Location matters

That was, more or less, the theme of my talk to the Fabian Society in Wellington last night.

I outlined some of things that seem to matter in explaining which countries prosper and which ones don’t.  The people and the “institutions” they develop, or adopt, matter most of all.  But natural resources also do –  note, for example, the contrast between the GDP per capita in Sweden (high) and Norway (materially higher).  But location, or geography also seem to matter. Once, much of that was about access to navigable waterways, and perhaps some climatic issues.  These days it seems to be more about proximity.  Whether in the past or present, one just doesn’t find many really prosperous places, or many people living in those places, at the peripheries.  As I noted

the total population of Kerguelen, the Azores, Hawaii, Seychelles, Fiji, Iceland, Tasmania, Reunion, St Helena and the Falklands is just a bit less than New Zealand’s.

If anything, proximity and personal connections seem to have become more important, not less.  Quite why this should be so, despite the rise of communications technology, isn’t entirely clear to me (it must be something about the nature of the products/services), but that it is so seems evident in the continued economic outperformance of big cities, even in already-advanced countries.  That puts New Zealand at a big disadvantage –  we have able people, a moderate level of natural resources, but are a very long way from anywhere.  And the stock of natural resources is largely fixed, and doesn’t need lots more people to make the most of (indeed, often fewer people –  think of how many more cows an average farmer can run now, compared with the situation a century ago).   New Zealand just isn’t a very natural place for many global businesses to develop successfully, or to stay.

The Treasury was the first organization really to capture my attention on the significance of distance.  About 15 years ago they drew a useful comparison:  if one drew a circle with a radius of 1000 kms around Wellington one would capture (now) 4.5 million people and a lot of seagulls, but the same circles drawn around northern European or Asian capital would encompass hundreds of millions of people.  But it is puzzling that Treasury doesn’t seem to have taken that point and applied it in thinking about the appropriate immigration policy for New Zealand.  They tend to ignore the market signal (the hundreds of thousands of New Zealanders (net) who have left), and also ignore the logic that if distance is, in effect, a tax on economic prosperity here, it isn’t obvious why one would set out, as a matter of policy, to expose even more people to that tax.    Nothing of these ideas was in the recently-released Treasury material that I wrote about the other day.    Implicitly, Treasury and MBIE immigration policy advice- and the advice of bodies like the OECD (perhaps more pardonably, located in the heart of Paris) –  is being formed as if New Zealand were moored just off the coast of western Europe or North America, or perhaps even in the South China sea.  They need to take more seriously the fact that these islands are in the middle of nowhere.  High value economic activity takes places on such islands, but mostly only stuff that is location specific –  the iron ore is in the heart of Australia, the fish stocks are off the coast of New Zealand etc.  But it is really hard for modern, non-location specific businesses, to develop, and be the best they can be, in such a remote location.  It isn’t specific to New Zealand –  check out those other remote islands too.

But we make it all the harder for anyone with the drive and ideas to develop such firms.  Having persistently the highest real interest rates in the advanced world, and a real exchange rate that never sustainably adjusted down following our decades of relative decline, just further skews things against the prospects of the tradables sector.  Business investment has been consistently modest.  And the Think Big mentality, of bringing in enough –  modestly skilled –  migrants each year to have given us one of the faster population growth rates in the OECD, both reinforces those pressures on real interest and exchange rate –  resources have to be used to accommodate a growing population rather than enriching the existing population –  but also ensures that the fruits of the largely fixed stock of natural resources is spread over ever more people.  In effect, we trade away one of our few advantages.

I argued that we need our politicians and their advisers to both take more seriously the constraints of our location, and abandon the sense –  embedded in the New Zealand psyche almost ever since first European settlement –  that we need more, and more, people.  There is simply nothing wrong with a country of around 4 million people.   There are plenty of successful small countries.  For many of them perhaps it is more of a discretionary choice. At such distance from world markets, mostly trading on our ability to apply smart ideas to natural resources, it is much more of an imperative –  at least if we are serious about trying to give our people material living standards that match those of the better-performing OECD countries.

Anyway, here is the text I spoke from. It was delivered to the Fabian Society –  where we had a good discussion and lots of questions.  But for readers skeptical of the left-wing audience, it is almost identical to what I would say on these issues to an audience anywhere else on the political spectrum.

Fabian Society speech 20 May 2016

As ever, comments (and questions) are most welcome.

