These remote islands are different?

I was having a discussion the other night in the margins of the Goethe Institute event about the extent to which we should think about New Zealand’s economic advantages and opportunities as natural resource based.  I’ve been running a proposition that the only thing really going for us is the land, its attendant resources (fish, wind, geothermal, as well as pasture, forests, and –  at the low value end –  tourism opportunities), and the technologies and management skills that enable us to sustain reasonably good incomes from them.  Those resources can support really good incomes, but I’m sceptical as to how many people they can support such incomes for.

The person I was talking to posed an interesting angle which I hadn’t thought of before.  What if the North Island and South Island disappeared and New Zealand just consisted of Stewart Island (or the Chatham Islands).  What would 4.5 million people do in such a country?

As I’ve thought about it over the last few days, I’ve increasingly concluded that most of them would leave.  The opportunities would be just so much better elsewhere.

4.5 million people on an area the size of Stewart Island or the Chathams isn’t implausible.  Both are bigger than Singapore or Hong Kong –  Stewart Island (1680 sq kms) has more than twice the land area of Singapore (718 sq kms).

My nine year old daughter recently got fascinated by a book on our shelves about remote islands, so we’ve spent quite a bit of time together learning about some small, remote and very obscure places, such as.

Kerguelen                                                                                 7215 sq kms

Falkland Islands                                                                     12173 sq kms

St Helena                                                                                     420 sq kms

Seychelles                                                                                    455 sq kms

Reunion                                                                                       2512 sq kms

Azores                                                                                          2346 sq kms

And less obscure perhaps, but still relatively remote islands

Fiji                                                                                                 18270 sq kms

Hawaii                                                                                            28311 sq kms

Tasmania                                                                                      90758 sq kms

Iceland                                                                                          103001 sq kms

For reference, the South Island has 151,215 square kms of land.

But the total population of all those ten countries and territories is about 4.4 million.  Distance really seems to matter.  It is not that one can’t sustain good incomes in these places, but that not many do. History, revealed preferences, and revealed opportunities seem to have seen to that.

In the Stewart Island thought experiment my interlocutor posed, Stewart Island would be about as remote as the median of my 10 territories above.

Really smart people could choose to live there and with strong pro-market institutions perhaps they could build First World living standards there.  But it wouldn’t be Singapore or Hong Kong, even if it were populated by people from those places.  Geography doesn’t doom a country or territory to poverty, but it can make it a great deal harder.

Nothing in the global distribution of population or economic activity suggests that a Stewart Island New Zealand would have anything like 4.5 million people –  unless some social engineer, defying logic and history, kept shipping people in  (there are always some places poorer).  If, by some chance, 4.5 million people had ended up on Stewart Island, and governments didn’t interfere, I reckon many or most of them would have subsequently left –  to Australia, back to Britain if they could, perhaps even to South America.  The Falklands Islands does now support quite a high level of GDP per capita, for its 3000 people.   But the fishing and hydrocarbons wouldn’t go far across, say, three million.

Of course, New Zealand is not Stewart Island.  Our total land area puts us the middle of the list of countries of the world.  But we are still incredibly remote.  Last bus stop before Antarctica is unfair  (the Falklands and Kerguelen are closer), but not so very far wrong.  It just is not the sort of place, around the globe, that seems to be able to support First World opportunities for many people[1].

Of course, we have some advantages.  A temperate climate appeals as a place to live.  And northern European, specifically British, institutions and the rule of law have enabled people to secure pretty good livings wherever they have settled.  For perhaps 75 years, after all, New Zealanders had some of the very highest material living standards anywhere in the world.  But it was on the back of land-based industries.  And the overwhelming bulk of our exports still are, but with many more people than we once had.

