Not much encouragement in the productivity data

New Zealand’s weak productivity performance has been an on-and-off theme of discussion for decades.   We’ve been falling behind for 70 years now, something that was recognised by expert observers almost 60 years ago. In all that time, there has never been any sustained period when we’ve made any progress in closing the gap.   A typical cycle seems to involve Opposition politicians –  of whichever party –  suggesting that they will do better, and that under their stewardship we’ll catch Australia, get back into the upper half of the OECD, or whatever.   Once in office, the rhetorical concern often lasts for a year or two, and then typically nothing much else is heard or –  worse –  there are attempts to twist the data to try to render our underperformance less stark.

There was a bit of focus last year on New Zealand’s latest run of poor productivity outcomes.  I and others had noted that we seemed to have had no productivity growth for almost five years.  And, sure enough, Opposition parties picked up the issue to some extent, and the then-government attempted to play distraction and pretend everything was fine.

And then there was a change of government, and a couple of months later a new annual update on the GDP numbers.  The new numbers saw estimates of GDP for the last few years revised up a bit and –  since estimates of hours worked didn’t change – that translated through into a lift in estimates of real GDP per hour worked.  In some quarters, a sigh of relief was breathed.  And, to be sure, in this context more was undoubtedly better than less.

But when I dug into the numbers it still resulted in this chart

GDP phw worked NZ Jan18

We’d gone from having no labour productivity growth at all (actually marginally negative) over the last five years to total productivity growth over that period of 1 per cent (ie about 0.2 per cent per annum).   It is a little better than the previous iteration of data has suggested, but……it wasn’t anything to boast about.  It shouldn’t have made anyone much less uncomfortable.  And on the updated data this was the New Zealand vs Australia comparison.

AUs and NZ reaL gdp PHW

Once a year, Statistics New Zealand release official estimates of annual labour productivity growth for what they label the “measured sector” of the economy, which covers around 80 per cent of the economy (total GDP).  The latest release, including data for the year to March 2017, was out last week.  The “measured sector” includes about 80 per cent of the economy, where Statistics New Zealand is reasonably comfortable about its real output measures (the main exclusions are education and health).

Unsurprisingly, there were some upward revisions in these numbers as well.   The numbers don’t get a great deal of commentary, but the reaction seemed encapsulated in this chart from one of the banks.


Not only were the numbers for the last couple of years revised up, but if you eyeball the chart productivity growth in the last decade doesn’t look much different than that for the previous decade.

That certainly looks more encouraging.

This is how productivity growth in (a) the measured sector and (b) the whole economy compare, based on the latest SNZ releases.   Here I’ve used just production GDP –  since it is production sectors SNZ uses to do the measured sector numbers –  and have shown the data in log form, in which a constant slope of the line means a constant growth rate.

measured sector and real GDP phw

Recall that the measured sector is about 80 per cent of the economy.  And for a gap of that size –  the measured sector productivity growth was 17 percentage points faster than that for the whole economy over the 21 years – to have opened up it suggests that productivity in the non-measured sector (the rest of GDP) must have done very badly indeed.

This little exercise is purely illustrative.  I’ve deducted measured sector productivity from the total, assuming the measured sector is indeed 80 per cent of the economy, and then multiplied what was left by 5 [(100/(100-80)] to produce a proxy residual index of implied labour productivity in the non-measured sector.  This is the result.

nonmeasured sector

It is only a proxy, calculated residually, and the precise numbers are sensitive to the (changing) exact share of the non-measured sector industries.  But the proxy suggests a pretty calamitous picture for productivity (especially, if summary numbers SNZ includes are to be taken seriously, in education) in the non-measured sector.  Disgruntled parental consumer of the education system that I am, something doesn’t seem to entirely ring true –  these aren’t, after all, quality-adjusted numbers.   When, as a matter of policy, money is being thrown at education and (eg) teacher/pupil ratios are being raised, one might expect crude measure of education sector productivity to fall.  But that doesn’t seem to have been the story of the last nine years –  whether the educational lobbies, or the former government, are to be believed.

One problem with the measured sector data is that there is no ready way to compare New Zealand productivity growth numbers with those for most other countries.    There are no standard compilations of such data and it would take a huge amount of painstaking effort for an individual to attempt to replicate the numbers for a reasonable range of other advanced countries.  Given the importance of common global (or at least advanced country) trends in productivity, that severely undermines how much use can be made of the aggregate data.

However, the Australian Bureau of Statistics publishes some very similar data, for what it calls the “market sector”, also around 80 per cent of the economy.  And SNZ themselves highlight the comparisons between the New Zealand and Australian productivity growth numbers in each of their annual releases.  As they note in the latest release, over the period since 1996 (the period for which the two countries have comparable data), labour productivity in the measured/market sector averaged 1.5 per cent per annum in New Zealand and 2.2 per cent in Australia (Australian data is for June years).   Over 21 years, those differences multiply up to big numbers –  and, in levels terms, we had already fallen well behind Australia by the mid 1990s.

You might have hoped that all those differences were early in the period. Unfortunately, the SNZ/ABS data suggest not.

measured sector nz vs aus

Starting from just prior to the 2008/09 recession (downturn in Australia) the relative performances of the two measuered sectors look depressingly similar to the pattern in the aggregate (real GDP per hour worked) chart I showed earlier.  Over nine years, Australia’s market sector managed total productivity growth a full eight percentage points fast than New Zealand’s measured sector managed.

All these charts just use hours worked as the relevant input measure.  Usually SNZ also publish (as do the ABS) the data using composition-adjusted labour input measures (eg if the amount of human capital per worker is increasing, as people get more skilled, that represents more inputs not higher productivity).   I’ve become a bit more sceptical of such measures in recent years, since proxies for human capital are often educational achievement numbers, and much of what Bryan Caplan writes about –  that much of formal education is about signalling rather than skill acquisition –  I find increasingly persuasive.  But this year I can’t even show you the numbers as SNZ ends their release noting plaintively

The composition-adjusted productivity in the measured sector data did not meet our quality standards for publication..The absence of this data does not affect any other data published in this release. We don’t have an expected release date for this data

Oh dear.

In sum, there isn’t much in the recent waves of productivity data/estimates that should give anyone serious about economic performance much comfort at all.   There are, no doubt, countries that have done worse than us on this score in the last decade, but  –  starting well behind –  we’ve made no overall progress in closing the gaps to other more advanced countries, and have continued to slip (quite materially) further behind our closest comparator, Australia.


Revisiting the case for splitting the Reserve Bank

The Minister of Finance has commissioned a two-stage review of the Reserve Bank Act.  The scope of the first part is pretty clear: it is about monetary policy (goals, transparency, and decisionmaking structures).  What, if anything, is included in the second stage is still up for grabs, with the Minister awaiting advice from the officials (a joint Treasury/Reserve Bank process) and from the Independent Expert Advisory Panel.   It seems likely that the Reserve Bank itself will try to keep any second stage to an absolute minimum –  as someone put it to me last week, the Bank seems happy with any reform that keeps things pretty much just as they are now –  and the arrival of Adrian Orr as Governor next month is likely, based on past performance, to reinforce that resistance.

A few weeks ago, I outlined the case that, as a key component of the second stage, the Reserve Bank should be split in two.  The Reserve Bank itself would remain responsible for monetary policy and associated activities (notes and coins, foreign exchange reserves, interbank settlement etc) while a new Prudential Regulatory Authority would take on responsibility for regulation and/or supervision of banks, non-banks, insurance companies, payments systems (and for the associated AML controls).

In favour of that position is that:

  • it is the more common model in advanced countries today (including Australia),
  • the synergies and overlaps between the various functions of the Reserve Bank are pretty slight (and probably no greater than, say, those between fiscal and monetary policy),
  • structural separation would allow for clearer lines of accountability, and
  • structural separation would allow for the creation of stronger, more effective, cultures  –  with appropriately skilled chief executives –  in each of the two successor institutions.

There hasn’t been a great deal of public commentary about this issue/option, but I noticed that the Shoeshine column in last week’s NBR picked it up.   NBR’s columnist  –  Jenny Ruth –  noted her support for structural separation (“a jolly good thing”).    She has been pretty critical of the Bank’s handling of a number of its prudential responsibilities, and is uneasy about the extent to which she believes the use of LVR limits –  by statutue, in pursuit of financial stability – “has become hopelessly confused with the Reserve Bank’s monetary policy functions”.

