Why New Zealand languishes

Back in February when no one was aware of this blog, and I was just trying to work out how to use the software, I posted the entry below.

Why New Zealand languishes

31 thoughts on “Why New Zealand languishes

  1. Or New Zealanders are not as poor as many economists would like to have us believe. I do not know of many economies around the world that would reject billions of dollars in investment dollars for the sake of fish and bird habitats.

    If you follow David Chaston of Interest.co.nz he firmly believes NZ would be much better off with higher interest rates. And surprisingly many contributors on that blog would support increasing interest rates. They did a small survey of their readers and the majority of its readership was actually indifferent to either a rise or a drop in interest rates but if you that that indifference number to those that wanted a rise in interest rates and there was a clear majority of people that did not care plus those that wanted interest rate rises.

    That gave me a clear indication that there are more New Zealanders that have cash savings in a bank than there are those that borrow. The numbers in the mortgage belt is far smaller than economists would like to mislead us into believing.


    • The best evidence confirming the statistics is the large outflow of NZers, on average, over decades to Australia. People don’t leave their home country en masse if the home country has as good material living standards as the destination. People have a “home bias” (economists’ jargon for you!) and usually only move for quite large gaps.

      As we’ve discussed before, the issue is not whether there are more people with positive deposit balances than those with mortgages, it is (a) that higher interest rates encourage deferring spending/consumption til later, and lower interest rates bring it forward (the substitution effect), (b) the impact of lower wholesale interest rates on the exchange rate. By contrast, the “income effect” – which you focus on – tends to be quite small. I’m sure interest.co has an older than average readership, so it doesn’t surprise me that personally they might be indifferent to higher interest rates.


      • That is why critical mass is so important. The grass is always greener on the other side but having worked and lived in a number of different countries and in cities like Melbourne, Sydney, Kuala Lumpur, Hong Kong and Bangkok. I would place NZ and Auckland on top of the list anyday. You just have to be a bit more creative in earning that extra 20% to 30% additional wage that Australia offers above the NZ pay scale.


  2. Which is fine, if NZ could sustain first world incomes with so-called “critical mass”. There is no evidence it can (hasn’t so far, despite the very rapid population increases), and good reasons to think it probably can’t. I’m told Reykjavik and Valetta and Tallinnn are very pleasant places to live. I like Auckland – spent my teenage years there – but the evidence is that people leave NZ and on average don’t come back. The grass isn’t always greener, but in this case it clearly is. People are pretty rational over the long haul – you saw it, for example, in Ireland where for decades people left for better opportunities in the US and UK. That changed when Ireland got its policy act together and got its measured GDP per capita up to high OECD levels. If we could match that, same thing would happen here. My story is that we could do it if we stopped using policy to drive up the population.


    • I am not convinced by your “fewer people is better” story but I do like your “lower interest rates is better” story. Auckland is so much more vibrant and alive compared with 30 years ago when everything was dead after 5pm.

      The last census shows that over a 5 year period, NZ population only grew by 200k which happens to be around the net birth rate versus death rate. Therefore immigration has largely been a replacement policy and NZ population growth is via natural birth. This 200k number was substantially lower than NZ statistics numbers indicated over that 5 year period and substantially lower than what economists believed at the time. I suspect the next census would again disprove the exaggerated claims by NZ economists.

      As far as i am concerned people are people where ever they come from because the migrant story is really only 1 generation. Your kids and all these new migrant kids would be New Zealanders by birth.

      I believe our hawkish approach to interest rates all these years have driven New Zealanders into a cottage industry type attitude. We do not in general have billion dollar aspiration because the incessant hawkish attitude of the RB creates a stop start nature of the NZ economy has driven any of those aspirations. The recessions and hawkish stance usually alot longer than any bullish years.


  3. Michael, I’ll have to read that article a few times to make sure I get it! No trained economist here…..a first take:

    I think I understand the gist and I think you are suggesting that the lack of productivity in the non tradable sector – which has been influenced by population/policy dynamics – can continue to exist for a while; not least because of NZs increased access to international capital over time??

    Could such access change? After all, the people earning these too high wages do so for an economic entity that presumably provides market returns to its investors.

