Perhaps 20 more terms in office will be enough?

The ever-ebullient Minister of Economic Development (and a great deal else beside) Steven Joyce was interviewed on TVNZ’s Q&A programme yesterday, defending the government’s economic record.  Despite the efforts of the interviewer to pin him down –  including on the rising degree of unease even among some of those one might think of as “elites” about immigration policy –  Joyce put up a pretty forceful defence, often citing the Prime Minister’s mantra that if New Zealand has challenges they are ‘quality problems” or “side-effects of success”.  If one didn’t have access to the facts, it might even have sounded persuasive.

I was tempted to devote a lengthy post to the Minister’s claims, but I have other stuff I really have to finish today.  So apart from noting in passing New Zealand’s continuing lousy productivity performance (see the chart in this post), I wanted to focus on just two of the areas the Minister covered.

The first was around the skills of immigrants.  In June the OECD released the results of a fascinating multi-country study of the skills level of workers.  It suggested that the skill levels of New Zealand workers –  over several dimensions – were pretty high.  I wrote about it at the time, and summarized the high-level findings this way

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand.    Perhaps there is something very wrong with the way the survey is done, and it is badly mis-measuring things, but those aren’t usually the OECD’s vices.  For the time being, I think we can take it as reasonably solid data.

As I also noted, the survey also looked at the skill levels of non-native born workers.  In almost every country, including New Zealand, the skill levels of immigrants were below that of natives.  Of course, in every country there will be many very able immigrants, but these are averages across the full samples of native born workers and immigrants.  As I pointed out, if your country (New Zealand) already had among the very highest skill levels in the world, and immigrants had less good skills, it didn’t lend much support to the idea that we needed lots and lots of immigration to lift the productivity of New Zealand workers, and make up for deficient skill levels at home.

But none of that stopped Steven Joyce introducing this same report in support of the government’s immigration policy.  How did he manage that?  Well, he correctly pointed out that New Zealand’s immigration policy is more skills-focused than those of most countries.  Unlike most countries, we have almost complete control over who we let in –  there isn’t a material illegal immigration problem –  and unlike, say, the United States (where legal immigration is mostly family-focused) we have an explicit economic/skills focus.  We may not do it well –  my argument –  but we are less bad, on that score, than most.

One might reasonably expect literacy skills of immigrant workers to lag behind those of natives –  after all, for many/most English isn’t their native language.  But the OECD survey also reports results for “problem solving proficiency in a technology-rich environment” (Figure 3.15 of the OECD report).  There are 28 countries/regions in the OECD study, but there is only data on the skill levels of immigrant workers for 17 of them (many of the other simply don’t have much immigration).

Here is the proportion of foreign-born workers with what the OECD calls relatively high level skills in this (problem-solving) area.

skills technology

New Zealand scores well here.  Our (really large scale) immigration programme seems to have done better in attracting people with these sorts of skills (and keeping out others) than most other countries have.

But remember that our overall workforce –  mostly native-born –  also has among the very highest level of skills of any of these countries. On this particular measure, we were top equal with Sweden.

So here is the gap between the skill level of natives and the skill levels of immigrants (again, on this problem solving proficiency measure).

skills gap

New Zealand doesn’t do too badly –  although Israel and Ireland stand out as clearly better –  but in every single one of these countries the skill levels of the average immigrant worker are less than those of the average native worker.  And this in an area –  the use of technology –  where the Minister often likes to stress the importance of immigration.  We don’t have the problems of Sweden or the Netherlands, but these OECD data –  which the Minister himself quoted in support of his policy –  just do not support the claim that our immigration programmes have been boosting overall skill levels in New Zealand.  If anything, those programmes have been a net drag.  As I’ve repeated many times, I’m not suggesting immigration never could boost skill levels –  or that there are not many highly-skilled individual immigrants (as there are many highly skilled natives) –  but our skills-focused programme, on the scale the government continues to stick to, just isn’t achieving that goal.  Perhaps with annual target of 10000 to 15000 non-citizen migrants (per capita, the same sort of rate as the US has) we might do so.

The interviewer also attempted to push the Minister onto the back foot over the government’s target for the share of exports in GDP.  The goal, announced several years ago, was to lift exports as a share of GDP from around 30 per cent to around 40 per cent by 2025.  I thought the formal target was daft and dangerous, even while sympathizing with the intuition that motivated it – small countries get and stay successful by selling lots of stuff, competitively, in the rest of the world.

As the Minister fairly noted, the base level of exports got revised in one of SNZ’s long-term national accounts revisions.  But that does not change the fact that exports as a share of GDP have been going nowhere.  It is all very well to blame low dairy prices –  as Mr Joyce sought to –  but on other occasions he’d be telling us just how well tourism and export education sectors were doing right now.

Here is chart of exports to GDP, going back to the start of the quarterly national accounts data in 1987. This time, I’ve also shown the average export share for each of the last three governments.

exports to gdp by govt

Plenty of things cause fluctuations in the series, and not many of them are under the direct control of governments.  Nonetheless, the average export share of GDP is materially lower under this government than it was under the previous government, and the latest observations are below even that average. Since the start of 2009, exports have averaged 27.7 per cent of GDP.  Under the previous National government –  one that first took office more than 25 years ago, that average was 27.5 per cent.  The government’s goal was to lift the export share by 10 full percentage points, and there is now only nine years left until the target date.  On performance to date –  and policy to date – we might be waiting several more centuries to achieve that sort of goal.

