Uruguay: one more angle on our dire long-term economic performance

I’d never given much thought to Uruguay until some time around the turn of the century when Struan Little, then at Treasury and now Deputy Commissioner at IRD, came over to the Reserve Bank and gave us a presentation on his thoughts on comparisons between New Zealand’s economic performance and that of two other small and relatively remote countries, Uruguay and Iceland.  At the time, Iceland counted as a success story, and Uruguay not.     Since then, I’ve used Uruguay as a bit of a benchmark of what could happen to us if our continued relative decline wasn’t reversed. It was, after all, an agriculture-dependent colony of European settlement.

100 years ago, New Zealand had some of the very highest material living standards in the world.  Uruguay look reasonably good too, with GDP per capita estimated to have been above those in many countries in Western Europe.  The historical estimates move around a bit from year to year, but over the couple of decades from 1890 to World War One, the relationships between incomes in the United States, Uruguay, and New Zealand were reasonably stable.  Here are the averages, drawing on Angus Maddison’s collection of data:

uruguay nz 1

We were level-pegging with the United States, and Uruguay had incomes around 60 per cent of those of the United States and New Zealand.  Both Uruguay and New Zealand had around one million people back then.

Here is much the same chart for the last five year, this time using the estimates reported in the IMF WEO database.

uruguay nz 2

The Uruguay/New Zealand relationship hasn’t changed much, but both countries have fallen a long way relative to the US.  Relative to the United States, New Zealand is now about where Uruguay was prior to World War One.  Very few advanced or semi-advanced countries have done worse over that period: Argentina and Venezuela are the two I’m aware of.

Unfortunately, even this comparison still flatters us.   For every 100 hours the average Uruguayan worked over the last five years, the average New Zealander worked 116 hours (the US is in the middle).  Our relative productivity performance (GDP per hour worked) is rather worse than our GDP per capita performance.

We don’t have GDP per hour worked data going back to the decades prior to World War One.    In fact, in Uruguay’s case I could find that data only back to 1990.   Here are the Conference Board estimates.

uruguay nz 3

Despite all those reforms we did, we’ve continued to lose a little ground relative to the United States.  And Uruguay, wedged between two troubled countries (Brazil and Argentina) and having got into so much difficulty fifteen years ago that they needed an IMF support programme, has been improving significantly, against us most dramatically, but even relative to the United States.  They have a long way to go to get incomes or productivity anywhere near 60 per cent of those in the United States –  where they were 100 years ago – but GDP per hour worked is already up to almost 70 per cent of New Zealand.

uruguay nz 4

It isn’t just a labour productivity story either.   Here is total factor productivity growth since 1989, again from the Conference Board.   The improvement in Uruguay has been staggering, even allowing for the fact that the starting point had been a pretty badly distorted economy (and some decades of serious political turmoil).

From what one reads of Uruguay, there is still a long way to go –  consistent with the fact that it is still materially poorer than poorly-performing New Zealand.   But they’ve begun to catch-up, while we seem to just work longer hours (per capita) –  and add more people to the mix.  As late as 1970, New Zealand and Uruguay had much the same sized populations, but now their population is only around three quarters of ours.

Contrary to the wisdom of Treasury and MBIE –  accepted by the political elite –  all that infusion of new people doesn’t seem to have done us much good.

Of course, continuing the slow path of relative decline doesn’t prevent New Zealand being a pleasant place to live for many. The sun shines, the beaches and mountains call, and so on. But Montevideo’s beaches look attractive too.    What the continuing slow relative decline tends to mean is a continuing loss of our people –  our children, siblings, friends, grandchildren –  and for those who stay, the struggle to sustain good quality health systems, cancer drugs etc.

Perhaps our leaders might focus on these basic issues instead of pursuing seats on the Security Council, the Secretary-Generalship of the United Nations or whatever.  It isn’t just a National government failure after all.  Perhaps in the 1990s there was a reasonable “the cheque is in the mail” argument, but for the last 15 years –  under both National and Labour governments –  it has been increasingly apparent that economic policy just wasn’t working, and New Zealand was continuing its relative decline.  And nothing serious has been done to address that failure.   We are no better now –  relative to the leading countries – than Uruguay was 100 years ago.  What is stop us drifting further back, towards where Uruguay is today?

9 thoughts on “Uruguay: one more angle on our dire long-term economic performance

  1. That was a really interesting post; an equally interesting and perhaps more difficult question to end with would be “How can we catch up with more productive countries than ours?” I’m assuming, perhaps recklessly, that a small island nation a long way from anywhere can match other countries’ productivity and competitiveness.

    Since you obviously know much more than I do on these matters, can you recommend a text for the complete economic layman to start his learning?

