that (a) low and stable became a pretty global phenomenon (especially in the advanced world) around that time, and (b) that various other well-managed countries (eg Australia, Canada, Sweden, Switzerland) have much the same sort of fiscal record we do.  That leaves me sceptical of stories which put too much emphasis on specific New Zealand events, circumstances, law, individuals, or policy processes.    Moreover –  and I don’t think this appears in the chapter at all – we have greatly benefited from a big increase in the terms of trade (reversing the couple of decade decline that policymakers from the late 60s to mid 80s had to cope with),
  • many of the specific reforms (including those Mintrom and Thomas deal with) served us well.   Lower import protection, a well-designed GST, injecting much greater efficiency into state trading operations and a bunch of others benefited most New Zealanders.
  • but that isn’t true of all the reforms.  One might focus in on the RMA and associated provisions which have given us among the most unaffordable house and urban land prices in the developed world, or one might look at the tax treatment of savings.  And then there are the immigration policy reforms.
  • and, as honest observers have known for 20 years, there has simply not been the productivity turnaround that champions of the reforms hoped for at the time (and there is also no reason to suppose that problem is just that we didn’t engage in radical enough reform.)

Here is a table I was working on the other day, comparing average productivity in New Zealand with that of a leading bunch of OECD countries.

prod 1

The book was an ANZSOG project.  Here is labour productivity for New Zealand relative to Australia, indexed to when the New Zealand domestic data start in 1989.

prod 2.png

I reckon there is a plausible argument that the whole reform programme taken together slowed the rate of decline in New Zealand’s relative fortunes (although even that isn’t clear-cut: the rate of decline slowed, but I’ve not seen any careful attempt to assess how much of that was policy and how much about, say, improvements in the terms of trade).

But that isn’t the case Mintrom and Thomas attempt to make.  Judged by economic growth outcomes –  the sort of criterion their title asks us to use –  the programme just cannot be judged a great success. Perhaps the processes were good in some respects, and there was certainly a lot of intellectual rigour behind some of the reforms. It remains a fascinating case study in concentrated far-reaching reform.  But the productivity results really suggest that the episode belongs in another book, about the disappointing results despite the very best of intentions.  Those are salutary lessons policy advisers need to be trained in too.

How we –  certainly anyone who supported, voted for, worked on the reforms –  wish the outcomes had been different –  much better.   But they weren’t.  That is a failure –   uncomfortable as it is, there is no other word for it –  politicians and policy advisers have to grapple with honestly.

 

 

 

 

 

National on international affairs

The National Party yesterday released a discussion document on international affairs, complete with an online survey inviting your views on various questions around aspects of possible National policy.  If you want a fairly neutral, perhaps even sympathetic, treatment you could read Sam Sachdeva’s article on Newsroom.

I suppose one should welcome a major Opposition party putting out discussion documents on significant areas of policy –  when they speak, voters can learn something both from what politicians say and what they choose not to say.  Who knows, but perhaps one day they will have one on the shocking decline in our relative productivity performance, something presided over –  or actively delivered –  by successive National and Labour led governments.

Reading National’s document you get a pretty strong impression of a party that wants to create an impression that values, human rights etc actually matter to them.  It is there on the very first pages, in the introduction from Simon Bridges.

The story of the last century, apparently

From fighting aggression, advancing democracy and human rights, strengthening development, and promoting a more secure and prosperous multilateral rulesbased
system, we have overcome the tyranny of distance to act as a model global citizen.

Not quite clear to me what the “tyranny of distance” has to do such issues.  In wars it was mostly a great help –  too far away to invade or bomb.  But set that to one side, note that reference to “advancing democracy and human rights”.

Bridges goes on

National supports an independent foreign policy that works in the best interests of New Zealand. That means promoting shared values,

Sounds promising.   And there is more

We must be bold in our defence of the interests of our country and vigilant in the protection of the values we hold dear.

and

Our voice internationally means little if it does not authentically articulate our values.

and

This document outlines a vision from National on how to chart our course in the world, consistent with our core values

Introductions are easy.  Anyone with a fluent pen can write one.  In fact, National has another one – an introduction from their Foreign Affairs and Trade spokesperson Todd McClay.

He wants us to believe that he cares about values too.

values 1.png

values 2

I’m not going to quibble with much of that.  Mostly it sounds quite good.

In fact, there is still more in a similar vein.

“We must always remember that we act on behalf of New Zealanders. Everything we do on the world stage must reflect their interests and values.”
Todd McClay
Spokesperson for Foreign Affairs

and

We must use the tools of diplomacy to advance democracy, protect human rights, and promote inclusiveness around the world. First and foremost, foreign policy needs to be used to advance the interests of New Zealand.