So long as we don’t completely mess things up, New Zealand will never be what Uruguay is today (not much more than half New Zealand’s GDP per capita, the fruit of decades of really bad economic management last century).  But if, as a matter of policy,  New Zealand continues to  drive up its population quite rapidly, Uruguay might even have  better per capita possibilities in the very long run than New Zealand.   The same could probably be said, with even more force, of Romania (similar incomes today to those in Uruguay –  legacy of decades of even worse economic and political management last century).  They are just nearer where the people are. Locations still seem to matter.

New Zealand just isn’t a great place for many people to do terribly well.  Implicitly, New Zealanders have recognised that in the exodus to Australia that has occurred over the last 40 to 50 years.  The conventional wisdom on the right for a long time was that that was just a reflection of our mad policy regimes from the late 1930s onwards (heavy protection etc).  But it looks to have been more than that.  Decades on from the economic reforms, the average net outflow over time remains large (although it ebbs and flow with the Australian labour market), even as it has become more difficult for New Zealanders to make a smooth and secure transition to Australia.

One of my commenters is adamant that New Zealand’s immigration policy is “just” a replacement policy.  He is wrong on that .  (Over the last 15 years there has been an average annual net outflow of New Zealand citizens of around 25000 and an average net inflow of non-citizens of around 40000.  And our official target for residence approvals for non-citizens has been 45000-50000 per annum –  although not all who come stay).

But even if he were correct, there is no “just” about it.  What the government is doing is intervening to stymie a self-correcting mechanism that is going on in the private sector.   New Zealanders have seen, and responded to, the better opportunities (as they judge them) for themselves and their families in Australia.  They are moving to a place that –  with similar institutions –  is proving better able to generate high advanced-country incomes for more people.  What possible reason can the government have for interposing its own judgement, deciding that the resulting population and labour market outcomes are unacceptable, and actively seeking to bring in many more from abroad?

Perhaps as a policy approach it was more understandable in the 1950s and early 1960s.  After all, at that time our relative incomes were still high, and New Zealanders weren’t leaving in any appreciable numbers (the total outflow of New Zealand citizens in the 15 years to 1964 was 8283). And in the population discussion in New Zealand post-war, the idea of building up the population for national security reasons was also present.

But this is 2015 not 1950, and the economic signals have been pretty clear for a long time now –  and the central planners keep on ignoring the message.  Perhaps they believe the opportunities here are great.  But where is the evidence?  Remote places tend not to support very many people, and certainly not at the level of incomes New Zealanders aspire to.  Perhaps that won’t always be the case, but the onus should be on the planners to demonstrate that this island is different.

I’ve occasionally suggested that if “optimum population” meant anything,  New Zealand’s might be two million or 200 million.  With 200 million people, New Zealand would be a very different place, but it seems unlikely that in a world our size 200 million people would ever regard these remote islands as the best place possible to live and generate economic activities with an expectation of advanced country incomes. Peripheries seem, naturally, to be lightly populated places.

(To anticipate comments, I’m not arguing for a “population policy”  –  the idea seems absurd, but that is what we now have de facto –  but for leaving New Zealanders to determine these things for themselves.  In recent decades, the birth rate has been slowing and many New Zealanders see better opportunities abroad (most years), suggesting that their choices would leave us a fairly flat population.  But still one more than ten times that of Iceland –  which has 40 per cent of our land area, and is a great deal closer to prosperous population centres and markets.

[1] Australia faces somewhat similar issues, of course, but just has more natural resources.

36 thoughts on “These remote islands are different?

  1. Nice thought experiment. If you look at countries that have a large population per unit of land, yet maintain a high standard of living, many are in Asia. Yet many of these countries score amazingly low on self-reported life satisfaction scores relative to their income. There are some obvious explanations like cramped houses, but I also think it takes incredible societal self-discipline to run a successful crowded country. The Japanese have this concept of “meiwaku”, or consideration for others, which is very admirable but also sets an almost impossibly high standard to live up to. When I was in Japan, and eventually made local friends, they would often confess (after a few drinks) to feeling trapped by overbearing obligations to some group or other. Whereas NZers are recognised for being fairly considerate but also very tolerant of individual foibles. Which is a long way of saying I think 3 million NZers living on Stewart Island could make a go of it, but, as you say, why would you want to?

