Year: 2017

Fourth term government votes

Michael Reddell NZ politics

After the provisional election results were announced a couple of weeks ago I ran a post looking at how National and the other right or centre-right parties had done in this election compared to the experiences of the other two times (since National and Labour first dominated the scene) that a party had won a fourth term (1935 to 1949 under Labour, and 1960 to 1972 under National).   In both those cases, the winning party actually increased its vote share in the election that secured the fourth term (1946 and 1969).

MMP muddies the waters somewhat.  But here is a chart showing, using the final results this afternoon, the combined vote share for National, ACT, and the Conservative Party for the last four elections (numbered along the bottom) and comparing it with National’s experience in the four 1960s elections.  I’ve argued previously that most Conservative Party voters would (a) otherwise have voted National or stayed at home, and (b) had the Conservative Party won seats they’d have sided with National as surely as the Greens side with Labour.

centre-right vote share

The centre-right parties did impressively well to increase their total vote share in 2011 and again in 2014.  But the fall-off in this election – 6.6 percentage points –  is pretty stark.

It may still be enough to lead the next government –  time and New Zealand First will tell –  but, if so, it is hardly a ringing endorsement.    Here is some contextual material around National’s 1969 victory that I included in the earlier post.

Now that looks more like a genuinely impressive performance – the governing party lifting its vote share in the election in which it gained a fourth term.   There had been industrial action at the time of the election which had hurt the Labour Party, but the previous three years had been a very tough time to govern.   Wool prices had collapsed (and with them the overall terms of trade), the New Zealand government had been forced into a devaluation in late 1967, and had borrowed from the IMF under a pretty stringent domestic austerity programme.  Things here had been tough enough that over the three calendar years 1967 to 1969 there was a small overall net migration outflow (the first such outflows since the end of World War Two).

Some Australian perspectives on PRC influence-seeking

Michael Reddell Australia, China, NZ politics, Uncategorized

For those interested in the activities of the People’s Republic of China and the Chinese Communist Party in this part of the world, Professor Anne-Marie Brady’s paper remains essential reading.   The material Professor Brady lays out on the New Zealand is deeply troubling, as is the near-complete subsequent silence from most of our political leaders.

But if New Zealand remains somewhat unique in having a Communist Party member and former member of the Chinese intelligence services –  who has never disavowed his past and remains very close to the People’s Republic of China embassy –  as a serving member of Parliament, the issues around PRC influence-seeking, pressure on the Chinese diaspora, and direct meddling in the domestic affairs of other countries aren’t unique to New Zealand. In yesterday’s post, I highlighted several links to contribution to the open and active debate on these issues in Australia.

But today a new collection of 22 articles, speeches etc on the issue of PRC activities in Australia (“The Giant Awakens” ) has been released by Vision Times, one of the relatively small number of remaining independent Chinese media in Australia (as in New Zealand, most of the Chinese media in Australia are now apparently under the effective control of the PRC).  More than half the authors are themselves ethnic Chinese, including a former PRC diplomat to Australia who defected a decade or so ago.

I haven’t read the entire collection, but of those I have read almost every piece struck a chord in one way or another, with so much of what is written about raising similar issues and concerns to those Professor Brady alerts us to in New Zealand.   I’d commend it to anyone interested in the subject, both because Australia (a) matters to us, and (b) seems to have very similar issues to us, and because…..well….sadly there is nothing similar in New Zealand.   The near-complete cone of silence still appears to hold.

I’d particularly commend the first paper in the collection by Professor Rory Medcalf, who is currently the Head of National Security College at the Australian National University.   It is an easy read –  only three pages – but an uncomfortable one.

A few extracts

Here in Australia we have seen the Chinese Communist Party involved in what appears to be multi-faceted campaign to influence our politics and independent policymaking. This includes propaganda and censorship in much of this nation’s Chinese-language media as well as channels of interference through intimidation of dissident voices and the establishment and mobilisation of pro-Beijing organisations on Australian soil. There is also the troubling question of political donations and their motives.

On political donations –  recall the magnitude of some of the disclosed donations here

It has also been reported recently that Australia’s main political parties have received close to $6 million in donations over the last few years from individuals associated with the Australian Council for the Promotion of the Peaceful Reunification of China. The Council, in turn, is reported to have connections to the United Front Work Department, an organisation which reports to the Central Committee of the Communist Party of China.

But whatever the mix of motives, one thing is clear. The donations were enough for the Director-General of the Australian Security Intelligence Organisation (ASIO) to take the highly unusual step of directly warning the major parties that they and Australia’s national security could be compromised by such donations. For the head of ASIO to take such a step suggests he was genuinely worried, from a national security and national interest point of view. Security agencies cannot take effective action on any of this because it has been entirely legal – all they can do is raise the alarm. It is now up to the political class to decide whether there is, within Australian democracy, enough self-respect to function without money linked to the Chinese Communist Party. This, after all, is a massive, secretive, self-interested and foreign organisation, with interests that can sometimes clash directly with Australia’s.

These issues are at least as much about the interests of ethnic Chinese New Zealanders and Australians

Indeed, much of the worry about such influence is within this country’s diverse Chinese communities. If, as a nation, we chose to ignore such concerns, we would be effectively treating such dissenting voices among our Chinese-Australian population as second-class Australians, whose freedom of thought and freedom of expression do not warrant protection.

So the issue of foreign interference needs to be addressed in a context of respect for the rights of Chinese Australians. That means this needs to be an issue that is seized and owned by the moderate, bipartisan centre of Australian politics. This way, the issue cannot be captured by extreme voices or be distorted, misconstrued or falsely portrayed as one of xenophobia.

One of the points I’ve been making in a New Zealand context is that our economic dependence on China is (often) much-exaggerated.

The risk is that we will buy the story that our economy is so comprehensively dependent on China that Australia cannot afford to cause China much difficulty on security and political issues, even when our interests diverge. Indeed, perceptions of Australia’s vulnerability to Chinese economic pressure are exaggerated. Economic pressure from China that would have the biggest impact on Australia – most notably through iron ore trade – would also impose restrictive costs on Beijing. Privately or publicly, Beijing criticises or complains to Canberra frequently over multiple issues. But the accompanying threats tend to be implicit or general – that the bilateral relationship will suffer some unspecified deterioration if Australia does not heed China’s wishes.

…..If Beijing felt it needed to send an economic signal to reinforce its displeasure, its initial response would likely involve non-tariff barriers over quarantine and safety standards, or making life difficult for businesses operating in China, with limited long-term economic impact on itself or Australia.

Beijing has adopted this approach towards South Korean business interests, yet has not succeeded in its goal of changing Seoul’s stance on missile defence cooperation with the United States. Economic vulnerability is often as much about perception as reality – and it is in China’s interests for Australia to imagine itself highly vulnerable. Already, some voices in business, academia and the media focus on the possible economic impacts of annoying China. The perception of economic harm can have an outsized effect on domestic interests, creating pressure for rapid political compromise. If we overreact to any Chinese economic threats and self-censor on issues perceived to be problematic for Beijing, it will not protect Australia from further pressure – it will signal that such pressure works.

And finally

Foreign interference in Australia is not solely a national security issue. It is a fundamental test of Australian social inclusiveness, cohesion, equity and democracy that we ensure all in this country have freedom of expression, freedom from fear and protection from untoward intervention by a foreign power.

It is a paper, part of a collection, that should be widely read in New Zealand.

In my post yesterday afternoon, I linked to an article published in the AFR by Peter Drysdale and John Denton, attempting to play down the issue of Chinese influence and suggesting that critics are “demonising” the People’s Republic, or indeed Chinese-Australians.   There is a nice, accessible, response to that article by John Fitzgerald, another Australian academic.

…for Australia, the issue at stake is not whether Leninism and liberal democracy can work happily and co-operatively in their separate jurisdictions but whether it is possible for a democracy to maintain jurisdictional separation in a dependent relationship with a Leninist state without adjusting its everyday modes of operation. Whatever we may think of authoritarian Leninist states, of which contemporary China is clearly one, they are founded on an ‘enemy mentality,’ and they have immense difficulty recognising the territorial and jurisdictional limits of their overweening hierarchical authority. How is a liberal Australia to deal with a Leninist China as that country becomes more assertive beyond its borders?

A bold free press is one of the few instruments a democracy has at its disposal to check the encroachment of a Leninist state into its jurisdiction. An open, respectful, and evidence-based conversation on this encroachment in the media is essential to getting Australia’s relationship with China right.

It is not demonising China to report what the Chinese government says about itself: that it is a wealthy and powerful Communist Party state that has no time for democratic accountable government, no independent courts, security, or media, that denies universal adult political participation, that offers no protection for the exercise of fundamental rights of freedom of speech, religion or assembly. In China this is called guoqing. There are no plans to change anytime soon. Similarly, querying the behaviour of a few named and alleged influence peddlers from China no more tarnishes the reputation of all Chinese Australians than querying the conduct of Putin’s agents in Washington impugns the loyalty of all Russian Americans.

Meanwhile, here in New Zealand the final election results will be declared tomorrow.  A self-confessed member of the Chinese Communist Party, former member of the Chinese intelligence services –  both facts hidden fron voters for years, and partially hidden from the New Zealand immigration and citizenship authorities “because that is what the Chinese authorities told us to do” – will once again be confirmed as a member of Parliament.  That alone –  the tip of the iceberg in the issues Professor Brady raises –  should be deeply troubling.  But our establishment elites seem unbothered.  Nothing is heard from the Prime Minister. Nothing is heard from the Leader of the Opposition.  Nothing is heard from the Green Party.  Nothing is heard from the Minister of Foreign Affairs.  And when last heard from, the Attorney-General and minister responsible for several of the intelligence services resorted to simply making stuff up.

