What is the Reserve Bank’s monetary policy?

I’ve been banging on a bit about how the new(ish) Reserve Bank Governor has been enthusiastically talking about everything under the sun (mostly modish left-wing causes) in speeches and interviews, but six months into his term of office we still haven’t had a considered speech from him on any of the things he is, by law, exclusively responsible for, notably monetary policy and banking and insurance prudential regulation.  It is quite an extraordinary omission.  It is almost as if he isn’t overly interested in monetary policy and financial stability, which can be pretty dry but need to be done well and accounted for rigorously, preferring to use the pulpit his office provides to pursue personal political and policy agendas.   The appearance of that is bad enough, let alone the reality.  And then, of course, there are his meanders after the forest gods.

I stumbled yesterday on an example of what is lacking around monetary policy when a reader in the financial markets pointed out this line in a Bloomberg interview done by one of Orr’s senior managers, chief economist John McDermott, just after the last Monetary Policy Statement in August.

In current circumstances, the bank would need to see core inflation above 2 percent before it considered raising rates, he said.

I’d seen the interview when it was first published, but somehow overlooked this line.  As far as I’m aware, it didn’t get much –  or any –  attention anywhere else either, although who knows whether in the private briefings the Bank provides to select market economists they may have explained themselves.

As it stands, it looks like –  but perhaps isn’t – quite a change in the way the Bank thinks about monetary policy, but with no explanation and no elaboration.

Under the previous Governor –  on whose watch, and in agreement with the Minister, the 2 per cent target midpoint was explicitly made the focus of monetary policy –  the Bank’s approach would have been described as something like the following: adjust the OCR so that, allowing for the lags, a couple of years ahead (core) inflation would be around 2 per cent.

It was a forecast-based approach, and of course forecasts are often wrong.  Over the last decades, forecast errors were mostly one-sided, so that core inflation ended up consistently undershooting the target midpoint. The approach recognised that the midpoint could never be achieved with 100 per cent certainty, but envisaged departures from it arising only by (less or more) inevitable accident.

The approach the chief economist is reported as articulating in that interview seems quite different on two counts:

  • it isn’t forecast-based (they would need to actually see core inflation above 2 per cent before moving –  bearing in mind that the lags from policy to core inflation outcomes are probably 18-24 months), and
  • they would be relaxed about seeing inflation settle above the target midpoint, and not just by accident.

If that is the Bank’s new approach to policy, I would have considerable sympathy with it  (although many probably wouldn’t).   I’ve argued for some time that, given the limited scope to cut the OCR in the next recession, it would have been desirable to get inflation up, perhaps even a bit beyond 2 per cent, and with it inflation expectations.  That, in turn, would have supported higher nominal interest rates, and provided more room to move in the next serious downturn.   Given the evident difficulties of forecasting, I’ve also argued that for the time being the Bank should put relatively greater weight on what they can see now –  actual core inflation outcomes –  not on quite distant forecasts.  Doing so would seem a rational response to the evident uncertainty about the model (how the economy and inflation process are working).

(I’d have “considerable sympathy” if this were the new policy reaction function, but would have even more sympathy if such an approach had been reflected in the Policy Targets Agreement, ie with explicit ministerial support.)

But is this really the Bank’s policy approach?  We don’t know.  McDermott seems set to become a member of the new statutory Monetary Policy Committee next year, but for now he is just an adviser to the Governor, and only the Governor’s view finally matters.   There was no hint of such a policy approach in the last Monetary Policy Statement, or in the OCR announcement this week.  And, of course, the Governor talks about everything under the sun, but has provided no sustained analysis of how he thinks about the monetary policy process.

We don’t know, and that knowledge gap matters to anyone trying to make sense of how the Reserve Bank might respond to incoming information.    If core inflation now is at, say, 1.7 per cent rising gradually on current policy to 2 per cent over the next 18 to 24 months,  any upside economic surprise should be expected to take the Bank close to tightening, on the old forecast-based approach focused on the 2 per cent midpoint.   But if it takes actual core inflation to be above 2 per cent before they think about moving, near-term surprises would have to be very large –  with direct and immediate core inflation implications –  to make much difference at all to policy judgements.

If the new Governor has made such a change of approach, he’d have my full support – for the little that matters.   But whatever his actual approach, we are well overdue receiving a proper explanation from him as to how he –  in whom so much power is vested by law –  is thinking about monetary policy and the appropriate reaction function.

As part of that, we are overdue a good sustained explanation about how he is thinking about handling, and preparing for, the next serious downturn (beyond rather complacent, even glib, answers about there being lots of tools at his disposal).

It might all interest the Governor less than climate change, the (alleged) failures of capitalism, or idly lecturing people on the insufficiently long-term perspective they take to this, that or the other issues.   But it is the job he has taken on, and the Bank has liked to boast (not very credibly or convincingly) about how transparent it is.  A clear statement about how he thinks about monetary policy, not just as this or that particular OCR review, but in general, and in the context of the longer-term risks around the next downturn, would actually rather nicely fit with his emphasis on more long-term thinking.  Or is that lecture just for other people?

Fiscal councils and state-funding of parties

I’ve been engrossed in the Kavanaugh hearings, so just something short today.

A few weeks ago the government released a consultative document prepared by The Treasury on the possibility of establishing an independent fiscal institution.   There is quite a lot of useful background information in the document, although what is lacking at this stage is a clear specific proposal.

The creation of such an institution was part of the Labour-Greens budget responsibility pact announced before the election.  Broadly speaking, I thought it had the makings of a step in the right direction, but whether it would be so or not would depend greatly on the specifics of how the institution was set up, what it was made responsible for, and (to a considerable extent) the early key appointees.

I was generally in favour of a small institution that could provide some independent analysis and commentary on fiscal policy, fiscal rules, and so on.  Many OECD countries have such institutions.  I’d go a little further and suggest that in a New Zealand context such a body could be made more useful, and with a bit more critical mass, if the responsibilities were broadened to include independent analysis and commentary on other aspects of macroeconomic policy, notably monetary policy and financial system regulation.

My unease was the about the push, initiated by the Green Party, for the independent fiscal institution to take on a taxpayer-funded role of costing political parties’ proposed policies and promises.    That aspect appears quite prominently in the consultative document.  I remain unconvinced that there is a gap in the market.   I’m also unconvinced that a small body would be able to maintain a critical mass of the sort of detailed expertise required to credibly cost and evaluate policies proposed by political parties, across the entire spectrum of policy, on the off chance that one particular party might want some, perhaps quite detailed, policy evaluated.  And I’m also uneasy about the policy and political (not necessarily partisan ones) biases of the sort of bureaucrats who would inhabit such agencies (check out past Treasury advice around capital gains taxes for example), and the creation of any sort of expectation that these people should be charged with costing and evaluating party promises.

