Economic failure: the reluctance to recognise the implications of extreme remoteness

As regular readers know, I tend not to be particular upbeat about the New Zealand economic story.  For anyone new, there should be a hint in the very title of the blog.  If, by chance, you are still attracted to an upbeat take, only last week in a post here I critiqued a recent book chapter taking that sort of view.

And so I was a bit surprised when, more than a year ago now, I was asked to write a chapter for a forthcoming book on aspects of policymaking, and associated outcomes, in a small state (this one).  In principle, the book sounded potentially interesting, and they were approaching a bunch of pretty serious and senior people to contribute.  But it wasn’t clear there was much in it for me, and since the plan was for the introduction or foreword to have been written by the head of the Department of Prime Minister and Cabinet, it seemed likely that the thrust the organisers were looking for was a positive take on the New Zealand story.   So as not to mess people about, I declined the invitation, only to have my arm twisted, with assurances that there was no such agenda.  In the end I agreed to write something, and although the organisers/editors still seem keen on a more positive spin, by the time I discovered that I was committed.

The latest draft of my chapter, attempting to be positive where I can, is here.

An underperforming economy; the insufficiently recognised implications of distance (draft chapter)

I’ve had useful comments from various people on an earlier draft (none of them bear any responsibility for the current version though), but if any readers have comments you’d like to add to the mix, you can earlier leave them as comments to this post or email me directly (address in the “About Michael Reddell’s blog” tab).

The potential market for the book, as I understand it, is people like students of public policy, perhaps in parts of Asia.  Many of these potential readers, I’m given to understand, see New Zealand as a sucesss story.   Within the (severe) limitations of length, I’ve set out to provide a more balanced take on the economic story.  In a way, I guess, New Zealand is a sort of success story.  200 years ago on these islands there was not much more than a subsistence economy, and only recently had overseas trade resumed after the inhabitants had been isolated for several hundred years.  From that to one of the richest countries in the world in a hundred years was remarkable.  And even now, after a century of relative decline,  there is only a handful of countries in east Asia and the southwest Pacific with material living standards matching or exceeding our own (Australia, Japan, Singapore, Taiwan, with South Korea coming close).   And from a macroeconomic policy perspective, we’ve now had low and stable inflation again for 25 years, have had low and stable public debt, and a considerable measure of financial stability.  That isn’t nothing by any means.

But it doesn’t exactly mark us out.  What does mark us out is that century of relative decline: of course, we are much richer than we were 100 years or so ago, but then we were among the top three countries in the world (GDP per capita), and now we languish a long way down the advanced country rankings (especially on productivity measures).    With productivity levels not quite 60 per cent of those in the leading bunch of advanced economies, we are getting closer to the point where New Zealand could really only be described as an upper middle income country.

My story, as a regular readers know, is that our physical remoteness –  in an era where, internet notwithstanding, distance appears to be not much less of a constraint than ever in many respects – is the key issue in our underperformance.  It isn’t that –  as some models and sets of estimated equations suggest –  distant countries are inevitably poorer, but that distant countries seem to thrive (to the extent they do) mostly on natural resources, and industries building directly on those resources.  And with a limited stock of natural resources, there are limits to the number of people that such places can support top tier incomes for (a very different proposition than for economies –  eg those of northwest Europe – where most of the most productive economies are found) where natural resources are simply no longer that important, and where the advantages of proximity can be realised more readily.    The story is much the same for Australia as for New Zealand –  and Australia has also been in (less severe) relative decline over the last 100 years – with the difference that Australia found itself able to utilise whole new sets of natural resources, either unknown or uneconomic previously.  New Zealand has had nothing – that material – similar, and no big asymmetric technology shocks in our favour for a long time either.   Against that backdrop, using policy to drive population growth (rapid by advanced country standards) simply did not make sense –  putting more people in a fairly unpropitious location, albeit one with some reasonable economic institutions (rule of law etc).  It didn’t make sense decades ago –  before people fully appreciated the nature of New Zealand’s relative economic decline –  and it doesn’t now.   There was a valuable signal, that policymakers and their advisers simply chose to ignore, when New Zealanders –  who know New Zealand best –  starting leaving in numbers that (while cyclical variable) are really large by international or historical standards (absent a civil war or the like).

Perhaps the new bit to my story in this draft chapter – which was prompted by the way the initial specification was framed –  was to think about why the stark economic underperformance has been allowed to go on, not just by our politicians and political parties, but with no compelling remedies offered by our major economic policy advisory institutions (The Treasury in particular) or by international agencies that offer advice (notably the OECD).  I suggest a story in which it is simply difficult to identify that right comparator countries when thinking about economywide productivity and economic performance issues.  For many areas of policy –  monetary policy is an example, but it is probably true of health and education and welfare –  pretty much any advanced market economies can offer useful benchmarking, but if remoteness really does matter (not just to, say, defence, but) to the viable options and business opportunities available here, then the experiences of –  say –  Belgium or Denmark just aren’t likely to be that useful, even if Denmark has a similar population and was once the major competitor for UK dairy markets.