We are committed to enhancing New Zealand’s hard won reputation as an honest broker and considered voice and as a proponent of peace and human rights across the world.

All of which was sounding quite good until we got to the next paragraph, under the heading “Defending our values”.    Even it begins reasonably enough

Over recent years, there have been many examples of aggressive and violent actions
by state and non-state actors around the world. New Zealand must uphold our values in confronting such aggression.

What did they have in mind?  As it happens, they do move from the general to the specific.

The conduct of Russia towards Ukraine and their use of nerve agents in the United Kingdom; recent terror attacks in India and Sri Lanka; and the abhorrent disregard for democracy and human rights in Venezuela are examples that reach the threshold demanding New Zealand’s swift and strong condemnation. To not do so risks creating confusion and uncertainty with our friends and allies.

Spot any important omissions there?   A hint?   Biggest country in the world, first or second biggest economy, increasingly repressive (across a huge range of dimensions) at home, expansionist abroad, known for intimidating diasporas, for state-sponsored intellectual property theft, and so on.

Why yes, that would be the People’s Republic of China.  In fact, in a couple of weeks won’t it be 30 years since the PRC authorities murdered thousands in and around Tiananmen Square, and don’t those same authorities today suppress any hint of a mention of what they did?

“Demanding swift and strong condemnation”?  Distancing ourself from such a regime, in honour of the values we (claim to) champion.  I’d have thought so, but clearly National doesn’t.

A couple of pages on, National’s document gets into a discussion of specific countries    They don’t actually have the gall to suggest that there are shared values with the PRC –  curiously, at least in the document, only the United States and the EU are explicitly described as having shared values with New Zealand –  but they begin

Our relationships with China and South East Asian countries must be respected and
maintained. In an environment of competing priorities, greater weight must be afforded to those relationships.

Nothing at all about values now, or distinguishing between countries that live something like those values, and those (the PRC most notably) that simply disclaim any such interest.   Deal with the PRC if you must –  and keep those donations rolling in – but don’t ask voters and citizens –  who actually hold those values you talk about –  to “respect” your shameful relationship with them.

There is a specific section on China.  It is the full kowtow.   The strange boasts about

We share many firsts with China – New Zealand was the first country to agree to China’s accession to the World Trade Organisation; the first country to recognise them as a market economy;

Not something I’d be boasting about unless I wanted to keep Madame Wu and the donors onside, the PRC manifestly not being a market economy, and having failed to open its economy in the way in which those who championed WTO-entry argued would happen.

And what about those “values” which appeared so prominently at the front of the document.  I’m guessing this was supposed to be the merest hint.

As this relationship has matured we have raised issues responsibly and respectfully with our friends in Beijing.

Only 17 words, and so much to object to.  “Issues” –  what issues bother you Messrs Bridges and McClay?   Wasn’t there lots of talk in the document about a more open and transparent approach to foreign policy, convincing citizens you act for them.  “Respectfully” –  about people who imprison vast populations (in Xinjiang), brook no domestic criticisms, destroy any vestiges of religious freedom, allow no political freedom, threat a neighbouring free and democratic country, unilaterally seize and militarise the South China Sea, encourage a migrant to New Zealand to lie about his past with PRC military intelligence, threaten and intimidate diasporas, abduct citizens of states with whom we do share values, and so on.     And “our friends” –  to which all I can say is “speak for yourself”, and “people come to be known by the company they keep”.

In the same section they go on to champion the Belt and Road Initiative, which (we are told)

“presents a real opportunity to build closer ties and demonstrate trust”

I presume they can only mean “demonstrate to Beijing that we are trustworthy vassals”.

They end the section by asking for readers’ views on “how should we deepen our relationship with [several countries including] China”.   The idea of not doing so, of pulling back from getting so close and deferential to a regime responsible for so much evil simply never seems to occur to them.   It just adds to the sick joke that is the current parliamentary inquiry into foreign interference, chaired by one of National’s senior MPs  Nothing to worry about Madame Wu, I’m sure they assure her.

It is an extraordinary document in many respects, and not just for the utter disconnect between all the talk about values and human rights and that about the PRC –  perhaps the largest abuser of human rights today, the prominent regime whose values are so alien to those National claims to see as our own.  What was also striking was that there was no hint that these people had given any real thought to the geopolitical or strategic environment, even though it is less than two years since they were in governments, and the most recent National Minister of Foreign Affairs is still on their team.   There is nothing about what the continued rise of an extremely illiberal PRC means, in Asia, in the Pacific, and in the wider world.  Nothing, for example, about the risks of allowing key elements of your telecommunications systems to be provided by a company owned (in effect) and controlled by the PRC regime.  It is just unserious stuff in which –  for all the fine, but empty, words at the start of the document, only (trade) deals and (party) donations seem to matter.  Values, it seems, are relevant when there is no cost.  Anywhere else, well it seems thay they must have another set of “values” –  “whatever it takes” perhaps being the best summary.

