I’ve made a few passing comments in recent weeks about New Zealand universities, mostly in the context of discussions and debates around immigration.  Export education is one of the key emphases of the current government’s economic strategy; they and their MBIE advisers appear to believe that somehow we boost the incomes of New Zealanders by making it relative easy for people who come to study here to gain residence.

I’ve been a bit skeptical about this argument.  If there are economic benefits to New Zealanders from immigration to New Zealand, they probably arise mostly if we are able to attract particularly high-skilled, able and innovative people.  In a US context, people often talk of the benefits of having a top tier university system, which attracts top-flight students to do PhDs in the US and can help encourage some of those people to settle in the US, with possible spillover benefits to the wider economy.  It all sounds good in principle, and there is some evidence of those sorts of gains for the United States.

But what about New Zealand?  Well, I noticed that one set of international rankings of universities (the QS rankings) had been released earlier this month, and I started digging round in their data.  There are a number of different rankings systems, and they all produce slightly different results, emphasizing slightly different things.

On the QS rankings, here are the top 10 world universities

New Zealand universities just aren’t in the same league as these sorts of places.  But how do our universities compare with those of other small advanced economies?

I painstakingly went through both the QS rankings and the Times Higher Education rankings for New Zealand and all the smaller OECD and EU countries, plus Singapore.  “Small” in this context meant fewer than 11 million people (Greece, Belgium and the Czech Republic are all just below that population).  There is quite a gap to the next smallest country, the Netherlands, with almost 17 million people.  New Zealand’s population is around that of the median country.

I took the average ranking for each of the universities in each of these countries, for both the QS and Times rankings.  Across the two sets of rankings, New Zealand’s universities turn out to be right on the median among these small advanced economies. The really lowly ranked systems are those of the former Eastern bloc Communist countries (notably Bulgaria, Croatia, Hungary, Latvia, Lithuania and Slovakia).

But New Zealand’s economic performance is also less impressive than most of these advanced economies.    There is a reasonable correlation between the two.  Here I’ve shown the average university ranking for each of these small advanced countries against real GDP per hour worked for 2014, taken from the Conference Board’s database.  New Zealand is highlighted in red.

New Zealand doesn’t seem to do too badly, but we don’t stand out.  (The outliers on the right are Luxembourg and Norway).

If we don’t stand out, it is a little hard to see why top-tier foreign students would be keen to come and do PhD (and subsequent post-doc) study in New Zealand.   We will always attract some people –  and being an English language country helps us attract more foreign students than one might expect given our size and distance –  but not many of them will be from the top tier of potential students. It is those top tier students from whom the strongest contributions are later made –  and usually only from a relative handful of them.  And for almost all of those people, the top universities in the US or the UK (and a handful of others, in Switzerland, Singapore, or perhaps even Australia) will overwhelmingly be the destination of choice.

Perhaps for some these sorts of numbers suggest a strategy: “lets make our universities great, and then we’ll attract top tier students, who in turn might stay and help lift New Zealand’s economic performance”.  I suspect that if there are any causal relationships here, they are mostly the other way round.   Top universities are as much consumption goods as production ones, and luxury products tend to be found in the richest and most successful countries.  The United Kingdom and the United States have long been the richest and most successful countries and they have university systems that reflect that (the UK isn’t that large a country but has around 15 universities in the top 100).  Among the smaller countries, Switzerland and the Netherlands  have  also long been among the most prosperous countries, and also stand out with relatively high-performing universities.

No doubt, causation runs both ways –  top universities are a magnet for talent and in some cases that talent can be part of the process of innovation and economic advancement –  but it seems most unlikely that one can first  create the top tier university and then see the prosperity follow. That is perhaps especially so in somewhere as small and remote as New Zealand.   What would make top tier foreign academics, in large numbers, want to come and stay in New Zealand?  Perhaps money might do it for some, but even if governments were to make the money available, backing this as some new “growth strategy”, I rather doubt it could be a sustainable strategy.  Distance is simply too formidable an obstacle.