 

18 thoughts on “Location matters

  1. “The radius with 4.5 million people and a lot of seagulls’. It sounds like you are suggesting NZ needs more people, not less.

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    • I once did a post about NZ perhaps being best with 2m people or 200m, but as I thought further about it I concluded that if by some chance we got 200m here, many of them would then leave – because the cost of distance would still be material.

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  2. Many immigrants arrive here after they have made their money. Like the safety and lifestyle . Its a nice place to live. Some add value, some don’t. The immigrant program that allows the wealthy to buy into NZ is badly designed. Buy a building and get a passport.

    Govt. is not and never has been business friendly. It’s prone to picking winners, doesn’t attach much importance to research and development, allows tax deductions for flash new cars unrestrained and doesn’t foster investment in new productive plant by allowing greater depreciation rates which gives companies cash.

    The Govt. and Local bodies are attached to the property market.
    Both think they are good at business when they are nott .( oh they don’t say that but they pander to the electorate which doesn’t want them to sell their businesses. Look at the likes of Landcorp. The power companies, Airnz , Broadcasting and so on.

    Hard task to change the politicians attitude.

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    • Actually it’s not as simple as buying your own hone for residency. Immigration criteria is very much more robust than what you suggest. There is the skilled migrant category, the entrepreneur plus category with $500k investment in a business with minimum of 2 kiwis employed, the $1.5m entrepreneur category and the $10m investor category. Buying a house is a byproduct of just needing a place to live.

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  3. Very interesting read – thank you very much.

    What was the discussion like amongst the group when you presented? I don’t understand why policy (i.e. around immigration) continues to be the way it is when the evidence presented that it should be lower and more targeted is so compelling – is this from poor advice from policy analysts or political intransigence?

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    • The evidence points to immigration very much a replacement policy. For every kiwi that leaves the government replaces. NZ population grows largely from natural birth.

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    • We had a good discussion on Friday night with some pretty thoughtful questions.

      As for why things stay as they are, remember that there are alternative narratives around our economic underperformance. Mostly I don’t find them that persuasive, but they are typically put together by other smart people, and under “brands” that have a bit more authority than mine.

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  4. Your speech – Good to see all your thoughts in one place, and well worth a read.

    A number of thoughts: –

    Brexit debate – The Remain side argued there could 5m more immigrants to the UK by 2030, about 0.5%pa. I think they were more concerned about the absolute number, but still a lot less than NZ’s 1%pa.

    Immigration/emigration, should we apply standard supply and demand logic? Demand insufficient (wages/employment not high enough), supply decreases (emigration), government increases supply (immigration), balance not achieved.

    Could use NZ residents’ movements as a proxy for what the market is supplying/demanding, and as a guide to immigration policy.

    NZ may/will create big non-resource based companies (F&P Healthcare, Xero etc.), but to paraphrase what you say – what is their point being based in NZ. It is probably more appropriate for their business that they operate from overseas. But operation and ownership are separate. Unfortunately we often seem happy to sell out.

    Not convinced that interest rates would fall much if immigration was reduced. But at least they would end up at a level that wasn’t being influenced by an unbalanced immigration/emigration market. What is the evidence for how much interest rates and the exchange rate would drop?

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    • With tourist numbering 3.2 million a 400k increase over the previous year. We are simply not building enough hotels. Fewer migrants will not fix our supply problem.

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    • Thanks. I’m uncomfortable with trying to engage in short-term management of immigration based on changing econ circumstances, but I think the gist of what you are saying isn’t a million miles from where I am. I’d cut the permanent immigration target now – with perhaps a 20 year horizon in mind. If we genuinely turn out much more successful over that period, then lets have the political conversation about whether we want more migrants. If we did, it wouldn’t be too make us rich – we’d already be so – but we might just want to share the gains or whatever. But most rich and successful countries don’t have large scale immigration programmes, or aspirations.

      Re interest rates, there is about 150 bps difference between NZ and US 20 year govt bond rates (and various other countries – not in great shape – are lower than the US. Using a very simple UIP model, that is consistent with an implicit expectation of at least a 30% fall in the exchange rate (ie expected returns are equalized over that horizon, if the NZD falls 30%). Interest differentials aren’t a good predictor of actual exchange rate movements, but here it is expectations that matter.

