Month: May 2017

The IMF opines on the economy

Michael Reddell IMF, New Zealand economic performance, Uncategorized

The International Monetary Fund (IMF) was out yesterday with two major reports on New Zealand.    One was the Financial System Stability Assessment, the conclusion of the quite infrequent (the last one for New Zealand was in 2004) FSAP programme of reviews of the regulation of countries’ financial systems.  I haven’t read that document yet, but from media accounts there are some recommendation I’d agree with (eg deposit insurance, as second-best) and a great deal (mostly derived from the “nanny knows best” starting point) that I’ll have more problems with.

But this post is about the Article IV report –  the (typically) annual review and assessment of a member country’s macro economy.

Once upon a time, these reports were simply confidential advice to the government.  These days, at least for countries like ours, it is all out in the open.  And, partly in consequence, there often isn’t that much to see.  The IMF might be a prestigious organisation full of rather highly-paid economists, but it is striking how weak their surveillance reports often are.   Perhaps there just isn’t a gap in the market that can usefully be filled by a handful of Washington-based economists looking at our economy for a couple of months a year.

The challenge is compounded by the fact that no one much cares about New Zealand.  We are small, in an age when the IMF is heavily-focused on systemic risk, global spillovers etc.    We aren’t in Europe –  still over-represented at the Fund –  or from one of those Asian countries where governments are hyper-sensitive about anything the Fund says.    It is decades since we had an IMF (borrowing) programme ourselves.  And, whether this is cause or effect I’m not sure, but for decades no one here has paid much attention to the Fund.  As an example, our capital city newspaper this morning has some coverage of the FSSA, but really nothing at all about the Article IV report.  If a tree falls in the forest, and no one is around to hear it, does it make a sound?    (By contrast, when I was at the Board of the IMF, my Australian boss was very exercised about each year’s Australian Article IV report.  He’d get phone calls direct from the Treasurer about it, and the serious Australian media gave the reports a lot of coverage.)

Oh, and of course, the other challenge for those reviewing New Zealand is the features that stand out, and which haven’t readily and convincingly been explained.  Thus, we have a lot of reasonably good micro policies, we have pretty good government finances, a floating exchange rate, low and stable inflation, sound banks, high levels of transparency, and low levels of corruption.     And yet……having once been among the very highest income countries in the world, we now languish.  International agencies find Venezuela’s decline easy to explain.  New Zealand’s not so much.

But with all the resources at their command, including the benefit of being an organisation with data and perspectives on all the countries in the world, none of it really excuses the mediocre quality of what gets dished up each year.  Or the inconsistency from one year to the next.   Last year, for example, we were told that raising national savings rates was “critical” –  and it was reported that the NZ authorities agreed –  but this year there is barely even any mention of the issue.

This year we are served up some mix of regurgitated PR spin about how well New Zealand is doing, and when it comes to policy suggestions we get a grab-bag of bits of conventional wisdom, or favoured centre-left policy positions, without any discernible sign that the authors (or their reviewers in Washington, or the Fund’s Board) had any sort of robust framework (or ‘model’) for thinking about the New Zealand economy.

It isn’t easy to excerpt a fairly lengthy report, and often it is the omissions that are more striking than what is in the report itself.      Thus, the release opens with this

Since early 2011, New Zealand has enjoyed an economic expansion that has gained further broad-based momentum in 2016, with GDP growth accelerating to 4 percent, and the output gap roughly closing. Reconstruction spending after the 2011 Canterbury earthquake was an important catalyst, but the expansion has also been supported by accommodative monetary policy, a net migration wave, improving services exports, and strong terms of trade.

On its face, that all sounds quite good.  But countries don’t get rich by rebuilding themselves after disasters –  that reconstruction process mostly displaces resources from other, typically more productive and prosperous uses.   They don’t get rich through monetary policy either, valuable a role as it has in short-term stabilisation.  And although services exports grew quite strongly for a while (a) little or none of it was high value products (lots of tourism, and students pursuing immigration access at PTEs), and (b) in a world in which services exports are becoming steadily more important (as illustrated in eg this recent IMF working paper), for New Zealand services exports as a share of GDP are materially lower than they were 15 years ago.

In fact, you could read the entire Article IV report and not find any mention of the fact that, with total population growing at around 2 per cent annum and working age population growing at around 2.7 per cent annum, per capita income growth in the last few years has been pretty unimpressive.  And you’d find no mention –  explicit or by allusion – to the almost five years that have now passed since we saw any labour productivity growth in New Zealand.   I guess that would have undermined the relentless good news story the Fund staff seemed determined to tell.

Perhaps more surprising is the treatment of the external sector of the economy, typically a subject of considerable interest to the IMF.  Readers of the Article IV report in isolation would have no idea that exports (and imports) as a share of GDP have been falling –  not just this year, but for some time on average.  Nor would they appreciate that per capita real GDP of the tradables sector has shown no growth at all for more than 15 years.     The report does note that an overvalued real exchange rate is probably an obstacle to faster growth in the tradables sector, but again there is no hint of any sort of integrated understanding of what is going on with the real exchange rate, and what might make some difference in future.

The complacency, and weak analysis, carries over to the labour market.

The unemployment rate fluctuated around the natural rate of unemployment of 5 percent in 2016

But there is not a shred of analysis presented to suggest that the NAIRU for New Zealand is now anywhere near as high as 5 per cent.  It would be very surprising if it were that high, whether in view of continuing very weak wage inflation, the history of the last cycle (in which unemployment got to 5 per cent fairly early in the recovery), and changing demographics which are appearing to lower the NAIRU.  Oh, and not forgetting that our Treasury has published its own estimate of the NAIRU, at something close to 4 per cent.

The Fund isn’t really much better on the housing market.   They are all very interested in the various tweaky tools the government and its agencies have applied in the last couple of years (LVR limits, tax changes etc) and – contrary to many of the pro-immigration people in New Zealand –  they are at least quite clear that rapid increases in population are contributing directly to high house price inflation.    But there is no simple and straightforward observation that, at heart, the house price issue is a matter of regulatory failure, and that the current government (like its predecessors) has done little or nothing to fix the problems. Instead, we get banalities along these lines

Tighter macroprudential policies, higher interest rates, lower rates of net
migration, and increasing housing supply should help moderate house price inflation and stabilize household debt vulnerabilities in the medium term.

If you don’t change the fundamental structural distortions that gave rise to the problem in the first place, it is a little hard to take seriously the idea that things will come right even “in the medium term”.  You would not know, reading this report, that almost nothing substantive has been done to free up the market in urban land.    An organisation with the benefit of cross-country perspectives and databases might usefully have pointed out that this is an obstacle not just in New Zealand but in Australia, the UK, much of the east and west coasts of the US, and other places besides.  The silence might suit the current government, but it also makes the Fund complicit in the failure.  The Fund’s Board considered the material in the Article IV report on housing. They observed, in conclusion, that

Recognizing the steps being taken by the authorities to address the demand-supply imbalance in housing markets, Directors generally highlighted that further tax measures related to housing could be considered to reduce incentives for leveraged real estate investments by households. Such measures could help redirect savings to other, potentially more productive, investments and, thereby, support deeper capital markets.

Except that very little has actually been done on the supply side, and not much has been done to change the medium-term “demand-supply imbalances”.      Perhaps there is a place for tax changes (I’m sceptical, including that any changes would make much difference –  where else have they?) but the Board didn’t even seem to recognise that inconsistency in their own advice.  Do we have too many houses in New Zealand or too few?  Most people, rightly, would say “too few”  (a good indicator of that is the ridiculously high prices).    And yet the Fund Board thinks that a greater share of investment should go into other things, and a smaller share into housing?????   (As it happens, I agree with that, but only on the basis that we have much slower population growth, something there is no hint of in this report).

Buried deep in the report, is a recognition of some of the longer-term challenges facing New Zealand.

New Zealand’s structural policy settings are close to or mark best practice among
OECD economies, but persistent per capita income and productivity gaps remain. Income is lower than predicted by these policy settings, by an estimated 20 percent. Growth in labor productivity has declined, with multifactor productivity growth slowing from the early 2000s, and capital intensity has stagnated recently.

One could question even those details.  I wrote a bit about our structural policies a few weeks ago, as illustrated by the OECD’s Going for Growth publication.  There are plenty of areas in which we are well away from best practice, and overall at best you could probably say that our structural policies aren’t bad by OECD standards.  But there is no doubt that productivity levels are far lower than most would have expected based on those policies.

What does the IMF propose in response?   They reckon remoteness is a problem and for some reason, despite that, still seem very keen on lots of immigration.  But here is the rest of their list:

  • Targeting housing supply bottlenecks more broadly would safeguard the
    attractiveness for high-skilled immigration and business.
  • More central government property taxes, the proceeds of which would be distributed to local authorities.
  • Trade liberalization could help to strengthen competition and productivity, including in the services sectors.
  • Tax incentives for private R&D spending
  • As discussed during the last Article IV mission, there is also scope for tax reform to raise incentives for private saving and discourage real estate investment as a saving vehicle

And that is it.

I’d certainly support fixing up the land supply market and foreign trade liberalisation.  I’m a lot more sceptical of the other items.  And what about, for example, our high compayn tax rates?  But my real challenge to them is twofold:

  • first, where is the model or framework that explains how the absence of these policies is at the heart of New Zealand’s disappointing long-term economic performance (because it feels more like a grab bag of ideas they picked from one person or another), and
  • second, how large a difference do they really believe these measures, even if they were all implemented flawlessly, would make?     Without much more supporting analysis, they have the feel of playing at the margins, as if they felt obliged to offer up some suggestions, any suggestions.

A year ago, the Fund seemed quite taken with the idea that the persistent gap between our interest rates and those abroad was an important issue (they even cited approving my own paper on this issue), but that flavour seems to have disappeared this year.  And when they allude briefly to our high interest rates it is to fall back on the discredited risk premium hypothesis.

Of course, the government is just as much at sea.   The NZ authorities get to include some responses in the Article IV report.  In this section, they begin thus

The government’s ongoing Business Growth Agenda (BGA) aims to help overcome the disadvantages of distance and small market size, in particular by deepening international connections, with a focus on increasing the share of exports in GDP to 40 percent by 2025, and diversifying the export base.

Just a shame that, if anything, things have been going backwards on that count, and show no signs still of progress.

And, finally, from the final paragraph of the Executive Board’s assessment

Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

But there is nothing in the report to show what these benefits might be (recall that the focus here is on potential growth, not the short-run demand effects), let alone what “leveraging the benefits” might involve (generally, I thought the IMF was uneasy about leverage).   I guess it is just an article of faith.

It is pretty depressing all round.  Supposed international experts fall for the spin, and can offer nothing very profound on even the longer-term challenges.  Our own government agencies seem to be at sea, or just happy to go along.   Our representative on the Board of the IMF  – no longer a public servant, but now the (able) former chief (political) policy adviser to John Key – was happy to go along.  In his statement to the Board, published as part of the package of papers, he observed

As staff observe, New Zealand’s structural policy settings are close to, or mark, best practice. Lifting productivity, in the face of New Zealand’s small size and isolation, therefore requires incremental reforms across a broad range of areas. Recognizing this, the Government has established the Business Growth Agenda as an ongoing program of work to build a more productive and competitive economy,

When various major OECD countries have productivity levels 60 per cent above ours, who are they trying to fool in pretending that we have policy broadly right, and just need to keep tinkering (“incremental reform”) at the margin?

