Thinking Big…..

…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.

Against this background, I drew attention to the failure of our skills-based immigration programme

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.

 

21 thoughts on “Thinking Big…..

    • Whatever your views on the right number of migrants on average, surely we can improve on things. First set whatever you want as overall target, and I won’t argue about that part for now. But after that’s all done, upweight the applications of people from places with under-represented cuisines.

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      • The more I think about immigration the more I agree with one distinguished person who wrote to me the other day that “We should stop thinking about migration in general as a growth stimulant”. We make, or fail to make, our own prosperity, and immigration is probably best thought of in terms of what sort of society we’d like. That could encompass open borders, or no non-citizen immigration at all (except perhaps new spouses of NZers), or bringing in lots of people from places with attractive and underrepresented cuisines. For me, it might be more conservative Christians (whether from Ted Cruz country or east Africa), for most NZers it might be people from Obama-Sanders supporting places. The US in the 1920s squared all that away by (a) cutting immigration, and (b) using quotas to reflect people already there.

        Both level and composition of immigration are choices, and some of those choices can have profound implications (as the 1840 Maori may not have fully realized) but the economic dimensions, positive or negative, are probably mostly second order in significance.

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  1. Seems NZ banks assets are heavily concentrated in household and agriculture claims: history suggests that banking systems get into trouble when concentrated exposures go wrong so fingers crossed ‘white gold’ returns to the domestic economic lexicon (despite the stress test results). Mind you, as pointed out, keeping immigration high underpins demsnd so perhaps there is a cunning plan after all? And I guess at the end of the day, not many elections are decided on the issue of productivity – does the average voter (nb: demographics) want more output per head or more capital gain per head?

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    • Of course, experience also suggests vanilla housing loans don’t threaten the health of banking systems, and especially not in floating exchange rate countries.

      Dairy is potentially a bigger issue. I’m not entirely persuaded by the RB stress test article (post coming), but in isolation even if losses were twice what the stress test suggested it wouldn’t materially threaten the health of the banking system – and in such a severe scenario it is hard not to believe that the exchange rate would be materially lower.

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  2. Michael

    You said “pleasant” islands. Maybe this is why we cannot grow fast or as fast as you like. Usually, pleasant places are for relaxing and not working hard. I am not being sarcastic at all. I think that this is part of the issue. When I came to NZ in 1994 from the US I was astonished about the relatively slow pace. Businesses used to close on Sunday and no one bothered to hang a “business hours” on the door. The drugstore in the village used to go sailing whenever it was nice and sunny without a note on the door. Apparently it was customary for people living in the neighborhood to leave their prescriptions with the next-door dairy shop and the pharmacist would personally deliver the medicines to them later in the evening. Things changed, but we still live in pleasant islands.

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    • It sounds like a plausible story, but I wonder how different it was like for other advanced countries, esp the other Anglo ones. I recall going to the US for the first time in the late 80s and being astonished at an academic telling me about her town where no one locked their car, or their house doors.

      But even if it was a description of some parts of NZ 25 years ago, is it now? Violent crime isn’t low by international standards, nor are burglary rates, NZers work long hours per capita, and so on, I’d never heard – at least beyond the 1950s – something like your pharmacist story, but life certainly isn’ like that now.

      I’m don’t know the answer, but when I said “pleasant islands” I mostly now had in mind some combination of temperate climate and picturesque scenery (I was speaking today in a venue looking out on Akld harbor). And then I remember checking out the online photos of the beaches of Uruguay, which look pretty attractive too

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  3. Think small would be more appropriate title.

    NZers have a strong emphasis on property and this speculative investment has some advantages over other investments:
    1 profits are tax free
    2 capital gains have been enormous in the Auckland market
    3 govt policies and demographic/ economic factors support increasing property prices
    4 there’s huge amounts of money escaping China which can invest in NZ residential markets, despite govts new regs tax havens are a simple way to skirt these regs, and pay zero taxes. All this boosts prices.

