In one of his weekly columns over the holiday period the Herald’s John Roughan, a touch sentimental perhaps that his grandchildren were just returning home again to Singapore, made the case that the post 1984 economic reforms have made New Zealand “a place worth returning to”, “a place that can hold its own in the world”, and so on.
It is a nice story. It is certainly one that I hoped would come true. It is just a shame that the facts don’t really support it.
What have New Zealanders been doing? Well, the last time there was any sort of sustained net inflow of New Zealand citizens to New Zealand was when Sir Robert Muldoon governed: seven consecutive months in 1983. It probably wasn’t greatly to Muldoon’s credit, since by mid 1983 Australia’s unemployment rate had risen sharply to just over 10 per cent. There were also two months in early 1991 when there was an inflow of 90 people: and again Australia’s unemployment rate was rising rapidly. Even in the last 12 months a net 4800 New Zealand citizens have left. Sure, plenty of individuals leave and come back, but in net terms the data tell us the flow is outwards. It is a volatile series, and the outflow at present is less than it has often been, but we’ll need several years more data before there would be any reason to think the pattern of net outflows – in place since the mid 70s – is ending. There has been a net outflow of New Zealand citizens of 680000 since the reforms began.
And even if the outflows were to slow, it isn’t necessarily a mark of our own success. Australia has long been the natural place for New Zealanders to seek better opportunities for themselves and their families. For a long time, access to Australia was largely unrestricted – it was easy to go, pretty easy to adapt, and if things went wrong the social safety net buffers in Australia were there for the immigrants. New Zealanders can still easily go to Australia, but they now have a much tougher time of it – for new arrivals, access to the Australian welfare system is available only for those arriving on permanent residence visas (typically not New Zealanders). And their children can find themselves in a legal limbo. In boom times, only the most risk averse pay much attention to factors like that – and those who choose to migrate aren’t generally the most risk averse – but tougher times in Australia, and just the passage of time and the reporting of more stories of the difficulties some have faced, is reducing the attractiveness of Australia, even as the income and productivity gaps between the two countries have continued to gradually widen. It is too early to tell how large any structural change in the willingness of New Zealanders to go to Australia has been – the cycle dominates – but if it has happened it is neither a benefit to New Zealanders or a reflection of any success on our part.
Roughan glides between the talk of New Zealanders coming home and celebrating the overall net immigration statistics. But again, large net inflows of non New Zealanders aren’t a sign of economic success, just a sign of one strand in economic policy. A relatively rich country never has too much difficulty getting migrants if it wants them – there are always many countries that are worse off. Indeed, a violent middle income country like South Africa attracts lots of (mostly illegal) migrants – most of Africa is even poorer. This isn’t the place to resume debates about whether New Zealanders will benefit from our immigration policy over the long haul, just that inflows – however large – are not themselves a sign of our economic success.
I’m one who thought – and thinks – that most of the reforms of the 1984 to 1993 period were in the right direction, and generally needed to be done. But we need to face the fact that even if many of those reforms were beneficial – and I think they probably were – New Zealand’s productivity performance has remained pretty woefully bad. And absent huge new natural resource discoveries, productivity is the basis of sustained prosperity.
Roughan talks of finishing school at the end of the 1960s and having then been pessimistic about New Zealand’s prospects. And New Zealand did very badly in the fifteen or so year after that. Between some of the bad choices we made ourselves (Think Big for example), oil shocks, slumping commodity prices and the UK entry into the EEC, it perhaps wasn’t surprising that between 1970 and 1984 we had the lowest growth in real labour productivity (real GDP per hour worked) of any OECD country for which the data are available. I was one of young (and probably naïve) who looked at that record and thought that there was no real reason why it couldn’t be reversed with a couple of decades of decent economic management.
But it just hasn’t happened. Here are the same data (growth in real GDP per hour worked) for the 30 years since 1984.
We’ve managed to match growth in Spain and Canada – both countries that in 1984 had higher levels of productivity than we did – and we’ve done better than Greece, Switzerland, and Italy. Better than in the earlier period, but thin pickings really, especially when one contemplates how bad things in Italy and Greece have been in recent years.
Our story isn’t all bad, of course. We reversed a really bad track record of high inflation, and government’s accounts look pretty good by most (but not all) advanced country standards). The rapid accumulation of overseas debt (as a share of GDP) also came to an end. Without those improvements, perhaps the productivity picture would have been even worse.