As part of the package of material released with the Article IV report, there is an interesting empirical annex on immigration.  It isn’t well-integrated with the report itself, and I will cover it in a separate post.  The annex probably should have had some publicity in the local media, given the salience of the issue in New Zealand debate at present.

The backdoor to Australia – again

Michael Reddell Australia, Immigration

After my post last week on the apparent Australian concern that somehow New Zealand was providing a back door entry to Australia, for migrants who could not get into Australia directly, a commenter included a link to the text of a fascinating National Library lecture (itself drawn from a journal article) by Victoria University researcher Paul Hamer.   That made it clear both how longstanding these concerns have been  – going back 100 years or so –  and how focused they are on Pacific Island immigration to New Zealand.    Some of it looks like out-and-out racial biases.  But these days it is a bit different.

In their report on New Zealand out today, the IMF described our immigration policy as “fully merit-based”.   In fact, while that is more or less, and mostly, true, it isn’t fully so.  Within the annual target (“planning range”) of around 45000 residence approvals, we have Pacific quotas, for Samoa and for a group of other fairly small Pacific countries.    People from those countries can get in, to a certain extent, even though they do not have the skills, qualifications or whatever to get in through the standard nationality-blind policy.  In the year to March 2017, just over 1600 people were granted residence under these quotas.  In time, presumably, most will become New Zealand citizens.  They, like other New Zealand citizens, would then be free to move to Australia if they chose.   Australia, I gather, has no such nationality-specific immigration quotas.

In the past Australia’s concerns apparently extended to people from the Cook Island and Niue.  They are New Zealand citizens as of right, and don’t have to move here to be able to move to Australia.

What do the data show about this?    We do have PLT data on the departures of New Zealand citizens to Australia, broken down by birth country.  In my post the other day I just looked at the aggregate of the non-NZ (and non-Australian) born.  But one can dig deeper, using data that cover each year back to 2002.

Taking the Cook Islands born people first (since they aren’t covered by our immigration policy), there were total PLT departures to Australia from New Zealand of 3776 such people in the 16 years for which we have data.   That isn’t perhaps large  by Australian population standards, but it is equivalent to quite a large chunk of the small Cooks-born population.  Presumably, some other Cooks-born people might have gone directly to Australia (if there are direct flights).   The Cooks-born population of New Zealand in the 2013 Census was just under 13000.      However, a lot of those Cooks-born people came back again.  Over the same 16 years, the net outflow to Australia of Cooks-born people was a relatively modest 1248.

What about NZ citizens born in other countries, who mostly gain entry only through our immigration policy?

Here are the top half dozen or so birth countries of NZ citizens who left (net) for Australia

Net outflow to Australia of NZ citizens born in these countries  (Total, March years 2002 to 2017)
UK -8878
Samoa -8523
South Africa -7930
India -7086
Philippines -3983
Fiji -3552
China -3197

The UK tops the list.     Then again, there are many more British-born people in New Zealand than there are people born in any other country  (about 256000 at the 2013 Census).

So here are the net outflows over the sixteen March years (2002 to 2017) to Australia of foreign-born New Zealand citizens, as a percentage of the 2013 NZ resident population of people born in that country.

net outflow to Aus by birthplace

If the Australian government really is concerned about those Pacific Island inflows, the Samoa figures might appear to give them some support.   Then again, the South African and Sri Lankan born outflows, as a share of the respective populations, are almost as large –  and presumably those people got into New Zealand by meeting our nationality-blind tests.    For some of those birthplaces, the proportions seem quite remarkably high.

As it happens, the Cook Islands numbers are quite a way down the list, and Tonga further still.  SNZ don’t publish the data at a sufficiently disaggregated level to know what the proportions look like for New Zealand citizens born in Niue, Tokelau or Kiribati.

I don’t have  any great or specific interest in this apparent concern of Australia’s –  and frankly the absolute numbers seem pretty small relative to the size of Australia’s population (and overall migration inflows).  But, the subject having come up again, I was interested in what light the published data could shed on the issue.

Reflecting on the macro data

Michael Reddell inflation, Monetary policy, unemployment

The Reserve Bank’s Monetary Policy Statement (Graeme Wheeler’s second to last) will be out on Thursday.  I’m not in the market economists’ game of trying to tell you what the Bank will do and say (although no one expects they will do anything concrete with the OCR this time).  I’m more interested in questions around what they should do.  In time, what they should do, they usually will do.  But sometimes not until they’ve tried the alternatives.

I wrote about last month’s CPI data a few weeks ago, concluding that there had been a welcome, and expected, increase in core inflation (it is what typically happens if inflation is below target and the OCR is cut fairly substantially) but that

With the unemployment rate still above estimates of the NAIRU, and most indicators of inflation suggesting that core is probably (a) still below target, and (b) not picking up very rapidly, it certainly isn’t time for hawkish talk about near-term OCR increases.

Not everyone agrees of course.  I noticed the BNZ’s economic commentary yesterday which opened with this confident assertion

There is no excuse for the cash rate to be just 1.75% in New Zealand.

I don’t think I’m unduly caricaturing their record to say that, for at least the last decade, the BNZ economics team has never seen an OCR increase they didn’t like, even –  or perhaps especially –  those which had to be quickly reversed.  But mindful that in the story of the boy who cried wolf, the wolf eventually did come, I thought it was worth having a look at the latest wave of data.  Last week, we got the full quarterly set of labour market data (HLFS, QES, and LCI), and the Reserve Bank’s quarterly expectations survey.  To cut a long story short, it doesn’t alter my view.

Take the expectations survey first.   The headline story was one in which the two year ahead expectations of the inflation rate (of a sample of moderately informed observers –  including me) rose quite materially, and now stand at 2.17 per cent (up from around 1.65 per cent in each quarter last year).

infl and expecs

This measure of expectations isn’t typically very volatile, but it is typically somewhat responsive to changes in headline CPI inflation.  We’ve just had quite a large change in headline inflation, so some increase in the expectations measure shouldn’t be surprising. It certainly shouldn’t be concerning.  After all, ideally, the Reserve Bank wants people to believe, and act as if they believe, that on average over time CPI inflation will average around 2 per cent –  the mid-point of the target range, and the explicit focus of the current (but about to expire) PTA.

In fact, no one really knows whether this survey measure captures how people actually think and behave in real transactions in the goods, labour and financial markets.   It might be as good a proxy as we have, but (a) we don’t know, and (b) it still might not be good at all.  Glancing at the time series, there is a tendency for falls and rise to be at least partly reversed quite quickly.

But if inflation expectations are really in some sort of 2 to 2.2 per cent range, I’d welcome that.  With repeated increase in tobacco excises –  not some underlying economic process –  there is a reasonable case, in terms of the PTA, that headline inflation should average a little higher than the mid-point, and than “true” core inflation.  Only if inflation expectations were to rise further from here might I start to get a little disquieted.

In trying to make sense of the inflation expectations numbers, one thing I haven’t seen mentioned is the Labour Party’s monetary policy release.   There was a quite a bit of focus last month on their pledge to add some sort of employment objective to the Reserve Bank Act, and concerned expressed in some quarters that that could lead to higher inflation over time.   If it was a factor, you’d presumably have to take the probability of Labour leading a new government (call it a coin toss at present?) and multiply that by the probability that the change in regime (and perhaps the sort of people a new government might appoint) would make a material difference over time.  I have no evidence one way or the other, but it wouldn’t surprise me if there was a small effect of this sort.   (My own two year ahead expectation in the survey was 1.5 per cent –  around the current rate of inflation in the Bank’s preferred sectoral factor model).

Not many commentators seem to pay much attention to the rest of the expectations survey, even though its strength is partly the range of macro questions that are asked (although I’ve suggested some modifications to the Bank in their review of the survey).

Take GDP for example. There is no sign of respondents expecting real growth to accelerate.  Two years out they expect annual real GDP growth of 2.6 per cent – down on the previous quarter, but not far from the average response over the last couple of years.    But the survey also asks for quarterly GDP predictions for the next couple of quarters, and year-ahead predictions.   That enables one to derive an implied six monthly growth rate for the second half of the coming year.  Here is the gap between the expected growth rates for the first six months and the second six months, going back to just prior to the 2008/09 recession.

expec GDP growthAs we headed into the recession there was a lot of expectation of a strong rebound.  Even up to around 2012, respondents expected growth to accelerate.   For the last few years they haven’t expected any acceleration, and now the expect it to slow.  To be specific, respondents expect 1.6 per cent total growth in the first half of this year, slowing to 1.2 per cent in the second half of this year.     We don’t know quite why –  perhaps they expect immigration numbers to slow –  but it doesn’t speak of a sense that things are getting away on the Reserve Bank.   Similarly, two years out respondents expected that the unemployment rate would still be 4.9 per cent.

Perhaps these respondents will be proved wrong –  they often are, forecasting is like that –  but at the moment it doesn’t look like an imminent risk of core inflation rising much further, or to levels that might prove problematic for a flexible inflation targeter focused on medium-term inflation outcomes around 2 per cent.

What of the actual labour market data?   We have some problems at present because of the breaks in various HLFS series that occurred when the revised survey questions were put in place last year.  I’m still staggered they could have made these changes without running the two sets of questions in parallel for perhaps a year, to allow robust adjustments to be made for the discontinuities.   HLFS hours worked measures, employment measures, and probably participation rate measures all seem to have been affected to some extent.   We are pretty safe in saying that the number of people employed in New Zealand did not grow by 5.7 per cent last year (as the HLFS suggests).

What of the simplest headline number, the unemployment rate?   There isn’t much doubt that the unemployment rate has been falling over the last few years.  It is what one should expect after a serious recession, and with the stimulus to demand provided by low interest rates and large migration inflows (given that immigration typically adds more to demand in the short-term than it does to supply, thus tending to lower unemployment and use up spare resources in the whole economy).

But what should be somewhat disconcerting is that the unemployment rate has (a) gone largely nowhere in the last year, and (b) is still well above pre-recession levels (unlike the situation in many other advanced countries with their own monetary policies).   In the prevous boom, the unemployment rate got down to around 4.9 per cent as early as the start of 2003.     The picture isn’t much different if one looks at the broader (not seasonally adjusted) SNZ underutilisation measure.

U and under U

There still appears to be some progress in using up spare capacity in the labour market, but not very much at all.

What about the rate of job growth.  Fortunately, we have two measures: the (currently hard-to-read) HLFS household survey measure of numbers of people employed, and the QES (partial) survey of employers asking how many jobs are filled.   Unsurprisingly, the trend in the two series are usually pretty similar, even if there is a fair bit of quarter to quarter volatility.

employment

Since we know there are problems in the HLFS, and the QES doesn’t look to be doing something odd, perhaps we are safest in assuming that the number of jobs has been growing at an annual rate of around 2.5 to 3 per cent.   That isn’t bad at all. But SNZ also estimates that the working age population has been growing at around 2.7 per cent per annum.  No wonder the unemployment rate is only inching down.

