Small size simply isn’t the issue

Michael Reddell New Zealand economic performance, Population

Just yesterday I wrote, in response to a comment, that

My point simply was that there is no obvious correlation, in the cross section, between population size and GDP per capita (or productivity). I’m not aware of any serious observer arguing otherwise

At the level of very simple correlations, I’d illustrated this lack of relationship –  whether for all countries, just advanced countries, excluding the handful of extremely large countries, or whatever.  Bigger countries (by population) don’t, on average, have higher per capita incomes than smaller countries.

But then I went to a seminar at the Productivity Commission yesterday afternoon, attended by various private and public sector people.  The substance of the seminar –  a new MBIE report on the manufacturing sector, and the discussion of it and of possible policy responses –  is embargoed until David Parker releases the report next week.   But I hope I’m not breaching any rules in simply reporting that I noted around the room an almost unquestioned acceptance that size (small) is one of New Zealand’s economic problems.  Normally I might barely have noticed it, but having been writing about the topic in the last few days, it niggled away at me.

The more I’ve thought about that issue over the years, the more I’ve concluded that those who hold it are simply wrong, and perhaps in the thrall of the political equivalent of Keynes’s “defunct economists”  –  the long tradition of political leaders, dating back at least to Vogel, who’ve wanted, as a matter of policy, a lot more people in New Zealand, believing (presumably) that New Zealanders would be better off as a result.  There doesn’t seem to be much –  any? –  evidence in support of any economywide economic benefits flowing from this preference.

One hears talk in such discussions of ideas like “markets work better in big economies”, or even talk of economies of scale –  or opportunities for specialisation – in government/regulation.  In principle, the arguments sound plausible enough.

But they rarely seem to confront the simplest stylised data.  For example, Australia and New Zealand are almost equally remote (on standard measures), but Australia’s population has been consistently much higher than ours, and yet for a century (say 1860 to 1960) material living standards (GDP per capita) were much the same on the two sides of the Tasman.

Or we could look at some advanced countries where distance/remoteness is much less of an issue.  In what follows I’ve looked at the OECD member countries in Europe (continental plus the UK and Ireland).  There are 24 of them, ranging in population from Germany’s 82 million to Luxembourg’s 0.6 million.  Five of these countries – New Zealand’s size or smaller – didn’t even exist as independent states thirty years ago.

In this chart –  for 2016 –  I’ve ordered those 24 countries by population size and shown the real GDP per capita for each.  I’ve also shown the median (so not distorted by Luxembourg, or issues around Irish tax) for the group of countries with a population less than 10 million, and also the median for the large European OECD countries.

europe real GDP and popn

If anything, the typical larger country has a lower per capita income than the typical smaller country.  Of course, these are small samples, so not much weight should be put on them, but there is nothing to suggest bigger countries are performing better than smaller countries.  And if one insisted on excluding the former communist countries – even though they are now 25 years on as market economies –  the gap (in favour of the smaller countries) – is larger.

In many respects,  real GDP per hour worked  (labour productivity) is a better metric of economic performance.  Here is the same chart, for 2016, using the OECD’s data on productivity.

europe real gdp phw and popn

I could exclude Ireland and Luxembourg, I could exclude the ex-communist countries, I could add to the “small” category the countries (Portugal to Belgium) with populations just over 10 million, and it won’t change the story.  There is nothing in the simple stylised facts of European OECD countries suggesting that bigger countries do better than smaller ones.  Even at the most prosperous core bit of Europe (London is the richest –  by income –  region in Europe), Belgium, Switzerland, Denmark and Austria do really well.  And so do France and Germany (the UK less so).

Of course, there are lots of other things that help explain any individual country’s performance. Norway, for example, wouldn’t rank so high without oil, or Ireland without the features of its corporate tax policy which see a lot more economic activity booked in Ireland than directly results from economic activity occurring in Ireland.  One issue, of course, is the quality of policy.  There are lots of different dimensions of that, and sometimes one sees a story in which small countries try harder, regulate less, or whatever to overcome the alleged disadvantages of size.   One widely-used indicator is the OECD’s index of product market regulation.  As it happens, the PMR score for the median small country in OECD Europe is less good (ie more less-liberal regulation exists) than in the median large country.

Smarter people with richer datasets and serious econometric skills can produce much more complex models, encapsulating a lot more information simultaneously.  But whatever the results of such models –  which often end up depending on the modellers’ embedded assumptions –  it is always worth bringing them back to check against the simplest stylised facts.  Even in a region where distance is much less of a differentiator among countries (it isn’t nothing –  Portugal and Greece would have it tougher than Belgium and the Netherlands even with great policy) population size doesn’t seem to be an advantage, and isn’t associated with either higher GDP per capita or higher productivity.