As I was playing around with this material, I was thinking of the New Zealanders who had worked at the Reserve Bank in my time there who had gained PhDs.  A few have pursued them at New Zealand universities –  several are at present – because it enables part-time study and fits with family commitments etc.  But I jotted down a list of 14 people I could recall who had done PhDs overseas, mostly after leaving the Bank.  Most went to the US or UK, and all of those went to top tier universities (LSE, Cambridge, Berkeley, Stanford, Chicago, Yale, Princeton, Harvard, NYU).  Even the two who did PhD study in Australia did so at universities rated materially higher (overall, and in economics) than any of New Zealand’s universities.  These were all very able people, and the revealed preference in their choices suggests that universities of the quality of those in New Zealand (middling by international standards) are most unlikely ever to attract any material number of the sort of exceptionally talented creative people from abroad around whom one might reasonable begin to build an immigration policy.

PhDs aren’t everything, and lots of highly creative people have no interest in that particular sort of field of endeavor, but it just helps illustrate the point about how difficult it is more generally for a small remote country, with mediocre incomes, to attract the world’s best.  In my view, we are much better focusing on building a prosperous and successful society around our own people, as capable and hardworking as any in the world.

But, by all means, put in place a facility akin to the US one for people of ” extraordinary ability”. Here are the requirements for one set of fields:

Proving extraordinary ability in science, education, business or athletics:

The applicant can submit evidence of receipt of a major international award such as the Nobel Prize, Olympic Gold Medal or at least 3 of the following:

• Receipt of nationally or internationally recognized award
• Membership in organization that requires outstanding achievement
• Published materials about the applicant in professional or major trade publication
• Judgment of the work of others
• Original scientific or scholarly work of major significance in the applicant’s field
• Evidence of authorship of scholarly work
• Evidence that he or she has been employed in a critical or essential capacity at an organization with a distinguished reputation
• Has commanded or will command a high salary in relation to others in the field
• Other comparable evidence

If we can attract these sorts of people, New Zealanders might well benefit.  We probably wouldn’t get many, but who knows.  And large numbers aren’t really the path to prosperity; mass moderately-skilled immigration hasn’t been any sort of successful economic lever in New Zealand in the last 25 (or 70 ) years.

The Prime Minister was also on TV3’s The Nation last weekend.  Most of the interview was about immigration.

Late last year, I wrote about some earlier, probably rather off-the-cuff, remarks that Key had made about immigration, in which he described the recent high net migration inflows as a “time of great celebration”.

The TV3 interview was a rather more substantial occasion (The Nation isn’t exactly a mass market programme), and it was about the issues, not just an opportunity to attack his political opponents.  The Prime Minister will no doubt have been briefed for it by his own DPMC officials, and perhaps also by MBIE, the government department responsible for immigration (administration and policy).  And yet I was surprised just how insubstantial his answers were, and a little alarmed at the central planner’s mentality that they evinced.  On Radio New Zealand yesterday, Matthew Hooton described the current government as the most interventionist since the 1970s.  That mentality was fully on display in John Key’s interview.  I had to watch the interview again to be sure that I had correctly heard a Prime Minister from an avowedly centre-right party declare that there was an optimum number of (immigrant) truck drivers.

I was pleased to see that the interviewer kept the focus on the flows of non-New Zealand citizens.  New Zealand can’t, and shouldn’t try to, control the comings and goings of New Zealand citizens.  We can’t even, and shouldn’t try to, control the outflows of non-New Zealand citizens –  the people who come and, after a time, find that New Zealand isn’t quite right for them, or just find an even better opportunity somewhere else.    But every inflow of a non New Zealand citizen requires the approval of the New Zealand government  –  that is what immigration policy is about. (As a matter of policy, we allow any Australian citizens to move here without advance approval but (a) that is still a New Zealand policy choice, and (b) the numbers involved are pretty modest (over the last 40 years the annual net inflow of Australians has fluctuated between 0 and 3500)).