One can do a similar picture for the annual growth rates in the two (HLFS and QES) hours worked series.

hours qes and hlfs

It was pretty clear that there was around a 2 per cent lift in HLFS hours worked from last June, just on account of the new survey questions.  It seems safer to assume that total hours worked across the economy might have grown by around 3 per cent in the last year.   That is faster than the growth in the working age population, pointing to some increase in effective utilisation, but not a dramatic one.  For what it is worth, in the latest releases, the two hours measures were both quite weak in the March quarter.

(And remember that nothing in the expectations survey data suggested pressures were likely to intensify from here.)

And what of wages?    There is a variety of measures.  The QES measure is quite volatile –  there are issues of changing composition –  and I don’t put much weight on it.  But for what it is worth, average hourly earnings rose 1.6 per cent in the last year on this measure, around the lowest rate of increase seen for decades.    The Labour Cost Index measures should get more focus (but have some challenges of their own).

lci inflation 2Perhaps there is some sign of a possible pick-up in the analytical unadjusted series (which doesn’t try to correct – inadequately –  for productivity changes) but it is a moderately volatile series, and the most recent rate of increase is still below the peak in the last little apparent pick-up a year or two back.

A common response is “ah, but what about the lags?”.  But as we’ve shown, there is little sign of any material tightening occurring in the overall labour market, no sign of expectations that that is about to change, and so little reason to expect much different wage inflation outcomes over the next couple of years from what we’ve seen in the last couple.  At best, there might be some slight pick-up in wage inflation (especially if the increase in inflation expectations is real), but any pick-up is going to be from rates of increase that have, over the last couple of years, been consistent with disconcertingly low rates of core inflation.

So where does it all leave me?  Mostly content that an OCR around 1.75 per cent now is broadly consistent with core inflation not falling further, and perhaps continuing to settle back where it should be –  around 2 per cent.   Of course, there is a huge range of imponderables, domestic and foreign, so no one should be very confident of anything much beyond that.   But it is worth bearing in mind that the unexpectedly strong net migration over the last few years has been a significant source of stimulus to overall domestic demand (including demand for labour).  In the face of typically too-tight monetary policy, it is part of why the unemployment rate finally started gradually coming down again after 2012.

Whatever happens to the cyclical state of the Australian economy, the National government is already putting in place immigration policy changes that should be expected to lead to some reduction in the net inflow of non-citizens, and two of the main opposition parties are campaigning on promises of much sharper reductions than that.   If such policy changes come to pass then, all else equal, the OCR will need to be set lower than otherwise.  It isn’t something that Graeme Wheeler can or should actively factor into this week’s OCR decision, but it may well be something the acting Governor needs to think hard about (if any decisions he makes are in fact lawful) after the election.

Is there a Singaporean idyll?

Michael Reddell Exchange rate, Monetary policy, NZ First, Uncategorized

Winston Peters was interviewed on the weekend TV current affairs shows.  Any sense of specifics on his party’s immigration policy seemed lacking – perhaps apart from something on work rights for foreign students.  But I rather liked his line that while ministers and officials have been telling us for years that we have a highly-skilled immigration policy, all we hear now is all manner of industries employing mostly quite low-skilled people telling us how difficult any cut back in non-citizen immigration would be.

But what really caught my attention was when, in his TVNZ interview, Peters reiterated his view that what New Zealand really needs, in reforming monetary policy and the Reserve Bank, is a Singapore-style system of exchange rate management.    It was also highlighted in his speech on economic policy last week.  It is clear, specific, unmistakeable….and deeply flawed.   It seems to be a response to an intuition that there is something wrong about the New Zealand exchange rate.    In that, he is in good company.   The IMF and OECD have raised concerns over the years.  And so have successive Reserve Bank Governors.   I share the concern, and I devoted an entire paper to the issue at a conference on exchange rate issues that was hosted by the Reserve Bank and Treasury a few years ago, and which was pitched at the level of the intelligent layperson interested in these issues.   Another paper looked at a variety of alternative possible regimes, including (briefly, from p 45) that of Singapore.

What is the Singaporean system?  In addition to the brief summary in the RBNZ paper I linked to in the previous paragraph, there is a good and quite recent summary of the system in a paper published by the BIS written by the Deputy Managing Director of the Monetary Authority of Singapore MAS).

The key feature of the system is the MAS does not set an official interest rate (something like the OCR).  Rather, they set a target path (with bands) for the trade-weighted value of the Singaporean dollar, and intervene directly in the foreign exchange market to manage fluctuations around that path.   There is a degree of ambiguity about the precise parameters, but the system is pretty well understood by market participants.    Interest rates of Singapore dollar instruments are then set in the market, in response to domestic demand and supply forces, and market expectations of the future path of the Singapore dollar.    It has some loose similarities with the sort of approach to monetary policy operations the Reserve Bank of New Zealand adopted for almost 10 years in the late 1980s and early 1990s, and which we finally abandoned in 1997 (actually while Winston Peters was Treasurer).   It is also not dissimilar to the approach –  the crawling peg –  used in New Zealand from 1979 to 1982 (at a time when international capital flows were much more restricted).

There is no particular reason why a country cannot peg its exchange rate, provided it is willing to subordinate all other instruments of macro policy (and short-term outcomes) to the maintenance of the peg.  It is what Denmark does, pegging to the euro.  Singapore’s isn’t a fixed peg, but the macroeconomics around the choice are much the same.

It is a model that can work just fine when the economies whose currencies one is pegging to are very similar to one’s own.  Denmark probably qualifies. In fact, Denmark could usually be thought of as, in effect, having the euro, but without a seat around the decisionmakers’ table.

It doesn’t work well at all when the interest rates you own economy needs are materially higher than those needed in the economies one is pegging too.    Ireland and Spain, in the years up to 2007, are my favourite example.  Both countries probably needed interest rates more like those New Zealand had.  In fact, what they got was the much lower German interest rates.  That had some advantages for some firms.  But the bigger story was a massive asset and credit boom, materially higher inflation than in the core countries, and eventually a very very nasty and costly bust.  Oh, in the process of the boom the real exchange rates of Spain and Ireland rose substantially anyway.    Because although nominal exchange rate choices –  the things that involve central banks –  can affect the real exchange rate in the short-term, the real exchange rate is normally much more heavily influenced by things that central banks have no control over at all.

One can, in part, understand the allure of Singapore. It is, in many respects, one of the most successful economic development stories of the post-war era.   Productivity levels (real GDP per hour worked) are now similar to those of the United States, and places like France, Germany and the Netherlands, and real GDP per capita is higher still.   You might value democracy and freedom of speech (I certainly do), but if Singapore’s achievement is a flawed one, it is still a quite considerable one.  And if Singapore is todaya big lender to the rest of the world, it wasn’t always so. Like New Zealand (or Australia or the US) net foreign capital inflows played a big part for a long time.  As recently as the early 1980s, Singapore was running annual current account deficits of around 10 per cent of GDP.

And the Singaporean model is not one of an absolutely fixed exchange rate.  It is a managed regime (historically, “managed” in all sorts of ways, including direct controls and strong moral suasion).  It produces a fairly high degree of short-term stability in the basket measure of the Singapore dollar.      But it works, to the extent it does, mostly because the SGD interest rates consistent with domestic medium-term price stability in Singapore are typically a bit lower than those in other advanced countries (in turn a reflection of the large current account surpluses Singapore now runs –  national savings rates far outstripping desired domestic investment).  As the Reserve Bank paper I linked to earlier noted

From 1990 to 2011, the average short term Singapore government borrowing rate was 1.8 percent p.a. below returns on the US Treasury bill.

Those are big differences (materially larger than the difference between the two countries’ average inflation rates).  And they mean that Singapore dollar fixed income assets are not particularly attractive to foreign investment funds.  By contrast, New Zealand’s short-term real and nominal interest rates are almost always materially higher than those in other advanced countries.   Partly as a result, even though Singapore’s economy is now materially larger than New Zealand’s, there is less international trade in the Singapore dollar than in the New Zealand dollar.

Winston Peters has talked about wanting a lower and less volatile exchange rate.  He has given no numbers, but lets do a thought experiment with some illustrative numbers.  The Reserve Bank’s TWI this afternoon is just above 75.  Suppose one thought that was, in some sense, 20 per cent too high, and so wanted to target the TWI in a band centred on 60, allowing fluctuations perhaps 5 per cent either side of the midpoint (so a range of 57 to 63).    What would happen?

The Minister of Finance might instruct the Reserve Bank to stand in the market to cap the exchange rate (TWI) at 63.   If our interest rates didn’t change, the Reserve Bank would be overwhelmed with sellers (of foreign exchange) wanting to buy the cheap New Zealand dollar.  After all, you could now earn New Zealand interest rates –  much higher than those abroad –  with very little downside risk (certainly much less than there is now).  In the jargon, people talk about “cheap entry levels”.   There is no technical obstacle to all this.  The Reserve Bank has a limitless supply of New Zealand dollars, but in exchange would receive a huge pool of foreign exchange reserves (it is quite conceivable that that pool could be several multiples of the size of New Zealand’s GDP, so large are the markets and so small is New Zealand).

Ah, but the Singaporean option doesn’t involve interest rates remaining at current levels.  Rather, they are now set in the market.  And so, presumably, our interest rates would fall, probably very considerably.  In the current environment, they might even go a little negative.   That would deal with the short-term funding cost problem associated with the huge pool of reserves.  But what would happen in New Zealand with (a) a much lower exchange rate, (b) much lower interest rates, and (c) all other characteristics of the economy unchanged?   The answer isn’t that different to what we saw in Spain and Ireland.  Asset prices would soar, credit growth would soar, general goods and services inflation would pick up quite considerably.  Of course, there would be more real business investment and more exports, at least in the short term.  And that would look appealing, but as time went by –  and it wouldn’t take many years –  the real exchange rate would be rising quite quickly and substantially (as domestic inflation exceeded that abroad).  Export firms would be squeezed again.   If anything, the higher domestic inflation would lower domestic real interest rates even more, so the credit and asset boom would continue.  And before too long it would end very badly.

That might sound over-dramatic.  And if the ambition was simply to stabilise the exchange rate around current levels, things probably wouldn’t go too badly for a while.  But Peters has been pretty clear that his aim is a lower exchange rate, not just a less volatile one.

The lesson?  You simply cannot ignore the structural features of the economy that give rise to persistently high real interest rates, and a high real exchange rate.  And those features have nothing whatever to do with the Reserve Bank or monetary policy.    They are about forces, incentives etc that influence the supply of national savings, and the demand for domestic investment (at any given interest rate).   All that ground is covered in my earlier paper linked to above.