    But I guess, in aggregate, the capital providers who comprise the country’s gross liability/NIIP statistics no doubt take heart from our still productive agriculture sector (‘people need to eat’ view) and growing tourism sector (plus relative political stability/transparency). To that end, I think I am right in stating that collective export receipts ultimately service any external stock of obligations?? (in theory)

    So, for now, NZ gets the benefit of the doubt – including its lack of relative productivity improvement – but, as above, maybe the future ‘shock’ could come from an abrupt change in external views? If not, hard to see the NZD adjusting to a new lower level especially given an inflation targeting central bank…..??

    ps. Ireland had to bury some 32% of GDP into its banks!! (maybe at the behest of the ECB but point is, the banks were borrowing much from offshore to keep the party going – a little like NZ perhaps…)


    • Quin

      I had been meaning to do a post today on the NIIP position, but the gathering responsibilities of holidaying children, getting Christmas presents off etc meant a recycled post instead.

      I think the risks around the NIIP position are generally overstated – mostly it is a symptom of other imbalances mostly. SInce the banks are very well capitalized, and we haven’t seen the sort of reckless large scale property development lending they had in Ireland, I think the risks of banks defaulting (or the Crown having to bail out) are very very small. I covered this in some earlier posts, but in essence the risks were much greater (on both housing and dairy) in 2007 – much more rapid lending growth, much faster asset price growth across the board etc. So I think the external sector won’t force adjustment – – we can still pay off our mortgages (or banks have capital to cope with losses that will come, Recall too that our NIIP position has been around this high for 25 years – a very different position from a country that had run up those imbalances in the last few years (Ireland, Greece, spain – or the Baltics)


      • Cheers Michael, be great to understand those symptoms next year perhaps; enjoy the festive period and have a Merry Christmas!


      • Thanks – you too.

        (The essence of the story is that we have a high NIIP position because we have fairly high investment needs (associated with the rising popn – see yesterday’s post) and a fairly modest savings rate. 30 years ago it was mostly a govt deficit story, but these days it is private sector. Without evidence of reckless lending in the banking sector – the intermediary for that offshore finance – it shouldn’t be too worrying in its own right. But what goes with it – the high real interest and exchange rate I often talk about – should be worrying, not because it foreshadows crisis, but just because it predisposes NZ to continuing underperformance (and more losses of our own people).


  4. Felicity

    In some ways I thought it was more interesting that he chose to highlight the risk of a reversal in the US (as in NZ (2x), Sweden, Israel, and the ECB).

    Re the comments on the RB’s role I thought it was pretty mild, and hard to argue with – even the RB, in its inner counsels, must recognize the point, even if they still claim that non-forecastable things caused the problem. My bigger puzzle is still over why English is not willing to pursue the cause of reforming Rb governance (perhaps to come into effect once Wheeler’s term ends). They haven’t done particularly well – not just in the last couple of years, but even over longer horizons – and different governance models would be much more internationally conventional, and more in line with how we usually run other public agencies in NZ. I’ve heard the story that the economy is (believed by the public) to be doing so well that there is nothing in it for the Nats to pursue the issue, but the gloss is coming off that story (despite today’s data), and the current model isn’t really designed for dealing with things like so-called macroprudential policy.

    Perhaps the Minister is worried about a showdown with Wheeler, who clearly favours only an insider-expert committee, but politicians make the law, and should be advised primarily by Tsy on matters like this. then it is a matter of finding a suitable Governor for the new model.


  5. I had to come back to the start as I realised as I was typing that it gets a bit negative further down, apologies.

    I hadn’t read your first(?) post, but thanks for re-posting.

    “New Zealand’s long-term economic under-performance, and what can be done about remedying it, should be one of the most keenly-debated topics in New Zealand public life” – I agree.

    “something for the too-hard basket” – I’m not sure about that. In itself it is probably a worthy question for consideration. Why is there minimal engagement on that issue?

    “Since World War Two, New Zealand has had no big new opportunities – unlike, say, Australia’s mines or Norway’s oil”. 1) I think you are wrong on that (now), dairy is our current big opportunity, 2) I don’t think “big opportunities” are a good thing, they distort the economics of other industries eg. manufacturers having to deal with a high exchange rate, 3) Japan has minimal natural resources, but I believe did quite well from the 50s to the 80s. I guess there was another reason for that?

    “Our governments haves repeatedly handicapped the country’s prospects by pursuing large programmes of inward migration” – I hadn’t realised that really was the bee-in-your-bonnet. I haven’t found your arguments against immigration to be persuasive in terms of the impact on interest and exchange rates. Your comments yesterday about the investment multiplier required for immigrants was interesting, but I still don’t think it is enough. But I can understand the impact on employment rates. Although I assume if immigration was lower, unemployment would be lower, inflation would be higher, interest rates would be higher and the exchange rate would be higher?