But there is also an issue of mindsets.  Technocrats put a great deal of focus on precise costings and details, but elections are rarely about those details, and it isn’t obvious that they should be.  Elections are contests of ideology, personality, competence or otherwise, and only at the margins are precise numbers likely to be particularly important.  That is even more so in an MMP environment, where campaign promises and policies are no more than opening bids, and governments typically have to be cobbled together –  and policy details haggled over –  after the votes are in.    Sometimes parties find it in their interests to hire expert advisers to evaluate or cost their policies, and the political and commentary process evaluates and challenges what they produce in response.  Other times parties don’t.  People make their choices, and it isn’t clear they put that much weight on specific costings, no matter who they are done by.  Politics is a competitive and adversarial process, and I’m not sure there is much role for taxpayer-funded technocrats.

The idea of a policy costings unit looks like some mix of (a) trying to intrude technocrats into the process, and more concerningly (b), a backdoor route to have the state fund political parties.   Resources that would be spent by the costings unit, at the request of an individual political party, would be resources that party would not have to find for itself.  if that isn’t backdoor partial state funding of political parties –  potentially on quite a large scale –  I’m not sure what is.

Among the interesting charts in the report is this one, drawing on OECD databases.

fisc council chart

It is a very useful chart, outlining what various independent fiscal agencies do. But what I found most interesting was the eight countries to the right of the chart where the fiscal institution does policy costings, and the countries that aren’t in that grouping.

Every one of the countries where the fiscal entity does policy costing of some sort (in the US case, not for political parties in the run-up to a campaign, but the US system is very different overall) is that all of them are large by our standards.  Even the Netherlands has more than three times our population and Australia has five times our population (and more than that multiple of our GDP).  Some of those countries have quite large staffs for their fiscal institutions –  and they can afford it.

By contrast, not one of the small OECD countries with an independent fiscal institution is described by The Treasury as doing policy costings for political parties.  That seems pretty telling, and is unlikely –  across a variety of different political systems –  to be just a matter of chance.

The consultative document doesn’t give us a sense of resource requirements, but there aren’t likely to be big economies of scale in this game.  A Council of, say, 3 and perhaps 10 staff could do the fiscal (and macro) monitoring.  That looks to be the sort of scale quite common in the rest of the OECD.  Making a serious job of policy costing looks as though it could take multiples of that level of resources.   For what?

I might come back to the document if/when I make a submission next month, but in the meantime I’d urge a rethink, and encourage opposition parties not to fall for the siren song of more resources potentially becoming available to them.

More on Orr

It is six months today since Adrian Orr took office as Governor of the Reserve Bank, the latest (and last, given forthcoming legislative reforms) in a line of people who over the last 30 years have held office as the single most powerful unelected person in New Zealand (more powerful individually than most elected people).

When it comes to monetary policy, I’ve had no particular problem with the Governor’s bottom-lines.  In fact, if he’d stuck to those, the contents of this blog in recent months would have been quite different.

Here was the bottom line in May (the Governor’s first OCR decision)

The Official Cash Rate (OCR) will remain at 1.75 percent for some time to come. The direction of our next move is equally balanced, up or down. Only time and events will tell.

in June

The Official Cash Rate (OCR) will remain at 1.75 percent for now. However, we are well positioned to manage change in either direction – up or down – as necessary.

in August

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020, longer than we projected in our May Statement. The direction of our next OCR move could be up or down.

and here is the Governor today

The Official Cash Rate (OCR) remains at 1.75 percent. We expect to keep the OCR at this level through 2019 and into 2020. The direction of our next OCR move could be up or down.

As one of the only (perhaps the only) commentators who has been consistently on record in thinking a lower OCR would have been a good idea, and who has argued that if there is a move in the next 12 months it will be a cut, I’ve welcomed the fact that –  unlike most market economists –  the Bank’s focus doesn’t appear to have been on when the next OCR increase happens.  Too much focus in that direction misled both the Bank and the market economists for much of the last decade.

Thus far, well done Governor.

The bit in those “bottom line” statements that has left me a little uneasy is the apparently confident statements about the future: in March, the OCR would stay at 1.75 per cent “for some time to come”, and in the last two releases it has been even more specific about dates if less dogmatic in tone (“we expect to keep the OCR at this level through 2019 and into 2020”).       But none of us knows the future.  Macro forecasting is pretty futile more than perhaps a quarter or two ahead, and yet the Governor spends resources and puts his reputation somewhat on the line as if he were some sort of oracle, granted insight into the far –  by monetary policy standards –  far future.    It is bizarre and unnecessary.

But perhaps equally surprising is the way the market economists play the game.  Their commentaries are full of discussions around whether the next adjustment is more likely (say) 12 months out or 15 months out, as if they too are oracles, blessed with some particular insight.  I suppose they have clients who want this sort of stuff, but you might think that at least some of the better clients would appreciate being told the truth: there is almost no chance of the OCR changing in the next three months, and beyond it is really anyone’s guess, almost inherently unknowable.  Words like those in the Governor’s first statement: only time and events will tell.  Crisp and honest.

And yet I’m conscious that much of my experience was in periods when interest rates moved round a great deal.  And these days they seem not to.

The OCR system itself is almost 20 years old.   The first OCR was set in March 1999.  In this chart, I’ve shown the first 10 years of data (to February 2009) and the subsequent 9.5 years to now.

OCR 10 years

In the first 10 years, the range from low to high was almost 500 basis points.  In the rest of the 1990s, the amplitude of fluctuations in the 90 day bank bill rate was similarly large.

And the last 9.5 years?   The total range within which the OCR has fluctuated is only 175 basis points, and it was only even that wide because of the msisguided enthusiasm for tightening in 2014.

That is quite a difference.

But the difference is even more stark if we look at retail interest rates.   Here is the Reserve Bank’s floating first mortgage rate series for the same two periods.

floating 10 yr

Over the last 9.5 years, this mortgage interest rate has moved within a total range of only about 110 basis points.

And here is the same chart for the Bank’s six-month term deposit rate series.

TD rate 10 years

The range from high to low is about 170 basis points (similar to that for the OCR), but the peaks were a very long time ago now (back in 2010/11).  For years now, term deposit rates (on this indicator) have fluctuated little, between just over 4 per cent and just over 3 per cent.

I don’t have a good hypothesis for why we have seen such a dramatic change in the variability of interest rates.  It doesn’t surprise when one sees such patterns in countries that hit the effective lower bound on nominal interest rates –  unable to cut further, inflation lingers low and there is little reason then to raise rates. But that isn’t the New Zealand story at all  –  the lowest the OCR has got is the current 1.75 per cent and everyone recognises it could be cut further if necessary.