Of course, the Singaporeans also increasingly can’t ignore those forces.  Decades ago, global financial markets weren’t that well-integrated, and the Singaporean web of controls was pretty extensive.  For some decades, even as Singaporean productivity growth far-outstripped that of other advanced countries, Singapore’s real exchange rate was not only pretty stable, it was falling.  Here is a chart of the BIS measure of Singapore’s real exchange rate all the way back to 1964.   The current system of exchange rate management didn’t start until about 1980.

Sing RER

It was, in many ways, an extraordinary transfer from Singaporean consumers to Singapore-operating exporters.  The international purchasing power the economic success should have afforded consumers and citizens kept getting pushed into the future.

But even in Singapore, these things don’t last forever.  Look at that last 10 years or so, when the real exchange rate has appreciated by around 35 per cent.   The real value of the SGD is still miles lower than where long-term economic fundamentals suggest they should be –  consistent that, the current surplus is still around 18 per cent of GDP –  but there has been a lot of change in its value over that time.  For many firms even in Singapore that must have been a challenge.  With US interest rates near-zero for much of that time, historically low Singaporean rates will have afforded the authorites fewer degrees of freedom than they had had previously.

(The Singapore authorities impose all sorts of other controls, including their compulsory private savings scheme and increasingly onerous direct controls on private credit.  I’m not going there in this post, partly because it will already be long enough, and partly because what I’ve heard from NZ First is about the exchange rate system in isolation).

Singapore is a (hugely-distorted) economic success story in many respects.  Some mix of the people, the policies and institutions, and the favourable geographical location all helped.   Nonetheless, it some ways it is an odd example for New Zealand First to favour.

For example, Singapore has had an extremely rapid population growth, mostly immigration-fuelled, in recent decades.  Here is a chart of Singapore’s population growth and that of Australia and New Zealand.

sing popn

(On my telling, Singapore has had opportunities, and lots of savings, and thus rapid population growth made sense, enabling more of those opportunities to be captured, even while real interest rates stayed lower than elsewhere –  although not, presumably, as low as they would otherwise have been.)

And Singapore’s economy is pretty volatile.  Sadly, the IMF doesn’t publish output gap estimates for Singapore, but the MAS estimates (in that document I linked to earlier) suggest much more volatility than we see in New Zealand or most other advanced economies.  And here is annual growth in real per capita GDP for New Zealand, Australia and Singapore.

sing real gdp

Hugely more volatile than anything we are accustomed to (and in recent years, interestingly, not even materially higher).

And for all that the MAS likes to emphasise the close connection between the exchange rate and inflation, here are the inflation rates of the three countries.

sing inflation

On average, the differences aren’t that large, but even in the last 15 years or so Singapore’s inflation rate has been more volatile than those of Australia and New Zealand.

It isn’t really clear that Singapore’s system is even serving them that well these days.

But what of exchange rate comparisons?  You might have supposed that Singapore’s exchange rate was a lot less volatile than New Zealand’s.  But here, from the RB website, is the monthly data for the SGD and the NZD, in terms of the USD since 1999.

SGD

And, yes, the New Zealand dollar is more volatile in the short-term, but even there over the last seven years or so the differences are pretty small.   And if hedging isn’t always easy, particularly for firms without large physical assets, it is a lot easier to hedge those sorts of short-term fluctuations than it is the longer-term real exchange rate uncertainty.  (And, of course, given Singapore’s faster productivity growth, you might still be troubled that our exchange rate has more or less kept pace with theirs, but that is a real and structural issues, not one that can be fixed by fiddling with the exchange rate system.)

As it happens, Australia is our largest trade and investment partner.   Here is how our exchange rate, relative to the Australian dollar, compares with the Singapore dollar relative to the US dollar.

SGD and NZDAUD

It is an impressive degree of stability.  Again, in the very short term the New Zealand exchange rate is a bit more volatile, but it isn’t obvious that for longer-term planning purposes New Zealand exporters have had it tougher –  on the volatility front at least –  than those operating from Singapore.

And, as a final chart, this one uses the BIS’s broad real exchange rate indices to illustrate movements in the real exchange rates of Singapore, New Zealand, and (another export-oriented development success story) Korea.

SGD NZD and KRW

Singapore’s real exchange rate has certainly been the most stable of the three, but if anything Korea’s has been more volatile than New Zealand’s.   It would clutter the gaph to have added it, but Japan’s real exchange rate has also been more volatile than New Zealand’s.

There are real exchange rate issues for New Zealand.  The fact that our real exchange rate hasn’t fallen, even as relative productivity performance has fallen away badly, is a crucial symptom in our overall long-term disappointing economic performance.  It has meant we’ve been less open to the world (lower exports, lower imports) than one would have expected, or hoped.   But the issue isn’t primarily one of volatility –  which is mostly what the Singaporean system now tries to address –  but of longer-term average levels.   This real exchange rate symptom appears to be linked to whatever pressures (NB, not superior economic performance) have given us persistently higher real interest rates than the rest of the world.   New Zealand First, and other parties, would be much better advised to focus their analysis, and proposed policy solutions, on measures that might directly address these real (as distinct from monetary) issues.    As it happens, a much lower trend rate of immigration seems likely to be a strong contender for such a policy –  taking pressure off domestic demand for resources, and freeing up resources to compete internationally.     Singapore simply isn’t the answer.

 

The sort of productivity growth we once achieved

Michael Reddell New Zealand economic history, New Zealand economic performance, Productivity

Over the weekend I was (as you do) dipping into the 1968 edition of the New Zealand Official Yearbook, in pursuit of some material I might write about later in the week.

As I flicked through the pages, I stumbled on a table showing labour productivity for the previous 12 years.  It wasn’t an ideal measure.  There wasn’t a good series of hours worked nationwide in those days, so this series was a measure of real GDP per person employed.  But what really caught my eye was the numbers.  Over only 12 years, labour productivity was estimated to have increased by 28.9 per cent.  And this was in an era when experts, and official agencies, were starting to worry about New Zealand’s productivity growth, and to produce data showing that we were beginning to fall behind other advanced economies.

Here is the chart showing both the old data (for 1954/55 to 1967/68) and the same measure (real GDP per person employed) for the 12 years from 2004 to 2016.  For the more recent period I have (a) used an average of the production and expenditure GDP measures, and (b) adjusted for a lift in measured employment of around 2 per cent in June last year, solely because of the change in the HLFS itself.

real gdp per person employed

Over 12 years, they managed 28.9 per cent productivity growth in the 50s and 60s (with a fairly inward looking economy, with high levels of trade protection), and in our generation  in the same period we’ve seen only about 7.9 per cent growth.

Of course, much of the slowdown is a common phenomenon seen across the advanced world, so this isn’t intended mainly as a stick with which to beat New Zealand governments specifically.    But is a sobering reflection on how little material progress we, and other countries, are now making, relative to the astonishing progress seen in those post-war decades.

And, of course, we do have better data now.   A rising share of part-time workers tends to dampen GDP per person employed.  Here is real GDP per hour worked for the same modern period – ie 2004 to 2016.

real gdp per hour worked 04 to 16

Overall growth has been a bit stronger (12.1 per cent in total) on this better measure.  But this measure also puts the New Zealand specific problems into sharper relief.  We’ve had no productivity growth at all, on this measure, for four or five years.  And that isn’t a global phenomenon, just a New Zealand one.

Could we manage 28.9 per cent productivity growth over 12 years again?  It is only an average annual growth rate of a touch over 2 per cent, and the gaps now between New Zealand average productivity and that in the leading OECD economies are so large (they are more than 60 per cent higher than us) that it really should be achievable.   But it would probably require, as a first step, giving up the rhetoric suggesting that really everything is just fine in New Zealand, and starting to focus on measures that might make a real difference.

 

 

 

Full, accurate, and accessible records

Michael Reddell Reserve Bank, Reserve Bank Board

That is what the Public Records Act 2005 requires of all “public offices”.    Specifically

Every public office and local authority must create and maintain full and accurate records of its affairs, in accordance with normal, prudent business practice, including the records of any matter that is contracted out to an independent contractor.

and

Every public office must maintain in an accessible form, so as to be able to be used for subsequent reference, all public records that are in its control,

Under the Act “public office”

a) means the legislative, executive, and judicial branches of the Government of New Zealand; and

(b) means the agencies or instruments of those branches of government;

I don’t think there would be any doubt that the Reserve Bank, and its Board, would qualify as “public offices”.  And yet the Board, in particular, appears to have, at best, a shaky grasp on its statutory responsibilities in this area.

As regular readers know, I’ve been trying to understand the process that led to the appointment in February of an acting Governor of the Reserve Bank, including understanding how, if at all, officials and ministers convinced themselves that the appointment is lawful.

As I noted in a recent post

Section 48 of the Act covers a vacancy in the office of Governor.    The key bits read as follows

If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint….[a person] to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.

The critical phrase here appears to be “whichever is less”.      When Don Brash resigned as Governor in April 2002, there was about sixteen months to run on his term.  The then Minister appointed Rod Carr to act as Governor.    He could be appointed for as long as six months, because there was still sixteen months to run on “the Governor’s term”.  By contrast, on 26 September this year there will be no days left on the Governor’s term.  Graeme Wheeler’s term will have expired at midnight the previous day.   So an acting Governor can only be appointed for…….. zero days, since there are no days left on “the Governor’s term”.  In other words, the Act simply does not appear to allow an acting Governor appointment along the lines of the (purported) Spencer appointment.

In an earlier post, I covered the extensive material The Treasury had released on the period leading up to the acting Governor appointment.

By contrast, the Reserve Bank Board released almost nothing.    I had lodged a pretty comprehensive request seeking

copies of all papers of the Reserve Bank Board relating to the end of Graeme Wheeler’s term as Governor, the process for appointing a permanent replacement, and the appointment of Grant Spencer as acting Governor.   This request includes papers on the Board’s agenda, minutes of relevant discussions, papers/letters sent to the Minister of Finance or Treasury, and filenotes of any relevant meetings.

I got back a copy of a single very brief letter from the chair of the Board to the Minister of Finance recommending the acting Governor appointment (with no supporting analysis or advice).    The only material they told me they were withholding was some Human Resources advice and some in-house legal advice.  The latter apparently covers the questions around the relevant provisions of the Reserve Bank Act, and I have appealed the Ombudsman the decision to withhold.   There was, if the Board was to be believed, nothing else at all.

But that seemed odd.  I knew that Board meetings had minutes, and if those minutes were often quite loosely written (in another context, I’m dealing with legal uncertainty created by loose Board minutes from 25 years ago), at least the minutes seemed likely to exist.  In fact, the letter from the Board chair to the Minister of Finance explicitly referred to an agreement by the Board on 30 January to make the acting Governor recommendation.  Surely there were minutes of that meeting (and the Bank’s Act explicitly covers both physical meetings and teleconference ones)?    They should have been captured in my earlier request, but perhaps there had been an adminstrative oversight?

