Not Treasury at its best

Michael Reddell New Zealand economic performance, Treasury

On 25 June last year, I wrote to The Treasury requesting

copies of any material prepared by The Treasury this year on regional economic performance, particularly in New Zealand. I am particularly interested in any analysis or advice –  whether supplied to the Minister or his office, or for use internally –  on the economic performance of Auckland relative to the rest of the country (whether cyclically or structurally).

It wasn’t simply a request out of the blue, but was prompted by a speech given a few days previously by the Secretary to the Treasury, Gabs Makhlouf, The Importance of Being Auckland: Strengths, Challenges, and the Impact on New Zealand.  In my post on that speech, I’d been quite critical of Makhlouf.

He’d begun his discussion this way

Why do I find this exciting? It’s because high levels of diversity provide dividends including through increases in innovation and productivity.

Auckland’s diversity is particularly critical for our international connections. There’s much more to international connections than trade. It’s the other international flows – flows of capital and people, and the accompanying flow of ideas – which are the key to reinventing trade, and which will lay the foundation for a more prosperous New Zealand in the long-run.

The high number of overseas-born Aucklanders can bring new skills, new ideas and a diversity of perspectives and experiences that help to make our businesses more innovative and productive. And perhaps most importantly, they often retain strong personal and cultural connections to other parts of the world, which opens up, and helps us to pursue, new business opportunities.

Auckland is truly New Zealand’s gateway to the world. It’s not just that there is a big number of companies here doing business internationally. It’s the port and airport linking the country to global markets; and tertiary institutions, researchers and innovators linking us to global knowledge.

To which my response was

Which might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

He might also have linked to the recent presentation by Jacques Poot (in a Treasury guest lecture), in which Poot was keen not to sound very optimistic about just how large those economic benefits of diversity really are, or to the work of Bart Frijns – an (immigrant) professor in Auckland (see last sentence of the extract above) –  whose recent work suggests that on some measures, in some contexts, there may be net costs, not benefits at all.

Of course, one can’t say everything in a single speech, but when a credible case could be made that the Auckland-centred model is in serious trouble, it is bordering on the seriously unprofessional to not even allude to any of these sorts of points, even if only to explain why the Secretary interprets then differently than, say, I might.

So I was curious about what background analysis Treasury had been doing, or what advice it might have been providing to the Secretary or the Minister, in support of Makhlouf’s “cheerleading” for the Auckland story.

It turned out that there was none –  or none recent anyway.  But it took some considerable time and effort to extract even that information.

Their initial response was fairly prompt.  It came on 12 July.  Treasury told me that they were “currently updating their analysis and advice on regional economic performance, including Auckland performance” and expected to include this analysis and advice in future strategic documents, including the next Long-Term Fiscal Statement.  Accordingly, they declined to release any material, citing as grounds under the Official Information Act the need to “maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”.

I lodged a complaint with the Ombudsman.  Perhaps some “advice” did need to be kept confidential for the time being, but it was hard to believe that the underlying “analysis” could legitimately be withheld.  And then I didn’t think much more about the matter –  the wheels of the Ombudsman’s office often grind exceedingly slowly.

But last week, somewhat out of the blue, I got a letter from Treasury, to advise that

“following the release of our Long-Term Fiscal Statement…… I have revisited my decision and am now able to release the relevant material to you”.

Doing so eight months after the original request, and three months after the release of the LTFS itself, was no doubt just enough to avoid having the Ombudsman rule against them.

And what had all this been to protect?  Well, almost nothing.   It turned out that there was one internal discussion document (and a set of slides covering the same material) prepared for some discussion forum Treasury staff and management were participating in.   There was no advice to the Minister, or to the Minister’s office, at all, so it is a little hard to see how they can have legitimately invoked, as grounds for withholding this material last year, constitutional conventions protecting the advice tendered by ministers and officials.  Perhaps the fact that there was almost nothing was what they wanted to protect, but that isn’t good grounds under the Official Information Act.

For anyone interested here is the document they released (Treasury usually put OIA releases on their website, but this one doesn’t seem to be there yet).

official-information-act-response-auckland-regional-performance-michael-reddell-20160227-2

The document seemed mainly focused on trying to get ahead of potential political pushes for further specific interventions in poorer regions and local authority areas in New Zealand, and there is some interesting material there.   On Auckland, there was little beyond conventional pre-conceptions (these extracts are from various places in the document).

As agglomeration and clustering theory predicts, our more urban services-based regional economies (Auckland and Wellington and to a lesser extent Christchurch) are relatively more productive and generate higher incomes than our more resourve-based regional economies.

Our Treasury preference is usually to encourage or permit the continued concentration of economic activity in key centres (forces of agglomeration) where returns are expected to be greatest.  Resources and activities should be allowed to flow betwen regions over time.  Agglomeration suggests productivity benefits from large diverse cities and clusterng suggests some businesses benefit from being in smaller but specialised cities. This means higher economic performance but spatial differences.