    I do wonder who is making money from our exchange rate being “high”. If it is not at the “correct” level, then surely someone must be “long” the kiwi, and have been so for the 30 years, since it floated?

    getgreatstuff – A variation on your comments. I wonder what would happen if the RBNZ forced banks to totally fund themselves from domestic savings. Are we really a growing country that needs savings to be imported from overseas to fund ourselves?

    Michael – 1) Immigration – Is it unfortunate/interesting that we have Australia (resource-rich) as a nearest neighbour rather than a country with similar resources to ourselves? 2) Interest rates – “the impact of lower wholesale interest rates on the exchange rate” – really? Is that what causes our exchange rate to move? I assumed it was the price of Whole Milk Powder. 3) “As we’ve discussed before” – doesn’t help me, I don’t know the economics like you do. I know it is more work for you, but a link to previous would help. “Mike’s Economics 101”? A never(?)-ending series of explanatory articles?

    “People are pretty rational over the long haul” – individually no, collectively yes – when people leave, it’s for a reason. No point sticking ones head in the sand and saying they’re all wrong.

    Michael – did Ireland get their policy act together or did they just get big subsidies from the EU – I don’t need an answer, I’m just putting it out there.

    “My bigger puzzle is still over why English is not willing to pursue the cause of reforming Rb governance” – my subtle comment would be, is there a negative correlation between population and “central bank” performance? The implied comment – do we have too smaller a population to get a decent group of people to run the RBNZ?


    • Lindley

      Lots of points there. Just briefly in response:

      You wrote “:Although I assume if immigration was lower, unemployment would be lower, inflation would be higher, interest rates would be higher and the exchange rate would be higher?”. Actually, the logic of my argument is the other way round – lower immigration would ease net pressure on demand, which would require lower interest rates and a lower exchange rate to generate full employment, but in the process would produce a better-balanced economy (more export oriented).

      Re the exchange rate, it has (on average) constantly been expected to fall, but hasn’t. So the windfalls have gone to savers (NZ and foreign) who got the high NZ interest rates and didn’t see that offset by a fall in the exchange rate. Foreign fund managers gain, but so do NZ purchasers of imports. On a related point,l WMP prices do affect the exchange rate, and expected interest rates, but my point just is that if something else changes that changes expected future interest rates then expected returns in NZD will be lower and the exch rate will tend to fall (to equalize future expected returns). I don’t think that part of the story is particularly contentious.

      Sorry about the “as we’ve discussed before” but getgreatstuff is a very prolific commentator, often repeating the same points, and I have only so many hours in the day. I do try to include the links and set out the assumptions in my posts.

      Ireland – it was a mix, but they did a lot of good micro reforms themselves including their corporate tax policy. But again the point is really that immigration wasn’t a path to riches – – rather they got rich (thru a combination of good policy and the EU) and then population growth was a complement to that.

      The argument about “too few people for a committee” is a common one, and I dealt with it more fully in earlier posts on governance. I’m not persuaded: after all, we have lots of other govt functions run by committees/board (including Cabinet and our higher courts) and if anything one might worry that we were a bit small to find a consistently top notch individual to be single decisionmaker across all the RB functions.


      • “Actually, the logic of my argument is the other way round – lower immigration would ease net pressure on demand, which would require lower interest rates and a lower exchange rate to generate full employment, but in the process would produce a better-balanced economy (more export oriented).”

        But doesn’t the absence of significant inflation in the presence of cyclically high net migration imply a level of (positive) net pressure on demand that should already be inflationary”? Where do you see real wages fitting in your argument – couldn’t depressed real wages (as a result of labour oversupply) also be contributing to low inflation? That is, correct the oversupply and real wages rise, inflation stirs, and there would be no need for lower interest rates… Especially if the real interest rate is already below neutral, that would seem to target the more deleterious distortion.