Has the economy really got so much more stable than it was in the previous couple of decades?  It seems unlikely, perhaps especially in New Zealand (with, for example, record swings in population, big earthquakes, and big terms of trade changes).  Perhaps, to some extent, the Reserve Bank has simulated the sort of behaviour seen in the lower bound countries: always reluctant to cut (even though they always could have), inflation has stayed too low, and the economic upswings have, partly as a result, been pretty muted by historical standards and not very inflationary.  I’m genuinely puzzled.  Who knows, perhaps the Governor could offer the benefits of Bank research and analysis on this point whenever he finally gets round to deigning to give a substantive speech on his primary (according to the Act) responsibility, monetary policy?

Changing tack, in yesterday’s post I had a bit of fun taking the Governor to task over his attempt to articulate the story of the Reserve Bank as if it were some obscure mythical tree god, Tane Mahuta.   Late in that post, I noted that they had adopted some imagery of an island, as what the Bank was working towards.  In their own words

“We have visualised ‘our island’ that we are moving towards on the horizon, one that all New Zealanders can be proud of and that Tane Mahuta –  our Bank – can stand tall on.”

And this was the page with the picture I showed.

our island.png

I noted yesterday

It appears to be the island where the imaginary tree god dwells.  But, here’s the thing, it doesn’t look a bit like anywhere in New Zealand.  And the Reserve Bank of New Zealand is supposed to be primarily about New Zealand and New Zealanders.   Has the tree god flown the coop (so to speak) and fled to some poor Pacific Island where –  perhaps –  well paid senior central bankers take their winter holidays and commune with the deity?   I’d prefer a central bank –  even one deluded that it is a tree god –  to think New Zealand, New Zealand people, New Zealand places.

A diligent reader took the photo and did a little digging with the help of Mr Google.  Turns out that the Governor’s island is Bora Bora, a very expensive resort location in French Polynesia.  I guess it is the sort of place the Governor and his chums flit off too –  although I’d been under the impression the Governor’s destination of preference was the Cook Islands –  but the weird thing is that it is in a quite different country.  Even more oddly, given his distaste for the colonial experience –  suffusing his official document –  it is a territory of an old European empire.   Don’t we have any islands in New Zealand?

But we do, of course.  The Governor can probably see Somes Island out his office window. I live in a suburb named for its island.  And all of us live on these islands, the myriad of them that make up New Zealand.

I guess it was just a silly slip –  though you wonder how no one picked it up –  but it does seem all too consistent with the Governor’s style: once over lightly, and  more focused on the issues he isn’t responsible for (recall not long ago he told us we were lucky as a country not to export fossil fuels) than on the narrow range of things he is responsible for.  Perhaps he could put aside the tree god stuff and get back to (what a commenter this morning urged me to) the “dry old world of money”.   There is more interesting and important stuff in the world, but “money” is the Governor’s job, and it needs to be done well, and in a way that commands respect.

And, finally, regular readers might recall a post from a month or so ago, in which a reader had passed on a report of the Governor’s address (off the record –  and thus only the favoured few had access) to an INFINZ financial markets function in Wellington in late August.    It was reported that the Governor has been typically loquacious, but offering up potentially quite highly market-sensitive information to his favoured audience.

Typically loquacious but, so the report suggests, perhaps going rather beyond the Bank’s public lines on monetary policy as articulated in the August Monetary Policy Statement, in a very dovish direction.     And weighing in on what sort of person he wanted (and did not want –  economists apparently not wanted) on the new Monetary Policy Committee –  the one where the Minister supposedly makes the appointment, the one where the legislation has not yet been dealt with by the relevant select committee.

It seemed rather undisciplined and inappropriate, and I reminded readers again of the contrast with the Reserve Bank of Australia where speeches by the Governor and senior staff are typically on-the-record, usually with a published record of the subsequent Q&A session as well.  The difference doesn’t matter much when off the record speeches are totally anodyne, and people answer questions in a similar unrevealing way, but that certainly isn’t Orr’s style.

On this occasion, so the report I received suggested, it wasn’t just monetary policy things the Governor was free and frank about.    There was, for example, reportedly stuff about how if banks didn’t change their ways he’d change them for them, by setting up a Royal Commission here  [something the government would surely not be keen on given their difficult relationship with the business community, and plethora of reviews/inquiries], and a totally dismissive approach to the recent failure –  on the Bank’s watch – of CBL Insurance.

I put in an Official Information Act request to the Bank about this speech.  I didn’t expect much –  it seemed unlikely the Governor was working from a text, but (given his style) it was at least possible (it would be prudent more generally) there might have been a recording.  There wasn’t apparently.

But I also asked for copies for briefing notes or emails related to the content of the speech.  And there was some material there in the response I got back this morning.   The full response will apparently be put on their website before long (now here).   What was interesting was a request sent out on behalf of the Governor to several Bank staff who had been at the function inviting any feedback  (the request was for anything, good or bad, but perhaps not surprisingly none of the staff offered anything sceptical or critical, to a Governor not known for welcoming challenge).   In those comments we learn from one

My impression from the crowd was that they also enjoyed the speech and are really starting appreciate that having a longer-term vision and focus is important. I like that you gave the audience practical examples such as the United Nations Sustainable Development Goals, Carbon Disclosure Project, and Principles of Responsible Investing that they can start using/working toward now – they have no excuses for inaction!

The SDGs have nothing whatever to do with the Reserve Bank or its responsibilities.

And from another

For example, Adrian discussed climate change and short-term vs. long-term thinking.

Nor, of course, has climate change.  Short-term vs long-term thinking is one of his hobbyhorses, but as I’ve noted previously the Bank has done nothing substantive on this claim.

It sounds as if the speech was all over the show, and mostly (as we’ve come to expect) not on the things he is paid to be responsible for. It is undisciplined and unfortunate, and won’t help wider confidence in him or the tree god (though those who like his leftist political analysis may, shortsightedly, welcome it).  And none of it is transparent and open, more like a locker-room chat to his buddies in the financial sector.  He tells us the economy sat in darkness before the advent of the Reserve Bank.  Maybe, maybe not, but assuredly we all too often sit in darkness when it comes to the activities of the Bank itself.  That simply shouldn’t be acceptable.  Openness, and equal information for all, should be the watchwords of a modern accountable central bank and its Governor.

Shame on our MPs

There are some things I write about here that I really don’t care that much about.

But this isn’t one of them.

Yesterday at the start of Parliament’s sitting day, the prayer was read in Chinese by Labour MP, Raymond Huo.   This was apparently in recognition of the PRC-government sponsored Chinese language week.

There are three “official” languages in New Zealand: English, Maori, and sign language.  Chinese is not one of those languages, so why is it being used as an official part of parliamentary proceeedings in this country?

There are, of course, migrants from the PRC (and other Chinese-speaking countries/territories), as there are migrants from many other countries.  But when they come to New Zealand, and participate (as they should) in our political processes, they should do so speaking one of our languages.  As a migrant you might, to some extent hold on to your birth culture, but you made a choice to come to New Zealand, and part of that choice should be to adopt New Zealand ways and laws.   We are not some PRC colony.