But in putting together her column she also talked to Massey banking academic David Tripe who “agrees there is a problem but isn’t so sure separation is the solution”.  He is quoted as saying

“My suspicion is that it wouldn’t improve matters because it would still be the same people doing the supervision”

and arguing

“We’ve got bank capture of the regulator –  the Reserve Bank asks for the data that the banks agree to provide, not the other way round”

On his first point, I guess my response would be that structural separation is not panacea, but that (a) change starts from the top, and (b) it should be materially easier to hold the financial regulator to account when it is responsible for only one main job (unlike today’s Reserve Bank).   And, as I’ve noted above, many of the other considerations also point in the direction of structural separation.  Finding a chief executive and senior management team who care primarily about the prudential regulation of the financial system –  whereas most of the senior management of the Reserve Bank over decades has always been more interested in (and had more background in) monetary policy –  is likely to be significant part of lifting the performance of the regulator.

Perhaps my one real unease is that a standalone regulatory agency could – if it were allowed to – become even more resistant to transparency and public accountability for its actions.  Whether there is a structural split or not, the officials and politicians doing the current review need to take steps to make the regulatory side of the Bank (as it is now) much more open.

(On Tripe’s second point, while I think there is something in what he says –  especially around data –  I rather doubt many of the banks would recognise the “regulatory capture” story.  On that note, I’m looking forward to the forthcoming publication of the New Zealand Initiative’s work on economic regulatory agencies, including the Reserve Bank.)

In her column, Jenny Ruth highlights a number of recent cases where the Reserve Bank’s handling of regulatory issues leaves a lot to be desired (and where, even if the Bank was correct, it has been so untransparent that we couldn’t possibly be confident of that).  I’ve written a bit about one of the cases she mentions –  the Westpac capital models issue.  The Bank has made no attempt to pro-actively disclose the relevant material (and would no doubt staunchly resist OIA requests), and although it claims it discovered the problem, as Ruth notes

“Westpac insiders say that Westpac outed itself. Shoeshine’s money in on Westpac”

Whatever the truth on that point, the whole episode did little to instill confidence in the Reserve Bank’s systems, processes, or accountability.

I haven’t written about the two other episodes Jenny Ruth highlights, both involving Kiwibank (you can read them for yourself).  Neither suggest that the Reserve Bank’s prudential wing has been on top of its game, or that they really have an instinctive handle on the nature of markets and financial institutions.

There are capable people in the regulatory/supervisory side of the institution (and I sat on the relevant internal policy committee for the best part of 20 years) but it is time for some refreshment, and the sort of restructuring that a fresh chief executive, focused on building and maintaining a strong and effective regulatory agency, can bring.  I’m not convinced, by any means, that all the regulatory framework is well-warranted, but if Parliament chooses to regulate, we need the job done excellently, and with considerable transparency and accountability.

NBR appeared on Friday morning.  As it happens, on Friday the Reserve Bank was taking regulatory action.   At 6.37pm an email dropped into my inbox stating that CBL Insurance had been placed in interim liquidation by the High Court, on application from the Reserve Bank.  The Reserve Bank is, of course, now responsible for the prudential regulation of insurance companies.

In time, I hope we see a substantial accounting by the Reserve Bank of its activities in this case, including its exercise of its powers to apply for the appointment of a liquidator.  In the meantime, I was interested in a piece on by David Hargreaves who suggest that, based on what we’ve seen so far, this episode too raises questions about the handling of the Reserve Bank’s supervisory/regulatory role.

From the Hargreaves article

That the RBNZ was interacting, strongly it seems, with CBL Insurance going back as far as July last year was revealed by CBL Corporation to the NZX only as recently as February 5, almost in passing and then more explicitly on February 7.

Key parts of the February 7 revelation for me were that the RBNZ had done an independent review on CBL insurance, that it had, as long ago as July 27, 2017 issued a minimum solvency recommendation, and then – most crucially from my perspective – that on November 22, according to the statement from CBL Corp, RBNZ had issued directions to CBL Insurance, CBL Corporation and its subsidiaries, requiring them to consult on any non-business-as-usual transactions greater than $5m.

That last one, as far as I’m concerned is a biggie. Essentially a publicly listed company with a sharemarket value of three quarters of a billion dollars was put on the leash by the regulator three months ago. And yet nobody was told publicly.

The CBL February 7 statement went on to say that “these directions and discussions that CBL Insurance has had with RBNZ have been occurring under strict confidentiality orders prohibiting CBL from making any announcement to the market while those orders remained in place. These orders have now been lifted.”

Neither confirm nor deny

The RBNZ refuses to either confirm or deny that it had placed confidentiality orders on its interactions with CBL Insurance last year.

He goes on

I actually think the RBNZ had some obligation to let the public know it was engaging with this company.

I do not like the idea of regulation behind closed doors because it is suggestive, at least, whether that is the reality or not, of a holier than thou attitude. It is to me, the regulator putting themselves above the public.

I’m not sure how well prepared the RBNZ was for getting itself into a situation like this with a publicly listed entity like an insurance company.

I’m not so sure about “holier than thou”, but it is an example of just the sort of thing the Reserve Bank always used to worry about: if it had private information (especially about significant regulatory interventions) and customers were nonetheless allowed to carry on trading with regulated entity, doesn’t that then create at least some moral risk, some moral exposure, if the regulated entity subsequently failed?  It seems extraordinary, if true, that the Reserve Bank could ban a regulated entity talking about a regulatory intervention.

Hargreaves’ solution isn’t one I’d agree with

Personally, I would suggest creation of a separate authority to regulate and supervise the insurance sector. Yes, it would be more money, it would arguably be more bureaucracy, but sometimes that’s what you’ve got to do for the best results.

Frankly, I’ve never been quite sure that the case for prudential regulation of general insurance is particularly strong anyway, and would be very reluctant to see a standalone insurance regulator. But I take the Hargreaves story as reinforcing the case for a strong standalone prudential regulatory agency, led by people whose sole job is prudential regulation and supervision, and within governance and accountability structures that help ensure serious and effective scrutiny of how the regulatory agency does its job.

I gather that Treasury and the Reserve Bank have been consulting this week with private sector representatives on the possible prudential regulatory aspects of the Stage 2 review.  I hope that the idea of structural separation –  with all it could entail –  isn’t lost in the desire of Reserve Bank management to keep things just as they have (not overly effectively) been.

A semi-official take on New Zealand and China

The New Zealand China Council was established by the government a few years ago.  It exists primarily as an advocacy body, using (mostly) taxpayer money

in support of deeper, stronger and more resilient links between New Zealand and China.

It has been very close to  the government.  The Secretary of Foreign Affairs and Trade, and the chief executive of New Zealand Trade and Enterprise are both ex officio members of the Executive Board.  The Council is chaired by one former Deputy Prime Minister (Don McKinnon), and another member –  with considerable ties to People’s Republic of China institutions – is former Prime Minister, Jenny Shipley.   The Advisory Board, another 20 people, includes as members several of those about whom questions have been raised in recent months (Jian Yang, Raymond Huo, and Naisi Chen)  –  as well as, somewhat surprisingly, a senior journalist.

The public face of the Council seems to involve relentless optimism about things that don’t obviously seem to require taxpayer-funded advocacy (eg the several tweets about the first New Zealand avocadoes into China) and rather gushy, one-eyed, takes on the PRC/New Zealand relationship, always extremely careful never to utter a critical or sceptical word about the PRC.  More recently, in response mostly to the issues raised by Anne-Marie Brady (and the Jian Yang story) they seem to have been pushed somewhat onto the defensive.

The Council employs a part-time Executive Director, Stephen Jacobi.  He spent considerable time at MFAT, but from his own account his focus was Europe and North America (including as our deputy high commissioner in Canada) and in trade negotiations.  Since leaving MFAT in 2005 he has run his own consulting firm, and been employed as the public face of various trade-related bodies, including serving as Executive Director of the NZ US Council from 2005 to 2014.  He is articulate and readily available to the media, but has no specialist expertise in China or (indeed) on the workings of New Zealand democracy.   That isn’t a criticism –  after all, neither do I –  just to note that his arguments, and evidence, need to be reflected on and carefully examined, perhaps having regard to the interests that are paying him, not as coming from an expert authority in the area.

I’ve written previously about one of Jacobi’s speeches, given late last year at a regime party to mark the PRC national day.  Those were pretty brief (and obsequious) remarks, albeit to a PRC audience.  And so it was interesting to see that last week he had delivered a much more substantial address, Dancing with the Dragon – Opportunity and Risk in the New Zealand China Relationship, to the Nelson branch of the New Zealand Institute for International Affairs.  There is also a much shorter op-ed by Jacobi in the Herald today, headlined on the China Council’s own website as “Anti-China narrative not the Kiwi way”.   I’m not going to comment specifically on that piece –  it covers mostly similar ground to the speech – except perhaps to suggest that deferring to vested interests (business and political) who want us to hurry along and simply accept that there is nothing to see here shouldn’t be “the Kiwi way” either.

What of the speech?