The Prime Minister, of course, was keen to emphasise the fall in the net outflow of New Zealanders.   In the data released yesterday, there was still a net outflow of 3890 New Zealanders to Australia over the last year.  That is, by the standards of recent decades, a small net outflow, but the people who know New Zealand best  –  New Zealanders –  are still choosing to leave rather than to return (and to a country where real per capita income has been falling for the last couple of years, and hasn’t grown in seven years).  That should be telling the Prime Minister something.

The interviewer kept trying to push the Prime Minister to name an “optimal number” for the inflow of non New Zealanders.  He consistently refused to do so, asserting that there was no limit to number of arrivals he would be happy with “so long as they add value to New Zealand”.  Oddly, neither he nor the interviewer mentioned that actual government policy is rather different.  After all, there is a target level for the number of residence approvals granted (45000 to 5000o per annum), that target is approved by Cabinet, and the target has not changed for quite a long time.   Despite all the fluctuations in the number of foreign students, or short-term workers, the residence approvals programme is the main way in which immigration policy boosts the population over time. Broadly speaking, I think it is a sensible way to run immigration policy –  we shouldn’t be playing around with the target each year in the light of immediate pressure, but setting some medium-term targets and reviewing them from time to time.    But there was simply no discussion as to whether 45000 to 50000 is the best target, or how we might know.  Why not, for example, 30000 per annum more?  Or fewer?

In fairness to the Prime Minister, there was also nothing explicit along the lines often found in MBIE documents, lauding New Zealand’s immigration policy as a “critical economic enabler” or a “key lever” in economic strategy.  But he didn’t seem far from that either, but with equally little evidence.  He asserts that immigration is a source of growth, without ever being quite clear what he had in mind.

Everyone recognizes that increases in immigration boost demand, and tend to boost total GDP.  Bur our real interest should be in per capita or per hour worked measures, whether of GDP or of national income –  and, to be even more specific, in what, if any, gains there are to those who were already here.  From an economic policy perspective, immigration makes sense if it makes those of us who were already here better off.  But despite running one of the largest immigration programmes in the advanced world, neither the Prime Minister, nor his advisers in MBIE and Treasury, have been able to produce any evidence that New Zealanders as a whole have been made better off.  In his interview, the Prime Minister didn’t even try to make the case, to (for example) outline the channels by which he believes New Zealanders are being made better off.  (And, in fairness, the interviewer didn’t push him to do so.)

Instead, the Prime Minister seemed reduced to assertions that the high rate of immigration is a “sign of success” or even “a badge of honour”, asserting that people don’t want to come to countries that aren’t doing well.

It is surprising that anyone takes that line of argument seriously.  At the grim extreme, Turkey, Lebanon and Jordan –  none of them terribly well-performing – have been very attractive places to non-natives in the last few years.   They are simply (much) less bad than Syria.  But more generally, immigrants tend to move from poorer countries to richer countries, and for all its disappointing performance over 60 years or more, New Zealand still offers higher incomes than most of the countries of the world.  That people want to come here simply reflects what we already know, that New Zealand is better off than most places.  It sheds no light at all on whether New Zealanders are benefiting from the large scale immigration programme run by successive governments.  And that should be the question we constantly ask.

It is not as if this is some unimportant question: if New Zealand’s productivity growth or per capita income growth was outstripping that of all its peers there might still be an interesting question as to what contribution immigration was making to that outperformance.  But only a handful of people would care much –  there would be plenty of prosperity to go round.  But we’ve kept on underperforming for decades, despite the allegedly productivity-enhancing immigration programme.

And yet the Prime Minister is adamant that “we need these people”.

I’m not entirely sure why.  There are plenty of people around to offer cynical explanations of anything and everything John Key does.  Perhaps there is merit to that –  as for most politicians –  when it comes to tactical choices.  But the large-scale immigration programme seems to be one of those things which he genuinely believes in.