I noted that Chinese language week is a PRC-government sponsored event.  The patron is Her Excellency, the PRC’s ambassador in New Zealand.   Among the trustees are Raymond Huo himself, the president of the New Zealand China Friendship Society, well-known for its close associations with the regime, the chair of the Victoria University (PRC-funded) Confucius Institute (and a senior consultant to the PRC government around Confucius Institutes) and the chief executive of the local branch of one of the Chinese banks.   (On this occasion, former PRC intelligence offical Jian Yang  – who misrepresented his past to get into New Zealand – is only an honorary adviser.)   And who do we find among the “sponsors” and “partners”?  Listed first in Hanban, the PRC government agency behind that network of Confucius Institutes around the world.   In the same top-tier is one of the Chinese banks (recalling that all Chinese corporates are seen, by the Chinese government, as arms of the PRC party/state).  Just behind, are the New Zealand government propaganda arms –  the China Council (from whom never a sceptical word is heard) and the Asia New Zealand Foundation –  the individual Confucius Institutes, the Wellington City Council (wasting my rates again) and various businesses and universities that want to keep on side with Beijing.

This is, overwhelmingly, a PRC promoted and sponsored body/event.  Any serious observer would recognise that, and the propaganda win involved in allowing the parliamentary prayer to be said by Huo, in Chinese.   No wonder Huo could talk of a record number of people watching Parliament TV from abroad (assuming there is any data to support such a claim).    Could one imagine a member being invited to open the day’s session of the PRC legislature with a prayer in English?   Silly me.  Legislature, in the PRC.  Ritual rubber-stamp more like.  Prayer?  Why, it is an avowedly atheistic regime, uneasy about anything or anyone that claims a higher allegiance than the Party.

Being a fairly open-minded place, where our leaders are largely heedless –  and careless –  of our heritage, it might have been one thing if Chinese language week had had as joint patrons (evil as her regime is) the PRC Ambassador and the Taiwanese government’s representative in New Zealand.    Or if the key figures were not political at all.  Or if the ethnic Chinese MP reading the prayer had a track record of standing up, and speaking out, against the evils of the totalitarian regime that brutally rules the land of his birth.  Or had originally from another Chinese-speaking country.

But, of course, none of these things held.    What do we know of Raymond Huo, senior Labour backbencher (presumably hoping for higher office before too long) who – remarkably (or perhaps not given the carelessness of our MPs) – chairs the Justice select committee in Parliament.  A man who has never once that I’m aware of, in his years in Parliament, uttered a single word critical of the PRC regime.  A man who openly defends the Chinese conquest of Tibet, and the brutal suppression of the people and their identity.   And here is what Anne-Marie Brady wrote about him in her Magic Weapons paper last year.

Even more so than Yang Jian, who until the recent controversy, was not often quoted in the New Zealand non-Chinese language media, the Labour Party’s ethnic Chinese MP, Raymond Huo霍建强 works very publicly with China’s united front organizations in New Zealand and promotes their policies in English and Chinese. Huo was a Member of of Parliament from 2008 to 2014, then returned to Parliament again in 2017 when a list position became vacant. In 2009, at a meeting organized by the Peaceful Reunification of China Association of New Zealand to celebrate Tibetan Serf Liberation Day, Huo said that as a “person from China” (中国人) he would promote China’s Tibet policies to the New Zealand Parliament.

Huo works very closely with the PRC representatives in New Zealand. In 2014, at a meeting to discuss promotion of New Zealand’s Chinese Language Week (led by Huo and Johanna Coughlan) Huo said that “Advisors from Chinese communities will be duly appointed with close consultation with the Chinese diplomats and community leaders.” Huo also has close contacts with the Zhi Gong Party 致公党 (one of the eight minor parties under the control of the United Front Work Department). The Zhi Gong Party is a united front link to liaise with overseas Chinese communities, as demonstrated in a meeting between Zhi Gong Party leaders and Huo to promote the New Zealand OBOR Foundation and Think Tank.

It was Huo who made the decision to translate Labour’s 2017 election campaign slogan “Let’s do it” into a quote from Xi Jinping (撸起袖子加油干, which literally means “roll up your sleeves and work hard”). Huo told journalists at the Labour campaign launch that the Chinese translation “auspiciously equates to a New Year’s message from President Xi Jinping encouraging China to ‘roll its sleeves up’.”   However, inauspiciously, in colloquial Chinese, Xi’s phrase can also be read as “roll up your sleeves and f..k hard” and the verb (撸) has connotations of masturbation.  Xi’s catchphrase has been widely satirized in Chinese social media.  Nonetheless, the phrase is now the politically correct slogan for promoting OBOR, both in China and abroad. The use of Xi’s political catchphrase in the Labour campaign, indicates how tone deaf Huo and those in the Chinese community he works with are to how the phrase would be received in the New Zealand political environment. In 2014, when asked about the issue of Chinese political influence in New Zealand, Huo told RNZ National, “Generally the Chinese community is excited about the prospect of China having more influence in New Zealand” and added, “many Chinese community members told him a powerful China meant a backer, either psychologically or in the real sense.”

and

During his successful campaign for the Auckland mayoralty, in 2016, former Labour leader and MP, Phil Goff received $366,115 from a charity auction and dinner for the Chinese community. The event was organized by Labour MP Raymond Huo. Tables sold for $1680 each. Because it was a charity auction Goff was not required to state who had given him donations, but one item hit the headlines. A signed copy of the Selected Works of Xi Jinping was sold to a bidder from China for $150,000.  A participant at the fundraiser said the reason why so many people attended and had bid strongly for items was because they believed Goff would be the next mayor.

and

In June 2017, at the Langley Hotel in Auckland, the State Council Overseas Chinese Affairs Office hosted an update meeting to discuss the integration of the overseas Chinese media with the domestic Chinese media. In attendance was Li Guohong, Vice Director of the Propaganda Department of the State Council Overseas Chinese Affairs Office, and other senior CCP media management officials, representatives of the ethnic Chinese media in New Zealand, representatives of ethnic Chinese community groups, and Labour MP Raymond Huo.  Update meetings (通气会) are one of the main ways the CCP relays instructions to the domestic Chinese media, in order to avoid a paper trail. Party directives are accorded a higher status than national law.

There is no sign at all of Huo putting any distance between himself and one of most repressive totalitarian regimes on the planet.  If anything, he only seems to want to hug the regime, and Xi Jinping, closer.  No wonder former diplomat and now lobbyist Charles Finny told a TVNZ Q&A interviewer last year that he was always very careful what he said in front of Huo.

