A question for The Treasury

One thing I like about the Reserve Bank is that it has largely stayed clear of Twitter.  They use it –  you can find them here – but there was a deliberate decision made a few years ago to use it only to highlight new Reserve Bank releases; links to articles, research papers, press releases etc.  I’ve always been sceptical of a medium for expressing ideas in 140 characters or fewer.

The Treasury is a bit more adventurous in their use of Twitter (here), offering editorial perspectives at times, and enthusiastically retweeting things from other people and organisations  (here and abroad) who either endorse something Treasury has done or said, or that Treasury agrees with or endorses.

This Treasury retweet of something from a British academic caught my eye the other day.


Jun 1

Distance matters (still): Trade volume with UK vs distance of trading partner from the UK.  

It is quite a nice chart from The Economist that illustrates a now fairly well-known point.  Firms and people do much more trade, all else equal, with firms and people in countries close to them that with those in countries far away. I don’t think this particular version of the chart is wholly compelling: it uses the total value of trade between countries, but population numbers matter as well, and it might have been better to illustrate the point using per capita trade values instead.  Doing so in this chart would move both Ireland and New Zealand a long way up relative to the other –  mostly much larger –  countries that are highlighted.  But the key point holds: distance matters, a lot.  Not just in terms of who one trades with, but in terms of how much total foreign trade is done at all.  For small countries even more than for large countries, the ability to successfully sell more and better stuff to the rest of the world is a vital part of improving a country’s long-term economic fortunes.

In retweeting it, presumably official Treasury was keen to remind us that distance matters to New Zealand too.    There is no way Australia, for example, would be the largest trading partner for New Zealand firms if, for example, these islands were set in the Bay of Biscay.

Treasury has made a useful contribution over the years in reminding us of this point.  They developed the useful line 15 of so years ago that drawing a circle with a 1000 km radius around Wellington would encompass 4.5 million people and lots and lots of seagulls. while a comparable circle around Vienna or Seoul would encompass hundreds of millions of people.  Sadly, seagulls aren’t a terribly promising market.

Treasury also included this chart in their Holding On and Letting Go document, which formed part of their 2014 Post-election Briefing to the Minister of Finance

Figure 8: New Zealand’s geographic challenge
Selected countries distance from world markets and populationFigure 8: New Zealand's geographic challenge   . Note: The x axis is scaled so that each marker is ten times the magnitude of the previous one.
Source:  World Bank: World Development Indicators, ITC: Trade Map, CEPII

Among OECD and major emerging economies, New Zealand is more distant from markets than any other country.  Chile and Australia are almost as distant.  Chile is a much poorer country, and Australia –  while wealthier –  is very fortunate in the scale of its usable natural resources, but when one looks at the productivity data it is no longer in the top tier of countries.

Treasury also produced an interesting piece of formal empirical research a couple of years ago  using cross-country data to look at the various barriers to foreign trade that New Zealand faces.  In the modelling they report, distance shows up as a highly statistically significant factor influencing (negatively) the volume of foreign trade a country does.

Distance  –  and trade – isn’t mostly about land, it is about people.  Our islands are really remote, but much of what counts is the people living here, who have to find ways of making and selling stuff abroad, especially if we are to have any chance of offering top tier incomes and material living standards to those people.

And so it puzzles me that Treasury never seems to consider population size –  and especially the role of immigration policy in changing population size over time – when they discuss the implications of distance.  4.5 million or so of us face the (quite substantial) penalty of distance.  What leads Treasury to think that exposing ever more people to that “tax” –  not as a result of New Zealanders’ private fertility choices, but as a direct result of government policy –  makes sense.  As I’ve pointed before, in none of Treasury’s writing on immigration policy in recent years has there been any sense of evidence that a large scale (notionally skills -focused) immigration policy has been doing anything useful to lift the overall productivity performance of New Zealand, and the income prospects of New Zealanders.  If anything, we’ve continued to lose ground relative to other advanced countries.

For some time it has surprised me that Holding On and Letting Go had scarcely any mention of immigration policy, and most of the (few) references to immigration were simply to the cyclical pressures, rather than the medium-term issues, even though (for better or worse) it is one of the larger government policy interventions in the New Zealand economy.

Treasury argues that “geography isn’t destiny”, and there is clearly an element of truth in that.  But I don’t think they have yet taken seriously enough the nature of the geographic constraint.  Yes, New Zealand did have top tier incomes for decades, but it did so by exporting natural resource based products deploying/supporting a very small population.  There are no more natural resources here than there were 100 years ago,  the overwhelming bulk of our exports are still natural resource based (not just the obvious farm products, but fish, wine, gold, oil, the electricity that produces aluminium, and tourism) and yet we now have four times as many people as we had in 1916.  Some countries make the transition from natural resources.  When Captain Cook got to New Zealand, Britain’s exports were about 95 per cent based on Britain’s own natural resources.  These days, very little of her exports are.  We have shown very little sign of being able to make that transition.

That isn’t because we don’t have smart, able, innovative people, or good institutions, it seems to be largely because places this remote don’t successfully support many non-natural resource based businesses.  There aren’t any other examples of places that successfully do –  the other even more remote islands are too insignificant to even get on Treasury’s chart.   Internationally-oriented non natural resource based businesses might start here, but mostly the business will be worth more if, in time, it comes to be based somewhere a lot nearer markets.  In some cases, proprietors will like to live here, and will sacrifice growth to keep the business here –  but it is a sacrifice, and in that sacrifice is a measure of the limitations of this place  as a (remunerative) home for too many people.  As one person who runs a small global business here recently put it to me, face to face contact still matters a lot, and if air travel is a bit cheaper than it was 50 years ago, it is no less physically draining or time-consuming.

So my question for Treasury is something along the lines of, why not take seriously (a) the lack of hard evidence that New Zealanders have had economic benefits from immigration, combined with (b) your own recognition that distance matters a lot, and (c) the fact that New Zealand remains a heavily natural resource based economy, with few signs that that is really changing, with no more natural resources being made (and increasing environmental concerns/constraints),  and then think harder about whether a government policy to drive up New Zealand’s population –  even as New Zealanders have kept on leaving –  really makes much economic sense at all.  Treasury has recently asked some good questions about the skill mix of our actual migrants, but they need to think harder about whether there are really top tier income-earning opportunities here for very many people, even if we could somewhat improve the average skills level of those who come.

Distance and location really do seem to matter, a lot.  Policymaking hasn’t really taken that seriously.