Day: February 11, 2016

Unborn firms utter no cries

Michael Reddell Exports, New Zealand economic performance

Late last year, in a series of posts on the quarterly national accounts I showed this chart of export volumes per capita (for New Zealand and Australia).

exports real pc

Exports (per capita) had carried on growing over the last decade or so, although at a materially slower rate than they had been growing previously.

Exports matter, but they are only one outcome of the international competitiveness of the New Zealand economy.  Another way of looking at things is to think of the economy as divided between tradable and non-tradable sectors.  It is a useful analytical device, but (like many useful economic concepts) doesn’t map 100 per cent easily onto the official data we have available.

My proposition (not, I think, overly controversial) is that a high-performing economy will be one in which the tradables sector –  the bits selling to, and directly exposed to competition from, the rest of the world –  is growing strongly, absolutely and certainly in per capita terms.   Such growth in the tradables sector in a mark of the success of companies operating here in being able to meet, and succeed in, the global market.  There is, of course, nothing wrong with non-tradables activity: we want phone services, cafes, theatre, and holidays at the beach.  But it is exceedingly rare that a strong sustainable economic performance, especially in a small economy, is led from production in the sectors that aren’t exposed to international competition.

In an IMF Article report from perhaps 10 years ago the Fund staff had the clever idea of representing the tradables and non-tradables sectors in a single chart.  It was rather rough and ready, and the Fund knew it, but it helped illustrate something of how the New Zealand economy had been unfolding.   They started with the production measure of real GDP, and allocated the primary and manufacturing sectors to tradables.    Our exports and imports are typically either primary or manufactured goods, or they are services.  To proxy the contribution of services to tradables production, they took the services exports component (from real expenditure GDP) and also assigned that to the tradables sector.  Everything left over was non-tradables.   The resulting chart was reproduced in various fora around Wellington over the years, even used by the Minister of Finance  –  much to the distaste of purists.

I hadn’t seen the resulting chart for a while, and was curious how things had been going.  In particular, given the rapid growth in the population over the last decade, I was curious about how tradables sector activity had been doing per capita.  After all, both National and Labour governments have constantly talked of strengthening New Zealand’s international competitiveness, international connections etc.

In this chart, I’ve shown primary and manufacturing real value-added per capita, and real services exports per capita, back to when the quarterly population series began in 1991.  Each component here is indexed to 100 in 1991.  At the end of the period, these three components of tradables production are of broadly similar size.

tradables components

If your eye is drawn to the services line, as it probably is, bear in mind that not one of these series is now at its historic peak.  One peak was in 2004, one in 2005, and one (primary) in 1997.     By contrast, real per capita GDP is at its historic peak –  growth hasn’t been strong over the last decade, but has been around 8 per cent over the last decade.  Per capita export volumes haven’t been doing that well (see first chart above) –  but they have clearly done a whole lot better than the domestic (import-competing) component of tradables production.

So here are the aggregate tradables and non-tradables components, as proxied by this particular approach.

tradables and non-tradables gdp

I found it a rather bleak picture, to say the very least.  Tradables sector production, per capita, is now nowhere near as high as it was as much as 12 or 13 years ago.  It is most unlikely that New Zealand will make any progress at all in sustainably closing income and productivity gaps to the rest of the advanced world if it can achieve no growth in per capita tradables sector production over a period that long.

Why has it happened?  What has so strongly skewed production towards non-tradables?  I’d argue that it has, primarily, been rapid population growth, which had to be accommodated through a much higher exchange rate (the big step in the exchange rate dates back to 2003). For many of our tradable product sectors, raising our own population does nothing to materially boost output –  land and sea and mineral resources are given, and the (real and significant) productivity possibilities in those sectors are independent of population.  And the higher exchange rate just made it that much harder for other firms in the tradables sector to survive or thrive.  The exchange rate has been so high for so long that we don’t hear many squeals any more –  those who can thrive at these exchange rates do, and dead firms and unborn (ie never launched) firms utter no cries.  Loosely speaking, it is a fully-employed economy (no 5.3% isn’t full employment, but 4.5% might be –  and that difference is swamped by the scale of the divergences evident in this chart), but it isn’t a path to sustained prosperity.   Non-tradables firms, especially in Auckland, do well –  as they do in every population-fuelled boom anywhere (in history or now) –  but it isn’t a path to sustained national prosperity.

Are there some caveats to the story?  Yes, sure. The Christchurch repair and rebuild process exacerbated the skew to non-tradables, and there wasn’t anything much we could do about that.  And high terms of trade, in principle, made it less necessary to produce tradables volumes (price substitutes for volume)….but, in the longer term, higher terms of trade tend to induce strong investment and volume growth in the sectors that are benefiting.  There was no sign of that in New Zealand.

As I noted, purists don’t like the tradables/non-tradables chart, for a variety of reasons (some good, others less so).  A couple of SNZ staff made an effort a couple of years ago to do a slightly more refined version. It was a worthwhile exercise, but I wasn’t persuaded that the more complex version materially altered the results, while making it a bit harder to explain just what had been done.  Bottom line: this has been quite an unbalanced, more inward-focused, economy for more than a decade now, and there is little real sign of that sustainably changing.

 

 

 

 

 

The IMF at sea on New Zealand’s (lack of) growth

Michael Reddell IMF, New Zealand economic performance

As I noted yesterday, the IMF released several “selected issues” background papers in association with the release of the New Zealand Article IV report.  These papers are usually a little more in-depth than the main report, and the topics chosen reflect some mix of the expertise and interests of the people on the staff team and the priorities of the New Zealand agencies involved (Treasury and the Reserve Bank).  In my experience, the efforts of the team are often spread too thinly and so unfortunately not many of the papers have added very much to the understanding of the macroeconomic issues facing New Zealand.