The first couple of pages (of eight) is reasonably unexceptionable.   There are lots of statistics about the growth in trade between New Zealand firms and Chinese ones –  curiously, only about exports, and barely a mention of (the benefits of) the imports.   There is some nonsense about New Zealand alleged heavy reliance on China in the ‘global financial crisis”, but on the other hand a welcome acknowledgement that the New Zealand – China trade agreement isn’t the only factor explaining the growth in two-way trade and investment.  Of course, there is no acknowledgement that the interest of the entities exporting to China –  many represented around his board table – might not always be the same as those of New Zealanders as a whole.

But then he turns towards addressing the (quite limited) New Zealand public debate on issues around the activities of the People’s Republic of China and the Communist Party which controls it.  Part of Jacobi’s rhetorical strategy  appears to be to imply that anyone raising concerns about the Chinese regime and the Party that controls it, is somehow anti-China/Chinese more generally.  It is never quite put that like  –  just insinuations –  but the impression is pretty clear. Mention the poll tax, for example, to play up the guilt, but never mention that we and China (pre-Communist) fought on the same side in World War Two.   And never, ever (that would be job-ending for Mr Jacobi no doubt), note that across the Taiwan Straits is a highly succesful, prosperous, free, and non-threatening ethnic Chinese democratic state.  Never, ever, mention the unease apparently felt among numerous New Zealand citizens of ethnic Chinese origins –  some of whom migrated here to escape the party-state and its evil –  about the effective control regime-associated groups have over most of the Chinese language media in New Zealand, and many community groups.

Around the world there has been growing unease –  including in such impeccably liberal circles as academics –  about the growing number of Confucius Institutes established as part of many Western universities.  With PRC funding comes PRC restrictions, on hiring and on the sort of issues lecturers are allowed to address.   There are several of these institutes in New Zealand universities – Canterbury, Victoria and Auckland  In various places overseas there has been a pushback and some major universities –  notably Chicago – have closed their Confucius Institutes.   I’m sure no one has a problem with the PRC government subsidising Chinese language learning in New Zealand –  any more than with Alliance Francaise or the Goethe Institute –  but not as part of New Zealand universities, subject to a foreign governments controls and constraints.

Why do I raise this?  Because Jacobi included this line

There has been pleasing progress in the number of primary schools teaching Mandarin, especially with the help of the 150 Chinese language assistants in New Zealand, but this has not followed through at secondary and tertiary level.

I presume this is a reference to things like the Confucius Classrooms programme (or here) .  By this means PRC-funded and chosen people are operating directly in our school classrooms.  One can only imagine the awkwardness if a student asks about Taiwan or Tibet, the rule of law, or freedom of speech.

Can anyone imagine us allowing Soviet funded teaching in our schools in the 1970s, or German-funded teaching in the 1930s?  But Mr Jacobi, and his government-funded council, simply avoid ever confronting the nature of the regime.  (I’m sure they are quite aware of it, but if the public ever got concerned it might threaten the Council’s easy life, and the business and personal opportunities of some of its members.)

And then Jacobi turns directly to the recent debate, such as it has been.

Public debate about the relationship is to be welcomed in a robust democracy like ours, although care needs to be taken to ensure that public debate remains civil and properly focused on the issues.

And who is going to disagree?  But then perhaps Mr Jacobi could point us to examples of where the debate has been less than civil and not “properly focused on the issues”?  I can think of the former Attorney-General at an election meeting attacking Anne-Marie Brady as somehow “anti-foreigner”, but then I’m pretty sure he and Mr Jacobi are on the same side.    I’ve heard various claims that people raising issues are being “racist” or anti all things Chinese, but I’m pretty sure that not once have those sorts of slurs –  the stuff Jacobi purports to dislike –  been backed up with arguments and evidence.  In this speech, Jacobi certainly makes no attempt to.  For a taxpayer-funded body it is a pretty poor show really.  But then, unfortunately, it is par for the course.    Neither politicians, nor outfits like China Council, have made any attempt to address seriously and directly the issues raised in Professor Brady’s Magic Weapons paper, or the issues around the background and ongoing associations of National MP Jian Yang.

Jacobi notes that occasionally the New Zealand government and the PRC disagree

While we do have occasional public disagreements, these have not detracted from the momentum in the relationship.

If so, presumably because when such “occasional public disagreements” matter, politicians and diplomats scurry round and assure Beijing it will never happen again.  It is hardly news that the New Zealand government has operated a policy of avoiding do anything that might upset Beijing.  Nor that the PRC is not some typical country which recognises that the possibility of robust differences of view characterises real mutual –  as distinct from subservient – relationships in this world.

Politically, even while we receive occasional Chinese naval ship visits, we continue to maintain close defence and intelligence relationships with our Western allies.

I’m pretty sure we never welcomed naval vessels from the Soviet Union or Nazi Germany.  But even setting that to one side, Mr Jacobi simply never addresses the  unease our traditional Western allies –  including through Five Eyes –  have reportedly come to feel about the New Zealand government’s relationship with the PRC.  And he does not even seek to address the PRC’s own strategic interests, which might include a fostering a more semi-detached relationship between New Zealand and the countries which share rather more of our “fundamental values” [Jacobi’s own term].

And then there is the attempt to play distraction, with the suggestion that all that is going on is “soft power”, and “everyone does that”.

New Zealand itself uses soft power with great effect when it seeks to portray a positive view of our country overseas, including by funding visits by journalists and other “influencers” to New Zealand.

Although Americans, Europeans and Japanese all use soft power, it is the Chinese use of soft power that is being questioned today.

If the PRC wants to subsidise artistic or cultural displays in New Zealand, to foster a positive view of the regime, probably not too many are going to object very loudly.

But that isn’t the sort of influence that Professor Brady was writing about, and Mr Jacobi is well aware of that.    We don’t have (for example) formerly-French members of the New Zealand Parliament, constantly liaising with the French Embassy, and in front of whom former diplomats are careful of what they say.  And even if we did, there is a much greater commonality of “fundamental values” between,  say, France and New Zealand than there is between the PRC and New Zealand.  The British government doesn’t attempt to control the English language media in New Zealand.    The US government (and government-controlled entities) doesn’t dangle post-politics opportunities in front of former senior politicians.  No other government I’m aware of attempts to exert tight control over the students’ associations of its overseas students, in the way that the PRC does with the Chinese Students and Scholars Associations (CSSA).

Jacobi goes on

Some prominent members of the Chinese community have faced intense criticism about their past and present connections with the Chinese Government and the Chinese Communist Party.

Chinese community networks have been described as being a conduit for Chinese representatives to promote a positive view of China and to subvert local decision-making.

The funding of New Zealand political parties has also been highlighted.

Some of this criticism appears to be linked to a similar debate in Australia, although I would argue that the situation in Australia is quite distinct – although we share many things, we have a different political culture, we are not a military ally of the United States and we see our role in the world differently.

In all that, there is just nothing specific at all.  Jacobi doesn’t, for example:

  • address why it is appropriate to have as member of Parliament in New Zealand a former Chinese intelligence official, former (at least on paper) member of the Communist Party, someone who now openly acknowledges misrepresenting his past on forms to gain entry to New Zealand (apparently because that is what the PRC regime told people to do),
  • address the PRC control of the local Chinese language media, and associated (and apparently heightened) restriction on content,
  • address how it can be appropriate for the Mayor of Auckland to receive anonymous donations (from China) of $150000 for his mayoral campaign.

He asserts that the situation in Australia is ‘quite distinct’, but makes no effort to back his claim.  If anything his three points reduce to little more than “we’ve decided to just ignore these things, and that’s the way we do things in New Zealand”.    There is an increasing volume of material on Chinese influence activities in a range of countries, and if the situation here is not that of, say, the Maldives, or Cambodia or even perhaps the Philippines, there is little to suggest that things are materially different here than in Australia, or Canada, or a variety of European countries.

Jacobi response is

Recent allegations here in New Zealand have sought to identify ‘smoking guns’ but mostly without the proof or evidence to demonstrate culpable wrong doing.

Everyone in New Zealand is innocent until proven guilty.

If there has indeed been misbehavior or unwarranted interference, a higher standard of evidence needs to be provided so that this can be investigated by the proper authorities.

Innocent until proven guilty is, rightly, the criminal standard.  If crimes have occurred, they will need to be proved to that standard to secure a conviction.  But as Mr Jacobi knows very well (a) someone in authority needs to take an interest for anything to be proved to that standard, and our leadership appears to have an active lack of interest in doing so, and (b) plenty can be inappropriate or threatening that need not be illegal.    I’m not aware, for example, that anyone has suggested that Jian Yang’s membership of the New Zealand Parliament is, or should be, illegal (unless concerns about his citizenship application come to something).    The argument is that it is highly inappropriate in the specific conjunction of circumstances (PLA and Party background, deliberate misrepresentation of his past, continued close association with regime representatives in New Zealand, failure ever to say anything critical about the PRC regime, and so on).   Perhaps Mr Jacobi has a compelling and specific alternative perspective?  If so, it would be very interesting to hear it, but that would require engagement, rather than lofty disregard (“someone else’s problem”).    Perhaps next time he talks to Jian Yang he might suggest that in an open and democratic society, making yourself available to the local media for a searching interview is the way things should be done.  As it is, Yang has not made himself available for a single English language interview since the story first broke in September.  And this is an elected MP, paid with public money.