Individuals generally don’t make choices based on macroeconomic data, but on their perceptions of the opportunities for themselves and their families. But in this area, the flow of people and the macro data seem pretty well aligned. New Zealanders just keep on leaving – in smaller numbers right at the moment, but with little sign of any structural reversal of the flow – and our productivity performance continues to languish. Yes, to pick up Roughan’s words, New Zealand is a “lovely” place and I enjoy the “temperate warmth of our summer”, “the deep blue sky” and the “beaches and bays” as much as anyone, but…..the beaches look pretty good in Uruguay too, one of the few (then) advanced countries to have done even worse than New Zealand over the last 100 years.
croaking cassandra 
Is it actually New Zealand born leaving or is it new migrants that have received NZ citizenship that are leaving? Perhaps we are just replacing old migrants with new migrants.
LikeLike
SNZ have a break of about 10 years in their “birthplace” data, or I’d have shown that. But over the last 12 months, it makes almost no difference whether one looks as the flow by birthplace of by citizenship (ie a net)low of around 5000.
LikeLike
In Martinborough with an international group a few years ago, a US friend commented “it’s so beautiful here… I can’t understand why you guys all leave”. As to why, I have a few observations & speculations:
– NZ vastly overproduces and subsidises tertiary graduates relative to demand; hence starting salaries are pitiful relative to other developed countries.
– lack of high productivity medium to large corporations that pay well and make or do interesting things
– of those who have stayed, they are either working in low-paid service jobs, self-employed, senior civil service, or lawyers helping the private sector navigate government regulation.
LikeLike
Yes, there are beautiful places all over the world – and Sydney is among them. But people move, mostly, where the opportunities are better (within countries, grimy 19th C Manchester, or 21st century Delhi), seemingly with not much weight on pretty countryside or bucolic rural visions.
1500 kms from anywhere – that “anywhere” in turn quite a way from the rest of the world – just isn’t where many really high productivity firms are going to build and sustain their operations.
LikeLike
I would have thought tyranny of distance arguments apply a lot less than they used to. Shipping costs and trade barriers have fallen a lot since the 1970s. Businesses with global brands can be anywhere. If we had a lower real exchange rate for ten years we would see a lot more of them.
One question I am not sure about is to what extent you can offer concessional corporate tax rates to export-facing firms. I believe Ireland does so.
LikeLike
I think concessional tax rates to export-oriented firms would count as an export subsidy (verboten). Ireland has a general corporate tax rate of only 12.5%. I would certainly favour a much lower capital income tax rate here. The standard response is that it is a windfall gift to existing foreign investors, but that is mostly wrong as most FDI in NZ is in the non-tradables sector (think banks) and the benefits of a lower tax rate could be expected to be competed away (ie gains flowing to other NZ consumers and producers).
If anything, the literature says that agglomeration etc has become materially more important than it used to be. You could think of NZ’s 19th C product mix – it was expensive to ship, but they were pretty vanilla products and there weren’t complex supply chains or the need for the personal interactions. The gist of my argument is here
https://croakingcassandra.com/2015/11/26/these-remote-islands-are-different/
There is plenty we could do; lower taxes, and cut immigration, and we would have a lower cost of capital, lower real exchange rate, and the resulting improvement in living stds would slow, and perhaps even modestly reverse the outflow of NZers, but I’m increasingly skeptical that as remote a location as this can support top notch living standards for very many people. What we mostly have going for us is the land/sea, which aren’t super-fertile.
But I might be completely wrong – this leg of the argument (Reddell reverting to pessimistic form) is still quite gestational
LikeLike
Should you ever get the chance – you should get a copy of Neil Oliver’s “Coast Australia” presents and explores some of the most beautiful sights you will ever see in a lifetime – that is if the outdoors is your thing – however you should be aware that nearly all of the places featured requires either a lear jet or a high-end helicopter to get to them – not possible for the casual day-tripper – (I say that as someone who lived there for 30 years and access to them was outside my budget)
LikeLike
Is there any country where there is a net inflow of its own citizens? I would imagine that, by definition, this is very hard to achieve, especially for more than a few months.
However, if you include category jumpers (very easy to do between NZ and Australia) you may find NZ has a net positive flow at present. If sustained even for a year I this would be an astonishing result.
LikeLike
Fair observation: I think one should expect to see modest net outflows of citizens from their own countries (since most acquire citizenship by birth and some will always move abroad). But the typical net flow will be small, at least in reasonably successful countries (be it the US or Norway, or even Australia itself).
I think the default might change somewhat though when there is a very large diaspora, which creates a large stock of citizens abroad. It is much easier (legally and culturally) for them to come home if the opportunities improve here, than for non-citizens.
My impression (I haven’t recently checked) for example is that in the Irish boom years there was a net inflow of Irish citizens (again, the large diaspora), and if econ policy (or good fortune) had really turned things around here we might one day hope for something similar. UPDATE: Between 2006 and 2009 Ireland had a net migration inflow of around 30000 of its own citizens (the outflow data by nationality only seems to date from 2006).
