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.

26 thoughts on “A question for The Treasury

  1. Even for Internet startups, success often means relocating to Silicon Vally / San Fran area…. you have to be close to talent, money, ideas etc

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    • Not to mention the fact that people always seem to forget that sales — particularly software sales — have a massive face-to-face component, so if you’re going to export overseas you’re going to need to have at least a satellite office overseas….and that office will function way better if the people in it are close to the people actually making the software, at which point you may as well chuck the whole company overseas by selling it to Microsoft or whoever.

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  2. Yes, that is certainly true, but both lots of places are incredibly remote, and both economies prosper – to the extent they do – on natural resources. That isn’t a bad thing in itself – in fact, given the remote location it is largely inevitable – but unlike a lot of the industries other advanced economies prosper from these days, it isn’t indefinitely scalable. There are big potential productivity gains in both sorts of industries (plenty of “knowledge base” in those natural resource industries, but the natural resource stock is largely fixed.

    In the OECD modelling, Australia pays an even greater price for distance than NZ does (since we have them not too far away). Australia has managed to cope with so many more people only be discocvering and unlocking a huge volume of previously untapped natural resources. We’ve had nothing similar in recent decades – and if the minerals are there, environmentalist concern make it very hard to (a) find them, and (b) utilise them.

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    • The point though surely being, once NZ and Australia get over their separate resource dependent economies is we have some pretty good cities on Australia’s eastern side and in NZ, in relative proximity, which have good institutions, a shared culture and enough vibrancy that a local Australasia diversified economy could develope.

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      • Perhaps. But there isn’t much sign of it happening yet. I suspect both countries are running a misguided policy in permitting such high rates of immigration: the issue is more apparent in NZ, given the continual outflow to Aus, but that doesn’t mean they aren’t real for Aus too.

        If we had 20m people between the 2 countries instead of 27-28m would per capita incomes be higher in both countries than they are now. I don’t know, but my hunch – and the implication of my hypothesis/analysis – is that the answer is yes. And we’d still have those cities.

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  3. “I’ve always been sceptical of a medium for expressing ideas in 140 characters or fewer.”

    Twitlonger allows a tweeter to express their ideas and views with however many characters they wish to type.

    For someone like you to say he is “sceptical of a medium expressing ideas…” you don’t seem to have an issue with having that twitter share this app for others like myself to share your expressive ideas with the twittersphere.

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  4. Despite the tyranny of distance, I would have thought NZ could at least get to a Northern European level of prosperity with better economic policies. For example, if our capital taxes were at least 10% below Australian I think we would start to see some head office relocation.

    I was chatting with an Irish investor the other day, and he said that what really turned things around there (apart from the EU which everyone knows about), is the drop in the corporate tax rate to 10% for manufacturing, combined with the change in education. He said that they got rid of the old arts-focused education and directed more funding to STEM and business schools. His university graded him with a US-style grade point average so American employers (in Ireland) could understand it.

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    • The comment regarding grade point averages is really interesting – what is the current level of comparability/acceptability of New Zealand qualifications compared to US and other international ones?

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  5. As you know, I’m all in favour of lower capital taxes, and it probably would encourage some relocations, but whether it would encourage that much more real investment in NZ I’m more uncertain about than I used to be., The more better micro policies we have the more we can sustain more people at first world incomes, so in my ideal world we’d do all of the above (cut capital taxes, wind back a bunch of other regulation, and sharply cut the immigration target).

    I’ve read quite a bit about Ireland and agree the company tax rates looks to have been vital, but it made a huge difference partly because IReland was (a) in the EU, and (b) so close to major markets/

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  6. NZIER produced a report a year or two back promoting NZ aiming for a population of 15 million within 50 years, thereby enabling a large home market (such as Australia or Chile in fig. 8). Maybe some policy makers are fixated on such a goal and thus unable/unwilling to take seriously yours points a, b & c. However, if rapid population growth is contributing to declining GDP per capita, we’d be poorer by the time we got there; not to mention all the other serious problems that would come (are happening?) with aiming for such population growth.

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  7. There is quite a long tradition over NZ history of hankering for a much bigger population and in a sense that NZIER report was just the latest manifestation. In the late 19th C there were people looking ahead to a NZ of 30m people – partly because it was perceived to be such an abundant land and partly concern about national security – and it keeps echoing down the years. I recently read a thoughtful British book from the 1950s called Peopling the Commonwealth, which was shaped by a sense that Britain was overcrowded while the vast open spaces of NZ, Aus, and Canada in particular could,/should be filled in, to everyone’;s advantage. My impression is that it was seen as strange in its day.