And since this was a prayer being said, what about the religious dimensions?  Parliament’s prayer is an odd sort of beast, made odder by the current Speaker who rewrote the prayer to remove any distinctive Christian aspects, while keeping it distinctively monotheistic (references to Almighty God –  and not to localised tree gods or other minor deities).  As a Christian, I’d be happy enough (would probably prefer) Parliament dropped the prayer altogether: even if hypocrisy is the tribute vice pays to virtue, I’d rather MPs just recognised that the dominant “religion” of New Zealand (and every society has one, defined broadly) isn’t theistic at all.

But, for now, Parliament is opened each day with a monotheistic prayer, some vague nodding reference to our heritage, but vague enough that the small numbers of Muslims and Jews in New Zealand can probably nod along.

And what is the status of religion in the People’s Republic of China?   The Communist Party, which runs the state, is avowedly atheistic.  Religous believers, of whatever stripe, aren’t allowed to join the Party, as a matter of ideological commitment.    And both the Party and state are threatened by any sense of higher loyalties, not just theistic ones –  witness the extreme measures they’ve taken to suppress Falun Gong.   And what of theistic religions?    In the case of Islam, consider the extreme repression now in place in Xinjiang province, where some estimates suggest more than a million people may be in concentration and indoctrination “camps” (prisons), the surveillance state is taken to extremes, kids are taken from imprisoned parents, declared orphans, and then retrained to forget the identity, or even the existence, of their parents.   No New Zealand public figure –  no minister, no MP, and certainly not Raymond Huo (former countrymen of these victims) –  has spoken up, or spoken out, against that almost unbelievable persecution.     What you don’t speak up about –  when you in a position to be heard – is what you tolerate, what you really don’t care much about at all.  And yet Raymond Huo has the cheek to accept the offer to utter the prayer to this monotheistic Almighty God.

What of Christians?   They’ve had an uneasy relationship with the PRC over recent decades.   There are tame churches, in the Three-Self Patriotic Movement (Protestant) and a parallel with Catholics.  In many respects, they are orthodox, and yet they allow themselves to be placed under the thumb of the party-State (as for example, much of the Lutheran church in Germany did during the Nazi era).  But those churches who won’t bend the knee to the party-State are subject to increasing persecution in the Xi Jinping era, and attempts to suborn them and their leaders.  One large independent church in Beijing recently closed –  went to operating in small groups and by podcasts –  after the authorities insisted on the right place surveillance cameras in their buildings.  In response to growing repression and threats more than 100 pastors recently signed a declaration ending this way (emphasis added)

Christians are obligated to respect the authorities, to pray fervently for their benefit, and to pray earnestly for Chinese society. For the sake of the gospel, we are willing to suffer all external losses brought about by unfair law enforcement. Out of a love for our fellow citizens, we are willing to give up all of our earthly rights. 

For this reason, we believe and are obligated to teach all believers that all true churches in China that belong to Christ must hold to the principle of the separation of church and state and must proclaim Christ as the sole head of the church. We declare that in matters of external conduct, churches are willing to accept lawful oversight by civil administration or other government departments as other social organizations do. But under no circumstances will we lead our churches to join a religious organization controlled by the government, to register with the religious administration department, or to accept any kind of affiliation. We also will not accept any “ban” or “fine” imposed on our churches due to our faith. For the sake of the gospel, we are prepared to bear all losses—even the loss of our freedom and our lives. 

The situation has got consistently worse under Xi Jinping – who Raymond Huo holds close –  who is reported to regard churches as “severe national security threats”.

And yet Raymond Huo is invited by the Speaker of our Parliament –  presumably with the acquiescence of other party leaders, including the Prime Minister and the Leader of Opposition – to utter the daily prayer to the monotheistic Almighty God?   It is shameful.

But also telling.  After all, Simon Bridges last year signed up to the idea of a “fusion of civilisations” with this evil totalitarian regime.  Party presidents, Haworth and Goodfellow, head up to Beijing and sing the praises of the party/State and of Xi Jinping himself.

And just the other day, the chief executive of the Ministry of Foreign Affairs and Trade  –  about to become head of the PM’s department, and so we can presume was assuredly on-message –  gave a rare published speech.     In it he articulated New Zealand foreign policy, including among his ten basic principles this one

Second, be deliberate in supporting New Zealand’s values, speaking out in defence of them when required, even where that might put us at odds with others.

In fact, he quoted the Prime Minister from a speech earlier in the year

“In this uncertain world, where long accepted positions have been met with fresh challenge – our response lies in the approach that, with rare exceptions, we have always taken. Speaking up for what we believe in, standing up when our values are challenged and working tirelessly to refurbish rules and build architecture, and to draw in partners with shared views.

And noted

I can say with confidence that all of the Governments for which I have worked would hold these things to be true. 

In which case, I guess we must be able to deduce the real values of our leaders –  ministers past and present, and MPs –  but what they do and don’t say.    After all, they speak up for what they believe in, or so we are told?

When our Parliament invites a CCP-affiliated MP, who champions the interests of the atheistic PRC regime, and has his own party campaign under a Xi Jinping slogan, to open the day’s parliamentary sitting in prayer, in Chinese it seems unlikely that any of them care much about anything other than trade deals for big corporates and their donors, and none of them has the slightest regard for our own heritage, our own values, or for the freedom (including to worship, or not) of Christians, Muslims, and others in China.   There are, so we are told, Christian MPs in our Parliament.  But apparently not even a single one of them was willing to speak up, or speak out.

I don’t suppose New Zealand ranks very high among the issues that concern Beijing, but it must have been a good day in the relevant corners of Beijing officialdom yesterday –  bonuses for the Ambassador perhaps –  as they looked at the useful idiots masquerading as leaders in the New Zealand Parliament.

As a matter of urgency, we need someone –  some party –  to stand up for taking back our country, for asserting the values, traditions, and liberties of its people, the self-respect that (among other things) was presumably part of what attracted some ethnic Chinese to move here in the first place.  As for the present leadership, heedless, careless, and useless……selling out their country (mostly not for personal enrichment) whether by their indifference or their active involvement.

Yes, it will have been a good day in Beijing.  If the butchers ever take time to chuckle, yesterday might have been one of those days.

 

 

 

 

Orr among the forest gods

Almost 1300 years ago, the English missionary priest and bishop Saint Boniface confronted the belief of some pagan German villagers in Thor, god of (among other things) oak trees. Tree gods (or beliefs in them) were vanquished, and Boniface became known as the apostle to the Germans..

Pre-evangelisation, Maori had their own tree god, Tane Mahuta.    As far as I can tell, not many believe any longer in this local tree god: when I looked up the 2013 Census data, there were lots of Maori recording no religion, and there were plenty of Catholics and Anglicans.  But there wasn’t a category shown for tree gods, or any of the other deities (Wikipedia has a list of at least 35 of them).

But the Governor of the Reserve Bank seems intent on bringing them back.