It is time Mr Joyce and his colleagues faced the fact that they are simply failing on this count.  A rather different approach is needed –  one which permits/facilitates a sustainably lower real exchange rate, orienting the economy more strongly towards investment in the tradables sector, and enabling more able firms to grow (and locate here doing so) by successfully selling to the rest of the world.  As I’ve noted before, per capita output in that vital outward-oriented part of the economy hasn’t increased at all for 15 years now.  It seems unlikely that that sort of reorientation will occur, all else equal, while we continue to bring in, as a matter of policy, so many not-overly-highly-skilled non-citizen migrants each year.

And finally, the interviewer introduced my name to the discussion as one of those skeptical of some of the government’s claims.  Mr Joyce suggested that I was among those who had predicted a large balance of payments blowout, thus apparently undermining the credibility of my arguments.  Of course, economists are pretty hopeless forecasters, so when an economist offers a prediction about the future one should (a) always take it with a considerable pinch of salt, and (b) wonder if the economist recognizes his/her own unwarranted over-confidence.  But in this particular case, I didn’t even recognize the forecast.  Since I’ve spent the last four years –  both inside and outside the Reserve Bank –  arguing against interest rate increases and for interest rate cuts, it would be surprising if I had been worrying about the current account deficit blowing out.  Demand has been consistently weaker than it should have been –  inflation has been below target, and unemployment has lingered above the NAIRU.  Whatever I’ve warned about, I’m pretty sure it hasn’t been the current account of the balance of payments.

(UPDATE: And, as a reader notes, as banks’ dairy losses mount there will be an almost one-for-one temporary reduction in (mostly foreign-owned) banks’ profits, and thus in the current account deficit.   That won’t be a sign  of economic success either.)

7 thoughts on “Perhaps 20 more terms in office will be enough?

  1. Faced with trigger happy Reserve Bank governors over the years, NZ entrepreneurs have become very very conservative in their risk taking approach especially in taking on export risks with the kiwi dollar fluctuating wildly due to interest rates fluctuating wildly. The National government has certainly done very well in maintaining growth in the midst of a recession in Dairy exports which in the past would have been severely felt around the country.

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  2. There is a strange thought that we must export and that building houses is a non productive enterprise. That is really rather silly. Building houses meets one of our 3 primal needs. The need for shelter, food and pro creation. Exports do not meet our populations needs. It meets the needs of people external to our population. There is no reason to export unless we are overproducing. Due to our small population exports put undue pressure on our local resources. In effect we actually export too much. Dairy is an example. We are the largest exporter of Dairy in the world with 90% of our product going overseas but we are not the largest producer because other countries do not overproduce to the extent that NZ does.

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  3. 3% growth is still good growth. Nothing wrong with an economy that is growing strongly. Will we hit an ice berg? Well that depends on interest rates and how viciously the RB governor is prepared to wreck the lives of property owners. As the interest rate trend is downwards, I do not see a ice berg coming up.

    Singapores top export is tourism but they have ensured that the tourist industry and operators have paid billions for infrastucture. Therefore tourism is not necessarily bad except in NZ, when we, the taxpayer subsidises the industry. I cannot belief we have DOC personnel cleaning toilets and building bridges and walkways for tourists and everything is free. This is a cost that the commercial tourist operators need to pay for and charge tourists for.

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  4. Tourism mostly is a low value high volume industry. We need to charge them more to pay for what they cost.
    Make work schemes called Cycle ways that cost more than roads and in places where they will get almost no use. Wairoa out the coast being an example.and get funding when some of our worst roads get zilch.
    Walkways that are free to use including the loo’s.
    Camping spaces which are fouled up in such remote places. Lake Waikeremoana off road camping places being an example.
    Tauranga to Katikati road desperately needs rebuilding. Huge volume of traffic on what always has been a bad road. Instead we get a cycle way with a bridge worth 600k just as a starter.Minister of transport can’t get a major bridge feeding the Tauranga CBD fixed until 2025 but can get a walkway that will be used on Sundays when its fine, top priority..
    Bloody stupid priorities.

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    • Remember that the data aren’t saying NZ workers are (absolutely) highly-skilled across the board, just that on average (a) NZ workers seem to be as skilled, on these metrics, as those anywhere in the OECd – which would be consistent, eg, with our now high tertiary participation rates – and (b) that the average immigrant worker, in NZ and elsewhere, is less skilled than the average native worker (which also shouldn’t be very surprising given what we know from the approvals data, and the incentives – the very best foreigners won’t come here typically (even in they want to migrate, other Anglo countries will generally be more attractive), but (c) that gap between immigrant and native skill levels is less here than in most OECD countries (also not surprising as we have secure borders, haven’t had big influxes of refugees from really poor places, and have a policy which is more skills-focused – if not that well done – than many other advanced countries, including notably the US.

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