This view was reinforced by the 2010 economic geopgraphy debate, which emphasised the importance of agglomeration (and Auckland especially), and implicitly downplayed the economic significance of “non-agglomerating” areas.

Not a mention of how the gap between Auckland levels of income and those of the rest of the country are small compared to those typically seen between largest cities and the rest of the country in other advanced countries.  And not a mention of how those gaps have been closing rather than widening.  In other words, little attempt to grapple with the specifics of the New Zealand experience at all.

We should expect better from our premier economic advisory agency, both in terms of the quality of the analysis and advice they are presenting, and in complying with both the letter and spirit of the Official Information Act.

And in the meantime, the grand Auckland Think Big experiment rolls on, cheered on by the Secretary to the Treasury.  After 25 years we might reasonably expect our officials and ministers to be able to point to evidence of the success of the strategy.  If it is there, they haven’t found it yet.  More likely, it just isn’t there, and decades of bringing more and more non-New Zealanders to Auckland (even as New Zealanders, net, leave Auckland in modest numbers), looks like a strategy that has unbalanced the economy, and produced few real gains, whether for Aucklanders or the rest us.

 

 

 

 

 

 

16 thoughts on “Not Treasury at its best”

  1. I suppose the question is really about whether there is an agglomeration effect or not… I guess you are arguing that there is a negative agglomeration effect as the benefits of getting bigger are not there and the data is at least suggestive that growth is well beyond the point of diminishing returns..

    Treasury, based on your comments, say that everything is fine and nothing to see here… which doesn’t seem very honest… if everything was fine we should be able to easily see it in the data… but its not there…

    So what IS going on? I am still confused as to why the marginal return on extra capital/resources is negative. Why is Auckland going against the experience of other cities?

    Its fine to call Treasury out for laziness (it would seem) but the more important issue is getting to the root cause… the why??

    If it isn’t a question of geography is a question of lifestyle?

    Like

    Reply

    • The answer is very clear. Increasingly our largest industries have been in the service and hospitality sector. With 3.5 million touriists and 115,000 international students contributing $20 billion in GDP. Auckland is our largest international gateway city with almost 3million direct international flights into Auckland airport. Auckland airport handles 18 million inbound and outbound passengers a year with its associated gridlock traffic congestion.

      Tourists need to eat and they need to be pampered and serviced. This is why chefs top our list of skilled migrants. Restaurants need chefs and waiters. The best service comes from having more chefs and more waiters which affects productivity.

      With the target being 7 million tourists, expect more chefs, waiters, prostitutes, cleaners and baggage handlers. These are the key future jobs with a booming tourism and international student market.

      Like

      Reply

  2. I suspect the answer is some combination of failing to think hard about the specifics of New Zealand – a very distant, heavily resource-based, economy in an age in which personal connections, and closeness to markets/services/competitors etc seems to matter more than ever – combined with the heavy-handed government intervention that a large scale planned non-citizen immigration programme is. Without the latter, the former wouldn’t matter very much: on my story, Auckland would be a materially smaller share of NZ population than it is now (but GDP per capita and GDP per hour worked might even be a bit higher, relative to NZ as a whole than they are now – since many high value functions, even in a resource economy, will cluster in cities.

    Official agencies, and their academic acolytes, seem too ready to pick up interesting overseas theoretical models and insights, without thinking hard about the specifics of NZ.

    (And the Secretary to the Treasury, in particular, seems too prone to not-very-reflective cheerleading – for which I wouldn’t blame the organisation as a whole).

    Like

    Reply

    • The destruction started with trigger happy hawkish Reserve Bank governors like Don Brash and that hawkish interest rate policy was followed up by Alan Bollard driving the OCR to 9% which in turn pushed commercial interest rates to 12% plus. This lead to a culling of many of our export industries unable to compete with margins and profitability completely eroded by a high NZD. Alan Bollard single handedly decimated an entire building and construction sector, destroyed 61 plus finance companies with a loss of $6 billion of investors life savings.

      Like

      Reply

      • Even Graeme Wheeler who presided over a period of record low interest rates has been very hawkish in his approach attempting to push interest rates upwards in a global over production capacity with 4 ill conceived interest rate rises from the back of a disaster recovery and seasonal commodity milk prices and now reluctantly cutting to 1.75% thereby keeping the NZD on the high end and inflation still at the lower end of 1% with the target of 2% wishful thing for 7 years now.

        Like

    • That should be embedded in your legend at the top of your site

      Occasionally you come out with absolute gems that are worth preserving – this being one of them

      Official agencies, and their academic acolytes, ARE too ready to pick up overseas theoretical models and insights, without thinking hard about the specifics of NZ

      Like

      Reply

  3. Is it possible to compare agglomerating and non-agglomerating areas for productivity and incomes: for example Dunedin and Tauranga? And compare areas that are agglomerating at a similar rate but vary in degree of diversity – for example Auckland North Shore and maybe Hamilton or Tauranga?
    Should the government be optimising economic growth or accept less than optimum growth that can be shared more fairly? In light of family history when resources were tight they were invested in the most promising child (e.g. private schooling for the boys) but now the current generation is wealthier and we try to share equally with little concern about each child’s potential.