But why would any of this be a surprise (except perhaps the PR fluff designed to suggest they really do have a soul, and haven’t simply sold it all)?

After all, it is only a few months since Todd McClay was defending the PRC internment of probably more than a million Uighurs, running regime propaganda that these were “vocational training centres” and really it was no one’s business but the PRC authorities.

And a few months since Simon Bridges was attacking the government when there was a hint of a suggestion that they might not have been quite deferential enough to the PRC.

National’s party president pops in  Beijing from time to time to praise the regime and its leader, and seems to have business dealings in the PRC with National MP Jian Yang.

It is barely two years since Simon Bridges, as a senior minister in the previous government, held the pen in signing an MOU with the PRC on the Belt and Road Initiative, in which he and the PRC expressed an aspiration to a “fusion of civilisations”.

Or a year since Bridges and his then senior MP Jami-Lee Ross were dining with, and arranging donations from/through, a New Zealand citizens with strong and close ties to various regime entities in New Zealand and in the PRC.

And, of course, there is Jian Yang himself, who still sits in National’s caucus.   There is no dispute that he was a Communist Party member (experts believe he probably still is, since – they suggest – no one can leave voluntarily), no dispute that he served voluntarily as part of the PRC military intelligence system, no dispute (now, since he acknowledged as much) that he hid his past in applying for New Zealand residency/citizenship, (so he says) on instructions from Beijing, no dispute (apparently) that he is a large fundraiser, no dispute that he has never said anything critical of the regime in all his years in Parliament, no dispute that he associates closely with the PRC embassy and various United Front bodies in New Zealand, and (finally) no dispute that he avoids ever fronting up to the English language media in New Zealand.  And Simon Bridges and Todd McClay are apparently just fine with that. If it were otherwise –  if National was remotely serious about the values talk –  Jian Yang would be out of caucus, if not out of Parliament.

No wonder that in opening the select committee hearing on foreign interference a couple of weeks ago, the chair (National MP Maggie Barry) apparently opened by indicating that she would prefer not to hear names during the submission process.  Of course she would.

(Lest it be thought I could find no positives in the document, I agree with National on this

The National Government introduced the Autonomous Sanctions Bill to Parliament. This Bill would empower New Zealand to impose sanctions on countries where we believe they are warranted and outside of the ‘held hostage’ United Nations sanctions regime. This authority should be used sparingly, but is an important tool in New Zealand’s fight against aggression and in support of democracy, human rights and fundamental freedoms.

It is just that, even if it were on the statute books I’d have reason to expect National –  or Labour for that matter –  would do a thing about the PRC.     A National Party leadership that was remotely serious about the values talk would, for example, be criticising the government for its utter silence on the PRC abductions of the two Canadians, and it would be speaking out  two weeks hence strongly on the anniversary of Tiananmen Square –  less perhaps about the past evil, but about the refusal decades on of their “friends in Beijing” to allow discussion, debate, scrutiny of the record etc.  But we all know what they will in fact say. Precisely nothing.    Because deals and donations seems to be the “values” the matter.)

Finally, late last year Scott Morrison gave an impressive speech about values and foreign policy. I haven’t quoted from it again recently because –  like most others –  I assumed he would soon be passing into history. But perhaps it is the week to repeat his quote (emphasis added)

Our foreign policy defines what we believe about the world and our place in it.It must speak of our character, our values.  What we stand for. What we believe in and, if need be, what we’ll defend. This is what guides our national interest.

I fear foreign policy these days is too often being assessed through a narrow transactional lens.   Taking an overly transactional approach to foreign policy and how we define our national interests sells us short.

If we allow such an approach to compromise our beliefs, we let ourselves down, and we stop speaking with an Australian voice.

We are more than the sum of our deals. We are better than that.

Wouldn’t it be great if our politicians really acted as if they believed that, especially in their dealings with the PRC?   Sadly, there is no hope of it from National, or Labour.

 

Australia’s foreign trade

In the wake of the upset Australian election result on Saturday, I thought it might be a good day for a quick post on some Australia/New Zealand economic comparisons.

I often bang on about New Zealand’s atrociously poor longer-term economic performance, but if Australia’s longer-term performance is less bad by comparison, we are about the only country that makes them look less bad.