“That was a Newsroom article, timed to damage the man politically.  I’m not going to respond to any of the allegations that have been made about/against him. I think it is disgraceful that a whole class of people have been singled out for racial abuse.  As for Professor Brady, I don’t think she likes any foreigners at all.”

The best response to erroneous claims is the facts. As far as I’m aware, nothing in the original Financial Times/Newsroom articles, nothing in Professor Brady’s paper, and nothing in yesterday New York Times article has been refuted.  I’ve not even seen anyone try.  Some mix of embarrassed silence, and brazening through, in the hope that the issue will just go away seems to be what our “leaders” now count as responsible leadership.

Deposit insurance wouldn’t put credit ratings at risk

Michael Reddell Banking, deposit insurance, Financial stabilty, Uncategorized

There was a curious paragraph in an article by Alex Tarrant on interest.co.nz last week on post-election positioning .  Tarrant was writing about, in particular, fiscal positioning and the possibility that whichever party leads the next government could find its fiscal commitments put under pretty severe pressure because of the policy exepctations of the minor parties (New Zealand First on its own, or in conjunction with the Greens).  He argues that if Labour ends up back in opposition

It will also allow Labour to imply that National must have offered more to Peters on big-spending policies than Labour was prepared to. The hope for Ardern and Grant Robertson would be that National suddenly finds itself being attacked on throwing fiscal responsibility out the window with a set of coalition bribes. And this after the entire campaign was fought by National on sound management of the government’s books and plans to repay government debt to 10% of GDP, from about 23% now.

This could be a huge boost for a resurgent Labour Party even if it does go back into opposition. “We wanted to form a responsible government, but couldn’t get NZ First to agree to responsible spending.”

Labour might even be able to point to how certain policies might have put the government’s credit rating at risk – my understanding is that NZ First’s and the Green’s bank deposit insurance schemes could fit this argument.

The government’s credit rating currently benefits from ratings agencies placing less weight on that government would bail out a failed bank here, with the Reserve Bank’s open bank resolution policy and there being no government deposit guarantee/insurance in New Zealand. If introducing one means rating agencies rethink this position, the argument would be that a lower credit score would lead to higher government borrowing costs. (Peters’ policy on deposit insurance regards majority-owned NZ-registered banks; the Greens want a broader scheme.)

The main bit of the argument didn’t strike me as terribly persuasive –  the warm feeling of fiscal virtue would surely be of little solace to most Labour people on the dark winter nights if they did end up back in opposition for another three years.

But what had really caught my eye was the specific suggestion that New Zealand First or Greens preferences for some sort of deposit insurance scheme might imperil the government’s credit rating.  I’d made a mental note to come back to it, but yesterday someone asked my view on the suggestion, which is the prompt for this morning’s post.

The New Zealand government’s credit ratings are very strong.   There are foreign currency and local currency credit ratings, but for New Zealand only the latter now matter (there is little or no foreign currency debt, and no apparent plans to raise more).  Of the three main ratings agencies, one gives the New Zealand government a AAA rating –  the best there is –  and the other two give the government an AA+ rating, just one notch down.   That makes sense.   We not only have a low level of government debt (per cent of GDP) but successive governments have proved to have the willingness and capacity to keep debt in check when bad stuff happens.  The last time the New Zealand government defaulted on its debt was in 1933 –  and we had lots of company then.

Relatedly, our banking system has been strong and pretty well-managed.  There were some pretty serious problems in the late 1980s, immediately post-liberalisation, particularly with financial institutions that had been wholly government-owned (Rural Bank, DFC, and BNZ).   But since then –  and before that period for that matter –  banks have been pretty strongly-capitalised, and appear to have done a pretty good job of making credit decisions.  Banks took too many risks (were too complacent) in the 2000s around funding liquidity –  and needed a lot of official support on that score during the 2008/09 international crisis period.  But despite a really big credit boom in the 2000s, even a severe recession and quite a slow recovery –  and levels of income (servicing capacity) typically quite a bit below what would previously have been expected –  led to no serious systemwide impairment of the banks’ assets.  Loan losses rose, as they do in every recession, but to quite a manageable extent.   It was a similar story in Australia, Canada and quite a few other advanced countries.  The government put itself on the hook for some finance company failures (through the deposit guarantee scheme) and the ill-advised AMI bailout.  But that was it.

And these days, almost a decade on, pretty demanding stress tests on banks’ loan portfolios suggest that even a savage recession and a very severe fall in house prices would not be enough to topple any of the banks, let alone the system as a whole.  That isn’t grounds for complacency –  in the wrong circumstances lending standards can deteriorate quite rapidly –  but on the sort of lending the banks have been doing over the last decade or two, the banking system itself looks pretty sound.

Rating agencies still worry a bit about the large negative net international investment position of New Zealand (the net claims of foreigners –  debt and equity –  on all New Zealand entities).  Personally, I think that is an overstated concern: the NIIP position has been large for 30 years, but hasn’t (as a share of GDP) been getting any larger.  Mostly it is the net offshore funding of the banking system.   What matters then, from a credit perspective, is the quality of the assets on bank balance sheets (see above).   In my reading of the literature, big increases in banks’ reliance on foreign funding have often been a warning sign (internationally).  That hasn’t been the story here for a long time.

New Zealand is the only OECD country now that does not have a deposit insurance system.   The official rhetoric for a long time has been that depositors need to recognise that they can, and will, lose their money if their bank fails.  It is supposed to promote market discipline.  The Open Bank Resolution tool was devised to try to buttress that “no bailouts” message –  or at least to give ministers options in a crisis.  The OBR is designed to ensure that a bank can be reopened immediately after it fails (thus keeping basic payments services going). It does so through a mechanism that involves “haircutting” the claims of creditors –  the size of the haircut designed to be larger than the plausible, but still unknown actual losses –  while providing public sector liquidity support and a government guarantee to the remaning claims.  Without such a guarantee, rational creditors would mostly withdraw the remaining funds they did have access to as soon as the failed bank reopened.  In practice, since in a small system with quite similar banks all banks are likely to face quite similar shocks, such a guarantee might well need to be extended to the other banks (although I’m not aware that this latter point has ever been conceded by authorities).

It is no secret that governments tend to bail-out failed banks, and often end up offering a degree of protection that goes beyond anything in formal deposit insurance system rules.  That is particular so for retail depositors, but in the last major crisis of 2008/09 it was often true of wholesale creditors too (eg extreme pressure was brought to bear on the Irish government, by other governments and EU entities, not to allow wholesale creditors to lose money when Irish banks failed).

The practice might, in some abstract world, be undesirable, but it happens.    There are some signs now that authorities are putting more effort into trying to build regimes that make it more feasible for wholesale creditors to be allowed to lose money, while not disrupting the continuity of payments systems etc.  But there is no sign of such movement as far as retail depositors are concerned.

And despite the rhetoric, New Zealand’s track record hasn’t been so very different.  Governments twice bailed out the BNZ in the late 80s and early 90s.  The temporary retail deposit guarantee scheme was introduced with bipartisan support in the midst of the 2008/09 crisis.  And AMI –  an insurance company, not even a bank –  was bailed out, on official advice, only a few years ago.    Of course, many small finance companies also failed, and there was no bailout to those depositors.   But a rational retail creditor of a significant retail bank is quite likely to assume that if there is a bank failure, he or she will in the end be protected by the government.

Rational ratings agencies know this too.   In their ratings –  or banks and of sovereigns –  they take account of the probability of official government support.     It is likely to be a matter of serious concern in a shonky banking system, and in a country with high pre-existing levels of government debt.  It isn’t likely to be of much concern in a country with a good track record of stable banking, a low level of government debt, and a good track of reining in fiscal pressures.  And that is true whether or not there is a formal deposit insurance scheme in place.

For a long time I was staunchly opposed to deposit insurance –  like pretty much everyone at the Reserve Bank.  But I changed my mind probably a decade ago.  I’m not so worried by the question of whether it is “fair” or not for ordinary depositors to face the risk of losing money –  there are plenty of other areas where such uncompensated losses happen (eg house prices fall back, or the value of one’s labour market skills drops) –  as by realpolitik considerations:

  • at point of failure, governments are almost certain, whatever they say now, to bail out retail depositors of major core institutions, and
  • a pre-specificed deposit insurance arrangement increases the chances of OBR itself being able to work, and thus of being able to impose losses on wholesale creditors (notably offshore ones).

In an earlier post I outlined a scenario:

Suppose a big bank is on the brink of failure.  Purely illustrative, let’s assume that one day some years hence the ANZ boards in New Zealand and Australia approach the respective governments and regulators, announcing “we are bust”.

Perhaps the Reserve Bank will favour adopting OBR for the New Zealand subsidiary (since the parent is also failing they can’t get the parent to stump up more capital to solve the problem that way).    But why would the Minister of Finance agree?

First, Australia doesn’t have a system like OBR and no one I’m aware of thinks it is remotely likely that an Australia government would simply let one of their big banks fail.  But in the very unlikely event they did, not only is there a statutory preference for Australian depositors over other creditors, but Australia has a deposit insurance scheme.

I’m not sure of the precise numbers, but as ANZ is our largest bank, perhaps a third of all New Zealanders will have deposits at ANZ.