    Like

    Reply

    • It reminds me of when I put in an OIA for the academic evidence behind the 20% and ever lower net debt target (ie 20% is just the start). They referred me to ministers’ statements.

      So the answer to my question was, of course, none – because there is none.

      Like

      Reply

    • We don’t have decent official GDP or productivity data at lower than regional council level, altho I think MBIE has produces some city estimates for recent years.

      But i guess my view of “potential” is that governments will never know in advance, and should be wary of either specific interventions to promote specific regions, or apparently-general policies which have an effect of skewing population to one part of the country rather than others (non-citizen immigration is a classic, and perhaps rare, example). Of course, there is a balance to be had, but it needs to one that distils the actual evidence and indicators of what is working well and what perhaps (and even perhaps despite good models for why it “should” be otherwise) is not. The lack of that sort of critical analysis is what disconcerts me – too often we hear wishful thinking, cheerleading, or just ‘international literature suggests’ instead.

      Like

      Reply

    • Productivity measures in New Zealand is badly skewed if we factor in that 10 million cows only generate $10 billion in GDP but we tally that $10 billion against a few farmers and farmhands that mainly just work as cleaners and hearders. But if you properly factor in that 10 million cows generate a huge amount of waste products, contaminating our waterways, our drinking water, our swimmable rivers and depletion of our ozone and contaminating the atmosphere with methane gas. Not to forget the hundreds of tons of chemical wash to get cows clean of ticks and fleas. Now compare that with a city like Auckland with only a tiny 1.5 million people generate $75 billion in GDP. Productivity and GDP measure used by economists is a load of nonsense.

      Liked by 1 person

      Reply

  4. Getgreatstuff, those figures (for bovine waste) are highly dubious at best and are for feedlot cattle in any case so probably best not to read too much into that.
    The poor relative GDP performance for our major cities is concerning but what is far worse IMHO is their (Auckland in particular) appalling contribution to our current account deficit; poor export performance, high consumption of imported goods, services and capital.
    Our dirty waterways and declining marine environment, for example, can be viewed as a product of our desperation for exports to compensate for the abysmal performance of our largest city. Aucklands footprint?
    I am very concerned with the state of our inshore fisheries and the knock on effect on the marine environment and affected species in the food web.
    This summer saw us, over the course of a month, cruising our wonderful coast from Parengarenga in the north to Great Barrier Island. We observed a very noticeable population decline of our tern (AKA white fronted tern or Tara or kahawai bird) We used to regularly see flocks of a hundred or more these dainty characters. They are now seen as solitary individuals or occasional flocks of no more than are a dozen or so. Very sad and I suspect due to the loss of the kahawai on which they rely to bring their prey to the surface. These are a protected species – how can it be acceptable to knowingly starve them to death as is being done with our current level of fishing.
    This is the sort of thing that is occurring and there is considerable pressure being applied to increase our pressure on our natural environment that simply wouldn’t be required with a smaller population or one that was generally more effective in the export area.

    Like

    Reply

    • David George, time to face facts. All the available statistics point to huge amounts of waste, cow dung and Methane belching production factories. A dairy cow whether grass fed or grain fed produces massive amounts of waste. Perhaps 1 cow to 25 humans in waste might sound like too much waste product but our dairy cows are increasingly fed with palm oil kernels to supplement grass ie not enough grass to support our 10 million cows. 10 million cows is equivalent to having to deal with a city of 250 million people. The problems with our waterways is not a Auckland problem, it is a farming problem. Farm wastes is leaching into our waterways damaging inshore and coastal fishing habitats.

      Like

      Reply

      • Thank You Getgreatstuff,
        the website you quoted is outrageously exaggerating, they are also comparing to the amount of sludge at the final stage of human sewage treatment – mineral solids – which is entirely different from total waste. Auckland is failing now to properly treat all of its waste water, never mind the stormwater which is heavily contaminated with oil, rubber and plastic; the whole lot getting dumped into your increasingly Big Brown Backyard,
        For animals out on pasture natural processes in the soil will effectively treat much of the waste produced.
        In any case a little investigation came up with a more realistic figure for feedlot cattle, “The daily manure production of a 450 kg beast is about 27 kg per day, which is about 5 to 6% of body weight. Of the 27 kg, about 24 kg is water and 3 kg is solid material (dry matter)” https://www.daf.qld.gov.au/environment/intensive-livestock/cattle-feedlots/managing-environmental-impacts/manure-production-data
        I’m a hard out greeny and not here to excuse the performance of our farmers. My point was that our cities are not pulling their weight with regard to our 40+ years of unbroken current account deficits.

        Like

Leave a comment