…and drifting ever further behind (the rest of the advanced world).
That was the title of my address this morning to annual New Zealand Initiative Members’ Retreat in Auckland. It is a gathering of several dozen chief executives and senior executives of the Initiative’s corporate (and government) members.
Here is the text.
Drifting slowly ever further behind NZI retreat presentation 17 March 2016
I was sharing a session on the economy with James Shaw, the leader of the Green Party. I’m not sure how we got grouped together – perhaps speakers the organisers thought the attendees would be rather suspicious of?
I talked only briefly about the current state of the New Zealand and global economies, concluding that there wasn’t much positive to look forward to over the next few years from either source, but that at least New Zealand didn’t seem to face much risk of a domestic financial crisis.
notwithstanding the obscene level of Auckland house prices, and the overhang of dairy debt, New Zealand as a whole has not been on some credit-fuelled rampant boom. If we take the country as a whole, our dependence on foreign capital (the NIIP position as a share of GDP) has largely gone sideways for the last 25 years. Perhaps ideally it would have shrunk a bit, but this is no Greece, Spain, Ireland, or Iceland. Or even the US – with all that government sponsored or promoted poor quality housing lending. Risks of a domestic financial crisis should rate very low on your list of concerns.
I got the impression that some people thought that was about the only upbeat comment in the speech.
The rest of the address was about the longer-term economic challenges facing New Zealand. I pointed to some of the stylized facts:
- persistently high (relative to other countries) real interest and (relative to our relative productivity trends) real exchange rate,
- the continuing decline in our relative productivity (labour or MFP),
- the failure to see any expansion in tradables production per capita over 15 years, and
- the failure of Auckland incomes to rise relative to those in rest of the country, despite all the emphasis on possible agglomeration benefits and a policy focus on promoting Auckland.
I noted that New Zealand had been, and remains, a natural-resource based economy.
Modern New Zealand has always been, and remains, a natural resource-based economy, and no one is making any more land, sea or other natural resources. We find new and smarter ways to maximise what we earn from the natural resources – productivity in agriculture in recent decades, for example, has been quite impressive – but that doesn’t change the fact that we have a given stock of natural resources and a fairly rapidly growing number of people. For each new person we add there are simply fewer natural resources per capita. In a well-ordered society, abundant natural resources are a blessing not a curse, and there are plenty of opportunities for productivity gains in many of those industries. But the stock of resources isn’t increasing, and the people are.
That wouldn’t matter if we were rapidly growing industries that were taking on the world based largely on the skills and talents of our people. After all, there are no known bounds to human creativity and ingenuity. You could think of the US or the UK, or Belgium or Ireland. But we aren’t.
What New Zealand exports has changed over 170 years – at one stage, gold was our largest export, perhaps whale products at one stage even earlier. Optimists like to point out the agricultural exports have diminished in relative significance. But if we look at all our exports, our natural resource based exports – agriculture, oil, fish, gold, (most) tourism, forestry, aluminium – make up probably 80 per cent of our total exports (good and services). That proportion isn’t shrinking materially. There are some globally successful companies based here, who don’t primarily draw on the natural resource base – Fisher and Paykel Healthcare might be the best known – but there aren’t many, and there is simply no sign of the export base transforming. Exports of educational services have been in the headlines this year: they are a welcome boost, but we aren’t exactly selling premium Ivy League type products.
Unfortunately, there is not the slightest evidence that the New Zealand strategy has worked. The formal evidence base around the economic impact of immigration to New Zealand is unfortunately still quite limited, and we never quite know what would have happened without the immigration. But it was never a strategy that was likely to succeed. For one thing, New Zealand is small, remote and (by advanced country standards) relatively poor – not exactly first choice for the hard-driving and ambitious best and brightest. Our universities are middling at best, so we can’t attract many potential stars that way. As Hayden Glass and Julie Fry reportedly point out in their new book, our skills-based programme has been attracting less skilled people, on average, than the Australian or Canadian programmes.
And
There is simply no sign of a fast-growing knowledge-based outward-oriented tradables sector, that would lead faster national growth in productivity and incomes, emerging here. [Auckland].
