It is a good rule after reading a new book, never to allow yourself another new one till you have read an old one in between.” C S Lewis
Over the weekend I was reading the 2nd edition of Portrait of a Modern Mixed Economy: New Zealand, published in 1966. The original Portrait, by Professor (at Canterbury) C Westrate had been published in 1959, and the second edition was a simpler, shorter, updated version completed by Westrate’s son after his father’s early death. I’m fascinated by anything on New Zealand and its economy from this period, because it was a time when New Zealand was widely regarded as still having some of the highest material living standards anywhere in the world. There were already intimations of uncomfortably slow productivity growth (relative to other advanced economies) appearing in official and quasi-official reports, but no real hint of the deep decline in our relative living standards that was to follow.
To read such a book is also to be reminded just how remarkable the unemployment record was. For all the distortions that went with it, there was something impressive about sustaining an unemployment rate at around 1 per cent or less for decades (on the Census measure, which approximates the current HLFS approach). And they weren’t, mostly, make-work public enterprise jobs.
Of course, the distortions were numerous. Westrate quotes data that in 1964 government consumer subsidies were equivalent to 35 per cent of the retail price for butter, 40 per cent for milk, 55 per cent for bread and 65 per cent for flour. The subsidies were a bit lower than they’d been a decade earlier, but it was to be another couple of decades before they were completely removed. And while I’d come across the (statutory) raspberry marketing body previously, I hadn’t known that we had a monopolistic Citrus Marketing Authority, which controlled all imports and the sale of all local production. Odd as those measures now seem, I wonder what of the current regulatory state people in 2066 will look back on in puzzlement? How could they, our grandchildren may wonder.
In the 1960s, the Reserve Bank – and monetary policy – was firmly under the control of the government of the day. But I was reminded of the way that wage-setting was then officially delegated to unelected bureaucrats – in this case, the Arbitration Court where employer and employee representatives usually neutralised each other, leaving key decisions on basic wage structures to a single judge. As Westrate notes, it is debatable quite how much sustained impact the Court had, since labour market fundamentals matter and the Court only set minima. But in some respects the same could be said for the Reserve Bank: interest rates are ultimately set by fundamental forces shaping savings and investment preferences, but the administrative choices of officials matter in the shorter-term.
But what I really wanted to comment on today was the discussion of New Zealand’s external trade.
Westrate notes that exports accounted for a higher share of national income than in most trading countries – “consistently near the top of the list”. So far, so conventional – I wrote a while ago about Condliffe’s observation a few years earlier that New Zealand in the 1950s had had among the highest per capita exports in the world. But what caught my eye was that Westrate introduced a explicit discussion of how external trade might be even more important in New Zealand than it appeared, because of the high share of domestic value-added in New Zealand exports, mostly “agrarian commodities”. Westrate was Dutch and had previously been a professor at one of the Dutch universities, and he notes that although the Netherlands, for example, has a higher export share of its economy than New Zealand “it is known that exports from the Netherlands contain a good deal of foreign value.” As he notes, the data didn’t exist to do the calculations, and indeed it is only in the last few years that the OECD and WTO have started producing good cross-country data in this area. The story about the high domestic value-added share in New Zealand’s gross exports is now conventional wisdom, but probably wasn’t in the 1960s.
Having said that, if the story that New Zealand was one of the countries with the highest trade share in the world had once been true – and quite possibly it was in the 1920s – it doesn’t look as though it was in fact true by the time Westrate was writing – which should not be too surprising given the heavy cloak of industrial protection New Zealand had put in place, that tended to reduce both the import and export shares of our economy. Books and official reports from the period often compare New Zealand with the US, UK, Australia, Canada, France and Germany. And for many purposes, comparisons with those countries might have been quite enlightening. But when it comes to foreign trade, it is now well-recognised that large countries typically do less external trade as a share of GDP than the small ones do. There are more markets, and more suppliers, at home than is likely to be the case for a small country. When a large country has a very large trade share – China pre 2009 and Germany now – it is often a sign of other imbalances.
Finding comparable long-term historical data is always a bit of a challenge. But I had on my shelves a 1990 OECD compilation volume of historical statistics, with data on a wider range of variables (including exports of goods and services as a share of GDP) for 1960 for the “old” OECD countries.
For New Zealand exports as a share of GDP in 1960 were 22 per cent.
For the smaller Europeans (Netherlands and smaller), the proportions were:
|Exports (good and services) as a % of GDP, 1960|
With a median of 31.8 per cent. (By contrast, for the G7 countries, the median was 14.5 per cent.)