I’m also conscious that some people become citizens without really trying (eg two of my kids left the US as citizens – birthright citizenship) and those departures say nothing about relative econ performance.
And I agree that when PLT and total migration patterns diverge we should be wary of, say, people saying they are leaving NZ for good (PLT outflow) and then finding it doesn’t work out and returning a few months later (not PLT captured at all). That will have affected the cumulative net outflow estimates, altho over the last year or so I think the PLT and total migration flow numbers are quite similar.
LikeLike
Michael, it’s good to see a touch of reality being brought to the increasingly rose tinted views of the effects of the 1984 reforms.
We can all agree that reforms were needed, but the scorched earth mentality Douglas applied to the task should always live in infamy, in my opinion. I well remember the days (even pre-1987 crash) when many streets in industrial East Tamaki looked like ghost towns from western movies, not the thriving, bustling manufacturing centres that existed up to about 1986. In fact, we manufacturers of the day were bewildered by the disconnect between the reality of the streets and the fantasy of the sharemarkets.
And although the current minister of finance smugly points out that poverty, at least as indicated by the Gini index, has not worsened under his watch, neither has any government sought to roll back the 7-point increase that occurred in the wake of those reforms (save for the recent marginal, belated and grudging increase in benefits yet to take effect).
I also question how much of the ‘crisis’ supposedly faced by the incoming Labour government in 1984 was actually manufactured rather than a clear and present danger – the 1984 government accounts don’t actually look that bad compared to many of today’s advanced economies, and a major culprit of our perceived ills was probably the fixed exchange rate regime, anyway (but I haven’t followed up on my rather cursory readings about that time, yet).
Anyway, good to see you back blogging and Happy New Year!
LikeLike
Thanks Luc
Re your final paragraph, I have mixed feelings. There was a run on the exchange rate, and that had to be dealt with. Perhaps it could have been done by freeing up interest rates, but it probably needed at least a temporary devaluation (the average real exchange rate in the decades since 1984 has not been lower than it was pre devaluation). In that sense, the sense of crisis – incl Muldoon’s post-election reluctance to act – was very convenient cover for a sense of urgency on a whole range of fronts, many of which had little to do with the macro pressures. On the fiscal numbers, bear in the mind that the deficit in the Treasury documents Muldoon had preparatory to the 1984 budget he never delivered was something like 9% of GDP – large even by recent overseas standards. Some of that wasn’t “real” – the effects of inflation on debt service costs – but most was, and action was clearly needed there pretty urgently.
Having said all that, there was a really strongly held view, among very able people in the Tsy and the Bank, that the exchange rate pressures weren’t just temporary, but that a key part of the structural reform NZ needed was getting a much lower real exchange rate. That is hasn’t happened doesn’t mean they were wrong, but does mean that some of the steps they initiated – I’m thinking in particular of opening up immigration again – had (and continues to have) directly the opposite effect of what they were seeking (and what NZ still needs).
Michael
LikeLike
Our exchange rate does not appear to be affecting the record 3 million plus tourists coming to NZ. Sky City has also announced a 30% increase in profit largely from big spending tourists playing $300k a hand on the tables.
LikeLike
Productivity only comes from more production production.
It doesn’t come from social welfare handouts, nice to haves , over zealous production of average quality university graduates.
Do things that get business working better.
Allow better depreciation rates, get our interest rates and our dollar down and stable.
Remove the barriers to people working and business employing.
Stop handouts to a one sector of the population. Look at what has happened to Sealord. Can’t compete with our own fish because the IWIthat own other quota send it to China for processing after being harvested by cheap Asian Labour.
The same group that have the highest unemployed in NZ.
People spend half their money earned paying for the houses they live in which means it doesn’t get spent on business.
Stop beating up employers with more and more Law for the Benefit of Govt. depts. and LAWYERS.
Get rid of the rubbish that is GDP and start measuring our wealth and working towards increasing our wealth. Every time we have a disaster our GDP goes up and Mr Higgins and Mr Fulton and the like make a gain as opposed to the taxpayer who loses. Mr Higgins and Mr Fulton have got it right. They get wealthy.
Mr taxpayer just gets hit with the cost and the borrowing.
It’s an important distinction.
It’s my prediction that our GDP is about to crunch. Its been bloody lousy for years.
I getting on a bit and have to say that NZ has been very poorly served by both govt.’s and RBNZ.
I also have the view after getting around a bit over the last couple of weeks that there are more opportunities around now than I can ever recall in nearly 50 years of working.
Opportunities that will be taken by over sea’s companies if we don’t get encouraging our resident Kiwi’s.
We need better access to capital for young people who have idea’s but need to get started. It ain’t cheap to do anymore. Regulations and banks see to that. Try borrowing from a bank to get into business. Apart from charging enormous business interest rates (12 -15% not uncommon today on borrowing at 3-4 %)(Rates that are higher than even the notorious finance companies were paying a few years ago) If you don’t have some property then it’s like see ya later. Mind you you can finance a truck at 17%no trouble.