We may be able to learn something from reflecting on the differences, but it is typically much more compelling if one can point to another similar country (or 2 or 10 of them) and learn from them.   And thus I note an important difference between New Zealand and many of the (now fast) emerging advanced economies of central and eastern Europe.  Not only are they physically proximate to various highly productive economies (easy and cheap to meet fellow policymakers and analysts regularly, including in EU fora), but have a lot of similarities across each other (similar location, similar communist past, and so on).     I don’t claim to know Hungary, Slovenia, the Czech Republic or Slovakia in great detail, but if I were a policymaker in any of them, I’d be (almost obsessively) benchmarking my economic policies against those of the others, and of nearby rich and productive countries (eg Austria and Switzerland).  There are never exact parallels, but in New Zealand’s case it is hard to find good parallels at all. I suggest that Israel might be in some respects the best for New Zealand –  but it is little studied here (and its productivity performance is about as bad as ours –  partly, I’ve suggested, for similar reasons).

The lack of easy examples to benchmark ourselves against isn’t really an acceptable excuse, but I suspect it is part of the explanation.  It is long been a problem for the OECD in their advice to New Zealand: they’ve repeatedly brought a northern European mindset to a remote corner of the world, after early on investing quite a lot in the idea that the New Zealand reforms were exemplary, and almost sure to reverse our underperformance.  Places like the OECD work a lot on illustrating cross-country comparisons, but they simply never found the right ones for New Zealand (on these economywide issues) and have not shown much sign of trying.  It is particularly problematic because the OECD are full-on committed to high immigration, regardless of the experience of an individual country (see my post about the then OECD Chief Economist extraordinary performance when she launched their 2017 New Zealand report – there is a new report due out in a few weeks, and I’m not holding my breath).

Of course, New Zealand politicians no longer seem to have any appetite for trying to reverse the staggering decline in New Zealand’s relative performance.    But just possibly they might if their advisers were offering a compelling diagnosis and set of prescriptions.  As it, The Treasury seems to have no more idea than the OECD, and seems to have abandoned much interest in the productivity issue, in favour of the feel-goodism and smorgasbord of random indicators that makes up the Living Standards Framework, supporting the “wellbeing Budget”.  I was exchanging notes the other day with someone about the mystery as to who the next Secretary to the Treasury will be (there is a vacancy a month from now, and applications closed three months ago).  It is hard to be optimistic that it will make much difference who gets the job –  given the hoops they will have to have jumped through to get it –  but sadly it is a story of a low-level equilibrium: no political demand for answers and options to reverse our decades of relative decline. and no bureaucratic supply of such answers or the supporting analysis either.

Anyway, for anyone interested here are the concluding paragraphs.

Conclusion

After the bold reforming period of the 1980s and early 1990s, official and political economic policymaking in New Zealand appears to have been at sea, without a tiller or compass, for at least a couple of decades.   Much that was positive was done during the reform era, and various good institutional reforms were put in place.  Much needed to be done, and in some respects it was to the credit of a small country that so much – initially attracting considerable international admiration –  could have been put in place so quickly.    Seared by the experience of the quasi-crisis of 1984, and rapid escalation of official debt in the previous decade, New Zealand has since enjoyed an enviable degree of macroeconomic stability: low and stable public debt, low and stable inflation, and domestic financial stability (even amid severe policy-induced upward pressures on house prices and household debt).  Unemployment rates that are fairly low on average are another successful element.   In those areas of policy, meaningful international benchmarks have provided a routine check of policy, and the external advice sometimes provided has typically been drawn from countries (small floating exchange rate countries), where the comparisons are apt and insightful.

But if stability has been successfully regained and maintained, on the wider counts of economic performance only a “fail” mark could possibly be assigned.  Among the failures, policymakers managed to preside over reforms that have created artificial scarcity of urban land and sky-high housing prices, in common with many of their Anglo peers.  But the productivity failure is more stark, because it is more specific to New Zealand.   Despite numerous (de)regulatory steps taken to open the economy to international competition –  and a considerable increase in the real volume of exports and imports –  foreign trade as a share of GDP has shrunk and with it the relative size of the tradables sector.  The export sector itself remains heavily dominated by industries reliant on domestic natural resources (a fixed asset) – services exports have been shrinking as a share of GDP – and, despite rapid population growth, business investment has been modest at best.

To an outsider, perhaps the surprising feature of such an underperforming advanced economy is that population growth has nonetheless been quite rapid. Birth rates have been below long-term replacement rates for several decades now. But defying the revealed preferences of New Zealanders, who have left the country in huge (but cyclically variable) numbers over the last 50 years for 25 years now policy has been set to bring in one of the largest migrant flows (per capita) of any advanced country.   Regularly presented as a skills-focused approach, it has remained difficult to attract many really talented people to a small remote country with lagging incomes and productivity[1] and there have been few (apparent or realised) outward-oriented economic opportunities in New Zealand for either natives or migrants.

Advocates and defenders of New Zealand immigration policy often attempt to invoke arguments and indicative evidence from other countries.  Even then, the value of insights appears more limited than the champions believe: not one of the high immigration advanced economies (Canada, Australia, New Zealand, Israel – or the United States) has been at the forefront of productivity growth over the last 50 years, and only the US is now near the frontier in levels terms.  But even if those arguments might have some validity in some other countries, there has been too little serious engagement with the specifics of the New Zealand situation: remoteness, lack of newly-exploitable natural resources,  and the actual experience (lack of demonstrable gains for New Zealanders) following 25 years with a high level of (notionally) skills-based immigration.    As by far the most remote of any advanced country, it is perhaps the last place one might naturally expect to see policy actively working (encouraged by local officials and international agencies) to support rapid population growth.