As Westrate noted, we don’t have the data to know what the share of domestic value-added was in exports in 1960. The first OECD date are for 1995. But even by then, when domestic value-added of New Zealand’s exports was 83.2 per cent, the median for those smaller European countries was 76.4 per cent – lower than New Zealand, but not an order of magnitude different. If – heroically, and really only illustratively – the same value-added shares had prevailed in 1960s, New Zealand’s export value-added would have been around 18 per cent of GDP in 1960, while the median European country would have been around 23 per cent of GDP
What of the present? The latest OECD-WTO value-added data are for 2011 (I wrote about them here). Over the intervening 16 years, the domestic value-added share of New Zealand’s exports barely changed, while the median of that same sample of smaller European countries had fallen sharply, to 67.3 per cent, as the importance of global value chains (especially within continental Europe) has increased sharply.
For the more recent period, we have much larger set of OECD countries to look at (many of them also quite small). The data for exports as a share of GDP is available for 2014. If we apply the 2011 domestic value-added share of exports, to the 2014 data on total exports, we get this pattern of domestic value-added in exports as a share of GDP.
But what about “small” countries? If we rank the OECD countries, there is a natural break between Belgium with 11 million people and the Netherlands with 17 million. Here is the chart for the 19 OECD countries with populations of 11 million people or fewer (nothing would be altered by including the two countries with around 17 million).
New Zealand isn’t the lowest ranking country on the chart, but those that are worse aren’t generally ones we would want to emulate. Greece and Portugal speak for themselves – and, indeed, the export shares for those countries are flattered by the weakness of the domestic economy at present. Israel has had as poor a productivity record (and as modest per capita GDP) as New Zealand. Finland had been performing well until 2008, but since then it has been one of the worst-performing economies in Europe, and its exports as a share of GDP have fallen sharply.
A customary response to the New Zealand data is to point out that remote countries tend to do less international trade that less remote ones. By almost any measure, New Zealand is among the most remote of these countries. But if trade with the rest of the world is a significant part of how smaller countries get and stay rich – maximising the opportunities created by their ideas, institutions and natural resources – shouldn’t we be more bothered about the implications of our remoteness? New Zealand just isn’t a natural place to build lots of strong businesses, unlike – say – Belgium, Denmark, Austria or Slovakia. That doesn’t mean such businesses can’t be built at all here, but it is an uphill battle.
And it has probably become more of an uphill battle in the last 20 to 25 years. Gross exports have risen hugely among many of the European countries since 1995, but so has domestic value-added from exports (all as shares of GDP). And it isn’t just the former communist countries emerging – in Denmark export value-added as a share of GDP has risen by 7 percentage points, and in Austria the increase has been 12 percentage goods. In New Zealand, by contrast, there has been almost no change. This isn’t some mercantilist story in which exports are good for their own sake – but finding more markets for more stuff, enables people at home to import and consume more of other stuff.
As I’ve noted before, it looks as though New Zealanders have been responding – for decades now – by moving to other countries, especially Australia, where the income prospects have been perceived as stronger. But our governments have wrong-headedly sought to bring in lots more people, to more than replace those who are leaving. Somewhat to my surprise, the quality of many of those people now seems questionable at best – recall the most popular occupations for skilled migrants. But the real issue should probably be whether continuing to aggressively pursue a larger population, as matter of policy, makes sense in a country that is so remote, and where not even the soil is that naturally fertile. It is, in many respects, a nice place to live, but the ability to generate top-notch advanced country incomes for even the current population must be seriously questioned. To do so, a small country needs to be able sell a lot more of it makes to the rest of the world than has New Zealand has been managing – in the 1960s or now.
The government’s exports target rather crudely recognises the issue, but they have no credible economic strategy that might bring about such a transformation.
(And while climate change is not an issue that I pay much attention to, less rapid population growth through reduced immigration targets might also be a rather cheaper way of meeting somewhat arbitrary emissions targets.)
27 thoughts on “Thoughts prompted by an old book”
Cheers Michael – some historical gems there! The theory of having more people is solid enough so, as you suggest, looks like a need for improved policy coordination. And I wonder how policy could encourage ‘productive’ investment for want of a better term. Property doesn’t produce much ‘stuff’ for trade (an accommodation service I guess) yet remains a popular destination for savings/investment. Maybe a self select “Kiwisaver for Kiwi ideas” fund could be set up for budding entrepreneurs that are too risky for the banks?? (granted, no idea how that would work….)