No doubt it helps that his official advisers (Treasury and MBIE) keep telling him we benefit from the immigration programme, even if they don’t offer –  or even really try to offer – any evidence of those benefits.  That inclination is probably reinforced by the fact that the global elites among whom he moves treat the benefits of immigration as almost axiomatic.

And I don’t suppose he has ever seriously engaged with the fact that, despite its poor productivity record, New Zealand has had some of the highest real interest rates in the advanced world for at least the last 25 years, or the possible connection from that (and the associated high real exchange rate) to the weakness of business investment in New Zealand, and the failure to make any progress towards his own government’s (well-motivated but questionable) goal of markedly increasing the export share of GDP.

But I suspect that a significant part of why Key supports such a large immigration programme is because he buys into the skill shortages story.  It was the only story that he used in the TV3 interview.  Employers tell MBIE, and those taking surveys, that they can’t find staff locally, and that if they can’t find staff it will impede their ability to grow their business.  MBIE certainly believes the story –  as I wrote about a while ago, it suffuses their annual report on migration trends.

What I find remarkable in this document, as in other MBIE immigration work I’ve seen, is the absence of any sense of market processes, and how the market might sort these things out.  For example, if there are excellent opportunities here which New Zealanders are simply ignoring in their rush to get to Australia, surely we’d expect real wages to increase here?    If that happened, some of the opportunities might disappear.  Some New Zealanders might change their minds about going to Australia.  Some people might regard more training as worthwhile, to better equip themselves for those higher-paying opportunities.  Some will switch jobs from less rewarding ones, to the ones where the returns are now higher.  Some people might work harder or stay in the workforce longer.  But not one of these market mechanisms is even discussed.  And this from a key economic agency, implementing the policy of a vaguely centre-right government?  Does it not occur to them that “shortages” don’t happen in most markets, and when they do they are usually just a sign that the price has not adjusted.  Why does MBIE think that labour is different?

Although MBIE and the government seem to see immigration largely as a labour market phenomenon (“a critical economic enabler”), the price of labour  “wages”  appears only once in the entire document (purely descriptively).  “Price” does not appear at all.  In fact, “productivity” and “competition” each appear only once, in neither case in the context of an analytical sentence.  “Labour market” does appear repeatedly, but almost always only descriptively.  There is simply no sense, anywhere in the document, of a competitive market process at work.  If one were being unkind, one might think MBIE saw the role of government as being to ensure that the right pegs were in the right holes.

And that seemed to be how the Prime Minister saw it, as he talked of the need to juggle which occupations were on, and off, the approved list, and never once talking about market adjustments, changes in wages etc.  In fact, it was where the comment about the optimal number of immigrant truck drivers came in –  apparently truck drivers have recently been removed from the list.

From an individual employer level it all makes some sense. Importing a foreign worker really can relieve an individual firm’s shortages.  But it simply doesn’t do so economywide, and isn’t necessary anyway.  Markets and price/wage adjustments take care of reconciling supply and demand, in and across markets. One might have hoped that the Prime Minister of a centre-right government might, just once, have made that point.

When I make the point about market adjustment, I often get some sceptical comments –  higher wages, I’m told, would price producers out of the market.  But if we decided to have a much lower level of immigration a lot of things would change.  Some industries would shrink markedly.  We’d have a fairly flat population, so we’d probably have a much smaller construction sector, freeing up a lot of labour.  We’d have lower interest rates, and a lower real exchange rate.  Resources would, over time, shift from the non-tradables sector to the tradables sector, as more offshore opportunities became viable for smart New Zealand firms.  In some sub-sectors which have been favoured by immigration policy  –  dairy workers for examples –  wages might be expected to rise somewhat, to attract more New Zealanders into the industry.  But remember that the real exchange rate would be lower.    We simply don’t need government officials deciding which particular skills to import this year.

