Why New Zealand languishes

New Zealand’s long-term economic underperformance, and what can be done about remedying it, should be one of the most keenly-debated topics in New Zealand public life.  Sadly, it isn’t.  Too many of our political and economic elites seem to view it as something for the too-hard basket, or perhaps are simply reconciled to declinism, or implicitly take the view that “New Zealand is still a nice place to live, and me and my children will be fine –  after all, they can always leave”.

I don’t think that is good enough.

To the credit of The Treasury, they have sometimes sought to engage with these issues.  A couple of years ago, they ran a series of lunchtime presentations for staff, inviting in various people to offer their views.  I was one of those invited –  and the invitation encouraged me to be a little provocative.  As it happens, the presentation itself never happened, but I took the opportunity to write down what I would have said, in pretty much the style I would have said it.  I’ve distributed copies to a wide range of people, then and subsequently.

The very short version of the story: New Zealand had an abundance of productive land, made valuable by the urbanisation of Britain and the emergence of refrigerated shipping in the late 19th century.  That natural endowment, and the associated technological innovation, was  –  and is – enough to support very high living standards for a quite limited population.  Since World War Two, New Zealand has had no big new opportunities –  unlike, say, Australia’s mines or Norway’s oil – and our governments haves repeatedly handicapped the country’s prospects by pursuing large programmes of inward migration.  Particularly in the last 25 years, governments have been actively hindering adjustment  –  more than replacing the many New Zealanders who have responded to market opportunities and left.  Growing population has rarely, if ever, been a basis for successfully lifting per capita income.

I’d write some things a bit differently now, and I will flesh out many of the points in later papers and entries on this blog, but for now here is one hypothesis for

Why New Zealand languishes

As ever, I will welcome comment and debate.

6 thoughts on “Why New Zealand languishes

  1. There is a lot to chew on here – a very subtle and counterintuitive paper. As you point out, it is a pity that in the one period we might have tested an alternative population strategy, we also did Think Big! But you have convinced me that it is worth a try. If I understand correctly, it is also perhaps the closest thing to a major reform that is also politically feasible right now, in that the executive branch can heavily influence the immigration rate without additional legislation.

    I can see why there might be some resistance from the economics profession. First, most free market economists have a prior in favour of free labour movement, in my experience. Second, the paper ties together elements of economics, history and politics with some anecdotal observations about the economy, making it hard to test via a reductive statistical model.

    One aspect of the hypothesis I really like is that it treats the persistently high exchange rate not only as an outcome of the savings -investment gap, but also as a cause of low savings and investment. Your intuition that a much lower RER would see business increase savings and investment strikes me as very likely correct. Something like that happened in 1960s Korea I suppose when the sharp increase in national savings followed economic takeoff by a few years.

    I have begun to wonder whether the churn in the labour force may have a deleterious effect on productivity. Imagine a recently arrived French GP who is equally talented and trained to the local practitioners. One would assume he is initially somewhat less productive due to lack of familiarity with the local diet, language, social issues etc. Now, on a national level, we are looking at gross inward migration of >100,000 per annum, or say 2% of the labour force. That is a lot of churn in an economy and a lot of churn for a democracy. Do we really want to turn our entire population over every two generations?

    I think the very large reserve accumulation that happened post China’s entry into the WTO made a difference. Even if the PBOC never bought any NZD assets, the resulting liquidity could have sloshed back to NZ via the carry trade. I don’t agree with the commonly held view that it is impossible to lean against such trends.

    I also don’t agree that nothing could or should be done about household saving. First, I would expect a belt-and-braces approach where lower immigration targets were backed up by several other piecemeal policies, would be most likely to succeed. Second, while business saving is incredibly important, households are too large a sector to ignore. Third, although the low saving rate has been constant through many governments, state pensions have been generous for a very long time, and the default means of wealth creation has been to use other people’s money for a long time also (AKA property investment).

    It is often pointed out that Kiwisaver has made next to no difference to gross saving. But Kiwisaver is tiny – only around $20 billion, compared to $2 trillion in the Australian system. It beggars belief that if we mandated it at Singaporean levels of about 35% of wages, that it would all be bled away in substitution effects. (I don’t personally think we need mandated pension savings just yet, but they are a common feature in countries that have successfully gone up the export value chain).

    It would be interesting to have seen some discussion of whether, if immigration is to continue at its present level, some form of credit rationing would be in order, in order to preserve some minimal level of debt finance for business. In my view the RBNZ has already started down this path, even if unintentionally.

    Finally, the footnote about corporate tax rates was interesting. I would have thought some form of rebalancing away from corporate and income taxes and towards land taxes would help. The Irish offered a lower corporate tax rate on export-facing businesses from about the 1980s from memory, and I think that was smart.

    Like

  2. Thanks for the thoughtful comments Blair. Inevitably there are some areas where I differ – I’ll run a post shortly casting some doubt on whether the Australian compulsory savings scheme has made much difference to Aus national savings rates. On corporate/capital tax, doing something far-reaching there would probably be among my top 3 desirable policy reforms, with the potential to make a real difference.

    Like

    • National Super may not make an overall difference to Australia as a nation but it makes a huge difference to the individuals that receive an additional 10% in employer contributions each and every pay. National super is like a tax. it redistributes wealth from the hands of a few into the hands of the many. Peace is the result of keeping the many happy. War and revolution comes when the few gets it all and the many do not.

      Like

  3. NZ is literally the land of milk and honey. The idea that NZ languishes is a relative term. New Zealanders have choices. If they want a career and the city lights they head offshore. Those that choose to stay protect the status quo ie low or no development is more preferable to growth.

    Like

  4. Not many people will understand this and of those who do many will be directly benefiting from the status quo.
    Every morning I hear the same people on “RNZ” (bank economists etc) which is a bit like asking someone from the tobacco companies about health. Their seems to be a subtext: “you wouldn’t understand what’s going on so just keep out of it”?

    Around 2000 there was a TV program about our economic performance. It compared how many lambs it took to buy a tractor (200 then 2000 or something). They said we lost our competitiveness as other countries geared up their farming economies. – I just mention that as an (outlier) example of the television media could potentially be used to educate people. Generally though their selection of opinion guarantees a certain result (Eaqub, Townsend, Employers and Manufacturers on Auckland house prices – “RNZ”) and there is no follow up right of reply.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s