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies)   Past experience –  1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand.  But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s –  it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

[1] OECD (2016) adult skills data suggest that although the gap between skills of natives and migrants is small, migrants to New Zealand are, on average, less skilled than natives.

There won’t be any posts for a few days as we are heading off this morning to attend the funeral for my wife’s (extremely aged) grandmother.  Back blogging on Tuesday.

61 thoughts on “Economic failure: the reluctance to recognise the implications of extreme remoteness

  1. Against that backdrop, using policy to drive population growth (rapid by advanced country standards) simply did not make sense – putting more people in a fairly unpropitious location, albeit one with some reasonable economic institutions (rule of law etc). It didn’t make sense decades ago – before people fully appreciated the nature of New Zealand’s relative economic decline – and it doesn’t now.
    ……….
    Hmmm!? White supremacist….? Giles Beckford needs to hear about this!

    Liked by 1 person

    • When I attended the 2 day Tripartite economic alliance seminar, the speakers from Los Angeles made it very clear that they were quite surprised that the travel time was just a mere 12 hours to Auckland. For most of their travel in their respective global businesses they actually think Auckland is very close in terms of the travel time they are used to.

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  2. Hi Michael
    Thanks for your blogs. The country needs good independent thought.
    For your info, there is an opinion piece in today’s AFR from Roger Partridge (Chair NZ Initiative and former Chair Bell Gully) calling for change in the “remarkable concentration of power in a single individual” at RBNZ. He must read your blogs!
    Regards
    Paul Riethmaier

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    • NZ having lost most of our large scale industrial manufacturing. I am starting to think that we are actually ahead of the global curve in terms of having to deal with developing new industries that are not automation and robot dependent. The entire economic productivity argument falls over when you have to deal with an aging population and the largest growth industries being in the services industries ie it takes more people to deliver excellent services and not less.

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      • History shows that when you depend on people for services rather than machines then it is a race to the bottom in terms of wages. It took the Black Death to wipe out half the population for agricultural wages to increase. Braudel’s ‘A History of Civilizations’ mentions a town in France that had maintained the same population for about 1000 years and it started with ten butchers and as the centuries passed ended up with one. I suppose it is a matter of ownership – KFC gets wealther but their staff wages and conditions get worse.

        Liked by 1 person

      • Attended and cheered the Teachers on Strike rally at Aotea Centre for more pay. Many of those signs asking for more pay also asked for fewer working hours and more teachers.

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      • Bob, you are still making a case for a CGT on business goodwill which Jacinda Ardern found did not find favour with most Kiwis.

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  3. Two years ago when I discovered this blogsite I disagreed with the idea that remoteness mattered and pointed out improved & cheaper transport and the power of the internet to make distance irrelevant. Now I agree with you there is a relationship between remoteness and relative economic performance.
    Three examples: Tasmania has half our population density – wouldn’t NZ have a smaller population if it had become a state of Australia a century ago? The Outer Hebrides have been the poorest part of the UK for a long time while having one of the highest levels of education. Ireland + Northern Ireland have a combined population that is three quarters of what it was 170 years ago.

    Having agreed about the disadvantage of isolation it is worth asking why. It can’t be distance from markets because if it was we wouldn’t find Danish dairy products in our supermarkets. It has to be psychological; the human need to be where the acton is or FOMO. This can be seen by the rapid depopulation of small towns into our cities and from our cities to overseas.
    The peculiar problem for New Zealand compared to your east European states and the BeneLux countries is language. Just as it was very easy for me (a POM) to settle into NZ it is correspondingly easy to move to Australia, UK, USA and even other countries where English is the business language. The average Dane, Icelander, Slovak cannot just pick up a young family and move to another country for economic or social advantage.

    The economic failure of NZ will continue until we accept reality. So when finance minister Grant Robertson said yesterday “” what we desperately need to do is improve the skill levels of New Zealanders”” he is simply ignoring the experts at the OECD ( https://www.oecd.org/skills/piaac/Skills-Matter-New-Zealand.pdf ) which starts with this sentence: “”Adults in New Zealand score above the OECD average in literacy, numeracy and problem solving in technology-rich environments.””
    However the same minister does have the potential to grasp the solution with a suitable interpretation of ‘Wellbeing’. It is not hard to imagine a New Zealand with a lower population, low crime, with fewer but better universities, a second to none 100% pure environment and families living in houses on quarter acre blocks and having a holiday home.

    That utopia could start with this weeks budget. Only permit immigrants if they pay $1m per family and have genuine skills; make Te Reo the only national language; nationalise urban land; pay New Zealanders to leave; a massive Carbon tax; double department of Conservation budget every year for the next five years.
    Well maybe he will not do anything that drastic but we sure need a change of direction. Reputedly said by Einstein “”The definition of insanity is doing the same thing over and over again and expecting a different result. “”

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    • My cousin who lives in Tasmania is migrating to Auckland. She felt we are blessed with an amazing climate. I told her it is more to do with climate change and NZ is getting warmer. She loves it and have been looking seriously for houses in Orewa. She is sick of Tasmania and its cold freezing temperatures and the lack of people. She works in the health industry and was comfortable with the pay packages available in her mental health profession in Auckland.