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  2. Interesting. Presumably those Japanese concepts are rooted pretty deep in the culture. Population density in the UK, say, is not much lower than in Japan, and yet the sorts of attitudes or senses of obligations are quite different. Perhaps the east coast of the US is similarly dense.

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  3. I actually think there are a lot of parallels between Japanese and English culture, each being located n densely populated islands at the edge of continents. If you go back to the early 20th century novels like “Naomi” or “The Makioka Sisters” you see a description of rapid social change, exaggerated politeness and formality and rich inner life that would not have been out of place in London.

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      • Funnily enough I do see some similarities between bushido and the sense of duty with which the British upper class went off to their deaths in 1916, as brilliantly depicted in Parade’s End. But I don’t want to overstate the similarity; they’re still two very different cultures with a few striking similarities borne of being small island countries at the edge of large continents.

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    • The British brought law and order around the world. Even China today has adopted alot of foundation British law in their transition to a more modern China. The British ACCA, Chartered Accountants qualification is widely accepted and adopted in China.

      The Japs? Fabulously reliable cars.

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      • I’ll take your word for the Chinese having British law, but certainly not much British justice. Rule of law seems notably, and perhaps proudly, absent in that struggling middle income country.

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      • China is actually made up of at least 20 countries with different cultures and different languages, like a mini USA. They have a tough government but the rule of law is clearly there, perhaps administered sometimes a little cruelly. Without a tough no nonsense government we would see no end of problems like they have in the middle east after the the US decided to invade and remove the tough leaders necessary to control law and order.

        You would have to go back to the USA in the 1920’s where mobsters ruled cities. The chinese government is battling its own share of mobsters and warlords and going through this similar transition that the USA went through in the 1920s.

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      • Mini as in the USA being the mini version and China being the mega version of the USA going through their growth pains.

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  4. I’ve heard that suggestion previously, altho had wondered how deep it ran. Never having read any Japanese literature, you might be the prompt that finally does it.

    But I’m not sure one describe modern British culture as characterised by incredible societal self-discipline?

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  5. No, but I think the old school “mustn’t grumble” Brit was still pretty common in say the 1970s. The average British intellectual would argue it was Thatcher wot done it, and maybe prosperity does make people more self-centred. But I wonder if it was the welfare state implemented after 1949 also. (Thinking here of the writings of ‘Theodore Dalrymple’, where criminals describe their crimes almost as the product of social forces, with no personal agency involved).

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  6. Perhaps, but my point about revealed preference is that that isn’t the way the world has shaped itself. There is no sign of economic activity relocating towards St Helena or (to take somewhere with a better climate) the Seychelles.

    Or NZ….

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  7. Thanks. There are a number of articles around with this sort of model. I’ve not yet found them convincing, once they get beyond the finance perspectives and into thinking about the macroeconomics of those high yielding countries. I might do a post at some stage explaining the point.

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    • My thoughts on high finance seem to fit with this chap:
      http://www.alhambrapartners.com/author/jsnider/

      His basic thesis is that a vast tsunami of new bank credit swept the world (think $200 to $400 trillion) and is now receding. The mechanism seems to have been the Eurodollar and is highly opaque. He is a prolific fellow and his prose style is a touch complex, but well worth a look. It provides an answer as to why house prices doubled in Riwaka, why we have $200 billion in low productivity household debt, and where did the money come from for China to pour more concrete in three years than America did in a century.

      Hat tip to Stephen Hulme on interest.co.nz for the original link.

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  8. Nice article Michael. The comparison with Singapore and Hong Kong seems pretty absurd to me. They are major ports serving truly massive populations, as are London and New York. Ports are where goods change ownership and so very profitable banking and legal sectors arise. Totally unlike NZ.

    I agree the unquestioned policy that “immigration is a good thing” is probably a bit daft. There seems to be no comprehension that profitable businesses are needed not extra consumers. Makes no sense to me.

