Reflecting on Puerto Rico

For those not totally absorbed in the hour by hour machinations of Greek politics, another highly indebted area that has been getting attention this week is  the US territory of Puerto Rico.  The focus is on the debt, and Gillian Tett has a nice column in today’s FT on the complexities of trying to deal with that.

But the piece that got me more interested was a short post by Paul Krugman on the economic challenges of Puerto Rico.  Many probably disagree with Krugman on macro issues, and on politics, but issues around trade and economic geography are where he made his name.  He concludes:

But I’d argue for paying a lot of attention to the non-specific forces affecting the island, and in particular the economic geography side. Puerto Rico may to an important extent just suffer from being a slightly hard to reach island in a time when corporations place a high premium on easy, just-in-time shipments.

It got me thinking again about New Zealand and Australia.  Now, to be clear, I’m not suggesting that most of the parallels are close:

  • We have our own exchange rate, currency (and minimum wage).  Puerto Rico doesn’t.
  • And our public debt, while not low, is at pretty comfortable levels.  Issues of public debt unsustainability just don’t arise here.

But, on the other hand, we are a fairly small country, quite distant even from Australia.  We have a lot more land than Puerto Rico (but no warm winters) –  and have historically have had a land-based economy,  And no more land is being made.  We used to have a big manufacturing sector, but only when we built up huge and costly protective barriers that meant manufacturing here was the only way into the market.   If we had 10 million people we would still be small and remote.

For decades, tens of thousands of our fellow citizens have been leaving for what they perceive to be a better life, and better economic returns, in Australia.  The annual outflow fluctuates a lot, but over time the numbers mount up.  935000 New Zealand citizens (net) have left since 1970, mostly to Australia.  Even though I use these numbers often, every time I calculate totals like that the scale of the cumulative outflow still takes me aback.

Puerto Rico has been seeing outflows too, and the pace has stepped up in recent years. The most recent census was the first ever in which Puerto Rico’s population has fallen.  As Krugman notes, this is not necessarily a bad thing

Put it this way: if a region of the United States turns out to be a relatively bad location for production, we don’t expect the population to maintain itself by competing via ultra-low wages; we expect working-age residents to leave for more favorable places. That’s what you see in poor mainland states like West Virginia, which actually looks a fair bit like Puerto Rico in terms of low labor force participation, albeit not quite so much so. (Mississippi and Alabama also have low participation.)

And outmigration need not be such a terrible thing. There is much discussion of what’s wrong with Puerto Rico, but maybe we should, at least some of the time, just think of Puerto Rico as an ordinary region of the U.S.; at any given time, we expect some regions to be in relative and maybe even absolute decline, as the winds of technology and global trade shift. I wonder, in particular, whether Puerto Rico is suffering from the forces that seem to be leading to a general shortening of logistical chains and the “reshoring” of manufacturing to advanced economies.

We’ve had plenty of  towns/regions in New Zealand in which the population has fallen.  My usual examples are Taihape and Invercargill.  In one sense, emigration from those places is difficult for those left behind but, given the changes in relative economic opportunities, the departures are better (even for those left behind) than the alternative.  If everyone had just stayed in Invercargill or Taihape, even though the opportunities had moved away, the social and economic outcomes would almost certainly have been worse.  No one argues that as a matter of public policy we should aim to replace those who’ve left such towns.

But at a national level that is exactly what we have been doing in New Zealand for the last 25 years.  Rational economic agents –  our fellow New Zealanders –  respond to changing economic opportunities by moving to Australia.  Basic economics –  and plenty of formal literature on the great migrations of the 19th century –  suggests that those outflows will not only have benefited those who left, but will have contributed towards factor price equalisation – closing the gaps (but only somewhat ) between returns in New Zealand and Australia.  But central government, endued  with (or rather implicitly asserting) a superior sense of what is wise or right, stands in the way of that process of  factor price equalisation by bringing in yet even more people than the number who are leaving.  Having just come from one hubristic disaster –  Think Big –  we stumbled into thinking big on foreign immigration too.

They don’t do it in other countries.   Plenty of fast-growing successful countries have attracted large number of migrants, to take advantage of the opportunities (Singapore is a recent example, and Ireland –  after it had already become successful –  was another).    But countries that are aiming to catch-up with the rest of the advanced world don’t use inward migration as a means to that end.    It doesn’t work.  Ireland didn’t, the eastern European countries didn’t, and Korea and Taiwan didn’t.

Advocates of agglomerationist arguments will be spluttering by this point.  But there isn’t a lot of evidence for such effects in comparisons between countries.  Over 100 years big countries haven’t grown faster than small countries.  Indeed, many of the countries with the highest per capita incomes are resource-based economies with small populations.  I occasionally run  the line that perhaps the optimal population of New Zealand (if there such a thing) is either 2 million or 200 million.  At 200 million perhaps we’d be like Japan, albeit still facing a “distance tax”.  At 2 million we might be maximising the per capita value of our natural resources.  Would, for example, any fewer cows be being milked?

We aren’t going to have a population of 2 million or 200 million in my lifetime.  But if we pulled inward migration of non-New Zealanders back to around 1980s levels, we’d now have a slightly falling population.  We’d have a much better chance then of beginning to close the income and productivity gaps, of sustainably slowing the outflow of New Zealanders, and perhaps even in  time of attracting home again some of those 935000 New Zealanders who’ve already gone.    We’ll do that when, and if, we succeed.  We won’t help the prospects of success by simply importing more other people.

7 thoughts on “Reflecting on Puerto Rico

  1. Fully agree. I like the “2 million or 200 million” argument. I actually believe in agglomeration arguments at city level – more from my own business experience that from Ed Glaeser type arguments. But it’s hard to believe that these would be noticeable in Auckland unless we were prepared to push the population to 6-10 million, in line with the Bay Area or London. And we can safely say that is not part of the government’s game plan (central or local).

    I also think high house prices have been a factor for many of the 935,000 who have left. A combination of low starting salaries for graduates plus a forbidding sum required to make a decent deposit for a first house makes a compelling reason to start searching for jobs in London or Sydney (or at least it did so long as those jobs were abundant).

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  2. Thanks. And I wouldn’t want to dispute the agglomerationist descriptive anaylsis within country (altho, as Glaeser noted when he was here, it did not have obvious or automatic implications for policy). I suspect there is even something to it in a “total Australasia” context, given more-or-less free labour mobility etc. If so, trying to bulk up Auckland by aggressive immigration policy is pretty silly, given that Melbourne and Sydney are already the big cities of the economic area.

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  3. Whilst I agree with the fundamental thrust of the article I feel compelled to point out the misleading nature of “no more land is being made”. What exactly are multi-storey buildings if not more land? Thousands of acres of it have been built in places like Hong Kong. Ok, it’s manufactured land but it is real enough.

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  4. Yes, true, but in making the point about land I was simply alluding to what has always been the overwhelming bulk of our exports (gold for a couple decades, and subsequently agric and pastoral products). We have a comparative advantage in those activities, but probably not much of one in the offices we put on top of the land

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    • Yes, I agree. There seems to be a misunderstanding about why Auckland exists. It exists because it is a port. Ports are special places where transactions take place. These physical, legal and financial transactions require a lot of specialised skills and equipment, infrastructure and institutions.

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