So, if the New Zealand Minister of Finance is considering using OBR he has to weigh up:

  • the headlines, in which ANZ depositors in Australia would be protected, but ANZ depositors in New Zealand would immediately lose a large chunk of their money (an OBR ‘haircut’ of 30 per cent is perfectly plausible),
  • and, even with OBR, it is generally accepted (it is mentioned in the Bulletin) that the government would need to guarantee all the remaining deposits of the failed bank (otherwise depositors would rationally remove those funds ASAP from the failed bank)
  • and I’ve long  thought it likely that once the remaining funds of the failed bank are guaranteed, the government might also have to guarantee the deposits of the other banks in the system.  Banks rarely fail in isolation, and faced with the failure of a major banks, depositors might quite rationally prefer to shift their funds to the bank that now has the government guarantee.

And all this is before considering the huge pressure that would be likely to come on the New Zealand government, from the Australian government, to bail-out the combined ANZ group.  The damage to the overall ANZ brand, from allowing one very subsidiary to fail, would be quite large.  And Australian governments can play hardball.

So, the Minister of Finance (and PM) could apply OBR, but only by upsetting a huge number of voters (and voters’ families), upsetting the government of the foreign country most important to New Zealand, and still being left with large, fairly open-ended, guarantees on the books.

Or, they could simply write a cheque –  perhaps in some (superficially) harmonious trans-Tasman deal to jointly bail out parent and subsidiary  (the haggling would no doubt be quite acrimonious).  After all, our government accounts are in pretty reasonable shape by international standards.

And the real losses –  the bad loans –  have already happened.  It is just a question of who bears them.  And if one third of the population is bearing them –  in an institution that the Reserve Bank was supposed to have been supervising –  well, why not just spread them over all taxpayers?    And how reasonable is it to think that an 80 year pensioner, with $100000 in our largest bank, should have been expected to have been exercising more scrutiny and market discipline than our expert professional regulator (the Reserve Bank) succeeded in doing?  Or so will go the argument –  and it will get a lot of sympathy.

So quite probably there would be some sort of joint NZ/Australian government bailout of the Australian banks and their New Zealand subsidiaries.  The political incentives –  domestic and international –  are just too great to seriously envisage an alternative outcome.

But let’s suppose the Australian government was willing to jettison the New Zealand subsidiary and leave it entirely to us what to do.  The domestic political pressures to protect retail deposits will still be just as real.  In those circumstances, a pre-established deposit insurance scheme (eg for retail deposits up to perhaps $100000 per depositor) would make it more feasible for a Minister of Finance to (a) cap the government’s support, and (b) allow the OBR tool to be applied, under which wholesale creditors would be allowed to lose money.   It still might never happen –  there will still be unease about ongoing access to foreign funding markets for the other banks –  but the option is more feasible than at present (with no deposit insurance in place).  From a fiscal perspective, a pre-specified credible deposit insurance scheme –  funded by a levy, and backed by a credible bank supervision regime –  could actually reduce the fiscal risks associated with a banking crisis, rather than increase them.

Finally, it is worth keeping the numbers in some perspective.  At present, properly defined net Crown debt is about 9 per cent of GDP.    Total (book) equity of all our banks is currently around $37 billion.   Savage stress tests at present suggest little risk of a severe shakeout making material inroads on that buffer.    Banking systems tend not to lose much money on housing-dominated portfolios, when those loans are put in place in floating exchange rate systems without much government interference in the housing finance market.  But lets assume a really savage scenario, in which across the banking system all the equity is wiped out, and 50 per cent more, and the government chooses to recapitalise the banking system.  That would involve  the government assuming additional gross debt of around 20 per cent of GDP.  But much of that would be “backed” by the remaining good assets of the banking system (in time the recapitalised bank could be sold off again) –  it is only the amount the government injects that is beyond replacing existing equity that represents a net loss to the taxpayer.  That amount would be less than 10 per cent of GDP, even on these extremely pessimistic scenarios.   You’ll remember a recent post in which I cited some earlier New Zealand research suggesting that an increase in government debt of that sort of magnitude might raise bond yields by just a few basis points.

Of course, if New Zealand ever did face a really severe shakeout of this sort there would probably be many other problems –  including fiscal ones (tax revenues fall when economies shrink).  The sovereign credit ratings might well be cut.  Not only would there have been huge real losses of wealth within the community, but something very bad would have been revealed about the quality of our banking institutions, our private borrowers, and of our official regulators.  But, again, whether or not we had a formal deposit insurance scheme would almost certainly be a third-order issue in the midst of such a disaster.

At present, with very robust government finances, and a banking system which, to all appearances, is also extremely sound, the choice to introduce a well-structured deposit insurance scheme would be very unlikely to affect the government’s credit rating.   There is an argument that some observers –  rating agencies even? –  might see it as a refreshing dose of realism about how banking crises actually play out, establishing institutions that better respect that realism –  and which charge depositors (through a levy on protected deposits) for the insurance they will, almost inevitably, be provided with.  Priced insurance –  even if imperfectly priced –  is almost always better than unpriced insurance.

And in case anyone thinks deposit insurance is some sort of weird “out there” policy, not only does almost every other advanced country have such a scheme, but a few years ago Minister of Finance Bill English was quite happy to concede, in responding to parliamentary questions from Winston Peters, that there are reasonable arguments to be made for such a scheme (particularly in view of the quite different regimes operating in Australia and New Zealand for many of the same banks).  And he didn’t appear to worry that deposit insurance might threaten the government’s credit rating.

(I’ve argued here that a proper deposit insurance regime increases the chances of OBR being able to be used, especially for wholesale creditors.   My long-held view about OBR hasn’t really changed: it is mainly a tool that could prove quite useful in handling the failure of a small retail bank (eg TSB or SBS), at least if the relevant parliamentary seats (New Plymouth or Invercargill) were not, at the time of failure, held by the governing party.)

The kowtow

Michael Reddell China, NZ politics, Uncategorized

EARLY IN the morning of 14 September 1793, George, Lord Macartney, the first British ambassador ever to visit the Chinese court, entered the imperial tent in Jehol, the Manchu capital, to see the emperor Qianlong.

As one, a thousand demonstrated their submission to the Son of Heaven by performing the ceremony of the kowtow. Three times they fell to their knees, and three times on each occasion they touched their foreheads to the ground. Macartney, however, refused to kowtow. He would bend one knee, he said, to his sovereign; both knees he would bend only to his God. Three times, with the greatest politeness, he went down on one knee. And three times, in the course of each genuflexion, in rhythm with the mandarins, he respectfully bowed his head. But he flatly refused to touch his forehead to the ground.

(from this)

There is a good article today in the New York Times today on the Jian Yang affair –  or non-issue as the National Party, and most other parties, and most of our establishment appear to believe (and want us to believe).   As the article notes

While New Zealand is a small country, it is a member of the “Five Eyes” intelligence sharing partnership along with the United States, Britain, Canada and Australia. And so vulnerabilities in New Zealand’s government could have wider import.

Curiously, not being particularly well-connected, I’ve had several people mention in the past few days private talk among our traditional allies of possibly ending New Zealand participation in Five Eyes over our government’s growing deference to China.   Whether that possibility would bother a majority of New Zealanders is questionable, but it should.

The article goes on

Chinese-language news media outlets in New Zealand reported that Mr. Yang had presented awards in April to members of the New Zealand Veterans General Federation, a group made up of former Chinese military or police officers now living in New Zealand. The awards were reportedly for members’ activities during a visit to New Zealand by Premier Li Keqiang of China, when they blocked the banners of anti-Chinese government protesters and sang military songs.

Chen Weijian, a member of the pro-democracy group New Zealand Values Alliance and the editor of a Chinese-language magazine, Beijing Spring, said Mr. Yang was “very, very active” in New Zealand’s Chinese community.

“When he speaks, he speaks more as a Chinese government representative, instead of a New Zealand lawmaker,” Mr. Chen said.

And this is how New Zealand now appears in yet another impeccably liberal part of the global press?

There are several organisations in New Zealand, partly or wholly government-funded that serve, in effect, as fronts to advance the establishment perspective on China.   There is the Asia Foundation, the Contemporary China Research Centre, and the New Zealand China Council.   The Council is chaired by a former National deputy prime minister, and includes a former National Prime Minister (who holds various positions in the gift of the Chinese government, and other Chinese directorships), the chief executive of the Ministry of Foreign Affairs, the chairman of Fonterra, and other mostly less well-known figures.  The Executive Director is Stephen Jacobi, a former diplomat and industry advocate (with a past focus on North America).

At the People’s Republic of China (PRC) national day celebrations last week, the Consul-General invited Jacobi to speak.  He posted the text of his remarks on the Council’s website.  Those brief remarks were both extraordinary and banal.   Extraordinary for the degree of deference to the PRC, and the indifference to any concerns around Yang and Raymond Huo, and yet probably just what one has come to expect from an establishment whose considered approach appears to be never, ever, openly say anything that anyone could possibly construe as critical of the PRC.   National day celebrations aren’t the time to gratuitously offend people, but with normal countries it is quite appropriate to recognise differences of values, interests, and perspectives.  We and the United States, or the UK, don’t always see eye-to-eye, as you’d expect with two different countries.  With China, per Jacobi, it is as if our hearts are at one –  or at least our minds are well-trained to pretend so.

It is an honour for me to be with you this evening and to convey the warmest greetings and congratulations of the New Zealand China Council on the 68th anniversary of the founding of the People’s Republic of China.

Toasting the founding of a regime that has brought forth so much evil…..it turns one’s stomach.  He goes on to describe it as an “auspicious day”.