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    • Thanks David

      If I knew a single text, be sure I’d be quoting from it repeatedly. The New Zealand experience has been that has puzzled many very able people for a long time – some call it the “productivity paradox” although I refuse to, because I think I’ve got to the essence of an answer. Many of my generation in official econ agencies, like the senior ministers at the time, thought that the reforms of the late 80s and early 90s would be enough to reverse our decline and get us back among the richer OECD countries. Even if we allowed a little for distance, we looked at our reforms and reckoned that if anything NZ had done a lot of things better than many other countries.

      And I would not, at all, walk away from most of those reforms – they were necessary and desirable in most cases. But they haven’t remotely been enough to reverse our decline (altho may have slowed them). In casting around for explanations I’ve been looking for things that mark NZ out. Some are “fundamentals” – eg our physical location and natural resources – others are important symptoms (a combination of low productivity growth, high real interest rates, and a high real exchange rate, over decades). Another is the sheer scale of the outflow of NZers over 40 years now (since the income gap to Australia opened) and another still is the very high level of legal immigration of non-citizens that we promote (one of the very largest in the OECD – behind Israel, but 3 times the rate of the US, per capita). And so I’ve developed a story that says that the prosperity of the smart and able people we’ve had in NZ depends largely on their ability to utilize the fixed stock of natural resources (a good stock, but not exactly Saudi Arabia size). Our distance from markets is so great that few firms will want to base themselves here if not based on the natural resources – it might be a nice place to live, but so are plenty of places closer to major markets. Natural resource bases only support so many people at top tier incomes – see small v rich countries like Brunei, Oman, or even Norway – and yet as a matter of govt policy we keeping bringing in more and more people, who (good people as they no doubt are) have the effect of stymieing our efforts to catch up with the top tier countries again. The mechanism by which they do that is that new people need lots more physical capital (houses, road, schools, shops, factories etc) and the additional demand that results puts pressure on real interest rates and the real exchange rate, making the development of profitable export industries harder than it should be. Countries mostly get and keep rich by being able to sell good stuff to the rest of the world – but as my Saturday post illiustrated over 15 years we’ve had no growth at all in our per capita tradables sector production.

      There are lots of posts on these sorts of issues in the “New Zealand economic performance” category on the blog, and if you look on the Papers and Speeches tab on the home page it will take you to various articles and speeches, incl one I gave last month, that set the story out more fully.

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  2. I was in West Auckland at the weekend. I would say we are well on the way to being a middle income country. Interestingly, people were talking about articles they had read in the press (mainly Brian Fallow and Bernard Hickey, I think) which obviously picked up on questions raised by this blog.

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  3. In the Uruguay context, what correlation can be implied from the increase in performance with the policy choices they’re making? Or is it a case of they’re refraining from doing dumb stuff and are in catch up mode.

    I’m interested in what policy choices you’d recommend for a substantive improvement in outcomes for NZ? At the moment short of discovering oil Norway style it would seem like its a case of we’re located at the end of the world and we’re going to have to get use to middle income status over time.

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    • A great deal of good policymaking is “stop doing dumb stuff” (eg the abolition of all the protection and subisidies etc that built up in NZ after 1938). I’m not familiar with the details of Uruguay’s policies, altho I know that they too stopped doing dumb stuff (even more insular inward looking policies than we had, and social tensions reflected in very high inflation). As for NZ, I am relatively optimistic about what we could make of NZ: we have plenty of smart enterprising people, but a limited base of natural resources and big disadvantages of distance (that technology isn’t really easing). If we’d kept overall immigration of non-NZers at the sorts of levels we had in the late 70s and early 80s, we’d have a materially lower population now (and the same natural resources). More people aren’t the answer – if anything they are the problem. Of course, if NZers want more children that is just private choice (thus I rebut a regular commenter who insists I have a population policy), but I see no reason for the central planners to be running an alternative population policy – driving up our population rather rapidly by international standards, through a discretionary immigration policy – in a country that doesn’t seem to be generating enough successful businesses to support us all in First World conditions.

      I’d have other things on my list: RMA reforms (altho they’d be less imperative with a flatter population) and lower taxes on business profits (we want more investment – we don’t get it by taxing the fruits heavily; tax consumption not business earnings).

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  4. In a recent article you disclosed that within 3 years of entering New Zealand 30% of “skilled migrants” were unemployed

    Whichever view you wish to take, that result falls into the failure basket

    The “program” is not working. It needs to be managed rigorously.

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  5. I don’t recall that particular statistic, but I was interested to stumble a line in a recent MBIE paper which said that the unemployment rate for skilled migrants given residence visas while already in NZ (ie already here on work or student visas) was worse than that for those applying directly from abroad, even though our system gives priority to the former group. That looks like a fairly telling commentary on how badly misconceived the whole approach is.

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    • Yes – it was the MBIE paper – I misintrerpreted the 3 years into 30%

      [quote]
      Recent research on Skilled Migrant Category migrants found that killed migrants from Asia earned less and were less likely to be employed three years after gaining residence in New Zealand than skilled migrants from Europe, and that residents who had previously been students also fared worse

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