      Liked by 1 person

    • Hmmm… not sure about Slovaks but in my experience and estimation the average Dane and Icelander has pretty good English. I used to be a teacher. My German exchange students often had better written English than my local students. Says a lot really. The Germans actually knew how to structure essays and write in paragraphs. With capital letters and full stops as well. And argue a case reasonably logically. Hmmm.

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      • It can be done and I know of some German, Danish and French families that have done it but it is a subset of typical families – do you bring your aged parents who have poor English with you – and I do know Chinese families that have moved to Auckland with members of the family who cannot speak English. But it is difficult. Would you move your teenage child to another country with a different language and educational system?
        So I’m arguing language is an obstacle not that it can’t be overcome. It is an obstacle that has made it much easier for highly educated New Zealander families to leave for a large overseas metropolitan city than for most inhabitants of other countries.
        However recent changes to internet do allow a person to move to another country and retain instant video connection with their family and friends back home and to watch their favourite TV shows and read their favourite newpapers from back home. So by my theory in future more Danes and Slovaks will move for bigger better opportunities overseas. More likely to be Slovaks who have a standard of living similar to ours rather than Danes who are wealthier.

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  4. Remember Edmund Hillary and Tensing Norgay – not so very long ago – the first to conquer a pristine summit of Mt Everest

    Now witness the immages of the hordes queueing up to get to the summit. On the way up and on the way down they are stepping over dead bodies and on the descent they discard their oxygen tanks and dump them wherever

    That’s where the wealthy are going – Nepal – USD $30,000 a pop

    That’s the contemporary image of 5 million tourists annually and 1 million migrants (last 10 years) tramping all over NZ with the government and service industries bending over backward to facilitate the hordes

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    • I think you will die if you budgetted US$30,000 a pop. That’s the cheap not enough oxygen fare.

      Adventure Consultants charges $US65,000 ($NZ99,400), unchanged since 1994.

      The biggest single chunk is the $11,000 permit fee charged by the government, but then there’s cleanup costs, medical charges, insurance, guides, and of course, equipment.

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      • If you go back 160 years then you would find 80% of the population would be new migrants trampling all over NZ and burning villages compared to the meagre 25% of the population today that are mostly peace loving.

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      • GGS – my bet is that 160 years almost all those migrants were peace loving. However they supported a govt and paid it taxes to support a police force and an army. No difference to today. Maybe there were more ardent Quakers per capita during Victoria’s reign than Elizabeth’s.

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      • Railways and roads radically transformed much of the natural environment, facilitating forest clearance, flaxmilling, the drainage of swamps and a transition to pastoral farming.

        The impact on Māori was massive. The railway lines that edged inland from the coast nibbled away at the edges of the Māori landed estate before slicing it up into more digestible chunks for the state and settlers to consume. It may have taken four decades, but the rail-building programme launched in 1870 eventually prised open the Māori heartland of the central North Island. Ultimately it was public works and immigration programme, rather than the wars of the 1860s, that cemented the colonial government’s authority over all of New Zealand.

        https://nzhistory.govt.nz/politics/the-vogel-era/vogels-legacy

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      • GGS 160years ago a natural wilderness was converted to farming. 140 years later we reach a production possibility frontier and we turn to property development as part of a new population ponzi scheme.

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    • Will come back to this more extensively next week, but I don’t agree with that framing: we have simply pushed the limits of the natural resources, absent favourable specific productivity shocks, with a rapidly growing population.

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      • NZ has pushed the limits of natural resources with 10 million cows that eat to the tune of 200 million people.

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      • It would be awfully embarrassing to the government(s) if it was shown that Eg real wages in tourism and hospitality fell 24.5% between 1979 and 2006 as tourism lecturer David Williams told RNZ. I’m not convinced that our public service acts in good faith these days.
        Do we have data on individual industries?

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  5. Finished it.
    It seems to me that in our globalised world it is now every man for himself. There just isn’t anyone in the media to call them out.

    Why do you say NZ is Richer now than 50 years ago, Michael. Obviously some things are better (cars, double glazing and insulation, internet, medial advances. Surely 50 years ago some occupations were better paid than now (bus drivers and teachers)?

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    • I can definitely attest to being richer now than 30 years ago with $9 million in properties today and a $200k wage compared to $100 in my pocket and $30k wage in my first year in NZ.

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      • But back then, 30 years ago, I had the pleasure of driving a brand new NZ assembled Holden Commodore issued to me as part of Fletcher buildings company fleet vehicles and replaced every 3 years compared to my current Japanese imported Lexus now 11 years old.

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      • Sorethumb, you left out the most important part ie what economic activity will return the most dividends to the shareholders?

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  6. Your actual post asks for comments about comparators, and broadly you are right. There are no obvious takers. Denmark, Netherlands are desirable comparators as famous dairy countries but not realistic (although I want to make a point about this further on), I recall from much earlier posts that you have considered this previously, but are there intra-country comparators which are neatly delineated, e.g. states within the US? Alaska or (better perhaps) Hawaii must offer decent data against their continental counterparts?