Jacobi has a brief discussion of trade ties.

I was struck by a comment on Twitter this week which suggested that China could if it wanted to “paralyse New Zealand’s economy at will”.

I’m not sure why China would ever see it in its interest to attempt to do such a thing

As I’ve noted in various posts, China can’t paralyse our economy.  We make our own prosperity.  But they could make a great deal of difficulty for specific industries.

And they have form in this regard.  Specifics around experiences of Norway and Mongolia are here, and the PRC was active in using sanctions on specific sectors on firms in South Korea last year over the deployment of the THAAD missile defence system.  So for Mr Jacobi to say “I’m not sure why China would ever see it in its interests” to do such a thing in respect of New Zealand is either simply deliberately avoiding actual recent experiences with this particular regime, or saying “so long as we never upset Beijing” we have nothing to worry about.  (Of course, in Norway’s case, it wasn’t even the government that upset Beijing, but a (prominent) private entity, the Nobel Prize     committee).   Surely we deserve better than this from taxpayer-funded mouthpieces?

There is plenty more questionable material in the speech

Chinese economic policy is changing too – a move away from investment-led growth to consumer-led growth and the realisation that a significant and growing share of the economy is now in the hands of the private sector rather than state owned enterprises.

A new generation of Chinese leadership is in office – President Xi Jinping has consolidated his power at the recent Party Congress.

The leadership knows the old style of economic management cannot continue, but it looks at the ravages the global financial crisis caused the Western economies and is determined not to see the same thing happen in China.

Globally we see China’s economic weight continue to grow and the mantle of leadership pass from an increasingly inward-looking United States to a more confident China.

China has some way to go to “walk the talk” of openness and inclusion, particularly in terms of the way it regulates its economy, but the language from Beijing these days is more appealing to many than what we hear from Washington.

China too is grappling with the demands of a growing middle class becoming more impatient with the restrictions on human rights and personal freedoms.

All of which is clearly designed to suggest that things are improving in the PRC, when demonstrably they aren’t.

For example, the economy might largely (and formally) be in private hands, but Mr Jacobi –  and his MFAT funders –  know very well that the Party has been increasingly extending its tentacles directly into private sector entities, domestic and foreign, and that no business in China can be considered much apart from the regime.

And China “has some way to go to ‘walk the talk’ of openness and inclusion”?  Is there any evidence  –  even a shred –  of an intention to adopt a culture of”openness and inclusion”?  The environment for people less than enamoured of the regime just seems to be getting tougher as Xi Jinping’s power is further consolidated.   (Nonetheless, it doesn’t stop the presidents of the National and Labour parties gushing about Xi and the regime.)

And the “middle class becoming more impatient with restrictions on human rights and personal freedoms”.  Perhaps they are, perhaps they aren’t.  But really what matters is the regime, and its resolve.  At present, that doesn’t seem to involve more freedom.  The chilling new “social credit” control scheme is just another example.  But you hear nothing of any of this from Mr Jacobi, and his supporters, who just want to keep the deals flowing.

Some modest political/societal convergence might have been a plausible narrative 15 years ago.  It isn’t now.  And really I’m sure Jacobi knows it, as he’ll know the expansionism in the South China Sea, the military stand-off over the Senkaku Islands, the suborning of various regional governments, and so on.

Perhaps the most chilling sentence in the entire speech was this one.

A second consequence is that as China’s confidence grows they will become less willing to accept challenges to their political system and their own decision making processes. This will require careful handling on the part of New Zealand

Quite possibly, Jacobi is descriptively accurate, but it doesn’t lead him to suggest that we might be increasingly wary of the PRC regime, or uneasy about the power projection (including into New Zealand) that accompanies this greater confidence. It doesn’t lead him to point that true friends – and genuinely self-confident people  –  live happily, and embrace –  challenge, debate and scrutiny.  Nothing about self-respect.  Nothing about the shared interests of like-minded countries.  No, apparently for Jacobi we should simply double-down and “engage even more with China, not less”.

There was the, surely laughably deluded –  but perhaps just an attempt at distraction –  invocation of his former MFAT colleague’s argument.

Former New Zealand Ambassador to China Michael Powles has written recently about the need for New Zealand to “develop the already strong relationship with China to increase the prospects for New Zealand to have influence with China as it wields increasing regional and global power”.

Michael writes that New Zealand has a lot of experience in being a “small friend to a great power” ie with Britain and the United States – co-operating actively but also discussing differences frankly.

In what plausible world does any of this make sense?  Set aside the fact that to the extent that we were ever a “small friend” to great powers the US and UK, it was based on shared values, shared heritage, largely common interests etc.  Friends, even brothers, don’t always agree, but they share crucial commitments or interests.  There is simply no sign that the sort of values the PRC regime lives by  –  increasingly so at present –  are ones most New Zealanders any part of.  And nor is there any reason to suppose that China would be likely to heed New Zealand’s counsel around the exercise of its rising “regional and global power”.      New Zealand’s policy, after all, seems to be premised on not upsetting Beijing, and the PRC are better placed than we are to know what will upset them.

At the very end of his speech, Jacobi returns to one of his early themes

With this engagement invariably comes public debate – it is a debate worth having, but we are a better nation if we respect the people about whom we speak.

Frankly, I don’t respect Xi Jinping, or the PRC regime, or the Chinese Communist Party.  The Party has been a great force for evil in its own country –  depriving tens of millions of liberty, and even life, and presiding over a system that can’t even produce prosperity (unlike, say, Singapore or Taiwan, or South Korea or Japan).

I don’t have much respect for Jian Yang either.  He may be a perfectly pleasant person, may even have been a competent academic.  But that isn’t the issue.  He served –  voluntarily –  an evil regime, in its military intelligence system, he misrepresented that past to get into New Zealand and into Parliament.  And if he has ever had a Damascus Road experience –  now deploring the evil he once served –  the public has heard nothing of it.  Oh, and despite being an elected member of Parliament –  on the list, elected by all National voters –  he simply refuses to front the media.   You can avoid searching scrutiny in the PRC, but you shouldn’t seek to (and shouldn’t be able to) here.

I don’t have much respect for those who’ve, apparently successfully, managed to exert regime control over Chinese language media here.

And I have even less respect for the New Zealand politicians, and party leaders, from every single party (so it appears), who simply let this stuff go by, and try to pretend there isn’t an issue.

Oh, but those weren’t the people Jacobi was meaning?   I guess probably meant ethnic Chinese New Zealand citizens. But as a group, they simply aren’t the issue anyone (including Professor Brady) has been raising issues about in this debate.   If anything, part of the issue is about protecting the rights and freedoms of these people –  fellow New Zealanders –  from the PRC regime interventions, and attempt to exert influence and control.   But it suits those who want to avoid the real issues to pretend that the debate is about ethnic Chinese in New Zealand more generally, rather than about the activities –  some probably illegal, others just threatening or flat-out wrong – of a heinous regime.

I’ve been reading a lot about the interwar period recently.  As I’ve done so, the more apparent the similarities between the current situation vis-a-vis the PRC and that of the 1930s.  Parallels are never in the nature of exact mirror images.  And perhaps in the end the differences will prove greater than the similarities.     But the same expansionist tendencies, the same denials of personal liberties, the same making trouble among diasporas, the same border disputes, perhaps even (in the long term) the same economic weaknesses, and (on the other side) much the same –  India aside this time perhaps –  desperate desire to appease and pretend there is nothing much to worry about.  As I say, perhaps the parallels are overblown, but I suspect we’d get much more value from some serious engagement on those sorts of topics, rather than more taxpayer-funded efforts to pat the public on the head, suggest there is nothing to worry about, and bat away any critics –  expert ones like Professor Brady –  as somehow insufficiently civil or respectful.

On which note, where are the rest of the genuine China experts in New Zealand?  Presumably many of them will have perspectives on these issues?  I wonder if the media have approached these people –  mostly academics paid with public money, partly to advance knowledge, public debate etc.  If they won’t talk, one has to wonder why not, and what that would say about our self-respect as a society, and our willingness to nurture and cherish what made countries like New Zealand what they were at their best.

At very least we deserve rather better, and more substantial, engagement with the issues and concerns from our elected leaders, and from their paid voices (such as Mr Jacobi).

An employment objective for monetary policy: some survey results

Some link or other took me recently to the website of the University of Chicago’s Booth School of Business and, in particular, the IGM (economic) Experts Panel that they run.