The relationship is going from strength to strength, building on the firm foundation of mutual respect, shared interests and a history of co-operation.

As one observer of China noted, it is “Party-speak” (and not of the cocktail variety).

As we have watched China emerge as a major global power, we have continued Rewi’s pioneering spirit as we have built a Comprehensive Strategic Partnership based on expanding trade, investment and people to people links.

From the earliest days in the history of our country we have welcomed Chinese immigrants, thereby increasing the vitality and diversity of our nation.

And, so on the one hand we simply rewrite our own history –  Chinese migrants weren’t exactly welcome in the 19th century –  and on the other we blithely celebrate the emergence of a global power that simply flouts international law (South China Sea) and its own international commmitments (including around the WTO).  For a country –  New Zealand –  supposedly committed to a rules-based international order, it is extraordinary obseisance.

And then unadorned congratulations.

I would also like to congratulate Dr Jian Yang MP and Raymond Huo MP and the other MPs with us this evening on their re-election to Parliament.

If anyone close to the Council is remotely troubled by Yang’s past –  hidden from the electorate for years – or the wider arguments advanced by Professor Brady, they are obviously keeping very quiet.    As with Charles Finny the other day, this is the establishment falling right in behind the position of these questionable figures –  particularly Yang in our Parliament.

While we have achieved much together, I believe there is more to come.

For now, though, it gives me great pleasure to propose a toast to the health and prosperity of the great Chinese people and to the relationship between New Zealand and the People’s Republic of China.

It is almost as if Jacobi and the Council believe that the PRC has any concern with advancing the interests of New Zealand and New Zealanders.    And thus he concludes with his toast to a regime that has been responsible for the deaths of tens of millions of its own people (and tens of millions more unborn), that is increasingly repressive of its own people, is actively engaged in subverting the political process and values of countries like New Zealand, and which is an increasing expansionist threat to other countries in its neighbourhood.

Perhaps you might charitably think this is just stuff he had to say.  You sell your soul, and you pay the price.

But then earlier this week, Jacobi was tweeting his endorsement (“message in here for us kiwis too”) for a piece in the Australia Financial Review,  in which the authors –  an academic and a business figures –  push back, by very heavy use of straw men, against any concerns about the PRC and its activities in, in this case, Australia.  Nothing to worry about apparently, China no different from any other country, and foreign donations are just a “fact of life”.  And this in a country where earlier this year an Opposition Senator had to resign his shadow frontbench position over claims he’d been backing China’s position on the South China Sea in exchange for money.

At least there seems to be a serious debate occurring openly in Australia.   Denton and Drysdale can make their case for the defence in the AFR.  But others are considerably more sceptical.  There was an excellent sceptical piece in the Australian cultural, political, and literary monthly, Quadrant  by a former senior China analyst in the Australian Office of National Assessments and a former Australian ambassador to the Koreas.    And perhaps more powerful was a short article yesterday by a former senior Australian diplomat and deputy secretary in the Australian DPMC, “The China-Australia free trade agreement meets the all-controlling state”.

Philosophically, Australia and China occupy different solitudes regarding trade and investment. These days, not always, the underpinning attitude for Australia is free enterprise capitalism: commercially motivated, profit-driven, private sector enterprise, pursued within a clear legal framework. Beijing’s version is state capitalism, plus an underpinning of autarky: investment at home and abroad directed to national priorities, improving China’s competitive advantage (often using subsidies). The aim is to enhance China’s economic power and sovereignty.

and

At a societal level, President Xi has been emphatically reasserting the centrality of the Communist Party. Controls over China’s citizenry are being tightened—for example, by the ‘great firewall’ scrutinising and limiting access to the internet, and by closer monitoring of all citizenry for a ‘social credit score’.

and

The recurrent experience of foreigners seeking to invest in China has been that they are pressured to provide information on their secrets and systems as part of the price on entry. One fears for Cochlear and CSL. This is now being taken a step further. According to a recent Angus Grigg article in the Australian Financial Review, in future all foreign companies operating in China will be forced to hand over sensitive commercial data to Beijing under a system directed at generating a ‘social credit score’ for commercial enterprises as well as individuals.

More generally, while foreign investment in China is encouraged in cutting-edge industrial sectors, foreign firms are squeezed out once they reach maturity, with their key technologies secured. Writing some months ago in the Australian, Rowan Callick noted that China opened its mining industry to foreign investors about 20 years ago. At the peak, in 2009, there were 300 foreign mining operations in China. The number is now down to a handful. ‘Through a range of contrivances their services have been dispensed with.’

I presume Fonterra is well aware of all this, although one wonders if their farmer shareholders are.

There are other examples  (or here) of a robust debate in Australia, and serious open scrutiny of the way in which the PRC is attempting to exert influence in Australia.  Reasonable people might differ on the conclusions and appropriate policy responses, but in New Zealand any discussion or debate seems to be regarded as some sort of lese-majeste.    And yet this is the government of our country we are talking about.

One of the issues that needs to be tackled is our political donations laws.

In the Charles Finny defence of Jian Yang I linked to the other day, there was this line

It is my understanding that Dr Yang has become one of National’s most successful fundraisers, in much the same way Raymond Huo is important for the Labour Party’s fundraising efforts.

I dug out Barry Gustafson’s history of the National Party, published only thirty years ago.  There Gustafson’s records the active efforts of the party stalwarts to raise funds, while noting that

“An unwriten  but scruplously observed rule has always been that no MP should be placed in the position of seeking, receiving, or even being made aware of money collected on behalf of the party”

No doubt the culture change is not just of relevance to ethnic Chinese MPs or candidates.  MPs –  legislating in the interests of all New Zealanders –  shouldn’t be known for their fundraising prowess. But, more particularly, we shouldn’t be running a system where the largest known donor to the governing party is a foreign-owned company with quite modest New Zealand operations.

How has New Zealand come to this?   Where even the debate is almost disallowed, where neither the politicians nor the local media seem to have any interest in pursuing the issues (whether specific-  Yang –  or general, those raised by Brady).    When did we become the sort of country where the Financial Times and the New York Times  –  worthy outlets both –  are the ones raising more searching questions about New Zealand’s polity, and its relationship with a hostile foreign regime than our own media and our own political figures (past or present)?

What makes our establishment so willing to perform what amounts, in effect, to today’s full kowtow?

Debating immigration

Michael Reddell Immigration, Uncategorized

Someone yesterday sent me a link to a column from a Canadian newspaper in which a prominent Canadia academic was calling for a five-year pause in Canada’s high target rate of non-citizen immigration, to let housing (and other infrastructure) catch up to the population-driven increase in demand.  I can see the case when it comes to infrastructure, but I suspect that in Vancouver as in New Zealand the housing issues are mostly about land.  If the land use regulations aren’t fixed then a temporary pause in immigration for just a few years won’t make more than a temporary difference.   And in New Zealand, at least, the real economic problems associated with rapid immigration –  plenty of jobs, but few good economic opportunities to enable us all to really prosper –  have to do with the average level of immigration we target over time, not with the peaks and troughs in individual years.

But in reading that column, my eye lit on another article on the same site, “How to debate immigration without distorting facts and foes” .  It began

Canada is one of the few advanced countries that can’t seem to hold an authentic public discussion about immigration policy.

Canadian boosters of high immigration and those who oppose it are mutually contemptuous. Their verbal boxing matches are dominated by sloganeering and name-calling.

If Ottawa is ever going to take seriously public opinion to fine-tune its immigration policies, the combatants need to follow a few rules. They may need a referee, who acts fairly when others are losing their heads.

I’m not so sure that Canada is that different than other countries, including New Zealand and Australia.  But the article was about a new column by Andrew Griffith, a former senior official in Canada’s immigration bureacracy, who took early retirement, to undergo cancer treatment, and now has a interesting-looking blog Multicultural Meanderings  which touches on issues of culture, immigration, identity and so on.  I get the impression that he is generally rather sympathetic to Canada’s fairly liberal approach to immigration.   But what interested the journalist, and me, was the piece Griffith had written recently for a public policy forum on “How to debate immigration issues in Canada” .

Griffith begins

Given the polarization between those who advocate for more immigration and those who advocate for less, we need guidelines to facilitate more respectful and informative debates. I also suggest some alternative language for both viewpoints, to provoke reflection.

And he summarises his suggestions in two tables, one for those favouring more immigration –  apparently a live option in Canada at present –  but presumably also applicable to those defending the quite high rates of non-citizen immigration Canada already promotes.

and one for immigration critics

Not all of it is directly relevant to New Zealand debates, but much of it probably is.  I’d add, for both sides, “focus on the specifics of your own country’s experiences and constraints, even when informed –  as you should be –  by overseas experiences”.  These are important issues –  about economic performance, but also about culture and society –  and if all sorts of important issues often excite emotion (on both sides of any issue), it is likely to be more productive if the emotions and the analysis can be separated, to allow civil reflection on the arguments and evidence various people bring to the debates.  On the other hand, of course, political discourse and popular debate are never likely to proceed like some idealised academic seminar (and I stress the word “idealised” here).

On a more immediate note, Newsroom has a piece this morning on concerns in some industries about how they will/would cope if immigration to New Zealand was to be cut back.     The focus is particularly on a few industries that have made themselves very heavily reliant on immigrant labour.    If the rules make it relatively easy to recruit labour to particular occupations, and such labour is available from relatively poor countries, it is hardly surprising that the industry concerned will gravitate to a production model in which (a) wages in that sector are pretty low by New Zealand standards, and (b) a large proportion of the workforce is foreign.  New Zealanders become reluctant to seek work in the sector because there are better opportunities in other sectors.  It isn’t a state of nature, or something inevitable, just a product of the regulatory environment –  the rules.