And nor would I expect it to: this is a natural resource based economy, and simply not a place where those knowledge-based industries would naturally locate in any number. Even if they started here, in many or most cases the owners could maximise value by relocating (or selling) abroad.
New Zealand might have plenty of smart people and low regulatory barriers to starting businesses but it seems to be a pretty poor place to base global business. That seems to be our experience. But look around the world, and you simply don’t find many such businesses on remote islands.
And
In their individual wisdom, knowing their own country, New Zealanders has been recognising that prospects for them and their families are better abroad than here. Even last year, more left than came back. And yet our governments – backed more or less by all political parties – have simply decided to bring in huge numbers of new people each year. It is an astonishing example of a central planner’s hubris – a whole new Think Big strategy in which governments, all with the best will in the world, mess up the stabilising adjustments that would otherwise have been underway.
Governments don’t help by messing up the housing market but, salient as that pressure is, especially here in Auckland, it isn’t the real issue. The real issue is simply that there are no new really good income earning prospects – new highly rewarding export industries – that the much higher population is enabling us to tap. We haven’t found new natural resources or ideas that need lots more people to take full advantage of them. Of course, we sustain reasonable total GDP growth building to support a rising population, but it does nothing to close our productivity deficits. And because people can’t be used for two things at once, the need to build to accommodate the ever-rising population crowds out some productive, internationally oriented, investment that would otherwise be profitable here. If we keep on with such a strategy we’ll keep on, little by little, drifting further behind the rest of the advanced world. We are simply in the wrong place to support very many people. No other remote island has anything like our population. Our own people have implicitly recognised the limits of New Zealand for decades. It is governments and their official advisers who seem blind to it.
Concluding that we need to change course
Closing those gasps will take far more rigorous and robust analysis and advice from our key economic agencies, such as Treasury and MBIE, that looks hard at all the symptoms of our longer-term economic condition. But it will also take political will, drive and vision – and a willingness to put aside the implicit “big New Zealand” mentality that has shaped so much of our history – from Vogel to Seddon to Holland to Holyoake to Douglas, Birch, Clark and Key.
New Zealand isn’t in short-term crisis, and for that we can be grateful. But our people – our kids and grandchildren – deserve more than leaders simply smoothing the pillow of continued relative decline, all the while pursuing a flawed “Thinking Big” more-people strategy that failed in the post-war decades, and has failed again in the last 25 years.
Depressing? Well, several people thought so, one pointing out how fitting it was that I’d named the blog for Cassandra. Personally, I’m a lot more optimistic than that. I reckon there is no reason at all why a bunch of smart people can’t generate really high per capita incomes in these pleasant islands, combining our skills, institutions, and natural resources. Various other small countries do so – mostly from oil, but there is nothing unique about that particular resource. We have been deluding ourselves – or rather our politicians and officials have – in the belief that a bigger population and bigger cities are the path to success. There is simply no evidence they have been so far – not just in the last few years but in the many decades since the last really positive New Zealand-specific productivity shock. But that is really quite easy to fix. We can’t change where we are in the world, which is a big drawback in many ways – some activities are just never likely to be generated to any large extent in places like New Zealand – but that shouldn’t hold back our living standards so long as we avoid the central planners’ ambitions to rush to populate.
But if you still reckon my presentation is bleak, James Shaw trumped it with a fairly shockingly dark joke. (It was a Chatham House rules occasion, but he said I could say that) talking about robots and the risks they might pose he recounted a joke he’d come across on Twitter.
9 year old girl: Daddy, will robots one day rule the world?
Father: Yes, dear. Probably.
9 year old girl: Daddy, will that be before I die?
Father: Probably dear. Just shortly before.
Finally, I learned today that the New Zealand Initiative is planning to do some substantive work on the economics of immigration in New Zealand. It might still be some way off, but I welcome the prospect of the work being done, and look forward to what they come up with. Eric Crampton apparently is keen on inflows that would enhance the availability of Latin American cuisine.
croaking cassandra 