      • On the first part of your point, I think my response would be that NZ interest rates are too high. In other words, without the huge surge in immigration we’d be seeing core inflation falling further, not just staying at a fairly steady margin below the target midpoint. In the longer-term I think the high rates of (not particularly skilled) immigration are depressing NZ GDP per capita and NZ wages – similar to the results I was quoting for the 19th C yesterday – but in the short-term the boost to demand boosts overall economic activity. Quite what happens with wages in the short-term isn’t that clear – lots of fairly unskilled immigration (incl working holiday people and students) may be dampening wages at the bottom end, and perhaps boosting profits. I was surprised when I looked at breakdown of national savings yesterday to find that business savings (retained earnings) appear to be running very strongly


      • I repeat a point to make a point as we appear to disagree on largely the issue of immigration as the cause of NZ productivity lapses. I have looked at census data and the population growth equates to the natural birth numbers minus deaths. Therefore immigration is largely a replacement policy which equates to no population growth from immigration. Therefore the migrant issue is not a NZ problem it is largely isolated to a Auckland problem. All these replacement migrants just like living in a larger city.

        Your ideal is less than replacement which would equate to a population size of 3.5 million people versus a population of 4.2 million that we currently have. I just cannot rationalise your argument that 4.2 million is just too many people when Japan has 125 million on the same land mass.

        Your persistent argument is that we as a nation is so crap that we cannot sustain more people because more people just equates to more useless people???


      • The question is really about whether location matters. I think it does, and I think the evidence of economic history does. If we could cut NZ off its geological base and relocate it to the Bay of Biscay, I’d have no doubt that it (and its people) could support a lot more people at very high living standards. I’m much less convinced that we can do so as the last bust stop before Antarctica. This just is not a natural place to support high incomes for many people – the only thing going for the place is its natural resources and as we’ve discussed before some of those we keep tied up as a matter of policy. Peripheries just tend not to be very heavily populated and there is probably good reason for that.


      • There is a tendency for NZ economists to mislead the public that interest rates are a “consequence of” but that is not true. Interest rates and the corresponding NZD is “driven by the RB”. The key benchmark 90 day bank bill rate is almost a mirror image of the OCR. The banks set their margins off this key 90 day bank bill rate.

        I am told the global daily trade on the NZD is around $50 billion a day, the 10th most traded currency in the world. What the RB does to interest rates matters as our OCR setting is still one of the highest in the OECD. NZ GDP is only around $250 billion a year.


      • Yes, I totally agree that the RB controls the OCR and 90 day rate, and that setting influences the rest of the yield curve and inflation. there is no dispute between us on that. But the real question is what drives the RB in where it sets the OCR. I argue – and say from long experience directly involved in the rate-setting process – that it is set based on our reading of inflation risks, which in turn is influenced by how much NZers want to save or invest at any particular interest rate. The Rb gets it wrong from time to time, like any central bank, but it is not just a random process that involves setting the OCR on a whim – it is loosely anchored by the inflation target (which allowed Bollard to have interest rates too low for too long, and then he and Wheeler to have them too high for too long). It is much the same process in all inflation-targeting countries. The difference here is that for any given interest rate NZ gets more inflation (hence on average we have needed higher interest rates). I’ve put out one story for why that is. You aren’t convinced, which is fine, but do you have an alternative hypothesis?


      • We need to look beyond inflation targeting and decide what direction the economy needs to take. If we are trying to contain consumption. Interest rates do not contain consumption because NZhousehold debt equates to NZ household savings. There are more people with savings than there are people in the mortgage belt. Which means any interest rate response would have to first rise to such a high level as to decimate jobs and to decimate the economy before inflation can be affected.

        If you say corporate debt is too high then again interest rate is not the correct policy to use because again if you want to slow down corporate debt you have to raise interest rates up even higher to slow down corporate debt because you have to raise interest rates high enough to erode margins and profits and damage confidence to invest in the future and in Allan Bollards case single handedly decimate the entre building industry and 60 plus finance companies and you cannot argue all 60 plus companies are all so badly managed and just easily brush it off as idiots not knowing what they are doing.

        If you say landlords borrowing is too high you would have to get interest rates beyond what a tenant can afford to pay which means to damage tenants disposable income or increase the average number of people per property or live in cars.

        If you say the government borrowing is too high then government does not invest in infrastructure which damages productivity.


    • The high NZD encourage the import industries, eg The Warehouse has grown exponentially off the back of cheap chinese imports decimating our local manufacturers. The China story and the birth of a new super power was off the back of a manipulated Yuan peg to the USD effectively transferring US jobs and manufacturing to China. NZ was just caught up in the wake of what was the largest wealth transfer from West to East. The RB pretty much handed NZ manufacturing over to the Chinese.