Tomorrow will mark six months since Adrian Orr became the most powerful unelected person in New Zealand, as Governor of the Reserve Bank.  Six months on we’ve had not a single serious and substantive speech on the policy areas he is responsible for, and where he exercises a huge amount of barely-trammelled power.  No speech on monetary policy, no speech on banking regulation, and nothing either on the less prominent things the Governor is responsible for –  such as, for example, insurance prudential supervision, a New Zealand insurer having failed, regulated by the Reserve Bank just before the Governor took office.  He hasn’t substantively and openly engaged with, or responded to, the damning survey results on the Bank’s performance as a financial system regulator.

Instead, we’ve heard the Governor on almost everything else.  There was infrastructure, climate change (repeatedly), the failings of capitalism, geopolitics, women in economics, and of course bank “conduct” (playing distraction from his institution’s own failings, by trying to butt into a field for which the Bank has no statutory responsibility).    There have been lots of words, but not much sign of in-depth reflection or distinctive insights, and even less sign of doing him well, and being open about, the jobs Parliament has actually given the Bank.   Throw in some considerable complacency about monetary policy and it should be a pretty disquieting picture.

Some of it is probably just the Governor’s well-known propensity to talk.  Some of it might even be an understandable (if misguided in application) desire to lift the esprit-de-corps at the Reserve Bank after the demoralising Wheeler years.  And a lot seems to be about winning the turf battles, ensuring that in the reviews of the Reserve Bank Act that the government has underway as much as possible of the Bank’s powers are kept, in effect, under the Governor’s control, and that the existing powers and functions of the Reserve Bank are all kept in the Reserve Bank.  Part of that seems to be about openly subscribing what should be a non-partisan agency to every trendy left-wing cause that is going (and which, presumably, the Governor believes in personally.) A power play in other words –  and, with a weak government that probably doesn’t care much, quite likely to succeed,  somewhat to the detriment of New Zealand.

The latest example was the release on Monday of a rather curious 36 page document called The Journey of Te Putea Matua: our Tane Mahuta.   Te Putea Matua is the Maori name the Reserve Bank of New Zealand has taken upon itself (such being the way these days with public sector agencies).  It isn’t clear who “our” is in this context, although it seems the Governor  – himself with no apparent Maori ancestry – wants us New Zealanders to identify with some Maori tree god that –  data suggest –  no one believes in, and to think of the Reserve Bank as akin to a localised tree god.  Frankly, it seems weird.  These days, most New Zealanders don’t claim allegiance to any deity, but of those of us who do most –  Christian, Muslim, or Jewish, of European, Maori or any other ancestry – choose to worship a God with rather more all-encompassing claims.

But the Governor seems dead keen on championing Maori belief systems from centuries past.    In an official document of our central bank we read

A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to allow the
sun to shine in. Tāne Mahuta – the god of the forest and birds – managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.

This quote appears twice in the document.

All very interesting perhaps in some cultural studies course, but what does it have to do with macroeconomic management or financial stability?  Well, according to the Governor (in a radio interview on this yesterday) before there was a Reserve Bank “darkness was on our economy”.  The Reserve Bank was the god of the forest, and let the sun shine in.  Perhaps it is just my own culture, but the imagery that sprang to mind was that of people who walked in darkness having seen a great light.   But imagine the uproar if a Governor had been using Judeo-Christian imagery in an official publication.

On the same page we read

Many of these birds feature on the NZ dollar money including the kereru, kaka, and kiwi – core to our belief system and survival.

I’m a bit lost again as to who “our” is here.  I’m pretty sure I’m like most New Zealanders; I never saw a bird as “core” to my “belief system”.  Perhaps the Governor does, although if so we might worry about the quality of his judgements in other areas.

As I say, it is an odd document.  There are pages and pages that have nothing whatever to do with monetary policy or the financial system.  Some of it is even quite interesting, but why are we spending scarce taxpayers’ money recounting stories of New Zealand general history?  There is a page about the Maori navigators and, somewhat out of order, an earlier one about what early Maori ate and what the tribes traded among themselves.   And there is a whole page about Kate Sheppard who, admirable as she was, has nothing whatever to do with New Zealand economic or financial history and policy.  There is questionable history:  simple matters of fact (eg Apirana Ngata wasn’t the first Maori Cabinet minister and didn’t first hold office in the 1920s – James Carroll, who held high office for a long period (twice as acting Prime Minister), preceded him), highly questionable and tendentious economic history, and overall a tone (perhaps comforting to today’s liberal political elite) that seems embarrassed by the European settlement of New Zealand.     There is lots on the difficulties and injustices that some Maori faced, and little or nothing on the advantages that western institutions and society brought.  Reasonable people might debate that balance, but it isn’t clear what the central bank –  paid to do monetary policy and financial stability –  is doing weighing in on the matter.

As I noted earlier, in a radio interview yesterday the Governor claimed that prior to the creation of the Reserve Bank ‘darkness was on our economy’, that the Reserve Bank had let the sunshine in, and that Australia and the UK had somehow turned their backs on us at the point the Bank was created.   In fact, here it is – Reserve Bank as tree god –  in the document itself.

The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy.

I think there was a plausible case for the creation of a central bank here, but to listen to or read the Governor you’d have no idea that New Zealand without a Reserve Bank had been among the handful of most prosperous countries in the world.  Here from the publication, writing about the period before the Reserve Bank was created

The infrastructure funding was further hindered by the banks being foreign-owned (British and Australian) and issuing private currency. Credit growth in New Zealand was driven by the economic performance of these foreign economies, unrelated
to the demands of New Zealand. Subsequent recessions in Britain and Australia slowed lending in New Zealand when it was most needed.

Very little of this stands much scrutiny.  You’d have no idea from reading that material that the New Zealand government had made heavy and persistent use of international capital markets, such that by 1929 it –  like its Australian peers –  had among the very highest public debt to GDP ratios (and NIIP ratios) ever recorded in an advanced country.  You’d have no idea that New Zealand was among the most prosperous countries around (like Australia and the United States, neither of which had had central banks in the decades prior to World War One).   You’d have no idea that the economic fortunes of New Zealand, trading heavily with the UK, might reasonably be expected to be affected by the economic fortunes of the UK –  terms of trade and all that.   Or that economic cycles in New Zealand and Australia were naturally quite highly correlated (common shocks and all that).  And of course –  with all the Governor’s talk about how we could “print our own money” – within five years of the creation of the Reserve Bank, itself after recovery from the Great Depression was well underway, that we’d not unrelatedly run into a foreign exchange crisis that led to the imposition of highly inefficient controls that plagued us (administered by the evil twin of the tree god?) for decades.  Or even that persistent inflation dates from the creation of the Reserve Bank

One can’t cover everything in a glossy pamphlet, even one that seems to purport to be aimed at adults (including Reserve Bank staff according to the Governor), but there isn’t much excuse for this sort of misleading and one-dimensional argumentation, aka propaganda.