    The OECD is a problem in all of this – they prescribe medicine which we have dutifully taken and then either praise NZ or shrug their shoulders. I think the praise bestowed on NZ from OECD goes to the head of policy makers – any foreign attention has an amplified effect in NZ despite the evident flaws of the subject matter (e.g. Ardern). Given the remoteness you identify, instead of asking why does NZ do so poorly (despite following the OECD programme), we ought to ask why does it do so well despite the handicap?

    Concerning the draft chapter, I had a couple of comments (although I read it late last night and intend to print and read it properly when I have time). You make reference to emigration from NZ but I feel this not a powerful argument as NZ is also special in this respect – two other OECD countries have similar emigrant volumes and those are Portugal and Ireland (to Spain and UK). In each case, the common feature is a close and easy (or non existent border) and similar language and culture. Ireland is possibly stronger economically than the UK as a whole, but there is a strong pull towards the UK nevertheless. Australia is bigger, warmer and a bit wealthier, so it is hardly a surprise people move there. If wealth and income were equal I suspect more people would still emigrate.

    Another point is one that you have made more directly in the past, but obliquely here, at the bottom of page 10. This is a pessimistic argument that not only is NZ remote, but it always will be (true) and the general economic trend is against remoteness. I don’t know the answer to this, but no one does (it is a question about what the future will bring in the end). My own, totally uneducated view is that New Zealand was stuck in a cosy colonial agricultural loop for one hundred years which did okay, and at the point where we were dumped out of this, instead of restructuring the economy to be come a new Denmark or Netherlands, we instead embarked on think big projects, first Muldoon’s, and secondly the “big NZ” one (which you have correctly identified as such). At no stage did we ever orient the economy to achieve an escape velocity from the colonial butter/wool/lamb model – yes market forces from the 80s introduced some efficiencies but that was always going to be pushing on a string. Now we find ourselves having to find a substitute Britain, which of course links to the other key topic on your blog (China). We will need to suffer some pain again to truly make the break from the colonial model, but if done properly, I see only opportunities for NZ in the new internet world.

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    • Unless you live in a Communist State command economy little chance to see a major shift in “orientate the economy”. Muldoon tried with Think Big and ultimately that failed. Individual business people, (which includes farmers), make the decisions not politicians as to what is profitable for them. The swing away from Britain and the “colonial agricultural loop” was actually quite successful for the farmer led industries who found markets in the Middle East and elsewhere for their production. Subsides went in the 1980’s, farmers tightened the belt and kept going. From my perspective the poorest performing NZ industry in the last 50 years is manufacturing. Very few NZ manufacturers have grown to be world leaders. The farmers with Fonterra have built something the suits like GGS have never been able to do. Industry worldleadership.

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      • You left out the part where our farmers are the most heavily government subsidized industry in NZ. A billion dollars of taxpayer funds will go towards killing cows and killing kiwi fruit trees for disease control. Taxpayer tens of billions have gone towards roading for Fonterra to drive its trucks to collect milk.and irrigation to grow grass that feed 10 million cows that eat as much as 200 million people.

        The economic returns of 10 million cows is $17 billion in milk and meat. The economic returns of 200 million people runs in the trillions. Muldoon did the right thing. It developed NZ with highly skilled people.

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      • Not to forget, our customs military at our borders, DSIR and DOC are also taxpayer subsidies’ for our farmers.

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      • Last time I checked in Fonterra wasn’t performing strongly – the general consensus seems to be it hasn’t lived up to expectations.

        I don’t mean to criticise NZ farmers – they certainly have improved considerably since Britain joined the EEC, but further productivity gains to be had in agriculture in NZ are likely to be limited. Sunlight, rain, land are all fixed – the only variable being macro-economic and international factors (both of which can swing either way, beyond NZ’s control).

        My point was, exactly at the moment NZ had to re-invent itself economically, (1973) the government embarked upon firstly Think Big, and then very soon afterwards, mass immigration. Both changes, particularly the latter, imposed unusual incentives in our market – e.g. directing all activity and investment into infrastructure and housing construction, forcing up the value of the dollar… of course manufacturing (for export markets) won’t perform well in these circumstances – nor will export services or basically anything else aimed beyond NZ’s shores.

        You say “Unless you live in a Communist State command economy little chance to see a major shift in “orientate the economy” – but you miss the point that NZ’s mass immigration programme is a policy tool being used by recent governments to orientate the economy. Question is, what effect does that have on balance?

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    • instead of restructuring the economy to be come a new Denmark or Netherlands,
      ……………
      Why should that be a possibility? Maybe NZ was never going to be “a new Denmark or Netherlands” but should live frugally and efficiently with a smaller population, compensated for by lifestyle?

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  7. As technology advances, NZ’s physical remoteness will become less and less relevant as an impediment to economic growth; it might even become an advantage as people migrate to NZ to work from here remotely and enjoy the advantages we can offer as a safe and beautiful country. Policies need to focus on how to harness technology to make remote businesses viable from NZ. In the medium to longer term i think technology will overcome the impediments you focus on. I think your continued focus on remoteness is way too pessimistic and backward-looking. I am more optimistic that our future is bright because of technology, provided that we focus policies in ways that harness it.