    The pursuit of something like domestic critical mass – 15 m, 30 m, or the 200m one foreign academic recently suggested to me – would be an enormous high stakes gamble. Given that we already seem to staked our future on that vision for at least the last 25 years, it strongly argue it is simply not worth taking.

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    • Thanks Michael. I totally agree that it would a high stakes gamble; unfortunately policy makers seem willing to take such a gamble with our children’s future by lacking the nerve to make such bold policy changes as you suggest.

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  8. Re trade per capita, would it really make the graph look better for NZ? We’de still be a bit below Spain and Italy, and a long way behind France and Germany? Ahead of USA, Japan, China and India? It would be interesting to see, and also what the correlation was, perhaps minimal. Factoring in GDP might also be interesting. My guess is there would be a positive correlation with population size, particularly when relative GDP is also included ie. bigger wealthy countries trade more than smaller wealthy countries.

    It might also be interesting to look at the mix of trade over distance ie. whether resource-based or not. I imagine it ties in with your comments. Easier to buy 1000 tonnes of meat/milk/iron ore from the other side of the world (when you trust the seller) as the product is always the same, than to buy 1m TVs with the latest features/design, that you haven’t seen, from the other side of the world?

    I can agree that growing the NZ population might cause problems, but if we magically had a population of 50m, it would be interesting to see what would happen. Perhaps we’d have more people leaving.

    One pro-immigration line I’ve seen in recent days, and which I’ve thought about before, is the ageing population. It is probably an issue that the country should endeavour to resolve?

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  9. Good question about aging population. Maybe Michael could address this in a future post.
    In my opinion I believe there is much misunderstanding regarding this issue. NZ (and the world, from the poorest to richest countries) has an “aging population” in so far as people are living longer and healthier lives. However, unlike East Asia and much of Europe, NZ does not have serious sub-replacement fertility and consequently our population structure is not forming an inverted pyramid (as in those countries) but is forming a more balanced age structure.
    Yes immigration could be used to keep the average age of our population younger if we were to attract predominantly young migrants. However, young migrants become old New Zealanders, therefore such immigration would have to occur ad finitum (a ponzi scheme maybe?) and simply “kicks the can down the road” for future generations to deal with. On top of that as the world moves to a more balanced age structure (as it is) the supply of “high quality” young migrants will be eventually “dry up”.
    One other way of addressing an “aging population” is to increase fertility levels. However, as countries become wealthier their fertility levels decline. It is the poor and worn-torn countries which have very high fertility levels – not something we want.

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    • You’ve made most of the points I would have made. I had seen Kirk Hope pushing the “ageing population” line and had intended to cover his article – in part, because if it is the strongest argument the premier business advocacy group could put up, it didn’t seem remotely persuasive.

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    • Well if you can believe that more aging people with no young people can care for themselves then perhaps you would have to accelerate robot development because I certainly do not see many young Kiwis in rest homes taking care of these old folk. Young Philipino caregivers are doing exactly that as new migrants. Those aging people otherwise would be drooling on floors while we pretend that migrants do not contribute.

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      • Maybe robot development will help (Japan is trying hard with this avenue). Certainly keeping people healthier and independent longer will also help. And, yes, as you said, at present many young Philipino, Indian etc migrants who work in aged care are doing a fantastic job and contributing to our society. However, TFR in the Philipines, India and the rest of the world is falling and eventually they will be in the same situation as NZ. Then what? Clearly the status quo cannot go on indefinitely and as a young-ish person myself I hope that we can figure out how to manage our economy with a balanced population or myself (and future generations) are…well… kind of stuffed eh?

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      • Japan would have to look towards the US military for more robust robots. The Japanese ones keep falling over.

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      • Frankly at the snails pace that our population grows, I have been wondering if we are living in ground hogg day. Population growth is not a NZ problem. We just have to separate out what we believe is a migrant issue is actually a tourist issue. We just think all 3.2 million tourists are the few migrants that stay in NZ.

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      • DARPA did put up a US $3.5million prize money plus commissioned a $10.9 million development platform from 2012 to 2015 for one working robot. One of the primary task is to open a door and get through a simple door. I think a Philipino migrant is a more viable option eh?

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  10. I studied in Melbourne in the 80s. It was a well planned city of 3 million driven by large migrant numbers Today it’s a city of 4 million largely driven by migrants. Nothing wrong with Melbourne. Fantastic city.

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