The aged care/rest-home sector seems to be a prime example of this sort of phenomenon.  It is a growing sector –  ageing population and all that –  heavily reliant on government subsidies (and thus cost-restraint pressures), and is a totally domestically-focused sector.

As I’ve noted here previously, if overall immigration flows were sharply cut back, there would be short-term adverse effects on some sectors that have become particularly reliant on immigrant labour.  But there would also be a reallocation of labour within the economy: demand for labour would fall markedly in sectors (often not particularly reliant on immigrant labour, like construction) that depend heavily on population growth, and those workers would need to find work elsewhere.   In sectors like dairy farming and tourism –  previously heavy employers of immigrant labour – employers would be looking for locals to replace the immigrant labour they could no longer hire.   People might be reluctant to take those jobs, in which case employers might have to offer higher wages.  But because the exchange rate would fall –  probably quite a lot –  if immigration was cut back substantially, those employers could afford to pay higher wages.  Business activities in the tradables sector would be more profitable, and in relatively short-order the labour market would adjust (it would take time, and I’ve never suggested changing the rules overnight).

But the rest-home sector is different.  Cut back their access to immigrant labour, and they might have to offer more to attract New Zealanders to do the jobs.   New Zealanders will do the jobs, at a price.  30 or 40 years ago when my grandmothers were in aged-care homes, the bulk of the employers will have been New Zealanders.  The question is likely to be largely one of price (ie wage rates).

But rest homes may not have a lot of pricing power.  They are typically heavily reliant on fixed government subsidies, and if immigration is cut back they can’t suddenly turn themselves into an export industry.  There is no more income to support higher costs.

The industry pushes back in the Newsroom article

“It’s a big issue for us because we are facing over the next 10 years a real spike in the ageing demographic and estimations from the work that we’ve done … is that we’ll need 1000 extra workers a year between now and 2027.”

The notion that the industry could just hire New Zealanders to fill the positions was unrealistic, as caregiving was now a much more highly-skilled position and there were simply not enough locals willing to do the work.

1000 new workers a year –  in an industry that apparently employs 22000 people –  just doesn’t seem that much (there will always be fast-growing and slow-growing industries) and people will do jobs for a price.  In fact, whatever one makes of the recent pay-equity settlement – which seems to have loaded additional net costs on the rest-home sector –  it is likely to increase the number of people willing to do the work.

(And while I won’t rely on anecdotes, as Griffith notes they do sometimes contain insights.  And so the suggestion that care-giving was now “much more highly-skilled” rang a bit hollow when a staff member in a home a relative of mine lives in was trying recently to encourage a room full of dementia patients to vote.)

New Zealand is in rather desperate need of a lower long-term real exchange rate.  That means raising the prices of tradables relative to those of non-tradables, increasing the relative attractiveness of investing in tradables sector firms.  A much lower immigration target is one way to bring about such an adjustment.  For many non-tradable firms, such an adjustment would mean a much lower level – or path of growth for –  demand.   Those sorts of firms would become relatively smaller.   But there are some areas within the non-tradables part of the economy –  and the aged-care sector is a prime example –  where demand wouldn’t be materially affected, and costs might well rise somewhat (and, of course, the value of their extensive land holdings might fall).   There is no point pretending such pressure points won’t exist, but we shouldn’t be orienting a key strand of economic policy around the needs of a highly-regulated heavily subsidised industry, even if it is one that cares for many New Zealanders (our parents or grandparents) in their declining years.   An appropriate rebalancing probably would involve some increased costs for residents and families and some increased costs for the government.   But over time, the stronger productivity path that would be likely to ensue from abandoning the “big New Zealand” strategy, would enable New Zealanders as a whole to be made (considerably) better off.

As Andrew Griffith noted in his tables, sometimes opponents of the status quo feel free to attack what is happening at present without advancing specific alternative approaches that can themselves be scrutinised and challenged.   I’ve previously tried to meet that challenge and be relatively specific in what I’m putting forward as an alternative to our current (package of rules that make up) immigration policy.

Some specifics of how I would overhaul New Zealand’s immigration policy:

1. Cut the residence approvals planning range to an annual 10000 to 15000, perhaps phased in over two or three years.

2. Discontinue the various Pacific access categories that provide preferential access to residence approvals to people who would not otherwise qualify.

3. Allow residence approvals for parents only where the New Zealand citizen children have purchased an insurance policy from a robust insurance company that will cover future superannuation, health and rest home costs.

4. Amend the points system to:

a. Remove the additional points offered for jobs outside Auckland

b. Remove the additional points allowed for New Zealand academic qualifications

5. Remove the existing rights of foreign students to work in New Zealand while studying here. An exception might be made for Masters or PhD students doing tutoring.

6. Institute work visa provisions that are:

a. Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).

b. Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

More of the associated story for why such changes are needed is in this recent address.

(And as I quoted from a Newsroom story in this post, this is probably the point to disclose that I have recently entered an arrangement with Newsroom in which they will be paying me for occasional columns.  Those pieces will usually be variants of material that has appeared here first.  It will not change my willingness to disagree with other material they run, but in the interests of transparency, I thought I should disclose it.)

The Rennie review: still secret

Michael Reddell Governance, Rennie review, Reserve Bank, Uncategorized

Hamish Rutherford has a new story up at Stuff on the review of aspects of the governance of the Reserve Bank undertaken earlier this year by former State Services Commissioner (and former Treasury Deputy Secretary for macro matters) Iain Rennie.  The report was undertaken for Treasury, at the request of the Minister of Finance.  The final report was, we’ve been told, delivered in mid-April.

I’ve written about this a review a few times:

But still the review report has not been released, and nor is Treasury willing to release either earlier drafts of the report, or the comments made by reviewers.

Today’s article appears to be prompted by some observations from ANZ chief economist Cameron Bagrie,

Cameron Bagrie, chief economist for ANZ, said without the terms of reference he was “flying a bit blind”, but it was possible the review was headed towards recommending a model used across the Tasman, where powers are split between the Reserve Bank of Australia and the Australian Prudential Regulatory Authority (APRA).
“The consensus seems to be that the review is about monetary policy,” Bagrie said.
“I suspect it’s broader and maybe they are looking at whether we have an Australian model where they have the RBA for monetary policy, financial stability, markets, payments et al and APRA for the prudential/regulatory side.”

I’m quoted in Rutherford’s article.  As I’ve said previously, I’d be really surprised if Rennie was recommending a structural separation (along the lines of Australia).  There are all sorts of models internationally, but I haven’t heard anyone in New Zealand for some years seriously propose structural separation (I may at times have advocated such a split in the past), especially since the British government a few years brought the regulatory functions back under the same roof as monetary policy.   There are separate statutory committees for each main function, but they are all conducted out of the Bank of England.  If anything, the global trend in recent years has been to emphasise the important overlaps or crossovers between monetary policy and financial stability, if only in respect of the underlying information flows.

Although Bagrie noted that “the consensus seems to be that the review is about monetary policy”, it has surely been clear for some time that the review could not have been that narrow in scope?  After all, Steven Joyce told us in April that he asked the reviewer to look at whether the Reserve Bank should continue to be responsible for its own legislation –  an issue that is almost entirely about the Bank’s regulatory responsibilities.  And the terms of engagement document did note explicitly that

The Treasury is contracting Iain Rennie to provide a report assessing governance and decision-making at the Reserve Bank.

Nothing there suggesting monetary policy only.  And, in any case, no reviewer could really do a serious job looking only at monetary policy, given that it occurs within an institution, and both functional and (whole of) institutional governance would be likely to be affected by any decisions regarding monetary policy.  And Treasury has been known to be unhappy about the governance of the financial regulatory functions –  including the Bank’s responsibility for its own legislation –  and Rennie was contracted by The Treasury.

On which note, Rutherford includes this

Top officials within the Reserve Bank are said to believe Rennie’s report is something of a power grab by Treasury.

Michael Reddell, the former special advisor to the Reserve Bank, said even the details about the report already released , around which organisation was responsible for the central bank’s governing legislation, amounted to a power play.

Far be from me to agree with the Bank on this.  If I said there was a “power play” involved, it was simply to note that the Treasury has long been uncomfortable about governance, accountability and information flows around the financial regulation powers of the Reserve Bank.  I happen to agree with them   There is too much power vested in one individual, and in one agency.  Those powers should be trimmed, and stronger accountability established.  The Treasury should probably be made responsible as the primary advisers on the various pieces of legislation the Bank operates under.

In a post a couple of weeks ago, I referred to the Bagrie thesis, the Rennie review, and Reserve Bank reform prospects more generally, noting

On the National Party side, you’ll recall that the Minister of Finance had Treasury hire former State Services Commissioner (and former Treasury deputy secretary) Iain Rennie to provide some analysis and advice on possible changes to the governance of the Reserve Bank.  Having had drafts reviewed by various experts, the report was completed months ago, but hasn’t yet seen the light of day.  Treasury has been blocking the release of even drafts of the report, or comments on the draft by reviewers, and nothing is heard from the Minister of Finance.    Presumably Rennie didn’t conclude that everything was just fine and no changes were required.  Had he done so, there would have been no reason not to publish, and it might even have been a small piece of useful ammunition against the sorts of reforms opposition parties are campaigning on.