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    • You are saying roughly what I said two years ago. Technology is in our favour and so long as we keep NZ safe and beautiful that is in our favour too. I did some work for a supplier of aircraft parts and he found the time difference was often to his advantage just as our being in the southern hemisphere gives our stone-fruit crop an advantage when sold in the northern hemisphere. There are advantages and technology and established global infrastructure is making it ever easier to do business. [I recent read about the first shipment of frozen meat from NZ and their struggle to keep the freezer working – it would be far easier to do similar today and without such a massive investment.]

      However I do find the figures and the comparisons significant. It is your ‘focus policies in ways to harness it’ that needs more explanation. I love being a New Zealander, as proud and patriotic as only a newcomer can be. But I simply struggle to envisage your policies. The only one I can think of is some means of persuading New Zealanders to invest in businesses rather than property; and that does seem rather weak to turn our economic direction around.
      My understanding of the problem is that it is rooted in human psychology. The teenage singer Lorde from Takapuna produced a world wide hit and instantly moved to the USA. Prof Spoonley says a survey of academically successful school children in Taranaki had none planning to stay in Taranaki. I’m not doubting your potential policies to create businesses but how do you keep the successful ones in New Zealand? The more multi-cultural NZ becomes the harder it will be and that is a genie out of the bottle now. Every educated New Zealander has friends or relatives in other countries and has had foreign holidays. Just from my own holiday last year if I was young and successful why would I live in Christchurch or Wellington if I could live in Toulouse or Basel or Vienna or Frankfurt – all clearly with a better wealthier lifestyle for a young person.

      Very seriously I would like to see your answer – any policy that creates and keeps successful businesses in NZ will get my enthusiastic support.

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  8. Starting points to harness the economic benefits of technology as a means of encouraging foreign businesses and individuals to operate from NZ include:

    – strengthening internet and mobile coverage throughout the country, bandwidth and speed;

    – establishing fintech through innovation hubs and regulatory sandboxes, as is being done in several leading countries;

    – reducing the company tax rate to a level that compares favourably to other countries;

    – exploring the efficacy of company location tax incentives and likewise for individuals to migrate here to relocate their businesses here;

    – more generally, for NZers, promoting a culture of entrepreneurship in the school curriculum;

    – exploring the efficacy of well designed tax incentives for research/development, high tech and innovation;

    – reviewing and exploring scope to reduce regulatory hurdles and costs for businesses;

    – revising employment law to make it easier to hire and fire people.

    I think Treasury needs to establish a work program in liaison with business to develop a suite of policies to strengthen productivity and shift incentives to facilitate innovation and encouragement of foreign firms to locate parts of their operations here.

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    • 1. maybe a life time in computing has made me skeptical. But if you see our future in businesses related to our unique rural areas then I agree. That is where broadband bandwidthight help.
      2. Auckland has an innovation hub. Not sure how much it helps. Skeptical but why not give it a try.
      3. Obvious. Be like Ireland. Always keep it lower than Australia.
      4. Isn’t this like Ireland? To date immigration for business investors has not been a major success – probably because it has been used as a way of buying residency (I had an immigration lawyer trying to write a business plan for me until I insisted I would use the ‘skilled’ category). However if your other points were implemented then this might make sense.
      5. Judging by the Kiwis I met working in other countries there is no need. However anything that better links adult working life and school would be great.
      6. Previous articles by Mr Reddell have made me skeptical. There seems to be very little evidence that tax rebates for R&D make any difference. I also doubt ‘well designed’ is possible.
      7. True but if they were obvious we would know about them. It is said NZ is already the easiest country to start a business.
      8. True but unlikely with our current govt. My own experience is trial periods are a great idea for small businesses. Before they introduced them in the UK a computer project would fall behind schedule (very common) so new staff hired and then they would sit around doing nothing because established staff were too busy to train them. They brought in a trial period (4 months??) and then employers had to train you in order to find out whether you were rubbish that needed to be ditched. Not essential for businesses big enough to move staff around (IBM never sacked anyone and they were successful).

      I would push for points 3 & 8. Adding one of my own: delay citizenship until 10 years of residency or at least 5 years after tertiary education. It is too easy for a bright student from India, China or other 3rd world country to get a PhD in NZ become a citizen and then with the advantage of a NZ passport go and start a business in another country.

      Finally keep emphasis on a phrase in your earlier comment ” a safe and beautiful country “. We have to maintain it, not let it slowly decline as it has for the last 15 years.

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    • All of these bullet points are expressed in the passive voice, which is the basic problem. Who will do these things? With what money? Points 3, 4, 6 and 8 are obviously in the remit of government, ok fine.

      For point 8 – I can speak with some professional experience of these matters – there are few other developed countries with more liberal and flexible employment laws than NZ. This is not what is holding NZ back. If you consider for example Germany, a high productivity, wealthy state, the employment law situation is abysmal (very very hard to get rid of poor performers without having to make huge payouts, and the combination of laws also makes it undesirable for longer term employees to change jobs). There are far worse examples I am sure inside the OECD. There are some workplace culture issues in NZ that could improve (from my memory of working there a decade or so back, a pointless insistence on timekeeping and an aversion to working from home).