For decades, I’ve used the line that if only we could detach New Zealand from the ocean floor and relocate it –  land and all –  in the Bay of Biscay, just off the coast of France we’d be much better off materially, all else unchanged.  Perhaps the North Sea would be even more propitious.  But the point remains, the biggest handicap to economic success in New Zealand is our distance/physical remoteness –  in an age when, across the board (although with individual pockets otherwise) distance isn’t becoming less of an issue, but perhaps even more of one.    A modest number of people probably can do very well here, but not many.   And yet our policymakers –  aided and abetted by official advisers –  keep driving policy to locate ever more people in a really quite unpropitious –  even if beautiful and (now) peaceful –  location.

There is simply no evidence supporting the notion that our small size is “the problem” (or even a material part of it), and when the story continues to be invoked it simply serves as a distraction –  mostly unwittingly so –  from a focus on the real issue, responding realistically to the unchangeable (absent quite different technologies) constraints of our physical isolation.

26 thoughts on “Small size simply isn’t the issue”

  1. Is it any wonder that these people think this Michael?

    I imagine that many of them have skin in the game promoting immigration while many others are young analysts with little experience outside academia and policy making. And almost all of them reside in Wellington where the benefits of improved fiscal balances are apparent but the externalities of population growth running well in advance of the country’s capacity to manage it aren’t impacting their daily lives.

    Let them drive up Lake Road every day (any time of day from 06:30-20:00) a few times, let them see the beggars in the streets in Queen St, Quay St, Victoria st, let them face the noise pollution associated with construction etc etc and I think their views might broaden.

    When you initially broached this view to me at the FX conference at the Treasury end-2012 I was initially sceptical but over time I’ve come to embrace your view. I think you’re right..

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    • Japan has 125 million people and they do not have beggars on the street. We have 4.5 million people and we have beggars on the street. Are you saying that our population should grow to 125 million then we would have no beggars on the streets?

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      • Don’t forget Ngati Whatua was completely dispossed of their last remaining lands in Orakei in 1951 and kicked out of Auckland. Maori died early around 50 to 59 compared to white pakeha above 79 so perhaps they did not last long enough to be seen begging.

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      • The point I was making to Peter is that population size does not determine the number of beggars on the streets. It is surprising anyone would try and make that link. It has more to do with tolerance, the authorities and social welfare support services.

        In 1950s, likely beggars on streets would not be tolerated. Maori kids instead of wandering the streets would have been placed in white pakeha foster care.

        Today, we do not forcibly remove beggars from the streets. We are less tolerant of campervans on city streets overnight than we are of beggars. My travel in the South Island using a campervan was a nightmare. Naively thinking that Freedom camping in a campervan meant that you could park anywhere. Big mistake! The Campervan Patrol officials wakes you up with rude banging at 3am in the morning and yell and scream at you to get up and get out. Nasty.

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  2. The tyranny of distance – I’m not 100% convinced despite the clarity of your argument and the numbers that appear to back it up. Given the right policies who knows. However for NZ the right policies proven to be working needs to precede any population increase.

    Your comparison of 24 countries is persuasive but each country has its own history and specific circumstances so maybe a clearer comparison of the +ve / -ve effects of population on growing per capita wealth would be the three Baltic states which presumably shared similar history since independence. Similarly the split of the Czech and Slovak republics; if population helps for the reasons you gave then there ought to be an economic drop that would extend beyond the period of their bureaucratic reorganisation – compare say 10 years before and 10 after.

    I prefer a small population country. How would moving the beehive and its inhabitants to being an annex in Canberra suddenly make us all wealthier? Quite the reverse.

    On the other hand and not contradicting myself I suspect there is a minimum population that jeopardises good government with several small PI nations and maybe Iceland as living proof. Yet again policies are more significant than population so PNG with its healthy population is not an example of a well ruled country. It would be an interesting exercise to define the minimum requirements for a country – how about at least one hospital, one branch of a university and two rival media outlets?

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    • I think even Iceland passes your minimum requirements test (not sure about the media, but they have a pretty decent university) – and even made the World Cup!.