I also knew from the papers Treasury had released that by late last year the Board had already been well-underway in getting going a process for appointing a new permanent Governor once Graeme Wheeler’s term expires in September, and had been told as late as the end of November by the then Minister of Finance to keep on with that process, apparently regardless of the election issue.  In fact, the Treasury papers referred to the Board already having appointed a search firm.  So out of curiousity, I lodged a new request, not just for the minutes of the 30 January meeting, but also for minutes of any Board meeting in the December quarter last year.

I got a response to that request yesterday.  They released in full the minutes of the half hour (teleconference) Board meeting held on 30 January.  They were brief, but of some interest.

The Board received advice from the Minister of Finance that, on advice the Cabinet Office and after consultation with Cabinet, he had decided to appoint an acting Governor for a six month period to cover the post-election caretaker period, allowing the next Government time to make a decision on the appointment of a permanent Governor for the next five-year term. The Minister asked the Board to recommend a candidate for acting Governor.

The Board agreed unanimously to recommend Grant Spencer, currently Deputy Governor and Head of Financial Stability, for the role of acting Governor. The Chair would forward this advice to the Minister.

The Board chair’s letter to the Minister, dated 31 January, had sought to imply that the initiative for the acting appointment recommendation had come from the Board itself (the Act certainly envisages the Board taking the lead).  That never seemed likely, given the material Treasury and the Minister of Finance had released.  These minutes confirm that the Board was simply told what to do, and complied.  It is a poor reflection on the Board  that they had simply seemed unbothered about moving ahead to make a long-term appointment, which would take effect around the time of the election, in a climate in which there was little cross-party consensus on Reserve Bank matters.  Fortunately they were stopped in their tracks by the Minister of Finance.

It is another illustration of the weakness of the Board (not necessarily the current individuals, but the structure).  It reinforces my call to remove the recommendation/appointment powers from them back to the (normal international) model in which the Minister of Finance simply appoints a Governor.   These people simply don’t have the background, or any legitimacy, to be making an appointment of one of the most powerful people in New Zealand.   If there is a change of government (in particular), amending this provision of the Reserve Bank Act should be an early legislative priority.

But what also caught my interest is that although the Board released the minutes of its three meetings held in the December quarter (I will post a link when the Bank puts the material on its website), there is no record at all of any of their deliberations or decisions around the process they had underway of moving towards appointing a new Governor.  We know a lot about it from the Treasury documents, but if these releases are to believed, the Reserve Bank’s Board simply kept no records.

There was plenty of material omitted from the minutes that were released, but all the headings of the individual items were released.  Some of the decisions to withhold look questionable, but since I wasn’t really interested in that other material, I won’t take that any further.

In the October 2016 meeting there is an item 8.3 “Director’s-only discussion”.    That may well have been an occasion on which they dealt with the coming gubernatorial appointment.  But, if so, we’ll never know.    The minutes of this discussion weren’t withheld (in which case that withholding could be challenged to the Ombudsman, and future historical researchers would probably get access anyway) but simply don’t exist at all.    Minutes are typically taken by the Board secretary, who is a Bank staff member, but there is no reason why one of the Board members themselves could not have minuted this discussion, and recorded them in a version of the minutes not given general circulation.  But there appears to be no record at all.

In the November 2016 meeting there was nothing similar at all, and no (apparent) discussion of these issues.   In the December 2016 meeting, despite coming only a couple of weeks after Bill English had told the Board chair he was comfortable with them moving ahead with selecting a Governor recommendation, there is also nothing recorded.  Again, there is an item 8.3 “Non-executive directors only Session”, but there are no minutes at all (again, to stress, the minutes aren’t withheld; they simply don’t seem to exist).

It is quite extraordinary, given that we know from the Treasury material that there had been interactions with the Minister of Finance, the directors had appointed a search firm, and were planning to start advertising in January, only a month later.  But where are records of any of this?  It is possible that some of the decisions had been made earlier, but it is simply inconceivable that there was no substantive discussion, and no decisions taken, in the last three months of last year.   But none of it appears to be recorded.

Now perhaps there are some secret records –  file notes, email exchanges among directors – that the Bank staff who handled my request were not aware of. But any such material would have been covered under one or both of my OIA requests, and when I lodged the OIA requests I was quite explicit that they were requests to the Board, not to the staff of the Bank.

We seem to be in the sad state of affairs where either the  powerful Board of a major government agency is denying the existence of records that do actually exist about the process they had underway, and had to call to a halt, to appoint a new Governor.   That would be in breach of the Official Information Act.    Or the same Board is so shoddy in its record-keeping that it would seem almost certain to be in breach of the Public Records Act.    I’m not quite sure which to believe (although I suspect it is mostly the latter explanation).  Neither seem remotely satisfactory.  Neither option seems like what one should expect from a government-appointed Board responsible for recommending the next Governor of the Reserve Bank, holder of the most powerful unelected role in New Zealand.

It is not even as though this is material about something under active consideration.    The search process they were working on late last year, apparently oblivious to the significance of the election, was called to a halt.    In fact, as the Bank told us last week

The Reserve Bank Board of Directors’ recruitment process to identify a successor to Mr Wheeler is to commence later in the year.

We have record-keeping requirements on public agencies, and disclosure requirements such as the OIA, in significant part to enhance accountability and

thereby to enhance respect for the law and to promote the good government of New Zealand

If records simply aren’t kept, we have no way of knowing whether public appointees have done their job adequately,  That doesn’t enhance respect for the law, or promote good government.  Specifically, we still have no basis for knowing how the Board of the Bank concluded, or whether they advised the Minister, that the appointment of an acting Governor in these circumstances was lawful.

Full, accurate, and accessible records are a statutory obligation.  The Reserve Bank’s Board doesn’t appear to have been complying, even though the appointment of a new Governor is one of the few areas in which the Act gives them explicit decisionmaking powers.   It simply isn’t good enough.

UPDATE: The Bank appears to have decided not to put this material on its website, contrary to their usual OIA practice.  Here are the minutes of the three December quarter meetings.

1.3 Board Minutes – 20 October 2016 – for release

1.3 Board Minutes – 17 November 2016 – for release

1.3 Board Minutes – 15 December 2016- for release

Backdoor entry to Australia?

Michael Reddell Australia, Immigration, Uncategorized

In the various articles in the last few days on Australia’s decision to increase university fees for, among others, New Zealanders studying at Australian universities, there have been a few references to the fear sometimes expressed by Australian officials and politicians that New Zealand’s relatively liberal immigration policy might be being used by some material number of our migrants as a backdoor entry to Australia. Come to New Zealand, stay a few years and get citizenship, and then move on to Australia and the better-paid jobs that a more productive economy can offer.

It had some plausibility as an argument 20 years or so ago, when New Zealand’s immigration policy was much more open than Australia’s.  Any difference between the two countries’ immigration policies is much less marked now (they liberalised late in the Howard years).

It also hasn’t been an issue that I’ve paid much attention to –  it is, after all, mostly a matter for Australian policymakers.   But I thought I would take a quick look at the data SNZ has available on Infoshare.

Using the PLT data (with all its limitations) one can find numbers on the gross and net flows of New Zealand citizens between New Zealand and Australia, and also on the birthplaces (by country) of those making the move.  So one can easily work out what share of the New Zealand citizens moving to Australia (and coming back) were born in Australia and New Zealand, and what share were born elsewhere.  The data seem to be available only for the last 15 years.

Note that birthplaces don’t necessarily tie up closely with migration status.   I suspect that the bulk of Australian-born New Zealand citizens in these charts are the kids of New Zealanders who went to Australia for a few years, had a family there, and then came home.   And some portion of those born outside Australia and New Zealand will also be the children of New Zealanders, with citizenship by descent.   But the bulk of the movement of New Zealand citizens who were born outside Australia and New Zealand is likely to be people who were first given entry to New Zealand under our immigration policy.   Of course, some of the New Zealand born might be children born shortly after their parents arrived as immigrants, and thus in some sense also a phenomenon of the immigration policy.

Here is the chart for the net flow.

net flow to Aus

The Australia-born flow is small, and pretty stable, but has increased a bit in the last few years.   But the bulk of the action is in the New Zealand born line.

What of the non-Australasian born (our proxy for people who were policy-permitted immigrants to New Zealand?   That line looks like a very muted version of the NZ-born line –  many of the same fluctuations but on a much less pronounced scale.  Curiously, right at the moment more non-Australasian born New Zealanders are (net) leaving for Australia than NZ born NZ citizens.    Perhaps that might suggest there was something to the reported Australian concern.  But these are small net numbers of two quite large sets of gross flows.   So lets go directly to the gross flows.

This chart show PLT arrivals of NZ citizens from Australia (the much-vaunted people “coming home”).

arrivals from Aus

All three lines have increased in the last few years, with the largest percentage increase in the (small number) of Australian-born NZ citizens.   Non-Australasian NZ citizens coming back from Australia make up around 11 per cent of the total, and have done throughout the period we have data for.

non aus share

Of course, 11 per cent is a lot less than the foreign-born share of the population (around 25 per cent),  but that foreign-born population share has been increasing quite a lot in the last 15 years or so.

There is probably a lot more interest in the outflows to Australia.  Here is the same breakdown of NZ citizens by birthplace for departures.

departures to Aus

The numbers of Australian-born NZ citizens leaving for Australia has increased, but the numbers are very small.   And by far the largest absolute change has been in the NZ-born series –  outflows in the latest year to March are the lowest for any year in the data set.  But what of the non-Australasian born (the people who mostly initially came to New Zealand as immigrants?)

non aus share of departures

Somewhat to my surprise,  there has been quite a step up in the share of that group in the total outflows to Australia of NZ citizens.  In the most recent year, that share was 24 per cent, up from the around 17 per cent it had fluctuated around for some time.

Of course, as I noted foreign-born people make up around 25 per cent of the total population (that share may be higher again by next year’s Census).  So it shouldn’t surprise us that in the normal course of life, quite a few non-New Zealand born citizens will move to the better opportunities in Australia.  Some will be, for example, people who came as 2 year olds 40 years ago, and whose behaviour and motives are likely to be very similar to those of the NZ born.  The cold truth is that, typically, economic opportunities are better in Australia than they are in New Zealand.

And on the other hand, it is also likely that anyone who was sufficiently motivated to leave some foreign home and come to the ends of the earth (New Zealand) might, on average, be less settled, and more ready to move again,  than someone who had spent their whole life here.  That is an almost inescapable feature (not bug) of immigration, and doesn’t suggest any deliberate gaming of the system.

It is also worth pointing out that even if there is some gaming going on, the lags aren’t short.  The outflow of non-NZ born citizens in the last few years has nothing to do with NZ immigration policy in the last few years, because you have to have been here for five years to become a New Zealand citizen in the first place.  And, as I understand, when you apply for citizenship you have to sign a declaration stating that you intend to stay.  So, if there is the sort of issue Australians apparently worry about, it is quite a slow-burning story.

I don’t want to reach any strong conclusions (and I keep reminding people of the limitations of the self-reported intentions PLT data), but the twin facts:

(a) the foreign-born share of NZ citizens coming back from Australia is so much less than the share going to Australia, and

(b) the significant increase in the foreign-born share of NZ citizen departures in recent years

might suggest there is a little more of that sort of “backdoor entry” going on than I might previously have supposed.