      Point 5 I guess is in the governments control, as it defines the curricula. Personally I would prefer an emphasis on getting the basics right, rather than adding fashionable new subjects to an already crowded mix. Better pay for teachers would be a good idea too, rather than recruiting outside NZ.

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    • Open democracy instead of representational democracy? Well the former does sound more legitimate. The nearest example would be Switzerland which seems more conservative (votes for women in 1971) but successful with its economics whether measured by GDP or by wellbeing.
      It is hard to imagine our poliiticians will vote themselves out of the job of taking care of us all. They will point to Brexit as proof that asking the people to think for themselves is unwise.

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  9. “Economic history is a never-ending series of episodes based on falsehoods and lies. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.”
    -Soros

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  10. As an often trenchant critic of your often limited view of Productivity failure in NZ I enjoyed your read. I often criticised you over several years for ignoring this factor.

    However now I would argue that you are taking the academic approach of trying to isolate for one factor, remoteness.

    Of course it is a factor, so is lack of population (or market size), the mix of our population, eg resurgence of Maori birth rate,the huge influx of Polynessians in the 70’s, Chinese in the 2000’s the fact that most of our business is “jobbing” as opposed to true manufacturing,(in other words something only happens when you get an order), rise of the Govt sector as a proportion of GDP, the allocation of resources within that sector (welfare over infra structure)., the propensity to copy Europe and over regulate, Politicians who have no business or economic experience (our education system mix, .the mix of the economy I could go on

    Our failure, as you call it is only relative, against who? Well, we are unique so we could be a success on any scale that measured that uniqueness.

    The question you have to answer is :Why do we choose to be a relative failure?

    As yet I don’t think you have answered that question. But good chapter!

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    • Remoteness is not a factor. Businesses from all around the world sell product in NZ. They easily transport goods into NZ. Our businesses can’t compete because of our small domestic market. It boils down to simple pricing. In a billion people market, you only need to make $1 margin to have a $1 billion dollar company. In NZ if you price at $1 margin and you can only create small $4 million businesses.

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      • If we were truly remote and isolated then agglomeration would automatically occur. But because we are not considered remote or isolated by the rest of the world, manufactured goods come freely and easily into NZ at much cheaper prices due to them having scale and us far too small a domestic market.

        It is far easier to tack on a small market to a larger market than to try and tack on a larger market to a small market. Branding loyalty, pricing etc and also the managers operate on different types of market and procurement strategies. Overseas managers find it rather difficult to adjust to low volume and high margin markets like ours.

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  11. Why do we choose to be a relative failure? Because the establishment is thriving so they don’t notice. The elderly are better off than their parents, the upper middle classes have a great lifestyle. It is the young and the working class who are suffering – living in debt with little hope of decent accommodation. When home ownership drops below 50% then we might expect a revolution.

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    • Because the establishment is thriving so they don’t notice. Very true Bob. People have very different life experiences and yet they become the (only) voice. One of my favourite books is Two Years before the Mast by RH Dana. He was headed for college but decided to go to sea in the hopes of improving his failing eyesight. His book led to the improvement in the lives of ordinary seamen.
      Our current culture wars are classist in so far as they are between cosmopolitans who represent those who believe they are winners who can compete with anyone and lesser mortals who relied on a national family for support. The white supremacists are the white working class and the others are they who were once the hung drawn and quartered.

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  12. Great post! I’ve never seen the larger picture of your overall view as well as I have now after reading this post.

    I’ve always taken a liberal view immigration, that it should only be limited to the extent absolutely necessary. After reading that I’m much more coming around now to thinking maybe the targets you’ve described (down to ~10,000pa) might be appropriate.

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    • Unfortunately that overall view of our remoteness is wrong. If we were so remote we would still have own manufacturing being isolated. The rest of the world does not believe in our dreamed up remoteness. They all sell their products here in NZ and surprisingly for some products we have some of the lowest prices in the world which our local manufacturers can’t compete with.

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    • Curiouskiwicat: I’ve been reading this blog for a couple of years and also have been persuaded by the economic arguments against excessive immigration. Given refugees plus partners marrying Kiwis you will never get the figures down to 10,000pa. However between 15,000 and 25,000 would leave us similar to other advanced countries which encourage immigration.
      The economic argument for/against immigration has to cater for Kiwis choosing to emigrate and high numbers of long term work visas.
      Possibly more important is the social argument against high immigration and this is dangerous territory since reasonable concerns about social cohesian easily become ‘fear the alien’ and ignorant racism (worth comparing with Victorian fears of Catholics). For myself this simplifies down to a class issue; so much so that I fear I’m becoming a socialist. But the evidence is clear wealthy highly skilled immigrants do well for themselves and for their new country whereas low paid low skilled immigrants do well for themselves but introduce 3rd world work exploitation, reduce the wages and training of native workers, distort investment into cheap labour rather than technology. For an example compare muslim Indian immigrants into the USA – they have the highest salaries, lowest crime, highest educational achievements, least drug use etc. Then compare to almost the same ethnic group – the Kasmiri and Bengali immigrants to the UK – not a great success. The difference being class – wealthy professionals go to USA while it was displaced peasant farmers who went the UK.
      Not sure whether my attitude to immigration is liberal or illiberal.