      The sorts of comparisons you suggest should in principle be interesting, but in practice won’t be – because at much the same time as the breakups you also had enormous changes in the policy environment on both sides of the respective borders (the shift from communism towards market economies) The possibility of Scotland becoming independent would have been an interesting case study, but in the end (and so far) neither Scotland, Quebec, Wallonia, Basque country, or Catalonia have been willing/able to make the break.

      Irish independence worsened the Irish econ plight for decades, but again that was because of the insular policies they adopted. These days, they are richer on average than the Brits,

      (All the European comparisons are vitiated to some extent by the countries all being part of the EU Single Market – til next year anyway – but even allowing for that national boundaries still seem to matter, and a fair amount of relevant policy (incl tax and immigration from outside the EU) is still national).

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      • I had always considered you the politest of commentators but reminding me of my country of origin losing to Iceland at soccer is punching well below the belt. Having lost interest in soccer I turned to Netball.

        From that great site: http://www.ifitweremyhome.com/compare/NZ/MW
        If Malawi were your home instead of New Zealand you would…
        be 10.5 times more likely to die in infancy
        make 97.04% less money
        spend 99.25% less money on health care
        have 3.1 times more babies.

        That is evidence that 17 million people in a country half the size of NZ doesn’t solve personal wealth issues even if the extra babies make life sweeter. Their health care budget would make Grant Robertson happy and they can play netball.

        Having lived in Scotland just as the Scottish Nationalists began to win seats in Parliament I have given the matter of potential advantages and disadvantages of Scottish independence some thought for 50 years but come to no conclusion.

        This entire post with its comments to date has persuaded me that “small size simply isn’t the issue”.

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  4. I don’t mingle with the Wellington policy ‘elite’, but even on social media such as the New Zealand group on reddit, a lot of people are proponents of big New Zealand, and how if only our population was a bit bigger we would see a substantial improvement in gdp per capita and standard of living. The arguments normally revolve around economies of scale / economies of agglomeration, transport networks and other infrastructure working more efficiently with a higher population density, or even being able to attract multinationals such as Amazon and Walmart to set up here (cheaper consumer goods) !!

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  5. I suggest that you remove outliers such as Luxembourg, Ireland and Norway. Real GDP per work statistics does not reflect the real world. They are paper transactions, such as Apple and tech diverting profits through Irish shell companies. Luxembourg is a similar case with the financial sector profits being funnelled through. Norway produces little outside of oil.

    The above examples are within the EU and are in the common market. They are more similar to the states of America rather than separate discrete economies like NZ and Australia. Often, EU countries are a part of supply chains. E.g. German companies manufacturing at cheaper cost EU neighbours with parts from within the EU.

    Saying that I do agree that population size, up to a point, and GDP per capita are not correlated.

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    • As I noted in the post, the sign of the differences between the medians for the large and small companies isn’t affected by excluding Lux and Ireland. I’m not so inclined to delete Norway, because altho oil exaggerates their wealth, without it they would probably still be something like Sweden and Denmark.

      One way to get around the Irish issues in particular is to use GNI measures (rather than GDP). Ireland still ranks pretty well in GNI per capita terms, partly because the company tax policy has brought genuine worthwhile activity to Ireland, not just the diversion of profits really generated elsewhere.

      As you imply, all comparisons have their limitations – one of the frustrations of research/analysis at the level of entire countries.

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  6. The largest beneficiaries of immigration in terms of wealth is to existing asset holders. This is not reflected in your GDP per capita figures. Homeowners benefit from rising land values, and companies benefit with a larger market. Taxpayers pensions and benefit-takers benefits as the costs are spread over a younger healthier population. Most costs in health and benefits are caused by a relatively low percentage of the population, who are invariable native-born.

    That is missing from your analysis. Immigration is a transfer of wealth to the existing population. Wealth is not spread evenly. Similar to free-trade, some are adversely affected, but most benefit.

    When you analyse Australia point-based immigration system data: immigrants and children of immigrants are more likely to have lower unemployment levels, higher incomes and better educational attainment. This does not necessarily mean the country benefited overall, but how do we compare hypothetical outcomes of immigration versus no immigration?

    GDP per capita is much more complex than just immigration policy.

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    • Just briefly, most of any land price increases – from rising population – really result from land use restrictions, not population growth itself. And even then, they redistribute apparent wealth to the relatively old away from the relatively young (native or immigrant).

      On ageing population, a pretty standard view now is that immigration doesn’t materially alter the equation regarding support for an ageing population. In any case, those issues are probably bettter dealt with directly – eg in NZ, NZS should not be universally available at 65 when life expectancy is rising 2 year a decade.

