Whichever party, or group of parties, gets to form the next government will face the same facts about our disappointing economic performance. As I noted a few weeks ago, based on the recent PREFU projections, not even Treasury seemed to rate very highly the chances of meeting the National-led government’s export objective.
Here is the share of exports in GDP, showing actuals for the last decade or so, and Treasury’s projections for the next few years.
By the end of that forecast period, there will only be four more years until the goal of a much-increased export share of GDP was to be met. On these numbers, exports as a share of GDP would by then be at their lowest since 1989, 32 years earlier. So much for a more open globalising economy.
One of the indicators I like to use is a rather rough and ready decomposition of real GDP into its tradable and non-tradable components, first developed by an IMF staffer looking at New Zealand a decade or so ago. It assigns the primary sector and the manufacturing sector components of real production GDP, and the exports of services component of expenditure GDP, to the tradables sector – the bits where New Zealand firms are competing with the rest of the world. The rest of GDP is classed as non-tradable. It isn’t a precise delineation by any means: some local manufacturing isn’t really tradable (due to high weight and low value, and thus transport costs) and, for example, the electricity generated for Comalco is, in effect, tradable. But, broadly speaking, it seems to capture something meaningful about the New Zealand economy. In the early days of the National government, then Minister of Finance Bill English was quite keen on it.
All economies need firms in both tradables and non-tradables sectors. So one sector isn’t inherently better or worse than the other. But countries that are catching up with the world-leading economies tend to be ones in which the tradables sector (exports and import-competers) lead the way. In such economies, firms are finding more and better, more lucrative, ways to tap the much larger global market. Of course, we also gain when the non-tradables sector is becoming more productive – both directly as consumers, and as a reduction in the input costs of tradables sector firms. But there is a limit to how many cafe meals we can serve each other. There isn’t really a technical limit on, say, how many smart ideas, translated into appealing products, that firms in a small country could sell to the rest of the big world.
As well as dividing real GDP into tradables and non-tradables components, I’ve also expressed both components in per capita terms. Over long periods of time, most real economic series trend upwards, and actually it is something like per capita production or value-added that matters most in looking at gains in material well-being. Here is the latest version of my chart, updated for last week’s GDP release.
The series do bob around a bit. The tradables sector, for example, had a very good June quarter on the back of a couple of tourism one-offs (the World Masters’ Games and the Lions tour) but then it had had a poor year last year. But what I try to draw attention to is that (a) the peak in the tradables series was as long ago as 2004, and (b) real per capita tradables sector output is now no higher than it was at the end of 2000, almost 17 years ago. Across the whole terms of two governments, one National-led and one Labour-led, there has been almost no growth at all in the real per capita GDP of the tradables sector. None.
Some economists really don’t like the chart. So lets look instead at each of the components that make up the tradables sector measure.
Services exports, in real per capita terms, did very well in the 1990s, growing quite strongly until around 2002. But, overall, almost no growth since. The mining sector briefly did very well around 2007/08 when a new oil well came on stream. And, in per capita terms, the agriculture, forestry and fishing component of production GDP, and the manufacturing component, have gone almost nowhere over 25 years, again in real per capita terms.
What changed 15 years ago? Well, one of the things that has changed a great deal is the real exchange rate. Here is a chart of the Reserve Bank’s index, showing an average for the last 15 years (as well as one for the previous few years).
It is unlikely – all but inconceivable in fact – that if we keep on doing what we’ve been doing for the last 15 years or more, in terms of economic policy settings, that we’ll see any sustained per capita growth in our tradables sectors. It is that old line about a definition of insanity being doing the same stuff over again and expecting a different result.
Even to sustain those sectors at the sort of flat levels – no growth at all – we’ve had over the last 15 years or more has involved the significant subsidies of (a) unpriced pollution externalities especially around water, (b) significant direct subsidies (to, most notably, the film industry) and (c) significant effective subsidies to the export education industry (by offering a bundled product where students can pay for an education – in some cases an “education” – and get preferred access to work and residence visa entitlements too – that benefit being provided free to the providers by the New Zealand government).
I’d be very happy for a new government, of whatever stripe, to deal directly to any or all of those distortions. But they, and their advisers, need to bear in mind that exchange rate chart. Unless the real exchange rate falls quite materially, it is difficult to envisage much growth in other tradables industries to replace the shrinkage in the subsidised industries. (It was exactly the same issues policy advisers faced when we started liberalising, and stripping away earlier subsidies, in 1984.) Real exchange rates can’t be managed directly, but they can be materially influenced by removing the sorts of other policy distortions that put intense pressure on domestic resources, and drive up the prices of non-tradables relative to tradables, skewing the economy away from the tradables sector.
I’m not optimistic about prospects, but the good thing about pessimism is that one can, just occasionally, be pleasantly surprised.