      Liked by 1 person

      • In the long term the projections indicate:

        Increasing numbers and proportions of the population at the older ages.
        The population aged 65+ (0.70 million in 2016) has a 90 percent probability of increasing to 1.32–1.42 million in 2043, and to 1.62–2.06 million in 2068.

        The population aged 85+ (83,000 in 2016) has a 90 percent probability of increasing to 239,000–284,000 in 2043, and to 333,000–467,000 in 2068.

        http://archive.stats.govt.nz/browse_for_stats/population/estimates_and_projections/NationalPopulationProjections_HOTP2016.aspx

        This means that as population ages and in order to have the young people to pay taxes and to assist and care for the older folk that just hang around waiting to die and just won’t die you do need population to increase. Simple maths.

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      • GGS; There is some evidence that after a century of each generation living 2 years longer than the generation before it that we have gone into reverse and life expectancy in some developed countries is declining (they blame in on fast food).
        We could copy oher countries retirement ages (Iceland 67 and Ireland 68). Certainly the retired people I meet at my local liesure centre, at my gardening society and in U3A meetings are energetic into their eighties. So young tax payers paying for the elderlies super is simply a political decision – a nettle too tough for John Key but handled by most European leaders.
        You have a better argument about care-giving – whereas in the past most of the elderly just dropped dead now with advances in medicine we do tend to hang on severely ill for much longer.
        The problem with your argument about maintaining immigration rates to cater for the elderly is the maths. NZ absorbed roughly 250,000 immigrants over the last five years; average age about 30 so by your 2068 date that will be potentially another 250,000 over 80s. You are proposing an exponentially growing population.

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      • What annoys me is that the multicultural ideology has meant that two countries with mega populations and unique identities now have a claim to this country. It is that which has cooled relations between Australia and NZ. Thinking like this is called “othering” – I would call it seeing the lion in the grass. The police call on people with guns plus negative opinions about foreigners on line and ask what they think of Muslim’s. The question should be directed to the liberal elite: why do they think their ideology is more powerful than anyone else’s? It is only in Western countries that the majority ethnicity is under attack; aboriginals are painted as dispossessed (not the European aboriginals) and migrants are welcomed as “diversity”.

        We find that (a) there is consistent support for the constrict claim for aspects of social cohesion that are spatially bounded to neighborhoods, (b) support for the constrict claim is more common in the United States than in other countries, and (c) ethnic diversity is not related to less interethnic social cohesion. We discuss the implications of these patterns.

        https://www.annualreviews.org/doi/10.1146/annurev-soc-071913-043309

        Constrict theory. The first theory to derive hypotheses on the effect of ethnic diversity on informal social capital is Putnam’s (2007) constrict theory. … Putnam’s (2007) constrict theory proposes a direct negative effect of ethnic diversity on informal social capital.

        In view of the great liberal project under way there can only be one justification and that is that the benefits of immigration are a “no brainer” Nigel Latta and “the arguments against immigration are unsustainable” -Ali Achmed – Something (RNZ –A Slice of Heaven).

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      • Sorethumb: Does identity relate to the faces we recognise? “”The theory of Dunbar’s Number posits that 150 is the number of individuals with whom any one person can maintain stable relationships.”” In traditional PNG villages when more than 150 people lived in one place the village split into two different locations and became over time two villages. That held true for over 800 languages and as far as we can tell about 90,000 years until the arrival of the British and after about 70 years the formation of Hanubada (means the big village) formed from two coastal villages conveniently close to the British colonial govt which grew in population until they merged.
        I doubt I talk to more than 50 people in a year (excluding checkout operators) but I guess I recognise about that 150 faces – just familiar faces in the leisure centre, library, neighbours, etc. The current success of NZ immigration is that my 150 familiar faces covers a wide range of origins – with Chinese, Indians, Russians, Samoans, Maori, etc and they are all reasonably integrated that is they identify as Kiwis and regularly interact with me and with one another.
        What I fear is multi-culturalism as I found it in Bradford and in Spitalfields where there is as you wrote “”aspects of social cohesion that are spatially bounded to neighborhoods”” – here the 150 faces you know are all the same as your own.
        It is human nature to live near people who are like yourself so the current well mixed immigrants of Auckland are beginning to consolidate into what our local sociologist calls distinct vibrant ethnic communities and I fear are ghettos. Technology has changed in the last 15 years that makes this issue a greater concern. In the past an immigrant had little choice but to absorb Kiwi culture because that was the only option in the media. Now immigrants have video connections to family back in their country of origin everyday; online they read their own newspapers and watch their own TVs and films; there are fewer incentives for them to integrate (socially cohere). The best defence would be to moderate our rate of immigration and aim for well educated, well paid immigrants.
        You are right to suggest there is a ‘great liberal project’ which unthinkingly defines all immigration as good immigration. As a reaction against the worst horrors of racial conflict I can understand why they are nervous of admitting to any negatives about immigration. Of course the small negatives do not hit the middle class journalists and academics – they are not bus drivers having their wages set by Richie’s employing the cheapest 3rd world drivers, they are not school leavers looking for an employer who will train them to be a chef, they are not looking for adequate family housing while on a low wage.

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