The interesting question is (a) how far has Rennie gone in his recommendations, and (b) whether a re-elected National government (perhaps reliant on New Zealand First –  long critical of the Reserve Bank) would implement them?   I heard the other day a hypothesis that the report isn’t being released because it calls for reform so radical that the Reserve Bank would be split in two (a monetary policy and macro agency, like the Reserve Bank of Australia, and a prudential regulatory agency (like APRA).   There are pros and cons to such a structural split, but I haven’t for a long time heard anyone here seriously propose it as an option (and particularly not since the UK government brought all those functions back under one roof).    Time will tell, but I would hope Rennie would recommend things like (ideas previously proposed here, and practices in the UK):

  • moving (in law) to committee-based decisionmaking,
  • having external members appointed directly by the Minister,
  • separate committees for monetary policy and the prudential regulatory functions,
  • a mandated greater degree of transparency, and
  • (something Joyce asked for advice on) making Treasury primarily responsible for the legislation under which the Reserve Bank operates.

As I say, time will tell.  But if National is back in office, they will presumably want to move quite quickly on appointing a permanent Governor (the Board, which is driving the process, meets again later this week), and whoever takes the role would presumably want to know what legislative arrangements they would be operating under.

It is well past time for the Rennie report, and associated documents to be released.  Doing so can’t have suited the current government, but this is an official document, paid for with taxpayers’ money.   And there can’t really be any credible grounds under the Official Information Act for withholding a months’-old consultants report to The Treasury on matters of organisation design.  In fact, in the current hiatus –  between Governors –  I would argue that there is a significant public interest in the release of the report now.

 

On wages: expectations and reality

Michael Reddell labour market, wages

Last week, when I was tied up with other stuff, I heard a few media reports that a new Westpac survey was showing that public expectations of wage increases were slipping away.  At the time, I didn’t look at the details, but made a note to come back to it.

This was the key chart included in Westpac’s report of the survey results.

wage expectations

Introduced with this text:

Although workers may be feeling more confident about job opportunities, when it comes to the outlook for earnings, sentiment is really in the dumps. Increasing numbers of workers are telling us that they don’t expect any change in their earnings from work over the coming year. In fact, the number of workers who expect to receive a pay increase over the coming year is languishing at the sort of lows we saw during the financial crisis.

Concluding with this

And while nominal wage growth has remained muted, consumer price inflation has picked up. After lingering below 1% for much of the past few years, consumer price
inflation is now running at 1.7% per annum. This means that the limited pay rises many workers have received have only just been keeping pace with changes in the cost of living. And for those workers who didn’t receive a pay rise (and even for some that did), their spending power may be going backwards.

I’m not really convinced.

I’m not doubting that respondents did answer the question the way Westpac reports. I wouldn’t even be surprised if the recent reversal of wage expectations was the real thing: there was all sorts of talk not long away about wage inflation being just about to “take off”, which so far hasn’t come to anything much.   But even with the recent reversal, expectations are still just back to around where they were for a fair part of 2015 and 2016.

My concern is more about how to interpret the longer-run of data in the chart and, in fact, how to make sense of wage data themselves.

For a start, surely respondents to this survey are inclined to bias their answers downwards?  After all, look at the results for the 2005 to 2007 period, when the labour market was unquestionably tight (including the fact that the unemployment rate was below 4 per cent), and general wage inflation –  on any of the measures –  was quite high.  And yet only around 50 per cent of respondents expected a wage increase.  Many more than that must have been achieving a wage increase.  As I’ve noted previously, the labour share of total income has actually been increasing in New Zealand.

Second, it is worth remembering that inflation expectations now are materially lower than they were a decade ago.

household expecs 2017

The numbers bounce around a bit, but at the end of the previous boom the average year-ahead expectation was around 4.5 per cent, whereas now it around 3 per cent.  (One shouldn’t put much weight on the absolute numbers, but the pattern is consistent with others surveys of inflation expectations.)   If inflation expectations have fallen materially, surely it is reasonable that fewer survey respondents will now be expecting nominal wage increases, even if everything else (labour market tightness, productivity growth or whatever) was unchanged?

Westpac also uses as a reference point a 1.7 per cent rise in annual wages.  That number appears to come from the LCI, a series that purports to adjust for what firms’ report were productivity changes.  It is better to use the “analytical unadjusted” measure from the LCI, which is closer to a stratified raw measure of wage increases –  which is, after all, more like what the respondents in the Westpac survey are being asked about.

Many commentator also focus on the even lower wage inflation numbers from the Quarterly Employment Survey (QES) –  a wage measure that is notoriously volatile (and not really representative of how anyone thinks the labour market is actually working).  It is quite prone to compositional changes, and thus doesn’t reflect – or really try to reflect –  an individual’s own experience in the labour market.

I’ve covered this issue in an earlier post.

I’m not sure why people put so much weight on the QES measure of hourly wage inflation.  It has well-known problems (for these purposes) and is hugely volatile.   Here is a chart showing wage inflation for the private sector according to (a) the QES, and (b) the Labour Cost Index, analytical unadjusted series.

wages debate  No economic analyst thinks wage inflation is anything like as volatile as the blue line –  in fact, wage stickiness, and persistence in wage-setting patterns is one of the features of modern market economies.

And here is the chart I ran last week, comparing real private sector wage inflation (the orange line above, adjusted for the sectoral core measure of CPI inflation) with productivity growth.

Real wage inflation now is lower than it was in the pre-2008 boom years, but it is running well ahead of productivity growth (however one lags or transforms it).

As I noted in that earlier post, real wage inflation in New Zealand has been surprisingly strong in recent years, given the complete absence of any (actual or trend) growth in labour productivity (real GDP per hour worked).  Of course, low inflation and low inflation expectations hold down the nominal rates of wage increases (relative to what we were experiencing a decade ago), but the real measures are largely what matter.   Real household purchasing power from labour income in New Zealand has been increasing –  from increased employment, but also from real wage increases that are more than it is likely that the economy can support in the longer-term.

Perhaps then people are right to expect more modest wage increases ahead.  But if so, it will likely be because the non-tradables led pseudo-boom of the last few years comes to an end, and market processes across the economy force an adjustment in wage-setting to something more consistent with our alarmingly poor productivity growth record (in this particular bad phase now five years and counting).

 

Reserve Bank Annual Reports

Michael Reddell Governance, Reserve Bank, Reserve Bank Board, Uncategorized

Last Friday, the Reserve Bank’s Annual Reports were published.  There were two of them, both required by law.   But most people wouldn’t know that.

There was the outgoing Governor’s own report on the Bank’s performance, the annual accounts etc.  That warranted a press release, and some modest media coverage.  But buried inside the Bank’s annual report was the, quite separate, statutory Annual Report of the Reserve Bank’s Board.    It has no separate place on the Bank’s website, it wasn’t accompanied by a press release from the chairman, although this year it did actually get passing mention in the “acting Governor”‘s press release.

The Reserve Bank Board isn’t a real board, in the sense known either in the private business sector, or in the government sector.  As the Board itself notes “the Board is a unique governance body in the public sector”.  The Board largely controls the appointment of the Governor, and has some say over the recommended dividend.  But otherwise, its powers are all supposed to be about providing a level of scrutiny and monitoring of the Bank –  and in particular the Governor personally – on behalf of the Minister of Finance and the public.  In practice, at least with a public face on, the Board tends to be emollience personified –  nothing to worry about here chaps –  that has very effectively served the interests of successive Governors.

A post about the Board’s Annual Report has become a bit of an annual ritual (2015 and 2016).  But before turning to the substance of the Board’s 2017 report, I wanted to pick up just a few points in the (now former) Governor’s report.

In his final speech as Governor (which I wrote about here), Graeme Wheeler sought to (a) tell a pretty positive story about New Zealand’s economic performance over his five years in office, and (b) claim significant credit for the Bank for that (supposed) good performance.   He returns to the theme in the Annual Report

With our own economy about to enter its ninth year of expansion, it’s useful to put a longer-term focus on New Zealand’s progress. Compared to the period 1990-2012
(i.e., the 22-year period since flexible inflation targeting was first introduced), New Zealand’s economy has experienced slightly stronger GDP growth and much faster employment growth over the last five years. Headline inflation has, however, been weaker and our current account deficit has been smaller as a share of GDP, while the unemployment rate has been around its average for the period since the mid-1990s. Labour productivity growth has been disappointing, a challenge we share with many other advanced economies. While some of these economic outcomes since 2012 lie beyond the influence of Reserve Bank policy levers, the Bank’s monetary policy has been a significant driver behind the growth in output and employment.

Setting aside the minor point that there was a double-dip recession in 2010, and thus any expansion has been running for only around seven years, there is so much wrong or misleading with these claims that it is hard to believe that a serious public figure –  a public servant not a politician –  would repeat them.

Where to begin?

Perhaps with the five years in which there has been no labour productivity growth at all.  Yes, global productivity growth is weaker than it was in the 1990s and early 2000s, but few other advanced economies have experienced anything as bad as New Zealand’s productivity record in the last five years.

Or with the fact that headline GDP growth has been reasonable only because of very rapid population growth.  Growth in real per capita GDP has been pretty poor, largely reflecting the complete absence of productivity growth.  Similarly, rapid employment growth mostly reflects rapid population growth, and unemployment has been above any reasonable estimates of a NAIRU throughout the Governor’s term.

Or with the shrinkage of the export sector as a share of GDP.

Or with house prices.