These arguments aren’t remotely new even in a New Zealand context.  In a chapter in the Oxford History of New Zealand in 1981, Victoria University economic historian Professor Gary Hawke wrote

“Ironically, the success with which full employment was pursued until the late 1960s led to frequent claims that labour was in short supply so that more immigrants were desirable. The output of an individual industrialist might indeed have been constrained by the unavailability of labour so that more migrants would have been beneficial to the firm, especially if the costs of migration could be shifted to taxpayers generally through government subsidies. But migrants also demanded goods and services, especially if they arrived in family groups or formed households soon after arrival and so required housing and social services such as schools and health services. The economy as a whole then remained just as “short of labour” after their arrival.”

But 35 years on Radio New Zealand was still leading its news bulletins last night with a story along the lines of “despite record net migration flows, employers claim skill shortages are as severe as ever”.  We simply shouldn’t be surprised.  Immigration simply does not ease skill shortages in the economy as a whole or, typically, ease pressure on resources. Across a range of colonies of settlement, Prof James Belich illustrated that point quite effectively in his 2009 book Replenishing the Earth.

If there are real gains to New Zealanders from large scale immigration –  and the onus really should be on the Prime Minister and other advocates to demonstrate those gains –  they simply don’t come that way.

Finally, Auckland. The Prime Minister was astonishingly upbeat in his story about Auckland, and dismissive of the implications for house prices.  Now, we can all accept that high immigration does not cause housing market problems, and serious affordability issues, when housing and land supply are only lightly regulated.  But that isn’t the New Zealand situation.  The government has been unwilling or unable to legislate to facilitate the sort of physical growth of Auckland that would have kept urban land (and house) prices in check.  Given that, it is quite reasonable to ascribe much of the rise in Auckland house prices to the immigration policy that the government can, but won’t, change.

But the Prime Minister simply falls back on “global city” arguments. He asserts that Auckland has “reinvented itself”, and now competes on a global stage with cities like Sydney, Dubai, London and so on.  According to the Prime Minister, young Aucklanders simply cannot expect house prices to come down again –  this is, we are told, the price of being a “global city”.

This is really nonsense on two counts.  The first, of course, is that there are plenty of successful fast-growing cities in the United States where real house prices have not risen materially at all, and where price to income ratios remain about as low as they were in New Zealand for decades.  As just two examples, Houston and Atlanta are both materially larger, fast-growing, by most counts more successful, and home to much more international business than Auckland is.   Yes, real house prices in Sydney and London and Auckland might not ever come down, but if so in each of them that is a direct result of government choices –  constraining the supply of urban land in the face of population pressure (in the New Zealand case, the population pressure itself mostly resulting from immigration policy choices).

But perhaps more concerning is that there is just no evidence of this Auckland economic success.  Auckland’s population has grown much faster than that of the rest of the country, and Auckland is much bigger than any other place in New Zealand.  According to the champions of the immigration programme, and of the application of agglomerationist ideas more generally, this should have seen Auckland’s economic performance pulling away from that of the rest of the country.  If anything, the data suggest that the opposite is happening.  I ran this chart, from the regional GDP data, a couple of weeks ago.

If Auckland has “reinvented itself” anywhere other than in the heads of the Auckland Council and government officials, it doesn’t look to have been for the better.

The regional GDP data aren’t an ideal measure by any means –  and they can be a bit cyclical, as in the short-term Auckland benefits from the initial boost to spending from high immigration flows, and suffers when immigration slows –  but once again there is just no sign of the gains (incremental or transformational) that the advocates of the immigration programme, as a key economic lever, would have been looking for.    International trade isn’t growing (share of GDP), productivity growth remains disappointing, our biggest and fast growing city is slipping relatively.  All we are left with is some large distributional effects: firms in the non-tradables sector do okay, but those in the tradables sector suffer (and others never even get started); those who own land in Auckland do well, while those who ever want to buy into that market suffer.  And so on.

There are plenty of year to year fluctuations in overall net migration numbers. They shouldn’t really be the focus, and even if they were there are distinct limits to what governments can do about them.  But we deserve a much more compelling case for how the large scale medium-term immigration programme is benefiting New Zealanders as a whole than the Prime Minister (or his officials and ministers) has given us.