At present, for example, average real GDP per hour worked in Australia is about 15th in the OECD, with quite a gap to 14th.   To New Zealand readers that probably doesn’t sound too bad, said quickly, but in 1970 –  when the OECD series starts – Australia ranked 8th.   A hundred years or so ago, on the eve of World War One, Australia’s real GDP per capita –  the only measure for which there are long-run historical estimates –  was 1st equal among the countries that now make up the OECD (with New Zealand and the United States).

But my particular focus this morning is exports, as a share of GDP.   There is an old mercantilist sort of view –  which at times seems to be held by Donald Trump –  that somehow exports are a superior form of economic activity, and that whereas exports are in some sense good, imports are bad.  That isn’t my story at all.   Exports and imports are both good –  gains from trade and all that.  In many respects, at least at a national level, one doesn’t go too far wrong in saying that we export so that we can import.  Of course, firms export not countries, but over time and in the aggregate, our appetite for cars, jet aircraft, overseas holidays or Hollywood movies is only able to be met if we find other products and services we (firms based here, employing us etc) can successfully sell to the rest of the world.  And since, especially for small countries, there is a lot bigger market in the whole world (even just the whole advanced world) than at home, export success often tends to go hand in hand with wider economic success: it isn’t that the exports, per se, make you prosperous, but that you’ve been able to generate (or even dig up) products and services that other people will pay for: you’ve passed the (demanding) market test.   Empirically, countries that have sustainably caught up –  in GDP per capita or GDP per hour worked terms –  almost without exception have had strongly performing export sectors.

But what about New Zealand and Australia?

Here is the (nominal) share of exports in GDP for the two countries for the period since our quarterly data starts in 1987 (as the paeans to Bob Hawke last week remind us, at the time both countries were doing fairly far-reaching economic reforms).   This is simply the nominal value of exports over nominal GDP.

aus exports

That gap has closed, a lot, over the decades, perhaps especially over the last 15 years or so.

It is worth remembering two stylised facts:

  • remote countries tend to trade less internationally than do countries close to lots of other countries/markets (distance really does reduce economic opportunitites), and
  • small countries tend to trade internationally more (share of GDP) than large ones.

In economic terms, New Zealand and Australia are almost equally remote (arguably they a bit more so than we, since Australia is big relative to New Zealand).  So, all else equal, one wouldn’t really expect a country five times the (population) size of the other to be exporting a similar share of their GDP –  New Zealand should be well ahead.

There is another possible exports/GDP measure. This chart uses deflated (“real”) series for both exports and imports.  Statisticians tend to frown on it –  and I mostly don’t use it –  but it does strip out the direct effects of terms of trade fluctuations, which (for Australia in particular) can be large.

aus real exports

In New Zealand, there has been no increase in the volume of exports as a share of GDP this century.  In Australia, by contrast (and after a flat period) there has been a substantial increase this decade, primarily as the newly-exploited mineral resource projects have come on stream.   In both countries, the real volume of exports has increased – in New Zealand’s case by about 50 per cent since 2002 –  but in New Zealand trade with the rest of the world is a smaller share of GDP now, and in Australia it is larger.

Of course, even this story has its complexities.  Much of the mineral sector operating in Australia is foreign-owned, so that a chunk (but by no means all) of the benefit of the export surge is accruing to foreign shareholders rather than to Australians.  But without the surge in mineral exports –  a windfall to a considerable extent (although with a policy framework that allowed developments to proceed) –  it is hard not to look at Australia and conclude that on the present suite of economic policies –  much the same as prevail in New Zealand –  their relative productivity and income performance would have deteriorated even further over the years.

Perhaps the gaps between New Zealand and Australia would have narrowed a bit, but from the wrong direction.  Much better would be if both countries were doing something that credibly might move them back up the advanced country rankings.   If the re-elected Coalition is less likely to further damage Australia’s economic prospects than Labor, no party on either side of the Tasman really seems to have serious analysis or ideas –  or to particularly care – about reversing decades of relative decline.

 

Perhaps the politicians are content with this record

I’m on deadline trying to finish a chapter for a forthcoming book, but was checking some numbers and noticed that the OECD now has 2018 labour productivity estimates for most countries.

This is the company we keep these days (comparable levels of real GDP per capita, in PPP terms).

e europe.png

(For the two countries with asterisks the numbers are for 2017).

And here is total growth in labour productivity over the period 2012 to 2018 for each of those countries.

e europe 2

(On my reading of SNZ data, the OECD’s New Zealand numbers looks a little low: probably something between 0 and 1 per cent looks to be a better estimate).

It wasn’t that 2012 was particularly exceptional in New Zealand –  so that we were coming off an artificially high base –  just that since then productivity growth has vanished.

GDP phw may 19

I do hope our political leaders –  both main parties –  and their business and media cheerleaders are happy.

Citizens shouldn’t be.