Every few months, this outfit runs surveys of US-based academics on interesting economic questions.  Their panel is described this way

our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President’s Council of Economics, and past and current editors of the leading journals in the profession.

You might not go to this group for “truth”. Academic economists have biases and blindspots, like everyone else (and tilt leftward politically), and sometimes the answers can look quite self-serving.  But a panel like this is likely to provide a fair representation of what US-based economics academics are thinking about issues.  They even provide two sets of answers: the raw responses, and a set in which respondents self-identify how confident they are of their views on the particular topic.

Flicking through the surveys from the last year or so, there were a couple of some relevance to the current review of the Policy Targets Agreement –  a new PTA is required in the next few weeks –  and of the Reserve Bank Act.

The new government has indicated its intention to add some sort of employment dimension to the Reserve Bank’s statutory objective for monetary policy, and they have often cited the (to me rather vague) wording in the US and Australian legislation.   In the US, the Federal Reserve is required by law to manage the money supply to grow in line with production, with the aim of thus contributing to

the goals of maximum employment, stable prices, and moderate long-term interest rates.

The Fed itself has reinterpreted this mandate –  without statutory authority although probably not unreasonably – as

The Congress has directed the Fed to conduct the nation’s monetary policy to support three specific goals: maximum sustainable employment, stable prices, and moderate long-term interest rates. These goals are sometimes referred to as the Fed’s “mandate.”

Maximum sustainable employment is the highest level of employment that the economy can sustain while maintaining a stable inflation rate.

One of the concerns some commentators here have expressed is whether any employment dimension added to our central banking legislation will have any real meaning or substance.  My own view, articulated here previously, is that it could do, but whether or not it does depends on how the provision is written, and what sort of reporting and accountability obligations are imposed on the Reserve Bank in respect of the employment dimension of the goal.   The Minister of Finance has not yet proposed any specific wording.

Against this background, it was interesting that the IGM Forum asked their panel members about the US wording.

employment IGM Weighted by the respondents’ individual levels of confidence, 55 per cent thought “maximum sustainable employment” was well enough defined to be used beneficially in policymaking.  22 per cent disagreed, and the remainder were uncertain.

This survey was done only a couple of months ago.  In that light, it is also interesting –  although not directly relevant to New Zealand –  that more respondents thought the US was still operating below “maximum sustainable employment” than disagreed.

At very least, these sorts of survey responses suggest that the government can come up with a formulation that might pass muster, as useful, among academic economists.  As a practical matter – and most of these respondents haven’t spent much time around policy –  I’m sure they can.    As I’ve noted previously, Lars Svensson – the leading Swedish economist who did a review of New Zealand monetary policy for the previous Labour government –  certainly believes some such framing is desirable and practically useful.

It isn’t yet clear whether the government wants a formulation that is practically beneficial and makes some difference to the conduct of short-term monetary policy, or simply wants something that looks different.   With Treasury, and the Independent Expert Advisory Panel (of questionable independence if the report on the back page of Friday’s NBR is anything to go by), due to report very soon, we should have some stronger indications before too long.

There was another recent IGM survey question of some relevance to New Zealand and other countries.  Last July, panellists were asked their view of the following proposition

Raising the inflation target to 4% would make it possible for the Fed to lower rates by a greater amount in a future recession.

Weighted by the confidence of the individual respondents 86 per cent agreed.

The panel was also asked their view of this proposition

If the Fed changed its inflation target from 2% to 4%, the long-run costs of inflation for households would be essentially unchanged.

A majority (51 per cent vs 29 per cent) disagreed, presumably thinking the costs of inflation would rise.

I’d agree with the majorities in both cases, and would answer the same way if the questions were posed for New Zealand.    I’d prefer not to have the target raised to 4 per cent –  actually meeting (or perhaps slightly overshooting) the 2 per cent target would do for now –  because there are (modest) welfare costs from a higher inflation target in normal circumstances.   But limitations on macro policy in the next serious recession is a real challenge, and there is little sign that the Treasury or the Reserve Bank have really engaged with them (eg it never appeared in the work programmes in Reserve Bank statements of intent).      And if there isn’t a willingness to address the practical constraint on taking interest rates much below zero, the Minister needs to be taking much more seriously the option of a higher inflation target.   Better to address the problem at source, but there is no sign our government – or officials –  have been doing so.

For those of a technical bent, in a Brookings newsletter the other day I noted a description of an interesting looking new paper tackling this issue from another angle.

Decline in long-run interest rates increases optimal inflation, but not one-for-one
If the decline in long-run real interest rates in advanced economies persists, nominal interest rates may be constrained by the zero lower bound more frequently. To counteract this, some economists have supported increasing the inflation target. Using a new Keynesian DSGE model, Philippe Andrade of the Bank of France and co-authors find that a 1 percentage point decline in the long-run natural rate of interest should be accommodated by an increase in the optimal inflation rate of about 0.9 percentage point—an estimate that is robust to various specifications that allow for uncertainty about key parameters in the model.

The boondoggle

Earlier this week, Kiwirail released its most recent half-yearly financial result.  Once again, the taxpayer was poorer for their operations.   They make great play of a modest “operating surplus” but I rather liked this summary table from their latest Annual Report


In other words, no returns to shareholders at all; in fact losses in one year of a third of the (periodically replenished) shareholders’ funds

Last year, they had operating revenues of $595 million, and an overall loss of $197 million (much the same as the year before).  So roughly a quarter of their overall costs are not covered by income.   As an organisation –  and with all due respect to the energies of individual employees (including the five earning in excess of $500000 per annum) – it has all the appearance of being a sinkhole, absorbing more of the scarce resources of taxpayers each year.

And before people start objecting that roads don’t make a profit, it is worth remembering that airlines do and coastal shipping operations do –  and, if they don’t, they usually go out of business.

An organisation that operates such large losses (acquiesced in by successive shareholder governments) clearly isn’t one that applies the most demanding tests possible to the question of whether individual lines should be opened or closed.  Occasionally people attempt to justify government intervention in this or that activity on (questionable) grounds that the private sector is applying too high a cost of capital.  But in this case, the state operator’s average return on capital (ie over all its operations) is substantially negative, and it has no expectation of changing that.

A few years ago, Kiwirail closed the Gisborne to Napier line.  Rail volumes had been low and falling –  some trivial portion of the volume that Kiwirail estimated would have been required to make the line viable.  But ever since, there have been people hankering for the line to be reopened.

And yesterday, as part of the first wave of projects approved under the new Provincial Growth Fund, the Minister of Regional Development announced that

“We’re also providing $5 million to Kiwirail to reopen the Wairoa-Napier line for logging trains, taking more than 5700 trucks off the road each year.”

 In the more detailed material released with the announcement there is a suggestion that the Hawkes Bay Regional Council may also be putting in money.

There is no sign of any cost-benefit analysis of this proposal having been released at all. But we can assume that the proposal wouldn’t pass any standard (weak) Kiwirail commercial test since otherwise Kiwirail would have reopened the line without taxpayers’ having to chip in more money directly.

There used to be some logs/timber carried on the Gisborne-Napier line, but a reader pointed me to the numbers: in the final full three years of operation, a total of 327 tonnes of it.

There are, apparently, going to be a lot more logs to move in the coming years.  In the Minister’s words

“The wall of wood is expected to reach peak harvest by 2032 so reopening this line will get logging trucks off the road and give those exporting timber options that they currently do not have,” Mr Jones says.

“It makes sense to consolidate that timber in Wairoa and use rail to take it to the Port of Napier.

Except that apparently officials and Kiwrail had already looked at this option a few years ago.  In a report released only a few year ago it was noted that

“We note that Kiwirail was not convinced this would be finanically viable for users given the relatively short distance involved and the need to double-handle the logs.  Industry feedback has also indicated that transport of logs on rail across the study area was unlikely to be economic.”

Perhaps the economics has suddenly changed?  But, if so, where is evidence?  None was published yesterday.   We aren’t even told what assumptions are being made about how much of the logging business will be captured.

The Minister’s release also argued that there were climate change benefits from this move

“It will also mean 1,292 fewer tonnes of carbon dioxide released into the atmosphere each year.”

Even if this were relevant –  don’t we have an ETS supposed to deal directly with pricing emissions? –  and accurate (what assumptions are being made, including about the carbon costs of the double-handling?), it sound doesn’t terribly impressive.  A single 747 flying to London and back once apparently emits 1100 tonnes of carbon dioxide.

This is just one of the numerous projects the government is going to spend money on in the next few years.  I’ve only looked through the Gisborne/Hawke’s Bay list, and none of it fills me any confidence.   What, for example, is central government doing on this?

The Provincial Growth Fund will provide $2.3 million to redevelop the Gisborne Inner Harbour as part of a wider tourism investment programme.