The papers this time are:

  • Prospects for potential growth in New Zealand
  • House prices, household debt, and financial stability in New Zealand, and
  • New Zealand – Options for Tax Policy Reform

It would be interesting to know whose initiative the last paper was done at.  My guess is that Treasury may have reacted to the Fund’s anguishing about savings with the comment “well, show us what might actually make a difference”.   Unsurprisingly, the Fund doesn’t conclude on an optimistic note:

while there is some ambiguity on the effectiveness of tax incentives to raise private savings, short of the introduction of a compulsory savings scheme there are no alternatives to providing incentives.

There are real doubts our policies will work, but……we have to do something.  Not exactly reassuring.

The potential growth paper has a few interesting charts, and recognizes the probable importance (as a symptom)  of the ex ante savings/investment imbalances [1] that have given us persistently high real interest rates (relative to those abroad) and a real exchange rate that has been persistently out of line with medium-term fundamentals.  But the authors don’t have much of substance to offer on the way ahead.  They, like everyone else, can see the gaps between us and the world, but they don’t seem to have a “model” –  a way of thinking about or understanding the issues – that can usefully help respond to the specifics of New Zealand’s underperformance.

They believe

there are few if any low hanging fruit in terms of reform……..however, there may be targeted areas for improvement

They claim that

increasing New Zealand’s international exposure is a major aspect of productivity oriented reforms

but the actual list of reforms, and the evidence or arguments connecting them to the desired outcomes, is thin (and sometimes questionable), to say the least

  • “directly enhance innovation through greater expenditure on R&D”
  • “increase labour productivity through education”
and a couple of ideas picked up from last year’s OECD report
  • user and congestion charging for infrastructure, and
  • “more frequently update immigration targets and skill shortage categories”

The final paragraph of the whole paper begins by noting that there are “no obvious liberalization policies at hand”, and then lapses into the rather trite (because there is nothing to back it)

efforts would have to be made to exploit opportunities for greater international integration in order to boost competitiveness and overcome the disadvantage of distance

But for all this, in its apparent enthusiasm to accentuate the positive the IMF actually understates just how poorly New Zealand has done in recent years (or decades).   In particular, I was surprised to find this assertion in the report, citing the experience over the period 1995 to 2012.

Compared with other OECD countries, New Zealand’s TFP growth performance compares favorably

I was taken aback by this claim, and wondered what I had missed, so I went to check the data on the OECD website.  The OECD compiles TFP estimates for only 20 of its member countries.  Here is the total growth in TFP for each of them for that 1995 to 2012 period.

oecd tfp growth 95 to 12

We’ve been the lower quartile country for that whole period.  The only four countries which did worse over that period are either in the euro or tied to it (Denmark), and three of them (Spain, Italy, and Portugal) have had a simply atrocious economic performance in recent years.  If one looks as just the most recent 10 year period for which the OECD has data (2003 to 2013) we were actually second worst of all these OECD countries.

Estimating TFP growth rates involves a model – a way of estimating the contribution of capital and labour to growth, isolating the resulting TFP residual.  The OECD’s approach isn’t the only one, and I’m not sufficiently expert in the field to offer an opinion on which approach is best.  One other big international database that reports TFP estimates in the Conference Board, which produces estimates for a much wider range of countries.

I had a quick look at 37 pretty advanced economies for which the Conference Board reports complete data.  For the IMF’s chosen period –  1995 to 2012 –  there were only seven countries that had recorded less TFP growth than New Zealand had done  (the ones who did worse than us on the OECD measure, and Chile, Norway, and Greece (for whom the OECD reports no data).  So even on this measure, for this range of countries, we’ve been no better than a bottom quartile performer.  The Conference Board has data for all 37 countries as far back as 1989-  and since then, only Spain, Portugal, Greece, Turkey and Hungary have done worse than us.

The Conference Board reports estimates up to 2014.   Here is how those 37 countries have done over the most recent 10 years for which they have data, 2004 to 2014.

conference board TFP 04 ot 14

The picture doesn’t really change.  It is, perhaps, a little less bad than on the OECD’s ranking, but again we’ve been no better than a lower quartile performer.

TFP isn’t the be-all and end-all, and for minerals producers in particular it can be driven downwards in periods of high commodity prices (because less accessible, or lower grade, resources are (profitably) mined).  But there is really no way of looking at the New Zealand performance and reading it as any sort of good news story.

It is surely about time that the elites –  be it leading offshore agencies like the IMF and OECD, or our political and bureaucratic ones –  began to recognize, and state openly, just how consistently poor New Zealand’s economic performance has been, and to acknowledge just how limited or inadequate the policy responses they put up to deal with it  are, and have been.   Identifying policy responses might be hard –  although I reckon that a major reorientation of our immigration policy would go a fair way –  but the first step is an honest assessment that recognizes that what we have been doing simply hasn’t been working.  And it is no use falling back on “but its nice place to live” – as I’ve noted previously, Uruguay looks to have nice beaches – or “but lots of people want to come here” –  well, of course, poorly performing as we have been, we are still richer than China, India, South Africa or the Philippines.  The better test is what our own people are doing – and they just keep on leaving, even though the hurdles to doing so (in Australia in particular) have been getting higher

[1] They even approvingly cite my 2013 paper.