Or with the fact that, over this particular five years I’m pretty sure that the Reserve Bank was the only advanced country central bank to boldly set off on what it envisaged as a large tightening phase, only to have to (grudgingly) more than complete unwind the tightenings they actually did implement.

With no global crises, no domestic crises, no domestic concerns about conventional monetary policy exhausting its capacity (unlike many other advanced countries), Wheeler should have had a fairly easy five years.   As it is, there isn’t much credit he can claim for the Bank and its monetary policy.

It is the sort of self-serving nonsense the Bank’s Board –  if it was doing its job –  should have been calling out.   Apart from being simply wrong, it isn’t even helpful.  If the Bank had really had the huge influence on medium-term economic performance that the Governor seems to be claiming, it rather undermines the case for having so much power – so many choices-  at such a remove from elected politicians.  The normal case for an independent central bank is that such an agency will keep inflation down and won’t make much difference to economic performance at all.

But there is –  again – little sign in the Board’s Report of serious scrutiny or accountability.  Even honesty seems to be at a premium.

The Board’s Reports have certainly lengthened.  Only three years ago, the Board’s report was only two pages long.    Last year’s report was four pages long.  This year’s report is six pages long, and the first four of them are quite densely-packed text.

But apparently the Reserve Bank does no wrong, ever.  So not only is the Reserve Bank Board “a unique governance body” in the public sector, but the Reserve Bank must be a unique organisation, public or private.   One wonders if it was immaculately conceived, or acquired such perfection itself?

There is two solid pages of text on monetary policy and (as far as I can see) not a word that management would feel even slightly uncomfortable with.  No areas that the Board thinks the Bank might have put greater emphasis on, no disagreement, nothing.

There is another one and a half pages on the Bank’s regulatory functions, but again apparently nothing where the Board thought the Bank might have done better, or areas where a different emphasis might have been helpful. It could all have been written by management (and may well have been).  Management will have been particularly pleased to read this

“The Board has also observed that the Bank carefully considers the feedback it receives on regulatory initiatives, bearing in mind that regulated institutions will not always agree with the regulator’s approach and the eventual regulatory outcomes.”

No doubt, although there is little evidence open to the rest of us to suggest that the Bank pays any heed to substantive feedback in its formal consultation processes.  And one might reasonably wonder whether in a moment of introspection the Board might perhaps think that “monitored institutions will not always agree with the monitor’s approach or the eventual conclusions of the monitor”, and wonder if that description has ever characterised the Board’s Annual Reports on the bank.

And so we labour on through lots of descriptive text about the activities of the Board –  with nothing on the evaluative frameworks they use, or the external advice they draw on.  As we do, we come to the odd interesting snippet such as this

“Monitoring the Bank’s relationships is a continuous process.  During the year the Board availed itself of a number of opportunities to observe how these were operating in practice, paying particular regard to any feedback on the messaging, transparency and accountability of the Bank.”

It looks as though this sentence is supposed to be meaningful, but quite what the meaning is supposed to be isn’t clear at all.    Does it mean that perhaps they were just ever so slightly uncomfortable with the heavyhanded pressure Graeme Wheeler and his senior managers brought to bear on Stephen Toplis and the BNZ (the latter an institution the Bank regulates) when Toplis criticised the Governor’s communications, even if they can’t bring themselves to say so?    One might hope so, but if people who are paid to hold a powerful agency to account won’t even criticise, even diplomatically, such egregious abuse of office, we might wonder again what use they are to citizens.   (And I did lodge an OIA request, the results of which suggests no serious concerns in private either.)

Towards the end of the Board’s report, they write about the change of Governor.  To read this report, one wouldn’t know that the Board had been well down the track towards recruiting a new permanent Governor, oblivious to the election, when the Minister of Finance forced them to stop.  You have to wonder what they gain by the omission, when the relevant material is already public.   They explicitly note that they and Treasury sought advice from Crown Law on the approach to be followed.   Despite that advice, the purported “acting Governor” appointment still appears to be unlawful.  Remarkably, the report contains nothing on the steps the Board had already taken, before the end of 2016/17 to find a new Governor, even though that appointment is one of their principal responsibilities.

Finally, as it does every year, the Board’s Report notes the Board’s relationship to the Reserve Bank’s superannuation scheme (the Board appoints half the trustees including the chair).   This is a deeply troubled fund, grappling with some pretty serious historical errors –  including some made by the Board itself, which must approve rule changes.   I’ve written previously about the role of the Bank’s (now) deputy chief executive –  who attends all Board meetings –  in these matters.   But the Board’s Annual Report simply records the heart-warming fact that the new superannuation fund chair “kept the Board informed of the work associated with the development of a new Deed for the Trust”.  On the principle that when you things you know about are wrong, it leaves one worried about the other material that one doesn’t know in detail.  On this occasion, there was no “new deed”, but some amendments to the rules (largely) to allow the superannuation fund to comply with the new Financial Markets Conduct Act.   As part of those changes, trustees were about to left in the lurch by the Bank –  unremunerated and yet with no liability insurance.    Only threats that the new rules would not be executed (requires all trustees to sign) and a written protest to the Board helped secure a backdown.  And the more serious issues, of past rules breaches, and mistakes in past rule changes, still look set to head to the courts next year.  Millions of dollars are potentially in dispute.

As I’ve written (repeatedly) before, the Reserve Bank’s Board doesn’t really serve much of a useful function.  A thoroughgoing reform of the goverance of the Reserve Bank (including the role of the Board) is well overdue, and there are signs now that whoever forms the next government it may well happen (although I am less optimstic of that if National leads the next government as even if they favour some change, they may not favour changes New Zealand First –  or the Greens if you must –  would support).   If the Board is to retain a role as an accountability and monitoring body, it too will need a shake-up.  Independent resourcing would help, but much of what is really needed is a different mindset, in which the Board finally serves the public, not acting as guardians of the Governor.  My own preference would be for the monitoring and accoutability functions to be undertaken by a Macroeconomic Advisory Council, established formally at arms-length from the Bank, the Treasury and the Minister of Finance.

 

 

A national day for lament, not celebration

Michael Reddell China, NZ politics

Eamon de Valera, Prime Minister of Ireland, visited the German Embassy in Dublin on 3 May 1945, to pay his condolences to the Ambassador on the death of Hitler. He apparently justified it afterwards on grounds of diplomatic protocol, but it reinforced ever afterwards impressions that de Valera had been sympathetic to the Nazis.

Yesterday was the national day of the People’s Republic of China, marking the formation in 1949 of the Chinese Communist Party government. Various people have been highlighting photographs that have appeared in the Chinese-language media show National MP Jian Yang at the Chinese Embassy’s celebratory function, posing with Ambassador, the embassy counsellor, and the military attache.

and

(the latter tweet including a link to some further offshore commentary on the New Zealand situation).

Perhaps protocol more or less requires that, for example, the Minister of Foreign Affairs and assorted MFAT staffers attend national day celebrations. It is a part of normal state-to-state relationships. But there is no such obligation on obscure government backbenchers, and certainly no reason for such people to allow themselves to be photographed happily with the leading representatives in New Zealand of such a vile regime. A not unreasonable conclusion might be that Dr Yang is really rather sympathetic to, and supportive of, the PRC regime. Perhaps he just takes the view that what is in Beijing’s interests is, somehow, also in the interests of New Zealanders? Either way, with a (belatedly) self-acknowledged background like his, he shouldn’t be in our Parliament. The National Party should be ashamed to have him in its parliamentary caucus. Should be, but presumably isn’t. There is, after all, no sign that the whips have told him to lie low (and not, for example, be photographed with representatives of the PRC regime).

But, convinced as I am that Yang shouldn’t be in our Parliament – even if, as may well be the case, he has done nothing illegal – in a way, his conduct doesn’t seem out-of-step with that of our professional diplomats; neutral public servants one might hope.

The government-sponsored China Council was out openly celebrating 69 years since the Communist revolutionary victory.

And they were retweeting the enthusiasm of the New Zealand consulate in Chengdu

(note the exclamation mark. Is 68 years of a brutal murderous regime something to celebrate?)

And then somehow I stumbled on the Twitter account of the New Zealand Consul-General in Shanghai. Her tweet managed two exclamation marks.

She describes herself as “Addicted to China. From the government (MFAT) and here to help.”

I guess I can understand a passion of things Chinese, for the culture and history, but “addicted to China” doesn’t exactly suggest the sort of calm dispassion we might hope for from our senior diplomats – in dealing with a friendly country with whom we share values, let alone a brutal regime that appears to directly interfere in the New Zealand political process, and in entities and media outlets serving New Zealand (ethnic Chinese) citizens.

It is as if our entire establishment can’t bring itself to acknowledge the nature of a regime which has gone from one horror to another over the decades, barely regretting or apologising for any of them, and which now – richer and stronger than it was before, if a distinct economic laggard even in the region – poses real and new threats to its own people – the ramping up of surveillance for example – to regional stability, and to countries (including New Zealand) with a significant population of Chinese-born people. Are MFAT and the New Zealand China Council – and the New Zealand government – untroubled by any of this? Perhaps in 1938 their predecessors would have been celebrating the anniversary of the Nazi accession to power, all the while playing up the “trade opportunities”, and quietly observing that it wouldn’t do to upset the party-state?

It is a regime that is evil epitomised for this generation. Not, to be sure, North Korea and yet (a) chief protector of that evil regime, and (b) much more of threat to many more people and countries than North Korea is ever likely to be. And yet National MPs happily celebrate another anniversary of the evil. And quite probably Labour MPs do too, and would were they to form a government.