If, as the Minister claims,

“Tairāwhiti is brimming with potential and untapped opportunities

you would have to wonder why the private sector, and the local authorities, don’t seem to think them worth spending money on.  (On my story, a materially lower real exchange rate would help quite a bit, but the government shows no sign of addressing that.)

A couple of weeks ago, I commented on the Minister of Finance’s underwhelming exposition of what the government was going to do to transform the productivity outlook in New Zealand.   The Minister noted

A major example of this is the Provincial Growth Fund developed as part of our coalition agreement with New Zealand First.  This will see significant investments in the regions of New Zealand to grow sustainable and productive job opportunities.

To which my response was

If it ends up less bad than a boondoggle we should probably be grateful.  It isn’t the sort of policy that has a great track record, and it is hard to be optimistic that one new minister –  with a vote base to maintain –  is going to transform the sort of flabby thinking around regional development presented at Treasury late last year.  

hen again, the Secretary to the Treasury might quite like the idea of paying to reopen the Napier-Wairoa line.  I’ve told previously the story of Gabs Makhlouf, fresh off the plane from the UK, lamenting that the one thing New Zealand hadn’t sufficiently taken from the British Empire experience was to invest more heavily in rail (in response, assembled Treasury officials were not quite being sure where to look).

Sometimes economic policy in this country seems almost designed to defy reason and evidence in an effort to make us poorer, to hold back national productivity prospects.  Spraying around $5m here and $5m there –  $3 billion over three years, in some scheme reminscent of congressional earmarks in the United States – not backed, it seems, by any robust supporting analysis, seems just another  step along that path.

Advocating for the CPTPP

A couple of days ago MFAT released its National Interest Analysis of the new CPTPP preferential trade, investment (and all manner of other stuff) agreement.  Unsurprisingly, given MFAT’s own heavy involvement in negotiating the agreement for the government of the day, MFAT concludes that New Zealand should sign the agreement.

They may well be correct that, taking all the aspects of the agreement together, and recognising that the other countries would probably have gone ahead even if New Zealand hadn’t signed, entering the now-concluded agreement would be in the best interests of New Zealanders as a whole.    But the National Interest Analysis (NIA) isn’t the resource an interested and informed citizen would turn to for a considered assessment of all the pros and cons.  The NIA is really best seen as an advocacy document, written to make the government’s case.    In particular, the document seems targeted to the government’s (generally) left-of-centre constituencies.  And there are some pretty questionable claims included, for example about the gains from past preferential agreements (notably, the implication that all the growth in trade with China in the last decade is the fruit of the trade agreement, a suggestion which is simply without credible foundation).

That doesn’t mean the document has no value at all.   There is some useful summary descriptive material in it, but it is not the sort of independent professional assessment that the public (indeed Parliament itself) deserves before reaching a final view on the deal.    It seems unlikely that there will such an assessment done.   There will be select committee hearings on the deal but, even if they had the inclination, parliamentary committees don’t have the resources to commission such research and advice, and successive governments have had no interest in doing so.  That’s a shame.  A well-regarded agency like the Productivity Commission, hiring in specific expertise, could have made a valuable contribution to the debate.

The agreement is so large, covering such diverse ground, that there is no easy single, or agreed, metric for reaching a final conclusion.  Some might put the highest weight on the likely, but modest, trade and GDP gains.  But others, equally rationally, might use a quite different set of weights: not denying the probable trade benefits, but putting greater weight in things like ISDS provisions, or the way in which these agreements reach behind the border to influence domestic policy, on matters historically seen as simply matters for national governments.  For others still, just the risks of “being out of the club” might weigh most heavily.   In that sense, no independent agency can reach some definitive bottom line number that the deal is or is not good for New Zealand.  But, done well, such an assessment could still canvass the full range of issues, advantages and disadvantages, static effects and dynamic ones, leaving voters (and MPs) to make their own final assessments.

Much of the attention inevitably focuses on the bits where MFAT has produced some numbers: estimates that, when all new liberalisation measures (tariff reductions and non-tariff measures) have come into force (15 or 20 years away) annual GDP might be anything from 0.3 to 1.0 per cent higher.   Those aren’t tiny numbers (in the scheme of the sorts of model results one gets for micro reforms) but they need to be discounted to some extent precisely because the full effects are quite a long way into the future (and we have the highest interest rates –  and discount rates –  in the advanced world).  Perhaps a little more concerningly, MFAT does not appear to have published the modelling work they commissioned (all we have is a couple of summary tables), and thus it isn’t easy to know what assumptions they’ve made.  For example, in MFAT publications a lot is made of the gross value of the reductions in tariffs New Zealand exporters will pay, but we aren’t told what assumptions are made about the incidence of those tariffs.  When New Zealand removed most of its import restrictions the biggest winners were, almost certainly, New Zealand consumers rather than other countries’ exporters.

I’m not uncomfortable with the idea of a small gain in GDP as a result of the deal.  Almost inevitably it will be quite small, because New Zealand already has other agreements with most of the other CPTPP countries, and of the remaining four only Japan is really a large export destination for New Zealand producers.

I’m rather more uncomfortable with the claim (made repeatedly in the document) that the agreement will increase employment in New Zealand.  Frankly, that seems unlikely and I’m not sure what they base their claim on.  Monetary policy tends to be run in a way designed to keep the economy not too far from “full employment” (the rate of unemployment consistent with stable inflation).  From that base, trade agreements –  or other reforms – might boost GDP, and wage rates, but they are unlikely to boost employment numbers.  People employed in one industry can’t be employed in another, so if the CPTPP agreement really does boost exports (and employment in export industries) it will have to do so by shaking some labour out of other sectors.  Over time, higher exports will be matched by higher imports (a good outcome).  It might seem a small point, but overclaiming in one area that I know something specific about makes me even more nervous about the rest of the document.

What of the assessment of some of the other aspects of the agreement?

The government has gone on record as opposing ISDS clauses on principle, but has nonetheless signed up to an agreement which still has extensive scope for the use of such dispute settlement arrangements.   MFAT attempts to downplay the disadvantages to New Zealand (and highlight some potential benefits to New Zealand foreign investors).   But they never once highlight one of the most fundamental arguments against: the importance of the rule of law and, within that, the principle of equal access to justice.  ISDS provisions allow foreign investors recourse to resolution procedures not open to domestic investors engaged in exactly the same business.   Particularly in a country with a robust, independent, judiciary that should be simply unacceptable.   But it doesn’t seem to be a perspective that had occurred to our MFAT officials in their enthusiasm to sell the deal.

MFAT officials also seem not to recognise that, under some models (ways of thinking about how to organise society) there might be downsides to the fairly extensive way in which this agreement reaches behind borders into matters that the principle of subsidiarity suggests should really be solely for national governments.     Perhaps most of the left-wing constituencies rather like the idea of having labour and environmental chapters in the agreement, tying the hands of others governments and our own.  On the pro-business side, agreed procedures around regulatory issues might appeal to some.  But a principle like that, once adopted, can be a double-edged sword: other governments will commit to other regulatory limits that the enthusiasts for this particular set of controls won’t like.

MFAT, of course, seems to buy into all this without question.   In describing the labour chapter, for example, they talk blithely of it being ‘inappropriate to encourage trade or investment by weakening or reducing labour laws”, and assert that the agreement “helps ensure that CPTPP Parties’ competitive advantage in trade is not undermined” by agreement to “level the playing field for New Zealand companies and employees by setting minimum labour obligations for all parties”.    So microeconomic reforms that liberalise the labour market –  perhaps reducing the ratio of the minimum wage to the median wage – can never in future be adopted, lest some other government (perhaps under pressure from its own unions or firms) invoke dispute settlement provisions?   And what do they think real exchange rate adjustments are, but competing on the basis of changed real relative unit labour costs?  Some defenders of these sorts of provisions will talk of how these sorts of provisions aren’t very binding or effectively very enforceable. Even if so –  and only time will tell –  that just makes them bad law.  And there is a reasonable argument (in economics, and in principles of responsive democratic government) that they just shouldn’t be in a trade agreement at all.  But that perspective (and the risks) doesn’t even seem to be recognised –  even to be discounted – by MFAT.

And then there are near-vacuous provisions, which MFAT suggests have no disadvantages.    What business is it of governments to be, for example, encouraging enterprises to adopt “corporate social responsibility” initiatives?  And even if there is a case, surely there are downsides (more bureaucrats if nothing else) to the proliferation of feel-good initiatives.  Or around the creation of fora in which countries (bureaucracies) might work together on topics like work-life balance or “innovative workplace practices”.