If so, of course, it is totally rational behaviour on the part of the immigrants.  As I’ve repeatedly noted, and as I’ve even heard pro-immigration academics acknowledge, New Zealand isn’t a first choice for lots of migrants.  If they could get into Australia most would probably choose it over New Zealand (a bigger, higher income, country/market).  And they’d probably prefer the US, the UK, Ireland, and probably even Canada over New Zealand.   You take what you can get, and make the most of the opportunities that arise.  For those who become New Zealand citizens, access to the Australian labour market is one of those opportunities.

If we were genuinely attracting really highly-skilled migrants, that would be our loss and Australia’s gain, when they do move on.  But of course MBIE’s own data confirms that all too many aren’t that highly-skilled at all.  We don’t know what the skill mix looks like for those who later move on to Australia, but since the overall NZ outflow to Australia is often described as “looking like NZ” (in terms of skills/qualifications), perhaps it isn’t very different for once-immigrants who also move on.

I was planning to go on and write about how we should think about the option to move to Australia, and gradual changes that have made things tougher for New Zealanders doing so, but perhaps I’ll save that for another day.

And I won’t devote a post to the latest PR on Stuff from the MBIE-funded Professor Paul Spoonley.  Suffice to say that, relative to his piece in the Herald earlier in the week, he appears to have doubled down.    In that piece, even he thought some reforms were needed. But now…

Record immigration levels are not a bad thing for New Zealand, provided the current high standards for entry remain, an immigration expert says.

It was MBIE’s own data that showed that more than half of skilled migrant applicants couldn’t command more than $49000 per annum in the New Zealand labour market.

And while this time he avoids direct use of  the “xenophobia” slur, his case still seems to rest mostly on slurs and assertions.

But heading into elections, Spoonley said, it is important to call out prejudice in our leaders to avoid anti-immigration policies similar to the US.

“Let’s continue to debate immigration,” he said. “But let’s not stereotype or see one group or another as a problem.”

Instead of “xenophobia” now it is “prejudice” he claims to worry about.  Of course, he adduces no evidence, or examples, of such “prejudices”, or of how they are somehow driving the debate.  And as for US immigration policy, the immigration policy run under Barack Obama’s administration had its pros and cons (it wasn’t very skills focused), but the overall number of green cards issued per capita was around one third of the number of residence approvals we currently grant.

And, of course, the issue is hardly ever the migrants.  They are just people trying to make the best for themselves and their families.  The issue is, and should be, immigration policy choices made by our politicians, and by us as a society.

 

Winston Peters on the economy

Michael Reddell Exchange rate, Immigration, NZ First, Uncategorized

Winston Peters gave a speech on the economy yesterday to a Wellington business audience.   Going by Alex Tarrant’s report, the delivered version must have been quite a bit different than the prepared and published text, but here I’m going to focus on the published text.

When I first started thinking about the possible role of immigration policy in explaining New Zealand’s dismal long-term economic performance, the immediate response from the person I sat next to at Treasury was “careful, or you’ll be sounding like Winston Peters”.  In a similar vein (although I stress that it wasn’t the representative reaction –  most people were simply puzzled and didn’t know what to make of it) one manager  thumped the table and with the emotion very evident in his voice declared that it was disgraceful that we were even having such a discussion at The Treasury.

Peters has long been a polarising figure, and particularly so for the denizens of economic orthodoxy (of whom I generally counted myself as one).  And, of course, he has been around for a long time –  first becoming a Cabinet minister the same day in 1990 as Murray McCully, and presumably with aspirations to again becoming a senior minister after  this year’s election.  He has been Minister of Maori Affairs, Minister of Foreign Affairs, Treasurer, and Deputy Prime Minister.  Very few ministerial careers will have spanned a longer period –  Sir Keith Holyoake at 28 years is the longest I could think of.

And yet there has always been the question of what he has actually achieved, or delivered.  At present, the list of concrete New Zealand First achievements includes the Super Gold Card, some stuff about cheaper doctor’s visits for children, and……..well, not that much else.  That isn’t to say the presence of New Zealand First has had no other influence on policy over the years (quite possibly some of the government’s immigration policy changes last year and this have been partly pre-emptive measures).  But in office, Peters just has not accomplished much.

That is true of monetary policy –  long one of his bugbears.   He negotiated a new Policy Targets Agreement when he became Treasurer in 1996.  That agreement slightly increased the inflation target –  mostly reflecting actual outcomes which had been in the upper half of the previous range.  But even that agreement was a very long way short of the pre-election rhetoric.    And once the agreement was signed he never gave the Bank any subsequent trouble.   We managed to do some really daft stuff under his watch –  the infamous MCI experiment –  but he never called us out on it.  He served as Foreign Minister under Helen Clark, and while he seemed to be a safe pair of hands in that role, his biggest achievement seemed to be securing a much bigger budget for MFAT.  Somehow, I suspect that was not one of the priorities of his voter base.

And, of course, it is true of immigration policy.  As I wrote about here, despite all the rhetoric –  much of which I think was touching on, or prompted by, legitimate issues and concerns – there was nothing material in the detailed coalition agreement in 1996, and also nothing in the arrangement with Labour over 2005 to 2008.    Throw into the mix his opposition to asset sales, his unease about foreign investment, his opposition to raising the NZS age and so on, and I’ve long been pretty sceptical of Peters.

And so I turned to an election year speech on economic policy with wary interest.

I liked some of his lines (even recognised some of them).    He is totally right to call out the government for the way they make up lines to try to (a) pretend all is well (or even better) in the economy, and (b) to mask evident points of vulnerability (eg housing problems are “quality problems”).  In his words, from the title of the speech, “the facade of prosperity”.    Productivity is poor and per capita real GDP growth is pretty weak.

And while I wouldn’t word things quite this way

The fact is, massive immigration is neo-liberal, globalist voodoo.
It is an attack on those who believe in the nation state.

As a general proposition, I think the ideology of large-scale immigration in much of the advanced world isn’t far from that description.  Based on faith rather than sight.  Our politicians typically aren’t ideologues and like to think of themselves as practical people, but they’ve supped from the same streams of thought, and seem indifferent to the lack of hard New Zealand specific evidence on the benefits to New Zealanders of their preferred approach.  For many, as Peters put it,

In their make-believe world immigration is a free good – a gift.

I’ve been pretty critical of the ex post government “spin”, that attempts to suggest that all is rosy.   But Peters portrays it as the fruit of some deliberate and different economic strategy adopted by the current government.

Every country could flatter its economic growth by turning on the immigration tap.

But only NZ has seen governments reckless and irresponsible enough to try it.

In fact, to a considerable extent the current government has been running much the same immigration policy as its predecessors, including governments of which Peters was a part.

One can see it in the centrepiece of our immigration policy, the residence approvals target.  It hadn’t changed for years, until a modest cut was announced last year by the current government.  And what of actual approvals?

residence approvals 2017

For the 12 months to March 2017, the number of approvals is a bit lower than the last June year.   Overall approvals fluctuate from year to year, but average approvals under the current government are pretty similar to those under the previous government.

And here, using the MBIE data, is the numbers of people getting a first work visa in each year (excluding for the moment working holiday scheme people).

work visas granted

Not surprisingly, numbers dipped during the recession, but even with the increase in the last couple of years, the total number of people granted first-time work visas was still barely higher than in the last year of the previous government.

There are big differences in two areas.   The first is working holiday scheme arrivals.

WHS

Even The Treasury has raised concern about the labour market impact of these visitors, but looking at the chart, it is a pretty strong and steady trend increase going back almost 20 years now.  It certainly doesn’t look like a whole new strategy by the current government.

Students are another matter.  There has been a recent big increase in student visa numbers, although still only back to around the 2002/03 peak.

student visas 17.png

Here, of course, there has been a deliberate policy change by the current government, in allowing many or most students significant work rights while they are in New Zealand.    It looked like, and was, an “export subsidy”, and has probably had adverse implications for New Zealanders at the lower end of the labour market (with commensurate gains to the students and their employers).   But this looks like the only significant liberalisation by the current government.  Otherwise, they’ve largely been running the same (misguided) immigration policy as their predecessors

The student issue aside, I suspect that most of what has happened isn’t strategy –  has there been any sign of a serious economic strategy? –  but of being overwhelmed by unexpected events (while the large scale mediocre New Zealand immigration policy ran on in the background).  In particular, the weakness of the Australian labour market (perhaps reinforced by the increasing recognition of the limited entitlements most New Zealanders have in Australia) means that the net outflow of New Zealanders has slowed markedly, and for longer than most had expected.   The escape valve for New Zealanders for the last 40 years or so isn’t working at present, and New Zealand has to cope somehow.

It is a bit like the larger influxes of settlers back to France, after Algeria gained independence, and to Portugal in the 1970s when Mozambique and Angola gained independence.  Opportunities that once existed abroad were no longer there, and a huge reflux of people put pressure on the home economy.  It boosted aggregate GDP quite a bit –  all these new people needed roofs over their heads –  but it didn’t do anything very evident for productivity or the per capita things that matter.

So I don’t buy the line that the current government set out to supercharge population growth.  It just happened.  Perhaps the protracted weakness of the Australian labour market was foreseeable, but it wasn’t widely foreseen.  If it had been the government could have wound back our non-citizen immigration programmes.   It probably wouldn’t have, because ministers still seem to believe the twin gospels of “productivity spillovers” and never-sated “skill shortages”, oblivious to the way that in aggregate immigration increases aggregate pressure on resources, not eases it. But they could have done something.

As it is, they seem mostly overwhelmed by events, without any real strategy other than a desperate hope that it will all come right, in the meantime all the “made up stuff” serves mostly to try to distract attention from the unbalanced, not very productive, mess the New Zealand economy is in.

The government might well be without a strategy, but you have to wonder if any other party has a serious alternative on offer.  Because in the Peters speech yesterday there was a lot of rhetoric about the past, and talk of how

New Zealand First has comprehensive, common sense economic policies designed to build a strong and resilient economy.

But there wasn’t a single word about they would actually do about immigration policy, in any of its dimensions.

I’ve heard Peters in the past talk of reducing the net PLT inflow to around 10000 to 15000 per annum.   But not even that was repeated in yesterday’s speech –  which, in a way, is welcome, because there is no meaningful way the net PLT inflow can be successfully targeted from year to year.  And there was nothing else, at all.  Even though it is only 4.5 months until the election.

Perhaps Peters thinks he can ride high simply on rhetoric.  And perhaps he can.  Perhaps he is concerned not to be outflanked by the Labour Party, which has also yet to release its immigration policy.  But there was nothing at all in the speech.   I’ve seen references to Peters wanting to set something around Pike River as some sort of “bottom line”, but (with due respect to the families of the victims) there are many more important issues in New Zealand.  Judging from his rhetoric, you might suppose Peters thinks immigration is one of those things.

And so I can’t help wondering if we are being set up for a repeat of the last two times Peters went into government: lots of talk in advance, and no action on immigration policy at all.   If it happens, of course, the establishment will be quietly content.  But nothing fundamental will have changed.