The propaganda face of the document becomes clearer in the second half.   Among the issues the government’s review of the Reserve Bank Act is looking at is whether the prudential and regulatory functions of the Bank should be split out into a new standalone agency, a New Zealand Prudential Regulatory Authority.  I think that, on balance, that would be a preferable model.  It also happens to be the model adopted in much of the advanced world, including many/most small advanced economies.  There are arguments to be made on both sides of the issue, but you wouldn’t know it from reading about the Governor’s vision of the Bank as a Maori tree god, where one and indivisible seems to be the watchword.      Everything is about “synergies”, and nothing about weaknesses or risks, nothing about how other countries do things, nothing about the full range of criteria one might want to consider in devising, and holding to account,  regulatory institutions for New Zealand.

I don’t have any problem with officials, including from affected agencies, offering careful balanced and rigorous advice on the pros and cons of structural separation. But that is a choice ultimately for ministers and for Parliament.  And among the relevant considerations are issues of accountability and governance.  Neither word appears in Governor’s propaganda piece.   But then tree gods probably aren’t known for accountability.  New Zealand government regulatory institutions should be.   If ministers and Parliament decide to opt for structural separation, I wonder how the Governor will revise his document –  his tree god having been split in two.

Among the tree god’s claims about financial regulation and what the Bank brings to bear was this breathtaking assertion, prominently displayed at the head of a page (p27).

The Reserve Bank is highly incentivised to ‘get it right’ when it comes to prudential regulation. We have a lot at risk

It is an extraordinary claim, that could be made only be someone wilfully blind –  or choosing to ignore –  decades of serious analysis of government failure, and the institutional incentives that face regulators, regulatory agencies, and their masters.

There is nothing on the rest of that page to back the tree god’s claim.   On any reasonable and hardheaded analysis, the Reserve Bank has very weak incentives to “get it right”, or even to know –  and be able to tell us –  what “get it right” might mean.   When banks fail, neither the Reserve Bank Governor nor any of the tree god’s staff have any money at stake (at least in their professional capacity, and as I recall things, Reserve Bank staff – rightly –  aren’t allowed to own shares in banks).  It is all but impossible to get rid of a Reserve Bank Governor, and it is even harder to get rid of staff (for bad policy or bad supervision).  Most senior figures in central bank and regulatory agencies of countries that ran into financial crises 10 years ago, stayed on or in time moved on to comfortable, honoured (a peerage in Mervyn King’s case) retirements, or better-remunerated positions in the private sector.

And when the Reserve Bank uses its powers in ways that reduce the efficiency of the financial system, or stopping willing borrowers and willing lenders writing mortgage contracts, where are incentives on the Reserve Bank to “get things right”.  There are no personal consequences –  the Governor and his senior staff either won’t have, or would have no problem getting, mortgages.  The previous Governor got to exercise the bee in his bonnet about housing crises, and to play politics, with no supporting analysis and no effective accountability.    The current head of the tree god opines that lenders and borrowers can’t be trusted –  but tree gods apparently can –  but when challenged produced no analysis to support his claim.  That sort of system creates incentives for sure, but they aren’t to “get it right”.  Officials have incentives to keep things secret, and we saw that on full display with the Bank’s supervision of CBL Insurance last year –  they might argue it was in the public interest, but even if so, it was clearly in their private interests, and against the interests of many members of the public.

Another word that hardly appears at all in the document is “transparency”.  If you wanted to call yourself a tree god who sheds light upon the dark world that was pre-1933 New Zealand (or, presumably, a modern New Zealand without our current Reserve Bank) you might think there would be at least some self-awareness of the other side of letting the light in: letting in the light on the Bank’s own operation.   As I’ve documented here over the years, the Bank is quite open about what it wants to be open about.  But what credit to them is that, everyone releases what they want to release: the essence of transparency is readily and willingly releasing material that they might, in some senses, prefer to keep to themselves, to make for an easier life for the tree god.  Our Reserve Bank –  the Governor’s pagan tree god –  is notoriously secretive and obstructive, consistently pushing to and beyond the limits of the Official Information Act.  Only a few weeks ago the Ombudsman’s office had to intervene to remind them that simply invoking “Chatham House rules” doesn’t enable you to keep things secret.  And with even the Cabinet having promised pro-active release of Cabinet papers, and pro-active release of Budget background papers and advice, the Reserve Bank looks not like a tree god shedding light in dark places, but like some more malevolent self-interested dark deity.

The Governor also tells us he has adopted an ever more ambitious goal than the previous Governor’s one.  Graeme Wheeler articulated a vision of the Reserve Bank as “best small central bank” in the world.  It was pretty empty.    There was no sign that citizens or other stakeholders had asked him to be the “best small central bank”  –  richer countries than us will often choose to spend a lot more (and with less accountability) on their central bank.  In any case, when challenged a few years later, it turned out that there was nothing going on to benchmark themselves against that ostensible aspiration.   But Orr’s aspiration for his tree god is an unqualified “best central bank”.     The institution is a very long way from that at present –  and getting further away if Orr uses the Bank as a platform for pushing for his personal political agendas, well beyond the Bank’s statutory responsibility.  It isn’t open, it isn’t excellent, it is accountable.  It should do much better (although I’m still not convinced that a small poor advanced country should be expecting, ir aiming, ot have best central bank there is.)

And finally, among the oddities of Orr’s apparent aspirations is something about an island.  There is a full page under the heading “Our island and Tane Mahuta”, complete with lots of (mostly) worthy (if sometimes threatening, for staff ) aspirations, and this picture.

RB island

It appears to be the island where the imaginary tree god dwells.  But, here’s the thing, it doesn’t look a bit like anywhere in New Zealand.  And the Reserve Bank of New Zealand is supposed to be primarily about New Zealand and New Zealanders.   Has the tree god flown the coop (so to speak) and fled to some poor Pacific Island where –  perhaps –  well paid senior central bankers take their winter holidays and commune with the deity?   I’d prefer a central bank –  even one deluded that it is a tree god –  to think New Zealand, New Zealand people, New Zealand places.

Better still, ditch the pagan religion –  not (according to the Census) taken seriously by Maori, and never part of the heritage or beliefs of most New Zealand –  leave it to the cultural studies textbooks, and get on with doing your job, openly, accountably, excellently.

And, as part of that, abandon the complacency about monetary policy, expressed again  by the Governor is his Radio NZ interview yesterday.   The next serious recession  is, according to him, nothing to worry about.  Monetary policy faces no serious constraints.  Which, presumably, is why all those other countries who did find themselves at the effective lower bound last time round were able to rebound so quickly and effectively, and deliver inflation consistently near target.  Or perhaps that is only in a false tree god’s imaginary world?

UPDATE: I meant to include, but accidentally left out, reference to the fact that the Bank of New Zealand had been majority New Zealand government owned from 1894, forty years before the Reserve Bank was formed.   Surely the Governor was aware of that?