But it does prompt the question, where is the Green Party in all this?. I’m not a natural Green Party supporter and could not ever imagine voting for them. But over the years I’ve had a certain respect for them, and some of their MPs, when they’ve stood up against oppression, against surveillance, against threats to civil liberties. I was, perhaps a little strangely, an admirer of Keith Locke on this score. But on these issue – whether the specifics of Jian Yang, or the wider issues of PRC meddling- just total silence from the Greens. I’m not sure I really understand why. They don’t represent big and established business interests, and they don’t – as I understand it – have any track record of being heavily reliant on questionable fundraising. If there was ever a time to act as some sort of moral conscience, surely this is one of those?

I’ve found it a little hard to take too seriously earnest calls in the US for inquiries into Russian attempted interference in the US election last year (and am well aware of plenty of instances where the US has interfered in the elections of other countries). But if there is a case for such investigations in the US – and I think there probably is, even though Russia is a much inferior power to the US – how much stronger is the case here for a serious inquiry into the sorts of claims, and evidence, Professor Brady has outlined in her paper.

And there are simpler questions still that should be put to Dr Yang, whether by the National Party itself, or by the media. For example, can you name – say – three occasions on which, since you were elected to Parliament, you have disagreed with a policy stance taken by the PRC, and where you have spoken out clearly in defence of New Zealand interests and values? Shouldn’t be that hard. After all, South China Sea adventurism is in flagrant breach of international law. And the growth of the surveillance state in China under Xi Jinping isn’t exactly consistent with the sort of values the National Party proclaims. Or the increasing uses of “big data” highlighted in this article in the Financial Times today. Or one might ask how differently he sees the PRC being from, say, the Soviet Union or (the much shorter-lived) Nazi Germany – the latter being particularly active among the ethnic German populations in neighbouring countries in the 1930s. Does he look forward to a day when freedom of speech, freedom of religion and multi-party democracy prevails on the mainland – as it does, say, in Taiwan? As I say, it shouldn’t be hard to get clear and straightforward answers from someone who has genuinely abandoned his party (and military/intelligence) past.

Finally, while Dr Yang, MFAT, and assorted official China-promoters in New Zealand are celebrating 68 years of evil, there is this alternative perspective from Hong Kong, where people more readily appreciate the evil, the threat, that the PRC now represents.

I’m not suggesting that our government should deliberately go out of its way to upset the regime. And normal state-to-state relations (as we had in later years with the Soviet Union) are to be expected. But our governments – our diplomats – are supposed to be there to serve the interests, and values of New Zealanders. And that means, among other things, recognising and acknowledging the dreadful character of the regime they are dealing with. Hermann Goering was known to throw a good party too. Nuremberg rallies were, reportedly, spectacular.

Poor returns to tertiary education

Michael Reddell Education, New Zealand economic performance, Productivity, Uncategorized

Tertiary education was quite a theme in the recent election campaign. In my household – with three kids likely to go to university in the next decade – promises to reduce the direct costs of tertiary education were tempting.  But resisting temptation remains a virtue.

A few days ago I noticed (thanks to Jim Rose) this chart

lifetime benefit of a degree

It isn’t a new result. These OECD data have shown for some time that the economic returns in New Zealand to getting a degree are pretty low relative to those in other advanced countries.   Such results even prompted Treasury to commission some external research on the gap in private returns.

In the chart – from a few years ago – whoever put it together has highlighted two groups of countries: the Nordic and Benelux countries on the one hand, where there are already lots of skilled people, and high income taxes, and former eastern-bloc countries which are now catching up to the rest of the advanced world, and where skills are in high demand, and able to command high returns. I’m, of course, more interested in the contrast between New Zealand and those central European countries.  As I’ve written recently, 25 years ago both we and they were looking to reverse decades of poor performance and catch-up with the other advanced countries. They’ve made progress in that direction. We haven’t.

Since the net benefits are shown in dollar terms (rather than, say, as a per cent of GDP per capita or of lifetime earnings), it is probably reasonable to expect that poorer countries will be bunched towards the left of the chart. And there one finds Turkey, Greece, New Zealand and Italy. But that clearly isn’t the bulk of the story. After all, even though they are now catching up, all six of the former eastern bloc countries shown still have levels of GDP per hour worked and/or GDP per capita similar to or (generally) below, those of New Zealand.

I had a look at a few background documents from the OECD. If anything, as we shall see, the New Zealand numbers may be even worse than what is shown in this chart.

It is important to recognise the distinction the OECD draws between private and public costs and benefits. Some of these things can be easily measured (eg upfront private fees, or direct public grants to institutions or individuals). Others are more approximate. (The other aspect, which I’m not sure any of these particular indicators attempts to account for is the selection bias, in which the typical person who undertakes tertiary study has other traits – eg intelligence – that mean that they would probably earn more in the labour force than the average person who does not undertake tertiary study.)

This chart is from a few years ago, and tries to break down the costs of tertiary education (in this case for a man). In New Zealand, as in most countries, the largest private cost by a considerable margin, is the foregone earnings of the student themselves.

tertiary costs

These OECD indicators assume that students do not work while studying.  In the latest OECD Education at a Glance they show estimates for 15 countries as to how much difference it would make to include reasonable estimates of actual student earnings. For New Zealand, doing so would lift the estimated returns to tertiary education by around 15 per cent, more than for most of the other countries shown. However, as you can see from the first chart above, a 15 per cent lift in returns to tertiary study in New Zealand would not alter our relative position on the chart.

The other aspect of the calculations which often doesn’t get much attention is the appropriate discount rate to use in making these calculations. It matters a lot – the costs are mostly incurred between, say, ages 18 and 22, and the economic benefits accrue over decades. A decision by an individual is a very long-lasting investment project, with significant irreversibilities (the years spent on education can’t be reclaimed).

The OECD at present adopts a very low discount rate.

The NPV results presented in the tables and figures of this indicator are calculated using a discount rate of 2%, based on the average real interest on government bonds across OECD countries. However, it can be argued that education is not a risk-free investment, and that therefore a higher discount rate should be used.

I’d say there was no ‘it can be argued” about it. No sensible government would do a cost-benefit analysis of building more schools or universities using a discount rate of 2 per cent. The New Zealand Treasury, for example, uses a default discount rate of 6 per cent real. And as an economic proposition, an individual’s tertiary education is a pretty risky proposition, with few effective diversification options for most people.

As it happens, in the latest Education at a Glance the OECD presents a table illustrating, to some extent, what difference it makes to use a higher discount rate.

discount rates.png

Using a discount rate of 5 per cent (real) reduces the estimated benefits by around 60 per cent (relative to the 2 per cent baseline) – and these numbers are for a man, and in most countries the net benefits to tertiary education for a woman are (on average) lower than for a man.

This issue matters particularly for New Zealand which has a higher risk-free interest rate on average than any of the other countries in the table. The gap is large. On Friday, the real interest rate on the New Zealand government’s longest (23 year) inflation-indexed bond was 2.39 per cent, while that for the US government’s 20 year indexed bond was 0.77 per cent (and US yields are far from the lowest in the world). A margin of 1.5 percentage points above “world” rates hasn’t been a bad guide for New Zealand interest rates over recent decades.

Even a 5 per cent real discount rate appears too low to evaluate a personal decision to invest in a tertiary education in New Zealand. But if one takes the results for New Zealand in the table above when evaluated at a 5 per cent discount rate, and then compares them against the results evaluated at 3.5 per cent for other countries (to capture that persistent difference in real interest rates), only Latvia would offer lower returns to tertiary education than New Zealand does.

And bump up the discount rate a little more and the estimated net returns to tertiary study will soon be approaching zero or going negative.  And, remember, those estimates are for a man. The average female returns are even lower.

People will have a range of reactions to these sorts of numbers. Some will take them as supporting proposals to reduce tertiary fees or increase student allowances. Such changes might increase the net private returns to tertiary education, but they won’t (of course) change the all-up net returns (someone still has to pay).  Others seem to see tertiary education as some sort of “merit good” that people should have the opportunity to undertake, at moderate expense, whether there is an economic return – to them, or the public more generally – or not.  And, of course, for some people and some courses, a tertiary education is more akin to consumption than investment (which is not intended as a criticism).

For me, I see them as yet another marker of the failure of the economic strategy pursued by successive governments over recent decades.  Our remoteness means it is very difficult to generate consistently high returns to anything much in New Zealand for very many people. The determination of our governments to quite rapidly increase the population here, despite those apparently limited opportunities, just compounds the problem. It does so directly – the limited natural resources (our one distinctive advantage) are spread over ever more people – and indirectly, through a persistently overvalued real exchange rate and high real interest rates.

Returns to tertiary education in New Zealand are probably quite reasonable for those New Zealanders who get an education here, and then leave (but that is probably a poor investment for the taxpayer). For many of those who stay, it looks like a distinctly marginal proposition. Attempting to bring in lots more skilled people from abroad – most of whom aren’t that skilled anyway – just compounds the economic problem, even if the New Zealand taxpayer doesn’t have to pay anything for their tertiary education. There just aren’t the good economic opportunities here for a rapidly growing population, and increasing subsidies to tertiary education would seem likely to further exaggerate the evident imbalances.

In an economy that was making progress towards reversing decades of relative economic decline, there is good reason to expect that returns to investment in tertiary education (like other prospective investment returns) should be consistently high relative to those in other countries. Sadly, those returns appear to be consistently low in New Zealand – especially when evaluated at an appropriate discount rate. And, of course, we are making no progress at all in closing those productivity gaps.