    So why would anyone invest in startup small business where you have:

    28% tax on profits
    Enormous compliance costs : govt, local council, regional council, RMA.
    Often you are competing against multinational organizations who are able with ease to divert profits to tax havens, play zero tax and use the savings to slaughter local nz based businesses who are silly enough to think paying taxes on profits to support a bloated inefficient govt is an honorable duty.

    So what happens is that small business only grow to a size where they can be bought out by venture capital companies and then sold to off shore companies who then synergige, simplify and stifle.

    If you want to get out of the quagmire then you need to look at what factors a) make start ups unattractive and b) make small companies stop growing into big.

    Hint:Start with tax reform.

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    • I certainly think that a much lower tax rate on capital income (incl business profits) would be highly desirable, and would assist in beginning to reverse New Zealand’s relative decline. Of course, with an economy skewed so much towards non-tradables, if no other changes were made then simply cutting business tax rates could just reinforce that skew.

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      • So why does NZ not adopt a Singapore Model of 17% corporate tax? But the kicker is that their company super contribution can get as high as 15.7% in boom times and dropped to 8% after the GFC. A form of variable superannuation.

        But multinational corporates seem happy to pay for this Singapore model rather than the NZ model of 28% corporate tax and 3% company super contribution.

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      • But recently this NZ model of 3% company super now comes out of the employees wages as well after lawyers worked that legal loopholes in the wording. So NZ taxes on corporates are even lower than Singapores corporate tax model.

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      • Basically if companies using tax havens were charged a Utility Tax ( say 10% of turnover) you could probably drop the business tax rate to 15% and generate greater revenues. Haven’t done the maths but from my experience I wouldn’t be surprised.

        If you want to change investors behavior you need to start at a the micro level. For example dropping interest rates does nothing except creates Incorrect pricing signals and missal locates investment creating asset bubbles

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    • Madman, below is one of the reasons why there rational in investing in Auckland properties. There is a provision within the Unitary Plan to allow for a secondary dwelling which would double the rental income potential of almost every existing property in Auckland.

      PART 3 – REGIONAL AND DISTRICT RULES » Chapter I: Zone rules » 1 Residential zones » 3. Land use controls »

      1.Where a dwelling is proposed to be converted into two dwellings each dwelling must have a net internal floor area of at least 40m².
      2.The second dwelling must:
      a.have direct access to an outdoor living space. This space may be exclusive to the dwelling or shared with the primary dwelling
      b.have a common wall with the primary dwelling of no less than 3m in length or share a ceiling and/or floor with the primary dwelling
      c.comply with the daylight and minimum dimension of principal living rooms and principal bedrooms development controls.
      3.The primary dwelling must exist on the date of notification of this Unitary Plan.
      4.Parking is not required for the second dwelling”

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      • We won’t get cheaper houses but we may get cheaper rents. Auckland Planners are a sneaky and clever bunch, virtually doubling the housing pool overnight. Higher density without highrise.

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  4. Superannuation contributions just come out of the wages, over any reasonable period of time. They aren’t a cost to the employer, just a relabeling of overall remuneration costs.

    I’d actually favour an even lower capital income tax rate – altho given today Herald scare story about the tax overseas companies pay it probably isn’t quite the day to make the case (without some much more substantive analysis)!

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  5. In 1984 Dr Mahathir Mohammed former Prime Minister worked out that if Malaysia was to transition from a agricultural economy to a fully industrialised economy, Malaysia would need 70 million people. That population is today at 30 million and that same population growth policy is still active. It is clear that without sufficient domestic demand we would remain a agricultural based economy.

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    • In 1984, 16 million people and today 30 million. Now that is considered population growth. Not our meagre 4.2 million people that NZ statistics keeps revising downwards at every population census. NZ stats sure is lousy at forecasting. Perhaps Wheeler has the same training at forecasting. ie it is ok to get it wrong all the time.

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  6. I imagine that a bigger population is beneficial for many businesses that would prosper with a larger domestic market. So there are some very real drivers for people’s support of higher immigration, beyond the capital gains in Auckland argument.

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