Not much business investment

Yesterday’s post was prompted by looking at the export and import data in last week’s GDP release.   Today’s is prompted by looking at the investment data.

The latest quarterly data wasn’t that interesting in itself –  business investment fell a bit, but from quarter to quarter there is quite a bit of noise, and not much can be read into a single quarter’s data.

But here is a longer view on a proxy for business investment spending as a share of GDP (total gross fixed capital formation less residential investment less government investment spending), using the annual data back to the year to March 1972. The latest quarterly observation is almost exactly the same level as the final (annual) observation on the chart.

bus investment sept 18

Years into the recovery, after several years of very rapid population growth, business investment as a share of GDP has crept back up to levels that are only higher than seen in past recessions.  And by international (OECD) standards, business investment as a share of GDP has been low in New Zealand for decades.  It is consistent with the story numerous analysts have highlighted over the years: one of the proximate symptoms of our long-term economic underperformance is that firms haven’t found it worthwhile to invest more heavily here.   The last few years look as if they simply reinforce that story.

(And that isn’t, of course, because we have too many houses for our people.  If anything, we have too few, so when people –  like the Minister of Finance –  talk of shifting investment from housing to other things, while not changing anything about population growth, it is meaningless or worse.)

That first chart, which I’ve shown previously, is the flow –  each year’s new investment as a share of total GDP that year.  But this chart uses the stock figures: SNZ’s net capital stock (total less residential less government) relative to GDP.  That takes account of depreciation, and also of the changing growth rate of the population.

bus cap stock

The business capital stock (as estimated by SNZ) hasn’t been growing relative to GDP for over 40 years.  Over most of the last decade that ratio has been shrinking (and although these data are available only to March 2017, it seems unlikely anything in the last 18 months will materially alter the picture).  Businesses –  as a whole – simply haven’t found it attractive to invest and grow here.

The government is very keen on promoting R&D spending, rushing to put in place new and bigger subsidies without much evidence of having thought much about why it might not be attractive to profit-maximising firms to spend more here.

R&D is included in both the annual new investment spending shown in the first chart above and in the net capital stock data shown in the second chart.   SNZ don’t provide a breakdown between government and private components, but for what it is worth I found this chart interesting.

R&D capex

If anything, R&D spending seems to have been holding up quite a bit better than overall business investment and the business capital stock.  Which tends to reinforce my doubts about why more taxpayer money should be thrown at this type of spending.  Overall R&D spending might be quite low by advanced country standards, but so is business investment more generally, and so is foreign trade.  My hypothesis is that all three things are related, and that there is no obvious reason (and no analysis the government has advanced) suggesting that the root cause of the problem is insufficient subsidies for R&D spending.

On a completely different note, tomorrow I’ll take a lot at the latest from the Reserve Bank: Adrian Orr and the tree gods.

 

Once were traders

For small countries in particular, foreign trade is a key element in economic prosperity.  Firms in your country develop products and services that people abroad want, and that enables your citizens to consume from the wider range of products and services the rest of the world has to offer.  It isn’t just final products, but trade in intermediate goods and services (inputs to other production) also enables specialisation and the general gains from trade.

Foreign trade wasn’t always important in the islands of New Zealand.  For the centuries after first settlement there was none.  And (although not solely for that reason) the people –  Maori –  were poor.   In modern New Zealand, foreign trade has been critical: 100 years ago there was a widely cited claim that New Zealand did more foreign trade per capita than any other country.  Hand in hand with that, we were among the countries with the highest incomes per capita.

But no longer, on either count.

The latest quarterly numbers out last week did show an uptick in both exports and imports as a share of GDP.  But here is the chart back to 1972 –  annual data, plus the latest quarterly observation.

external trade share

The foreign trade share has been, at best, static for almost 40 years (in most countries they’ve been increasing).  The last few years have seen the trade share the weakest for almost 30 years (and the late 80s construction boom).  I’ve highlighted the only three occasions when exports and imports have averaged 30 per cent or more of GDP: the year to March 1985, the years to March 2000 to 2002, and the year to March 2009.   What was the common feature of those years?   It wasn’t the stellar success of outward-oriented businesses.  It was the (unexpected) severe weakness in the exchange rate: the devaluation of 1984, the period around the end of the dot-com boom when US interest rates were high, and New Zealand (and Australian) dollars were unattractive, and the international financial crisis (and extreme risk aversion) of 2008/09.   Based on the rest of the set of New Zealand policies, those low exchange rates weren’t sustainable, and there was a relatively quick rebound.

What of other advanced countries?

Big countries tend to do less foreign trade (share of GDP) than small countries.  That is no surprise, as there are many more markets and opportunities for specialisation (gains from trading) close to home.  Here are the OECD countries that in 2016 (last year with complete data) had exports and imports averaging less than 30 per cent of GDP.

Australia 21.0
Chile 27.8
Italy 29.0
Israel 28.2
Japan 15.6
Turkey 23.4
UK 29.1
USA 13.3

Of them, Italy, Japan, Turkey, the United Kingdom and the United States are big countries and big economies.    You’d expect to find them on this table, and if anything the anomaly is Germany, with a foreign trade share now in excess of 40 per cent of GDP.

Of the remaining countries, there are

  • Australia, with five times our population,
  • Chile, with more than three times our population, and with the second lowest labour productivity in the OECD (beating only Mexico), and
  • Israel, which isn’t much larger than New Zealand but which –  as I’ve highlighted here previously –  has a similarly lousy productivity growth record.

And all, in one form or another, with severe disadvantages of distance.

There has been a tendency in some circles to excuse New Zealand’s low foreign trade shares by citing distance, but simultaneously a reluctance to take seriously what is implied by that limitation.  If the opportunities for foreign trade from this remote location don’t look particularly good, isn’t there something deeply illogical (or worse) about continuing to use policy (as successive governments have done for last 25 years) to drive up our population –  more people in an unpropitious location?  All the more so when adopting that policy approach also involves driving the real exchange rate up, away from where it would likely settle otherwise.  Not all New Zealanders suffer in the process –  if you run a business geared, in effect, solely towards population growth you may well flourish –  but New Zealanders as a whole have.

For all the occasional talk about rebalancing the economy (from both main parties, at least when they first take office) none of it seems to take any serious account of this constraint.   Which is only set to become more seriously as –  relative to other countries –  the opportunities here shrink with the apparent determination to pursue net-zero emissions targets.  Planting (lots more) is unlikely to be a path to sustained prosperity or higher productivity.

These days, New Zealand’s per capita foreign trade will among the lowest in the advanced world.   Among the rich countries, only (very big) Japan and the United States will be materially lower than us.  It isn’t a mark of a successful economy.  But neither government nor opposition have any real strategy –  or interest? –  in turning things around.