    • Forcing NZ banks to fund debt out of NZ savings just misdirects NZ savings to funding debt. NZ savings is made up of a number of components

      1. funding debt
      2. funding investments in listed shares
      3. funding kiwisaver
      4. funding private companies

      NZ household savings in all these 4 different components is actually much higher than NZ household debt. Therefore in order to force banks to use only domestic savings would require local interest rates to compete with the investment returns of the other 3 components.

      Therefore enforced cash savings leads to significantly higher interest rates and correspondingly a higher NZD and a higher cost of funds for local businesses and less investment in the productive sector.


  6. Michael

    My influencer for many years has been Glenn Stevens of the RBA who believes Monetary Policy (central bank) and Fiscal Policy (government) are two opposing forces that should strive to be in equilibrium

    What we are seeing here in NZ (and the US) is an example where Fiscal Policies should be being implemented by Govt to overcome fiscal problems. If Govt doesn’t act, that puts pressure on the RB to take monetary policy action that it shouldn’t have to, in order to counteract distortions arising from “inert” passive fiscal policy

    NZ has been in the middle of a rocketing-boom-period where fiscal policy should be putting away some of the surplus for when the downturn comes. Govt has been running deficits during times of plenty, which dictates the Reserve Bank has to run a tighter monetary policy than it should have to.

    Lastly, the RBNZ Governor has his hands tied by an agreement with Govt. I was surprised Wheeler accepted the position and didn’t give them the 2 fingered salute. Why take on a job where your hands are tied before you start?

    So, if wheelman is his own man, don’t expect looser monetary policy anytime soon, in spite of all the banshees here. If he does, you know you are in trouble. Lots of trouble


    The dilemma confronting New Zealand now is, both the RBNZ and the Government have loosened their respective purse strings simultaneously


    • I think you are probably a bit unfair to the govt on fiscal policy. Yes, they should ideally have been running surpluses, but for the last few years they have, net, been pulling more out of the economy than they have been putting in (structural deficits have been narrowing, a lot). And those changes have been well-foreshadowed, so responsibility rests with the Rb for not having set monetary policy correctly.

      As for the Governor, he applied for the job, and if “his hands are tied”, the ties look quite loose – inflation has been well below the target midpoint throughout his term to date, and on his own forecasts inflation won’t be back to 2% until just after his term ends.

      But in the end, monetary policy isn’t really that important to NZ’s overall economic performance – the policy weaknesses that really matter are more structural in nature.


    • There is no rockkity boom period in NZ. It is so far only a recovery after Allan Bollard single handedly forced a deep recession onto the NZ economy pushing interest rates up to 10%.


  7. Going back to the Burke Review of Immigration 1987:

    “The attitudes of New Zealanders in the mid-1990s
    towards immigration may not have reflected the positive perspective on the
    value of diversity in our society that is contained in the Review of
    Immigration Policy August 1986. But this does not mean that the globalisation
    of immigration to New Zealand was an “unintended consequence of policy
    changes in 1986”. It was a deliberate strategy, based on a premise that the
    “infusion of new elements to New Zealand life has been of immense value to
    the development of this country to date and will, as a result of this
    Government’s review of immigration policy, become even more important in
    the future” (Burke 1986:330). “

    “This process of population replacement is occurring at a time when natural increase amongst all
    components of the New Zealand resident population is falling.”

    The real reason appears to be based on the idea that a nation made up of (predominantly) one ethnic group was a situation needing correction. This vision of a new world order (multiculturalism) will (I think) be looked back on as a popular delusion as it is based on (among other things) outmoded environmental models of behaviour. Fixing the (non) problem is simply rearranging deck chairs?


    • Thanks for drawing attention to those older reviews (which I’ve been meaning to write about for ages).

      I honestly think a wide variety of factors were at work, and different factors influenced different people. For some, the benefits of diversity (associated with endogenous growth theory), for some replacing those who were leaving, for some old “bigger NZ’ sentiment, and for some (eg Tsy) a belief that if free trade was generally good it applied to people too. But there just wasn’t much sustained broad discussion – a few years ago I checked the memoirs of all the key political figures from the period, and immigration barely figures.

      But your point about diversity, does remind me of sitting in a meeting in the early 1990s between the then Deputy Governor of the RBBZ and the Japanese Ambassador. The DG was going on at some length about how NZ needed to become more Asian etc, to which the Ambassador quietly responded that he didn’t see that at all, and each culture had its strengths and distinctives etc.


      • That’s interesting, Japan has quite noticeably not embraced the more liberal approach to immigration policy that the West has followed post WWII. That would appear to be reflected in the comments of the Ambassador.


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