There are so many of these sorts of provisions with no serious evaluation, guided (presumably) by an officials’ view that more meetings, more international coordination can only be “a good thing” or at least harmless.  There is, for example, an entire Development chapter, which establishes a whole new Committee on Development, explicitly designed as a talkfest on such topics as “women and economic growth” and “broad-based economic growth”.  Even if these are flavour-of-the-day topics right now, this agreement is presumably planned to live for decades  For decades, officials will cross the world, adding carbon miles as they do, all at the expense (perhaps small) of domestic taxpayers.  And yet MFAT explicitly state that there are no disadvantages.

There are all sort of more substantive provisions that aren’t seriously evaluated.  For example, countries are free to impose some temporary exchange controls in the event of a serious economic crisis, but under this agreement they won’t be able to restrict flows associated with foreign direct investment. In effect, this amounts to preferencing foreign investors over domestic investors in a crisis: domestic owners can be forbidden from shifting proceeds abroad, but foreign owners can’t.  Perhaps there is a good case for it –  although when I was an official I argued against it – but there is simply no serious attempt at evaluation, either of this line item or of the overall approach to crisis exceptions.

I’m still ambivalent about the overall agreement.  Perhaps for foreign policy reasons we had to be part of the deal once it was done.  Probably there will be some modest overall real GDP gains.  But undermining equal access before the law – not carving out special jurisdictions for cross-border investors – isn’t a principle that is priced here, and it seems to me it is something we just shouldn’t be sacrificing.    Others will reach different overall conclusions, but the process of doing so –  in an informed way –  would have been much assisted by a more independent, and far-reaching, assessment of the many provisions of the agreement.

(For those interested in ISDS issues, there was an interesting new article in the latest issue of the American Affairs magazine by a Yale law professor.)


“We could be the next Albania” – Brady

To their credit, the Herald yesterday ran a substantial op-ed from Professor Anne-Marie Brady on the influence-seeking and interference by the People’s Republic of China (PRC), and the Communist Party that controls the state, in New Zealand.

Professor Brady has been in the headlines in recent days over a burglary at her Christchurch home in which several laptops, phones etc (but nothing else of value) were stolen, the burglary occurring after she had received a letter warning that she was being targeted by the PRC regime.   The media has –  rightly –  sprung to her defence, suggesting a need to get to the bottom of just what is going on.   Another article in yesterday’s Herald suggested that the Police weren’t doing much about the break-in until the Prime Minister herself expressed concern.  In general, it is a bad look (and bad practice) for ministers to be putting pressure on Police to investigate, or not investigate, particular cases.  But perhaps on this occasion the end might almost justify the means.

Professor Brady’s article ran under the heading ‘We could be the next Albania’,  a reference to the reported observation last year by a senior Chinese diplomat that (in Brady’s words) “favourably compared New Zealand-China relations to the closeness China had with Albania in the early 1960s”.    Having fallen out with the Soviet Union, Albania sought refuge in ties with the PRC (a relationship described by one Western scholar as “one of the oddest phenomena of modern times: here were two states of vastly differing size, thousands of miles apart, with almost no cultural ties or knowledge of each other’s society, drawn together by a common hostility to the Soviet Union.”) before later also falling out with them.

Brady reports, and presumably is in a position to know, that this “startling and telling analogy…disconcerted New Zealand diplomats”.   She perhaps over-eggs the Albania point, arguing that

In the late 1970s the relationship ruptured over China’s failure to deliver economic development assistance. By the end of the Cold War era, Albania had become one of the poorest, most politically divided, and most corrupt of the former Eastern Bloc states.

Perhaps, but if we look at Angus Maddison’s collection of historical estimates of GDP per capita, Albania had long (well before the Communist era) been one of the poorest of those countries and had not exactly been a byword for political stability either.  Their failings were their own.

But I guess the real point –  and probably the one the Chinese diplomat was getting at –  was that New Zealand was seen from Beijing (with perhaps just a bit of exaggeration for effect) as small, remote (clearly both true), somewhat detached from its former allies, and diplomatically and economically subservient.   True or not, the suggestion will have put MFAT noses out of joint.

Brady goes on

Xi Jinping has been emboldened to pursue an increasingly assertive foreign policy and insisting that its strategic partners such as New Zealand fall into line with its interests and policies.  Accompanying this more assertive foreign policy has been a massive increase in the CCP’s foreign influence activities. China did not have to pressure New Zealand to accept China’s soft power activities and political influence: Successive New Zealand governments actively courted it. Ever since PRC diplomatic relations were established in 1972, New Zealand governments have sought to attract Beijing’s attention and favour. New Zealand governments have also encouraged China to be active in our region.

And not a word of scepticism is ever uttered openly, whether by politicians or by the (mainly government-funded) entities like the China Council and the Asia New Zealand Foundation.   No doubt, in most cases they genuinely believe their stance (quiescence) to be in the interests of “New Zealand” –  however those interests are defined.  In all too many cases, it also appears to have been in the personal economic interests of those involved.

The real point of Brady’s article appears to be to encourage the new government to think seriously about doing things differently.   As she highlights, the Australian government is taking these issues much more seriously   (for those still sceptical of the significance of these issues, in addition to Anne-Marie Brady’s main Magic Weapons paper, various of the submissions on the new Australian legislation make sobering reading –  for example, no 20 (by an academic whose new book on the subject –  already the subject of PRC threats –  is due out next week), or no 33 (from a national security academic at ANU) or no 32 (from an ethnic Chinese group, the Foundation for a Democratic China).

Brady appears to think there is a realistic possibility of change

In order to deal with the issue it can’t just attack the policies of the previous government, it also has to clean its own house. Significantly, unlike the previous National government, Ardern’s government has not endorsed Xi Jinping’s flagship policy the Belt Road Initiative, bringing New Zealand back in line with its allies and nearest neighbours.

It will take strenuous efforts to adjust course on the direction the previous National government set New Zealand. New Zealand has to address the issue, but the Ardern government must find a way to do so that does not invite pressure it cannot bear from the CCP, which is watching closely.

But is there any sign that this government is any different?  I’d like to believe that not having yet endorsed the Belt and Road Initiative (a sprawling massive geopolitical play, designed to extend PRC reach and in some cases load up poor countries with additional debts in ways that further extend PRC political influence) is significant.    But the New Zealand China Council –  largely taxpayer-funded, and with the Secretary of Foreign Affairs sitting on its Council –  was promising late last year that early this year they would have a report out on how New Zealand can engage with the initiative.  And senior Labour backbencher –  chair of a major select committee –  Raymond Huo seemed right behind the initiative

Meanwhile, China-born legislator Raymond Huo believed the Belt and Road Initiative can help solve the problem of infrastructure development facing many developed nations.

“There is a dilemma. New Zealand, Australia and other developed countries including the US and Canada are all facing the same problem,” Huo told Xinhua.

“We haven’t done much upgrading, so we need money, we need capital, and we need the construction capacity. China has both,” he said.

Huo said he first realized the potential of Belt and Road Initiative when he attended two high-level conferences in China, and he believed New Zealand should seize the opportunities it offers.

Along with other experts on China and leading business people, he has established a think tank and foundation on the Initiative.

What other straws in the wind are there?

As recently as this week, interviewed on Radio NZ about the Brady break-in and other matters the Prime Minister refused to express concern at all about PRC influence-seeking and interference in New Zealand. At one level, it is fine to talk about being concerned about any foreign influence from any source (as we all should be), but there is a real and specific issue around the PRC, which needs serious political leadership to address.  But instead there is a void.

It isn’t just the Prime Minister of course. In a post late last year, I highlighted that her minister responsible for the intelligence agencies, Andrew Little, was specifically dismissive of concerns around the PRC activities.

Andrew Little, the Minister Responsible for the SIS, said he was not aware of any undue Chinese influence.
“I don’t see evidence of undue influence in New Zealand, whether it’s New Zealand politics, or New Zealand communities generally.

“We have a growing Chinese community. We have a strongly developing trade relationship and diplomatic relationship with China. I don’t think those things, on their own, connote undue influence.

“If there’s other things she says constitutes undue influence, we’d have to know what that is.”

It was documented in Brady’s substantive paper minister, a paper which has had substantial coverage around the world.

Then, of course, there was the Deputy Prime Minister and Minister of Foreign Affairs.  Out of office he had occasionally been heard to express concerns, including around National MP Jian Yang.   In office, at a New Zealand event marking 45 years of diplomatic relations with the PRC, he wouldn’t even address the issue, stressing how cordially he would raise (privately) any concerns he ever had, and went on to suggest that, after all, one had to break a few eggs to make a omelette, and really no should get too bothered about human rights issues in China either.

“Sometimes the West and commentators in the West should have a little more regard to that and the economic outcome for those people, rather than constantly harping on about the romance of ‘freedom’, or as famous singer Janis Joplin once sang in her song: ‘freedom is just another word for nothing else to lose’.

“In some ways the Chinese have a lot to teach us about uplifting everyone’s economic futures in their plans.”