We need to empty out the RMA and lots of other officious bits of legislation that stop things happening.
Kiwi’s will stay or return when they can earn well and have a good standard of living.
It just hasn’t been and still isn’t that way for a lot of them.
I find it interesting that Kiwi’s just have to leave for the better. Look what happens to many immigrants. The come and see opportunity all around them and work like crazy and prosper.
Those that leave seem to be the new generation of the whingin Pom who came in the 50’s. The Dutch of course came and prospered.
Anyway Aussie is stuffed for the foreseeable future. Their day of reckoning is finally coming.
We did ours in 1983. Thank you Roger and a pox on the socialists of both parties that went back to strangling our country ever since.
LikeLike
Can we have an edit function please?
LikeLike
Agreed we need an edit function.
LikeLike
Here’s the stuff legends are made from.
We need lots more people and idea’s like this with way more development support, way more R & D assistance and so on.
These are ordinary people doing extraordinary things and they deserve every bit of help they need and can get.
Instead we waste money on so many losers and bureaucracy gone mad.
LikeLike
Here’s the link. sorry brain not functioning.
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11576692
LikeLike
Personally I am in 2 mindsets at the moment. I am a working person on a relatively comfortable wage.I have a investment property portfolio so I do have a relatively large debt but because I have done my buying 12 years ago my equity levels are relatively high. I am currently undertaking some developments to add value and cashflow to my existing portfolio. It is in my favour for interest rates to keep falling. However rents have risen.
My thoughts are that the OCR at 2.5% is at neutral. Economic activity is occuring nicely and businesses are increasingly confident of the future. Jobs are readily available for those that want to work and people are returning to NZ. Tourism and international students are at record levels. At this stage I also want to do more travels which means a higher NZD helps.
I think Wheeler should leave the OCR at 2.5%. This is still relatively high and would still encourage cash deposits to sit in bank accounts. Banks look evenly poised with mainly local savings supporting local borrowings with some overseas denominated funding. There is some downward pressure on interest rates because our interest rates are relatively high compared to the rest of the world but the NZD is now closer to our average USD/NZD cross at 0.60c and we still have a discount to the AUD at 0.93c
It all looks and feels that we are at neutral.
LikeLike
I think the lower corporate tax rate would make a big difference – not a couple of percentage points lower than Australia’s but 15% or lower. I think you would see trans-Tasman and multinational corps locating/retaining more higher value-added functions in NZ, and fast growing firms like Xero would have more reason to stay. A quick look at the budget suggests it would cost about $4 billion at first, so certainly expensive, but could be covered by a combination of spending cuts, bracket creep and nuisance taxes. Works a crack I reckon.
Regarding the agglomeration effects, I think I am a little more optimistic than you, and I think we could develop technological niches that fit into other larger ecosystems like Silicon Valley. I also agree with Marc Andreessen that the roots of network effects can often be traced back to a period of regulatory arbitrage.
LikeLike
I heard Rod Oram say today that every new job in tourism makes us poorer (on average) as a country. The cynic in me thinks that the government accepts this as it is looking after those higher up the food chain in property, finance and construction.
Why should I not be cynical? The Savings Working Group noted:
“Clearly, there are serious questions to be asked about New Zealand’s economic policy and how we got into this mess. Why was it not better designed and managed, and more focussed, coordinated and strategic? Did the electorate simply get what it voted for, without realising what was really happening, or have New Zealanders not been well served over the years?”
Click to access swg-report-jan11.pdf
LikeLike
But again, large net inflows of non New Zealanders aren’t a sign of economic success, just a sign of one strand in economic policy. A relatively rich country never has too much difficulty getting migrants if it wants them – there are always many countries that are worse off.
…
I hope David Farrar reads that!?
LikeLike
New Zealand Rates 5th in the world for Social Progress 5 places ahead of Australia and well ahead of the US.
Its really about time blog writers stop focusing on GDP as the “prime” indicator for a countries success. Due to wealth distributions, tax differences, cost of living difference, GDP in isolation is a very poor indicator.
Even John Maynard who invented GDP clear stated it is NOT meant as a measure of quality of living or progress.
LikeLike
Regardless of whether GDP is a good indicator of anything, it still seems to correlate quite nicely with the behavior of NZers. They started leaving when GDP started dropping well below Australia, and have just kept on leaving, as GDP per capita (and per hour worked) stayed weak relative to other advanced countries. If NZ has such high living standards as some of the alternative measures are claimed to suggest, why do so many NZers keep leaving. As my post showed, the extent of the outflow of NZers isn’t normal.
LikeLike