Of course, one can only hope that is true of another area of policy that he did discuss in some detail.

Since the Global Financial Crisis we have been in a new economic era that makes reform of the Reserve Bank Act urgent.

Updating the obsolete Reserve Bank Act is critical to take account of the realities of 2017 rather than using a tool that is now decades out of date.

While we cannot slavishly copy from others, in the area of monetary policy we can certainly learn from the experience of countries like Singapore.

The city-state of Singapore has a population of around 5.7 milllion people in a country hardly larger than Lake Taupo.

They don’t have our advantages but they have achieved an enviable record of growth and stayed competitive through using an exchange-rate based monetary policy.

Singapore has a managed float and has a good record in moderating short-term currency fluctuations to ensure that the Singaporean dollar reflects their economy’s fundamentals.

There is no magic wand to get the dollar down to an appropriate and competitive level – and we have never pretended that there is.

But in today’s environment of historically unprecedented low interest rates, failure to reform the Reserve Bank’s Act to make it fit for purpose is inexcusable.

Reduced exchange rate volatility might be helpful, but it simply isn’t the main game.  And Peters offers no thoughts at all on how the average level of the real exchange rate –  one of the critical symptoms of our economic problems –  might be lowered.    And even if you were after materially reduced exchange rate volatility, a Singapore style policy simply isn’t feasible in a country as dependent on foreign capital as New Zealand is.

All in all, it was pretty disappointing stuff –  the more so, because he isn’t far wrong in calling out the unreality of so much of emerges from the government on economic matters at present.

A world-leading debate on immigration?

Michael Reddell Immigration

Sometimes it can be hard to keep up with the flow of pro-immigration articles in the Herald.  At the moment of course, even they tend to be written with a defensive, more than celebratory, stance.

On Monday, the academic sociologist, Paul Spoonley –  who leads CaDDANZ the MBIE-funded academic immigration advocacy and research programme –  was out with a piece headed Xenophobia not welcome in migrant debate.     Hard to disagree with that.  Of course, not all fears are irrational, and political debate rarely occurs at the rarefied level of the fabled academic seminar room, but “deep-rooted fear towards foreigners” (the OED definition) doesn’t seem a particularly good basis for New Zealand’s immigration debate.  But what was a bit puzzling when I read the article, and then re-read it, was that Professor Spoonley offered no evidence that “xenophobia” was what was at work here.  And that’s good.  Presumably if there was such evidence he’d have mentioned it.

And despite generally being a champion of New Zealand’s non-citizen immigration policy, Spoonley himself has come to the conclusion that current immigration levels are “unsustainable” and some changes are needed.  Presumably he didn’t reach that conclusion based on “xenophobia”?

As it happens, most of the proposals he puts forward are pretty mild, or not even policies at all.

There is a case for revising aspects of the recruitment and approval of immigrants. The low value courses and qualifications offered by some educational providers puts New Zealand’s reputation at risk.

One could add that it is, in effect, an industry granted big export subsidies.   We’d sell more of any specific good or service, if doing so came attached with work rights or residence points.     Curiously, export education isn’t even that successful a subsidised industry.  The total number of people granted student visas in 2015/16 was only around 4 per cent higher than at the previous peak in 2002/03.

A more proactive regional focus. Canada and Australia allow regions to set their own targets and to recruit the skilled immigrants needed locally – without undermining local workers or wages. Up to a third of the points required for approval for permanent residence can be granted by regions.

This is even more daft, and dangerous, than the existing (quality-diluting) policy of giving additional points to people with jobs outside Auckland.  And since most local councils can’t even do well stuff they are already responsible for –  not making urban land unaffordable – I’m not sure I’d want to trust them with immigration policy.

Social cohesion. Positive settlement outcomes for both immigrants and host communities would benefit from a greater investment in helping transition immigrants to life in New Zealand – more generous provisions for English language acquisition, for example, would help.

Of course, we could spend even more taxpayers’ money, or we could simply require that people settling here –  refugees aside –  actually speak pretty good English.  These days, most really highly-skilled people –  the ones we might actually benefit from –  do.

And his final proposal

Let’s have a debate about population – its growth and distribution – as a context for decisions about immigration. And let’s not see immigration as a single causal factor or as a simple solution.

This is rhetoric rather than policy, but by all means have the debate.  I’m pretty wary of “population policy” myself, but some serious study of whether policy-driven rapid population growth over most of the period since World War Two has helped lift the material living standards of New Zealanders, or productivity in the New Zealand economy, would be a worthwhile subject for academic researchers.

In the end, Spoonley is mostly playing distraction.  He flings around the charge of “xenophobia,” without any substantiation, and then his own suggestions would make little useful difference in responding to the economic challenges, except by some tightening of rules around student visas (something the government has not yet addressed at all).

But the column that really grabbed my attention was one from the Herald business editor Liam Dann, headed Let’s lead the world on immigration debate.  A worthy aspiration no doubt.  But not, unfortunately, one the column contributed to. Instead, it is riddled with questionable claims and false comparisons, and at one point represents another example –  this time not from a government minister but from an acolyte –  of just making things up.

There is the weird opening.

It looks like immigration is going to be a big election issue.

That’s a shame.

He doesn’t like the way the debate has occurred in some other countries, so seems to think we should take some sort of self-denying ordinance, and not debate one of the larger government economic and social policy interventions there is.   Non-citizen immigration is, after all, far bigger here than in the UK, the US, or France.  Has been for a long time.

There have been a series of record highs for about a year. The numbers exceed even the great colonial influx into New Zealand in the 19th century.

On a per capita basis they exceed what the UK was experiencing pre-Brexit.

This is all rather misleading.   Considered per capita, the net inflow over the last year (New Zealander and non-citizens) hasn’t even exceeded levels seen 15 years ago, let alone at the peaks in the 19th century.  And, by contrast, every single year the number of non-citizens we let in far exceeds (per capita) the inflows to the UK.  So the analytical and policy issues shouldn’t be about this year’s PLT flow, but about the numbers (and terms on which) we allow non-citizens to settle and/or work here.

According to Dann

So we are vulnerable to populist political hijack.

Any world-leading debate on these topics would recognise that the essentials of our immigration policy haven’t changed much for 20 years at least.  Broadly speaking, we moved back to being a high (non-citizen) immigration country in the early 1990s.

I’m not even sure what “populist political hijack” really means, other “than some politician I really don’t like, responding to an issue of real public concern”.   Sounds like democracy to me, messy as it often is.

Funnily enough, Dann also thinks there are some real issues that need addressing.

Immigration policy of the past decade is not sustainable. Our infrastructure is under pressure and we are woefully behind in building to catch up. That’s not the fault of immigrants, of course. It is the fault of politicians and voters.

Not sure how this is all the fault of voters.   We were never asked if we wanted to have record rates of population growth, even though those in office knew that (say) the urban land markets were dysfunctional etc, so that importing lots of new people was only likely to exacerbate house price problems.

And, of course, the issues aren’t just about house prices or road congestion.  There is the small matter of the continuing poor productivity growth in New Zealand (none in the last five years), the shrinking (as a share of GDP) export sector, or the realities of living in a country at the ends of the earth where, for 40 years (with cyclical ups and downs) the natives have been leaving, pursuing better opportunities abroad.   Oh, and the highly misleading descriptions of the immigration programme –  we’ve repeatedly been told it was a skills-focused programme, helping lift productivity etc, and now MBIE’s own numbers show than more than more than half those applying for residence don’t have skills that command even $49000 per annum in the New Zealand labour market.

Dann continues

In other words, it’s our fault. We have been trying to have our cake and eat it too.

No, it isn’t “our” fault.  Voters didn’t ask for this.  Political leaders –  from both sides, but National is now in office –  made it happen.  And there is no “cake” for New Zealanders as a whole, only some nasty sectoral redistributions, and an overall economic performance that continues to underwhelm.   But apparently

One thing lost in the immigration debate at the moment is how successful the policies have been for New Zealand.

Really?

Economically, we have outshone our international peers. We have skipped the economic pain that most of the world felt after the global financial crisis.

That’s not all down to immigration but it has played a big part.

This is just making stuff up.  As I showed yesterday, we’ve done no better than the United States, which was the epicentre of the crisis –  and that despite having about three times the rate of legal immigration the US has (and other bonuses like a record average terms of trade).   We had a nasty recession, that took a long time to recover from –  and actually immigration policy in the “bust” period wasn’t materially different than it had been in the earlier “boom”.   We’ve underperformed Australia too.

real gdp phw dec 16 release

Sure, there are places that are worse still –  much of the euro area most notably –  but there is just nothing to back this claim that we have “outshone our peers”,  let alone that immigration policy has enabled us thus to shine.  Saying it often enough won’t make it true.   In fact, sometimes reality breaks through and even Dann seems embarrassed about channelling this stuff.

When you crunch the numbers on per capita GDP growth it has been far less flash.

Indeed. And it is things like per capita income growth and productivity growth that count.   Even on the labour market side of things, the SNZ release this morning shows that most of the OECD countries that control their own monetary policy have lower unemployment rates than we do.

Culturally, too, New Zealand has grabbed global attention in a way unimaginable a generation ago.

This country used to be largely unknown outside the Commonwealth, where we were acknowledged as a backward British colony that was good at sport and had lots of sheep.

Since we still hold the record low test cricket score, racked up in the bad old days when we had some of the very highest material living standards in the world, I’m not even sure about that “good at sport”.

But, frankly, what is he talking about?

100 years ago, before the First World War, people flocked here – and not just from the Commonwealth – to study New Zealand’s economic and social reforms.  And they often marvelled at what had been created, so quickly, so far from the centres of the world ( including (but not limited to) the best material living standards in the world).

Actually, 30 years ago, before the great immigration resumed, people abroad were fascinated by New Zealand’s economic reforms.  It was a darker story by then, trying to pull back from decades of decline, but the interest was real nonetheless.

Does anyone remember Dame Edna’s tragic Kiwi bridesmaid Madge Allsop? She summed up our image pretty well.

Personally, I don’t remember this character, but I’m sure Dann isn’t trying to suggest that Australians have stopped making fun of New Zealanders (accent and all), or vice versa.

So what is he talking about?  Does he know?   Allegedly….

Against all odds, New Zealand became cool.

Where is the evidence?  What does “cool” mean in this context?  And what does it do, even if it is true, for the living standards of ordinary New Zealanders?  Dann doesn’t tell us.  And yet somehow

Our place in the world has changed and that warrants debate about the immigration policy settings we have in place.

Actually, if one takes any sort of longer view of modern New Zealand history, our place in the world is in decline.  That is more or less inevitable.  We were once one of the handful of (very successful) offshoots of the most powerful empire in the world.   100 years ago there weren’t many independent countries, and few as successful as we were.  Since then,  many more countries have emerged, and quite a few have got a lot richer.   The UK’s global position has declined, and even the US is no longer what it was (in say the decades from 1940).  We are neither powerful nor important –  no longer with automatic access to counsels of the great and powerful we once had –  and, worse, we aren’t even that successful economically any more.  That has real implications for our own people, especially the poorer of them.