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  5. I respectfully disagree with much of what you say. I think you are completely backwards-looking. I’m looking at the next 100 years and I see the serenity of distance. The lack of competing entities for water and energy, a relatively low population that can adapt to rising sea levels, self-sufficiency in food production. New transportation technologies conversely will bring New Zealand very close to the world in the next 50 years. Certainly with virtual reality computing in the next 20 years. There is a reason why immigration levels are so high, you know, and they are not all being sold a bill of goods. Many of those immigrants have multiple degrees and are starting up or maintaining businesses. As to those who leave, well there are many reasons. But the major one is that we have a lot of talented people here. And many of us come back too eventually or live just a short hop skip and a jump across the ditch. On the interest rate side, 10 year bond yields are now within cooee of the US, adjusted for credit quality. We are getting there. If low interest rates have done pretty much nothing in Europe except make people consume less and save more, it’s hardly going to be a panacea in New Zealand. People can actually afford to retire here – but not for long if we sink into the European and Japanese abyss. Will interest rates drop if immigration stops? Probably not as the price of labour will very likely rise. You also don’t mention the price of credit in your articles. Credit trades often significantly tighter here than in Europe and the US and given our government bond paper outstanding is pretty low, it’s the total outstanding credit that should be looked at. What is true is that the ROEs of the NZ banking system are second only to Australia globally and that we are being royally ripped-off. *That* is where the problems are in reality with interest rates.

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    • Thanks for the comments. As I said in the speech, (a) immigration to NZ is a real gain to the migrants (so I’m not suggesting eg, that they are deceived (b) it would be great if technology was the death of distance, but it hasn’t been so so far. If it ever is, lets have the debate then as to whether we want a rapidly rising population to share in the gains.

      Re govt bond yields I do disagree. Our 20 year indexed govt bond yields are around 150 bps higher than those in the US (pretty similar to the expected differences in our short-term policy rates) and almost none of that difference is about the credit quality of the two govts (if anything our govt’s balance sheet is better than theirs)

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  6. Thanks for the talk: well-prepared and pretty convincing. But then I’m a baby boomer that looks backward at a relatively uncrowded land with a degree of wistfulness.

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  7. The policy position of Treasury and MBIE seems to be NZ needs more people and immigration is the way to get there faster… I do agree that it is a good topic to be thinking about, although I don’t profess a strong view either way at the moment.

    if you are in another country you may have choices about where to go… US, UK, Canada, Australia for English speaking migrants perhaps, Europe also? So why choose NZ?

    It might be useful to consider how to ask that question, but controlling for the differences in immigration policy, and ease of entry between countries. Also NZers that leave. Why did they go where they did. What might a comparative analysis of motivations tell us?

    If one is to discuss immigration policy then it seems reasonable to ask people who are migrating in either direction why they go where they go and the choices/trade offs they make.

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    • The problem we have in NZ is that we are so preoccupied with a tiny migrant number that equates to 14k a year and another 36k drawn from an existing pool of international students already counted as PLT migrants that would only stay for a few years and we conveniently forget that there is a 400k increase in tourists running around and John Key is planning for 4 million an increase of 800,000 over an above the 3.2 million this year. It is clear we are not building too many hotels or motels. Guess where they end up staying? Air BnB your everyday tourist survival guide to accomodation in NZ. Guess what? Almost all 4million will first stay in Auckland before they head out to the rest of NZ.

      Lets cut migrant numbers by 20k and increase tourists by 800k and we expect house prices to fall?? This housing issue is not going to go away until we start building more houses. Mt Roskill, Mt Eden, Epsom, Remuera has to be rezoned for 18 level buildings. Especially so with Mt Roskill where they are poorer people and do not have lawyers to object.

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      • Assume your tongue is firmly in your cheek?? Trouble is that people that come to NZ come here partly for lifestyle reasons in my view – might be wrong…

        I’ve done some analysis of building consents over the past three years in Auckland and 75% (!!) are for houses – stand alone houses, 10% for apartments, 10% for townhouses/flats and what have you and 5% for retirement villages – thats the way Stats NZ breaks the data out…

        So the market is clearly telling developers that they want houses on a postage stamp of dirt perhaps, but a house nevertheless… So how do you solve for that? How do you get people to change from demanding houses to demanding apartments – no amount of wishful thinking about apartments will make any difference.

        Some of the market is OK with apartments, but they are a small minority…

        Wot to do?

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