I’m not so sure the theory of having more people is solid enough. Surely it depends where: plenty of scope in London perhaps, or New York or Hong Kong, but how about western Nebraska, or Taihape or Invercargill. There is a logic in people flocking to places with high productivity growth, but much less so in encouraging people in to a place that has been falling behind, more or less rapidly, for at 60 years, probably more.
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….nothing wrong with Taihape: Gumboot Day was a great piece of innovation!! I guess my thought was you need people to generate ideas, to supply capital and work the combination so perhaps a necessary but not sufficient condition for wealth creation. Also, I think the party line is NZ’s persistent current account deficit reflects a relatively constructive view of future growth potential?? Or is it just a ‘carry trade’ ready to unwind one day which will provide that real FX depreciation?!
You do need shelter do you not? Before man started any export trade, the first contribution to commerce would be food and the second is shelter. Export only came about when you overproduced for your own needs. Don’t forget that dairy represents a significant part of our exports and dairy, meat, fruits & all sorts of crops including grass which happens to grow on property. So how does property not be productive?
…ggs! Fair points and I should have been more precise: residential housing (as opposed to farmed land) isn’t particularly good at producing ‘stuff’ but remains a popular savings destination. And you know my fun sponge view: the banks require a decent slug of funding via offshore markets which suggests the allocation of domestic credit has been less than ideal…
Clearly if house prices are rising then demand exceed supply, therefore, is that not a clear indication of under investment rather than a over investment in residential property? Our problem is that we have a Reserve bank that is trigger itchy and trigger happy with interest rate rises to the point that they are prepared to decimate an entire building industry to try and squeeze inflation into a targetted band. The boom bust cycles in the property building industry is very severe as that industry relies entirely on debt and very little equity. Every percentage rise in interest rates impacts immediately on profitability.
Therefore this creates a stop and start approach in the building industry and very much a cottage industry.
Yes, if anything we have built fewer houses than our population growth would have suggested was warranted (I’ve never been one to run the line “we invest too much in houses”). SOme housebuilding has been crowded out, but a lot more of the sort of investment that would have built a strong export sector.
Very straight forward business. No profit stop building, yes there is profit, start building then oooops no skilled employees as we stopped too long.
As I have repeatedly pointed out wee need to be targeting wealth creation.
Constant calls to export more and more and more haven’t changed anything except to make more people work longer and harder for the same coin.
not really rocket science.
Just need better business incentives. (less corporate Mercedes and more and better fixed plant and R & D etc.)
A lower real exchange rate, resulting from a convergence of NZ interest rates to those abroad, would be the most effective path to lift wealth creation (lower capital income taxes would probably help too), In the NZ context, a lower population growth rate would assist in reorienting these price incentives to lifting the sort of investment that would raise output per capita (or real wealth per capita), rather than just raising the total size of the economy just to keep up with the growing population.
Just don’t expect that the Reserve Bank should be targeting wealth creation. It can’t. Governments can, and do, heavily influence the climate for wealth creation, for good or ill.
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So we want more exports per capita, and our population is emigrating. So if we stopped/limited immigration so that we allowed our population to naturally decrease, and were able to export the same amount, the exports per capita would increase and possibly our productivity would increase. With a reduced population our imports would decline, and the exchange rate would strengthen, making those still here wealthier still.
I’m sure I’ve made some incorrect assumptions, but might be an interesting discussion if it was valid.
In my chain of reasoning, a much lower population growth rate (or even modest falls) takes a lot of pressure off demand (a lot less building needing), lowering real interest rates to or below world levels, which also lowers the exchange rate quite sharply. A larger share of the economy’s production is then exported, and as the resulting gains become more firmly established, enabling us to support a higher path of per capita consumption, the real exchange rate regains ground, It might take decades to be sustainably higher than it is now.
Wouldn’t that chain of reasoning work if NZ had more responsive housing/infrastructure provision too? Such that increased housing/infrastructure demand was translated into increased supply not increased prices in a way that allows the Reserve Bank to keep interest rates at low levels comparable with other OECD countries?
I’d argue not. The evidence, over time, is that the RB doesn’t raise rates because of higher house prices per se, but because of the pressures on resources from strong demand, incl strong population demand. there might be some “wealth effects” from higher house prices to spending (altho I find the evidence, in aggregate unconvincing) but if supply were more responsive – a good thing in itself – it would actually put more pressure, not less, on reall resources during that building phase (housebuilding is very labour intensive). Don’t get me wrong: I fully support a more responsive housing supply, to promote housing affordability, but it doesn’t deal with the resource pressures of a fast-growing population in a country with a modest savings rate. The NZ experience in the 60s and 70s illustrates the point quite nicely.