So, I really have no idea what Dann is on about.  Perhaps he is thinking of some references in once-hip publications like Lonely Planet guides?  But to what end?  As I ‘ve shown previously, our exports of services –  the lure of tourism, export education etc –  are lower now as a share of GDP than it was 15 years ago, in an age when international trade in services globally has become ever more important.

Leaving aside the detached-from-reality rhetoric, Dann tries to come back to specifics

The Government has belatedly started to recognised that with policy tweaks that have not yet had time to show results.

We could go further and look at more fundamental changes – such as how we set the criteria for residency.

But it would be a terrible thing for the debate to play out here the way it has in other parts of the world.

Quite what does that mean?  You might approve or disapprove of the Brexit result (I approve), but the process was an open one, there were no riots on the streets, and views differ on quite how large a role immigration policy played anyway.

I reckon Donald Trump is fundamentally ill-equipped to be US President.  Then again, the choice was a poor one.  I couldn’t have voted for him or his principal opponent.  And is a physical wall a good solution?  Quite probably not.   But it was an open and democratic election, and there were plenty of other issues at play in the election.  And –  unlike us –  the US really does have a large stock of illegal migrants in the country.  

Alternatively, and optimistically, New Zealand is in a position to lead the world on the immigration debate. We could do this right.

But simply flinging around, as slurs, references to Brexit or Trump isn’t really a great start to the sort of debate Dann claims to want to have in New Zealand.  After all, if immigration is an issue in those countries, there are good reasons why it could be a much bigger issue here (we simply take more people, per capita).

We could pay close attention to the data, we could look at economic impact studies and we could have a frank and open discussion about the kind of country we want to build.

That would certainly be a novel (but welcome) approach.  Perhaps Dann could point us to the New Zealand specific studies illustrating how New Zealanders, and New Zealand productivity levels, have been raised by decades of large scale immigration, much of it simply not that skilled?  Other champions of immigration policy haven’t been able to.    There is plenty of theory, but not much grounded analysis that takes specific and detailed account of the circumstances of New Zealand.

Dann doesn’t like the idea of Labour promising to do something to markedly cut the non-citizen immigration flow.

It is difficult for Labour because the politics are polarising. Labour wants power, it sees a rich vein of discontent but in the current topsy-turvy political environment, it has to make careful choices.

Retaining a traditional, optimistic liberal view leans towards free and open borders. That now puts them on the side of the neo-liberal globalists – not a fashionable place for the centre-left these days.

But campaigning to radically slash immigrant numbers by unspecified amounts puts them in the camp of angry nationalists like Winston Peters, Donald Trump and Nigel Farage.

It would certainly be good to see some specifics from Labour –  it is after all only four and half months until the election.  But it is not as if Labour has always been some sort of “open borders” party.  It was the Labour icon, Norman Kirk, who in the 1970s put in place the biggest post-war adjustment to immigration policy, depriving people from the United Kingdom (then far and away the main source country) of their automatic right to move here.

For the last few decades, Labour and National have had much the same immigration policy –  believers, apparently, in the rhetoric of lifting productivity through immigration, and in the skill shortages, that never seem to ease no matter how many decades we wait.

Suggesting that Labour would cut immigration by tens of thousands certainly needs something concrete behind it –  and soon –  but I’m afraid that comparisons between Andrew Little (or Jacinda Ardern, Grant Robertson, David Parker and Phil Twyford) and Donald Trump simply aren’t worthy of a serious journalist, and especially not one making the high-minded call for a world-leading immigration debate.

Dann starts to come to the end of his column

We can’t let the politics become emotive. This is fundamentally about economics. It should be boring.

Not sure I entirely agree.  Politics is about conflicting world views and values.  There are, and inevitably will be, emotional dimensions about that.  Personally, I’m angry at the decades of failure by a succession of political leaders to really grapple with New Zealand’s economic underperformance.   And pretty upset about the apparent (practical) indifference to the housing disaster, all politically wrought.    But Dann asks

Can we quantify how much value immigrants add to the economy?

How does the added value compare with the economic cost of new infrastructure that we need to cope with increased population?

It isn’t really a fiscal question, but the honest answer to his first question is that “no, no one really has”.  It has been a programme based on faith and theory, and often the short-term self-interest of employers (especially those in the non-tradables sector).    The government does not know if large-scale immigration has added to New Zealand’s productivity over time.      For such a large experiment, that is an extraordinary failure.

Distributional issues matter.

The harder question is trying to understand how the value and costs are distributed.

Some established citizens will be bigger beneficiaries than others. There are different geographic impacts.

Given we’ve had an immigration policy that favours wealthy immigrants it is self-fulfilling that our policies have increased wealth in this country.

But they may also have exacerbated inequality

Again, he has lost me.  Most of our immigrants aren’t very skilled or wealthy at all –  most can’t even earn $49000 a year, the starting salary for a primary teacher with a basic degree.  So there is no automatic presumption that the country is wealthier as a result (again, per capita, the only measure that really counts).  And it shouldn’t really be news to the business editor of our largest-circulation paper that inequality hasn’t materially changed in New Zealand in the last couple of decades (at least if the distorted housing market is excluded).   The New Zealand Initiative, rightly, point it out repeatedly.

I’m all for a good quality debate about New Zealand’s immigration policy.  One is certainly well overdue.  But when Dann’s call for such a debate is so riddled with errors, misconceptions, and slurs, it is hardly a good start.      In the end, it is hard to avoid a conclusion that what Dann really wants is just a continuation of the status quo, with a few more houses and roads built, and the column is mostly an attempt to avoid the real debates.   It certainly isn’t the start of a world-leading debate, especially not one that engages seriously with the decades of serious economic performance, or with the revealed choices of New Zealanders –  for 40 years now –  to leave.

A government that simply makes things up

Michael Reddell New Zealand economic performance, NZ politics

Perhaps all governments these days eventually do it, but one of the things that I’ve come to dislike most about our current government is the way they and their acolytes simply make stuff up.    I could, I suppose, understand them not actually doing anything much.  After all, they didn’t promise to do anything much.

But the endless spin, and stuff that is just made up, sickens me.  Apart from anything else, I try to bring up my kids heeding the biblical injunction to honour those in authority over us.  I don’t read that as suggesting people won’t disagree with those who hold office, but there is something quite sick about the political process –  and perhaps about a society that tolerates this stuff –  when so often one reads comments from senior ministers or the Prime Minister to which one can only  explain to kids interested in such things that “they are just making it up”.    We should expect much better than that.

I’ve written before about the current and former Prime Ministers’ dismissal of housing or conjestion problems as “quality problems” or “signs of success“.  And there are the repeated claims that New Zealand’s economy is doing better than almost any other advanced country –  a suggestion ably challenged in an article by journalist Graham Adams yesterday.   But today, since it is the day Murray McCully leaves ministerial office after a very long period in ministerial roles in two governments. I wanted to focus on an unfounded claim in a recent speech to the New Zealand Institute of International Affairs by the outgoing Minister of Foreign Affairs.

He begins with an unexceptionable observation

The key feature of the past decade has been the rise of China, in terms of both our bi-lateral relationship, and as a regional and global power.

Not just of the past decade, but the past several decades.

And, as the Minister notes, there has been a big growth in bilateral trade (goods and services).

In my eight and a half years in this role I have seen our exports to China increase from around $2 billion to nearly $10 billion, and visitor numbers more than quadruple from under 100,000 to over 400,000.

But then he dramatically over-reaches

Had it not been for the dramatic expansion of trade and economic relations with China in the early years of the Key Government, New Zealand would have suffered a long and sustained recession, and all of the associated social challenges that we have seen in some European nations.

There is simply no support for this proposition anywhere in the rest of the speech.

The implication, of course, is that New Zealand has done well over the term of this government.  But here is a chart of real GDP per capita for New Zealand and the United States, both normalised to 100 in the December quarter of 2007, just prior to the recession.

real GDP pc NZ and US

The United States, you will recall, was the epicentre of the financial crisis, and had a very nasty fall in house prices.  The United States cut interest rates as far as they then thought they could go.

New Zealand, by contrast, had a relatively modest home-grown financial crisis (localised in the non-systemic finance companies), never reached the limits of conventional monetary policy, and had a much stronger fiscal position going into the recession than the US (or most other advanced countries had).  Oh, and we the big bonus of a sharp fall in interest rates, as a country that had borrowed heavily from the rest of the world.

And yet look at the chart.  The initial recession was certainly a little deeper in the US than it was here –  but China wasn’t a significant influence on what was happening here in 2008/09.  But then we had a double-dip recession in 2010.

For a couple of years it looked as though we might be doing a bit better than the US, at least on this metric, but even that optimistic possibility has now faded away.  Over the nine years shown, real GDP per capita has grown almost exactly as slowly in New Zealand as it has in the United States (average growth rates of barely 0.5 per cent per annum).   You’d have to know economic data pretty well to be able to tell apart the US and New Zealand lines for the last six years or so.

So we had a pretty nasty recession, which we took years to recover from.  On some metrics – eg the unemployment rate –  we still haven’t.  And all that even though China took up a larger share of our exports.  It is so even though in those “early years of the Key government”, China was a big source of demand driving activity in our biggest trade and investment partner, Australia.

The Minister seemed to be telling a trade and exports story –  certainly those are the numbers he quoted.    But here are exports as a share of GDP for the two countries, again back to December 2007.

exports to GDP US and NZ

In both countries, exports took a hit during the recession – in the US’s case it was mostly volumes, while it our case much of it was prices (the fall in export prices).   But, despite all that additional trade between New Zealand and China, our export share of GDP has fallen quite a bit over the last few years, while that in the US (always much lower, given that the US is a large country) has held remarkably steady.

Perhaps this fawning “China our saviour” line went over well when the Premier of China was visiting recently, but it really doesn’t amount to much at all.  The country composition of our exports has changed –  and for a couple of years perhaps high prices out of China for milk powder lifted farmer incomes –  but as a share of the overall income, exports have been shrinking.  We produce stuff (mostly bulk commodities), and someone buys it.  In recent years, China has been a more important buyer –  although Australia remains our largest export market –  and the free trade market with China is likely to have been helpful, but it has hardly transformed our economic fortunes.

There are other differences between the US and New Zealand experiences.  The US unemployment rate went up much more than ours did during the recession, but then came down much more sharply and is now a bit lower than ours.

U rates in floaters

But one striking difference over the last few years is in the estimated population growth rates.

population US and NZ

Overall, ours is a story of little or no productivity growth (none for the last five years), of an economy that –  going by the headline statistics –  seems increasingly inward focused, reliant on population-fuelled (and earthquake rebuild fuelled) domestic demand.   And it is a pretty poor performance all round.

There are, of course, worse places among the advanced countries, and if that is all the Minister had wanted to say, no one could disagree.  But instead he over-reached, suggesting that somehow we’d done well.  We haven’t.  And mostly that is down to our own choices –  or, more specifically, those of the government in which Mr McCully has been a senior minister.