And since the election, Labour president Nigel Haworth –  presumably with his leader’s knowledge and approval – hobnobbing with the Chinese Communist Part itself, has been effusive in his praise of Xi Jinping and the Chinese regime.

One could add to the mix the stony silence of the Labour Party leadership –  pre and post-election – on the succession of revelations around National MP, and former PRC intelligence officer, Jian Yang.  From anything they say (or don’t say) in public, the Labour Party, and their allies in the Greens and New Zealand First, seem quite unbothered about the presence in Parliament of someone who acknowledges misrepresenting his past in his residency/citizenship applications,  who is widely regarded (by experts in the field) as likely to still be a member of the Communist Party, who closely associates with the PRC embassy, and who has never once been heard to criticise the Party-state that is the PRC.  Recall, former diplomat Charles Finny’s line, that be was always very careful what he said around Yang (and Raymond Huo) since both were known to be close to the PRC embassy.    But is there any sign that any of this bothers our new government?

Professor Brady calls for the government to emulate its 1980s predecessor

the Fourth Labour government made a principled stand on a matter that affected our sovereignty and our values with the nuclear issue; then it passed legislation to back up these principles. Now is the time for the sixth Labour government to take another principled stand to defend our sovereignty and values and make legislative changes such as to the Electoral Finance Act.

In truth, and whether you supported the anti-nuclear stance of not (I didn’t and don’t, and certainly don’t see it as a matter affecting our sovereignty) this one is a great deal harder.  For a start there wasn’t really money at stake around the nuclear-free issue.

I presume one of the issues that will be exercising ministers, and their MFAT officials, will be the negotiations around the proposed upgrade to the preferential trade agreement with China.  It would be easy enough for the PRC to put those negotiations on a slow track, or simply halt them altogether.  Such agreements might not matter very much taken as a whole, but they might matter quite a lot to a small group of people (with good political connections).  In the Australian context, there already appear to be some signs that the PRC is reacting to tougher Australian stance (and new legislation) by damping down the flow of foreign students.  We’ve already seen here the apparent ability of the export education industry to see off for now Labour’s promised changes to student work visa arrangements.  Those would have mostly affected the lower-level PTEs.  But our more prestigious – and government owned/controlled – universities get a lot of PRC students, and several attract direct PRC funding for their Confucius Institutes.  Chancellors and vice-Chancellors will be very nervous that if the government actually looked like taking a stand, their flow of revenue might be disrupted.  And they will constantly be bending the ears of ministers and officials, if ever the government showed any sign of self-assertion, and a respect for New Zealand values (and the interests of New Zealand citizens of Chinese origins).  And then there will be Auckland airport and the tourism operators too.

I’ve noted previously that during the Cold War it was much easier to maintain a moral clarity.  Most Western countries –  including New Zealand –  didn’t do much trade with the Soviet Union, and so there wasn’t a major self-interested constituency in New Zealand (or the US, or the UK) for simply bending over and letting a hostile regime, practising a completely different set of political values, have its way.  I noticed yesterday a recent interview with former (Obama-era) US Defense Secretary Ash Carter making much the same point.

Last time we competed with or had a long difficult strategic relationship with a large communist country was during the Cold War, and our approach to that was simply not to trade with them. Now, one of our largest trading partners is in fact a communist country, and I don’t think that the economists have given us much of a playbook to protect our companies and our people.

I’m not sure that economists can necessarily help much, except perhaps to repeat the point I’ve made here before: the PRC does have the ability to severely adversely affect the fortunes of individual firms/sectors (ask the Norwegian salmon industry, or some of the South Korea firms last year), but the PRC did not make Australia and New Zealand rich and it cannot, whatever unsubtle economic sanctions it attempted, make us poor.  Our prosperity, as a whole country, is very largely in our own hands.   And the very fact that we can worry about the possibility of such sanctions is perhaps the best case for making a stand now, rather than continuing to roll over, keep quiet, and hope that Beijing is happy.

But perhaps the other piece of economists’ advice might be, in this as in other fields, “beware of rentseekers”, people/institutions who will seek to use governments to advance their own economic interests, at the expense of the values, the freedoms, the self-respect, of the nation as a whole.  Governments have a poor track record of doing so, and there is little sign at this point that the current government will be any different.  As I wrote earlier

One of things we need to remember is that the interests of businesses (and universities) who deal in countries ruled by evil regimes, are not necessarily remotely well-aligned to the interests and values of New Zealanders.   Selling to China, on government-controlled terms, isn’t much different than, say, selling to the Mafia.  There might be money to be made.  But in both causes, the sellers are enablers, and then make themselves dependents, quite severely morally compromised.

Professor Brady’s Herald column seemed to build on an earlier (and somewhat longer) paper she produced shortly after the new government took office on things the government could do if it were serious about addressing the PRC political influence activities.   I wrote about it here (and here is the updated link to the paper itself).  In that earlier piece she had quite a list of things that could, or should, be done.

What should be done?  At an overarching level she says

The Labour-New Zealand First-Greens government must now develop an internally-focused resilience strategy that will protect the integrity of our democratic processes and institutions. New Zealand should work with other like-minded democracies such as Australia and Canada to address the challenge posed by foreign influence activities—what some are now calling hybrid warfare. The new government should follow Australia’s example in speaking up publicly on the issue of China’s influence activities in New Zealand and make it clear that interference in New Zealand’s domestic politics will no longer be tolerated.

Getting specific she calls on the government to

The Labour-New Zealand First-Greens government must instruct their MPs to refuse any further involvement in China’s united front activities.

That would be Raymond Huo I presume.

The new government needs to establish a genuine and positive relationship with the New Zealand Chinese community, independent of the united front organizations authorized by the CCP that are aimed at controlling the Chinese population in New Zealand and controlling Chinese language discourse in New Zealand.

And there is a list of six other specifics

  • The new Minister of SIS must instruct the SIS to engage in an in-depth investigation of China’s subversion and espionage activities in New Zealand. NZ SIS can draw on the experience of the Australian agency ASIO, which conducted a similar investigation two years ago. 
  • The Prime Minister should instruct the Department of Prime Minister and Cabinet to follow Australia’s example and engage in an in-depth inquiry into China’s political influence activities in New Zealand. 
  • The Minister of Commerce and Consumer Affairs should instruct the Commerce Commission to investigate the CCP’s interference in our Chinese language media sector— which breaches our monopoly laws and our democratic requirement for a free and independent media. 
  • The Attorney General must draft new laws on political donations and foreign influence activities. 
  • The New Zealand Parliament must pass the long overdue Anti-Money Laundering and Countering Financing of Terrorism legislation.
  • The new government can take a leaf out of the previous National government’s book and appoint its own people in strategically important government-organized non-governmental organizations (GONGOs) which help shape and articulate our China policy, such as the NZ China Council and the Asia New Zealand Foundation.

Most of those suggestions look sensible (although I’m no fan on AML/CFT legislation, with all its inane consequences –  goodbye ipredict, hello ID cards for 94 year olds changing banks).  There has been no sign of activity on any of these fronts.  Quite probably – based on what we saw in their BIMs, and Professor Brady’s mention of a Five Eyes discussion (itself repeated in the New York Times article last year on these issues –  our intelligence agencies themselves are worried).  But intelligence agencies can only apply the (current) law.  It is the political leaders who can bring forward legislation (on matters amenable to legislation, which not all of these are) and can display the leadership and moral standing that say “enough”  –  whether about Jian Yang, political donations, control of the Chinese-language media, university funding, PRC activities in the South China Sea, or whatever.   They could display such leadership, but there is no sign –  from any political party –  of anyone doing so.

I noted the other day that perhaps some journalist could ask the five contenders for the National Party leadership about their attitude to these issues, including (but not limited to) matters around Jian Yang and political donations.  A reader reminded me yesterday of Chris Finlayson’s arrogant and dismissive attitude before the election, when he was both Attorney-General and minister responsible for the intelligence services.  Finlayson still sits on the National Party front bench, and is still shadow Attorney-General.  Perhaps, five months on, someone could ask him if still thinks there is just nothing there, that Professor Brady is jumping at shadows etc.  Or is it that he just doesn’t want to know?

(I linked the other day to a couple of reports on PRC influence activities in other advanced economies.  For anyone interested –  including those doubting the seriousness of the PRC agenda –  I suggest searching out the (easy to find) serious articles about PRC involvement in places like the Philippines, the Maldives, Sri Lanka, Cambodia, and Pakistan.  The issues aren’t primarily about the internal nature of the PRC –  domestic human rights etc –  but about external expansionism, power projection, and the attempt to have other countries including (in Professor Brady’s words) “New Zealand fall into line with its interests and policies”, policies that are generally hostile to open and free societies.)

UPDATE:  Interesting ABC article based on an advance copy of Clive Hamilton’s book on PRC influence activities in Australia (book to be published next week).