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    • I forgot to add that NZ natural advantage in resource extraction seems to have got hit on the head by those who seem intent on returning to the stone age. So Aus has a once in a century mining boom which we manage to miss, instead focussing on dairy farming and grape growing that needs low wage workers from the Phillippines to make it work. At least mining pays well.

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      • NZ is laden with resources, the difference is that a lot of Australia is desert therefore open caste mining with massive building size trucks equates to lower safety risks, no environmental concerns which equates to lower costs than NZ where the land is covered with native fauna and flora. This equates to deep mining tunnels which incur health and safety concerns, potential for gas buildup and explosions and greenie conservation issues.

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    • The immigration issue is not a NZ issue. It is a Auckland issue due primarily to a single entry point. Auckland is the only gateway city into NZ.

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  9. I think this crosses over with the same drive which is pushing smart people born in regional Australia or NZ to move to Sydney, Melbourne and Auckland (myself included). There’s evidently more returns to human capital from these bigger cities, and the move from Auckland to Sydney (or London) is just the next step in that same process. I’m still not completely sold on why that’s occurring though, beyond the usual generic explanations – or what might cause that tractor belt to change direction any time soon.

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  10. Hi Mike

    As the person who posed the thought experiment, I suppose I should follow up.

    Part of the question is whether the ready availability of land means that innovation over time has been applied to land-based activities by default – and has this proclivity made it harder for New Zealand’s human capital to adapt to the challenge of creating other ways of generating first world wealth?

    But one island not on your list is Great Britain. 2,000 years ago, it was viewed as the periphery of the civilised world. It had a small relatively isolated population relying mainly on land. Largely on the back of human capital (not land), it became the dominant trading nation of the 18th and 19th centuries, and of course the home of the industrial revolution. And of course it’s global dominance was not necessarily a function of its relative proximity to Europe.

    So my thought experiment was whether, if the NZ economy evolved with a considerably larger population and much less land, whether human capital could transform the economy overtime to generate 1st world wealth without relying on agriculture.

    Taking a short time horizon, I would agree that there it likely to be a substantial outward migration if NZ’s population were to live on a Stewart Island-like place. I also agree that people express their clear preferences by migration flows. But didn’t NZ have relatively controlled (limited) inward migration flows during periods of economic prosperity last century (when by contrast Australia was more liberal). It is perhaps also relevant that a lot of the inward migration in the 1870s-1890s was Government-sponsored and targeted at people who wanted to become farmers ((Seddon’s policy was to get poor people from England and set them up as dairy farmers!). In other words, we were looking for human capital to work the land, not create manufacturing or other non-land based wealth. Another example of the pervasive influence of land in orientating our wealth creation. Somewhat different to Great Britain’s story of global trading conquest.

    (I note that the issue of whether geographical distance impairs NZ’s economic development has been much debated. Treasury, the NZ Institute and the NZ Business Roundtable have all produced papers on this question, which I have only scanned very briefly).

    Regards

    Tony

    _______________________

    Mobile: 0274 300 926

    Email: tony@tonybaldwin.co.nz

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    • Hi Tony

      I had a fairly substantive response and then the computer froze and I lost it. But for now, yes I realise I took the Stewart Island point in a different direction than you were originally suggesting, partly because I’m not sure that the focus on land has been wrong – given where we are placed on the globe, and the number of people we have.

      Re the past papers on the NZ story, yes I’ve read most of them. I used to be pretty sceptical of size/distance stories – I line I reflected in the 2025 Taskforce report – but was just about to go and dig out Phil McCann’s paper and revisit his arguments. there are key bits of the NZ story he can’t explain – I’ve asked – but I suspect there is more to what he was saying than I once thought.

      Re assisted immigration, it really tends to make my point. It was materially more expensive (days eating but not working) for migrants in the 19thC to get to NZ, so without the subsidiy we would probably have had many fewer, at least prior to 1890. The need for subsidies is usually a pointer to a flaw in the underlying economic argument!