      But yes the issues around immigration – and around population (natural increase) – often are quite complex. We’d be better for having the wider rang of complexities treated in any debate, including having them properly grounded in the specifics of NZ’s situation.

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    • As an interesting intellectual exercise, it would be interesting to look at GDP per capita in countries with shrinking population through emigration. Would there be increasing GDP per capita- a logical outcome?

      I am not sure if there are many examples: Ireland prior to the Celtic Tiger era, Puerto Rico. At the moment, there is significant internal migration in the US, away from the Mid-west and Coasts to the Sun-belt. The EU may also have examples.

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  7. YOu can see some such countries in my charts from Saturday and Monday’s posts (many of the eastern European countries have had falling populations in the last 20 years – low birth rates and out migration) and most have had strong growth in per capita GDP. Of course, they’ve also adopted market economies, so probably would have done some convergence anyway.

    In the historical literature it is a pretty standard results that big outward migration from say Ireland and Sweden/Norway, or Italy to the Americas tended to contribute to factor price equalisation – raising wages and per capita returns in the places people left and dampening them in the US (or Aus, NZ, Argentina). The destination countries stayed far richer – party because they had such abundant land back then – but the flows of people tended to narrow the gaps. For many advanced economies today those results may be less relevant, as land and natural resources are much less important. For NZ and Australia (and NOrway or Kuwait or Brunei) the results may still matter, esp if tied in with issues around distance which make it hard to economically develop new internationally-oriented industries in such places.

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  8. My view is that small size is certainly not an impediment to productivity growth and that there are no inherent reasons why New Zealand cannot be a more productive economy given our current population. But I do think our small size and remote location mean that our development path may be different to that of larger or more centrally located economies, which matters for policy.

    So I have no problem with people talking about size and the likely impact on performance and policy. Eg, we have a much higher share of really small firms compared to most other OECD economies. And small insular markets tend to restrict the flow of information and new technology across firms. In fact, we see the impact of size in all sorts of characteristics of the NZ economy.

    But it is far too simplistic to go from there to saying that we therefore need a big population driven by rapid migration inflows to become more productive. Most obviously, that brings its own set of issues and challenges, such as we are seeing with infrastructure in Auckland now. On balance, my own personal view is that migration inflows into New Zealand are too high currently and that we need to think harder about the impacts of our location and size on optimal policy settings.

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    • Thanks Paul

      Yes, I agree with you at that granular level, altho would go a bit further and say it is not just size that will influence our development path, but geography, location, natural resources and probably other things. In that sense, each country’s path will be different from every other one, and policymakers need to pay heed to those differences, while recognising that markets will optimise given constraints. Of course those sort of differences may matter less for say pairs of contiguous countries with similar populations (eg Belgium vs Netherlands, France vs Germany, Switzerland vs Austria, Sweden vs Finland). A particular challenge for thinking about NZ is that there is no such single easy comparison, even though comparisons with Australia can offer some insights.

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  9. Maybe the problem is over-simplification. The immigration discussion is similar to stating ‘consumption of food makes you fat’ without differentiating between healthy greens and sticky buns.

    David in Aus: “” Taxpayers pensions and benefit-takers benefits as the costs are spread over a younger healthier population. Most costs in health and benefits are caused by a relatively low percentage of the population, who are invariable native-born. “” The terms nativeborn and immigrant are fuzzy. Having arrived as an immigrant 15 years ago now I am a pensioner and have benefited from the health and superannuation recently. Would I be included in the statistics as an immigrant? Would my friend born who left South Africa aged 2 but resident in Auckland for the last 55 years be classed as an immigrant but not her younger brother born in Auckland but living in Australia for 20 years? Many of the immigrants I know were met when they collected their children from primary school; is the cost of educating those children put into the nativeborn or immigrant category by the accident of the child’s birth in one country or the other?

    In the USA the most success immigrants have been Muslims from India – best taxpayers, least crime, least drugs, least mental health issues. Compare that to the Kashmiri in the UK – worst educational achievements, least integrated, troubles with inbreeding, links with terrorism, etc. But Kashmiri are also Muslims from the Indian subcontinent. [They are now 3rd generation so probably get entered as ‘nativeborn’ in the statistics.]

    There is a problem with numbers, even Paul Spoonley agrees; there are issues with GDP per capita that are very difficult to analyse. However the main issue relates to some immigrants being good for us and some bad for us and having a policy that separates the good sheep from the bad goats.

    Given that most contributors point out the flaws in our immigration policy it might be interesting to list the conditions where immigration gives a clear long term gain.

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