You can test that reasoning in many many provincial towns in NZ. Aging population, no one to pay the rates for infratructure and businesses are shutting down and moving away. Less and less work, less and less income. Stagnation and eventual decline. Yes fantastic for the bird and fish habitat and yes we would meet our emmissions targets easily.
Or one could look at the relative success of countries like Estonia, LIthuania, Latvia, Germany, Poland, Romania.
The best thing that could happen to provincial NZ would be a lower real exchange rate, which would flow from an end to large scale immigration
That large immigrant target is largely associated with the 110,000(and growing) foreign fee paying students contributing $2.85 billion towards GDP each year. I guess you are advocating that the government enforce a dictator/Marxist type limit to the number of international student visas issued and that the $2 billion in infrastructure spending by these private and commercial education institutions must remain vacant??
no, and you know I’m not. I’ve been very clear that I’m advocating cutting the current 45-50K pa residence approvals to say 10-15K. I have no problem at all with export education altho (a) there are questions about the quality, of both the PTEs, and the universities, and (b) more importantly, the export education industry is being subsidized by the prospect of getting a residence visa. that isn’t export education standing on its own feet.
Estonia, LIthuania, Latvia, Poland, Romania, not too sure any New Zealander would want to live in those countries on a permanent basis, great for holidays but thats as far as it goes. Germany? When they desperately want to repopulate their cities with 800,000 muslim refugees it does sound more like a desperate need to repopulate rather than a need to be giving and charitable. Germans have never struck me a as being a kindly and charitable people.
I think you’ll find German public opinion isn’t too keen on Merkel’s unilateral decision (see the precipitous decline in her poll ratings).
The point is a narrowly economic one (as you know) – are those countries’ economies suffering because they have falling population (not, would you like to live alongside Russia). I don’t see the evidence that they are. But I’m open to evidence.
Thanks for the interesting post Michael. Could you provide more details on where one may obtain the census based unemployment rates please?
On that one per cent rate – you (correctly IMO) point out that most jobs were private sector. But if we are trying to explain why the UE rate is so low, then public make work schemes could have a significant role to play by employing only say 5-10% of the total labour force.
Westrate reproduces them in the book, as follows
1896 6.4 per cent
The later ones will be in the old Yearbooks (online), and I think Simon Chapple used them to produce his backdated estimated HLFS-like series.
On your final observation, yes that is true of course. ONe would need to dig into it more deeply, but my impression is that persistent excess demand (consequences of which were kept in check by import controls, exchange controls, credit rationing, administratively-imposed queueing etc probably played more of a role than active efforts to absorb workers in public enterprises. Most employers found labour so scarce in that period that deliberate overmanning in govt enterprises (as distinct from general inefficiency found in all countries’ public enterprises) would have met opposition from business groups. Old-timers at the RBNZ used to tell stories of something like the mirror test for employment – form a mist on the mirror proves you are alive, and you are hired! – and the RB used to hold marketing drives to attract competent 15 year olds to come and work for it.
Thank you, Michael.
I am interested in what mechanisms business had available to punish the government for over staffing?
The prima facie evidence suggests that the one of the roles of the STS was to mop up surplus labour. Consider that after corporatisation in the 80s, many of the largest SOEs shed two thirds of their payroll and began to make a profit
Re the public enterprises, my impression is that the overstaffing was not much different in other countries (similar shakeouts post-reforms), but our unemployment rate really did stand out. I’m not suggesting public enterprises were efficiently run just that I doubt they were much less efficient here than in the rest of the West.
My point about business pressures wasn’t about inefficiency per se, but about the idea that public enterprises were actively used to soak up surplus labour. National governed for most of the 50s and 60s and business/employers were a pretty strong influence there – see eg failure to remove protection, or even immigration (which business championed over economists’ advice). Had the govt made moves to actively increase employment in public agencies when firms couldn’t get workers I think you’d have seen pressure on the govt. Persistent excess demand seems an easier story that fits with more of the stylised facts.
We will have to agree to disagree on what story fits the stylized facts better. But I will point out that businesses do not get a vote, and that the National government often pursued a populist policy platform (e.g. promotion of home ownership). Would National lay-off workers at the behest of business interests and consequently lose votes? Or keep the jobs and throw business another bone (immigration, as you say, or help break the more militant unions, as in 1951)?
I have been looking for a good resource on corporatization elsewhere in the West. Any suggestions would be warmly welcomed.
Businesses may not get a vote but they can surely put pressure on media content.
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