      Will think about it some more and may do some more posts as I mull. thanks for the prompt.

      Michael

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  11. I suppose you could look at Russell and compare that with Auckland and wonder why Russell, being the first European settlement of NZ did not become a Auckland. I recall studying in Melbourne and Sydney was a much larger city double, but since then Melbourne has overtaken Sydney in terms of population growth and is almost the similar population size now . There seems to be some kind of critical mass that triggers a cities growth that makes one city more attractive than another.

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  12. Hi Mike

    I’m not suggesting that our focus on land has been wrong. On the contrary, it would have seemed perfectly rational. My query is more to do with what human capital might have done without it (or with much less of it) and whether it has made adaptation to non-land based wealth creation slower.

    My reference to the way Great Britain evolved over time would suggest that we don’t have to so land dependent (assuming price signals to create wealth from non-land resources are more attractive).

    And of course there are all the arguments about agglomeration of capital and ideas arising in a larger population.

    Also it would have been interesting to see how the focus of innovation in NZ might have changed over time if all externalities relating to land use had been fully priced (and if subsidies and protections had been not been introduced at any time).

    As for subsidised immigation, I’m not sure that it was subsidised during the prosperous periods of last century. My vague understanding is that numbers were restricted, and that population would have been larger if it had been open.

    Of course, my hypothetical assumes a substantial base of enterprising human capital. I think you’re saying, in essence, that without productive land, people would not have come to NZ in the first place; or if land were to no longer sufficient support their desire standard of living, people would leave.

    I think that’s probably true.

    Regards
    Tony

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    • Yes, your final para summary of my point is exactly right.

      It is why I think the UK parallel is interesting only to shed light on the differences. After all, it was just England that rose, in was Holland, Antwerp, northern Germany, France -closeness to other enterprising people and other markets made it sensible for good human capital and associated institutions to develop, and for people to continue to locate themselves there.

      Of course, human capital/institutions played a huge role here too – the raw land hasn’t changed in 200 years, but what is now made of it has. Without the imported institutions/people – incl their capability to innovate technologies and applications – it would still, on average, be much less productive today.

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  13. One other feature of our land based economy seems to be that, excluding increases in land values, owners appear to have been willing to accept relatively low rates of return on their assets for long periods, particularly over the last 40 years (sheep and beef for example, and indeed dairy).

    In other words, for large parts of the economy, the drivers to generate commercially appropriate returns seem to have been relatively weak. There does has not seem to have been a strong push to earn better rates of return in alternative (non-land based) investments.

    This says something about appetite for risk, perceived lack of expertise, lack of confidence in non-land based investments, and life-style (happy to stay on the land even if its returns are poor)

    Regards
    Tony

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  14. Not saying it is. That’s not the comparator.

    I understand that, it you take out increases in land value, a lot of farms have had a pretty low rate of return relative to opportunity cost and risk.

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    • I’m sure that is true, altho whether it makes sense to take out land price increases isn’t clear – after all, they aren’t driven by regulatory interventions to anything like the extent that urban land prices are. And up to 08 perhaps one could just call it a bit of speculative frenzy – but even in nominal terms seven years on land prices haven’t regained the previous peaks. Of course, you could counter that land prices are high because int rates have been trending down, but interest rates have fallen for a reason, not just central bank whim.

      We have seen a switch within agriculture over the last 30 years or so. In principle, if people have simply “overpaid” for land – in some sense are content with surprisingly low returns – that needn’t have lead to material misallocations of real resources.

      In principle, my story about real int rates and the real exchange rates suggests that without such population pressures the NZ agricultural sector would be rather more capital intensive that what we actually observe.

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      • I rather think that you need to consider global factors like the trillions of dollars in money printing by the major central bankers around the world rather than try and isolate NZ to localised variables that is more akin to 1980’s monetary policy ideology.

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