Month: July 2019

Thoughtful analysis of productivity from the Opposition

Michael Reddell Australia, Productivity

The Opposition in the Australian Federal Parliament that is.

In my post yesterday, I noted  that Simon Bridges’s latest speech continued the pattern in which our Opposition pretends there is no real structural problem in the New Zealand economy: no decades of productivity underperformance, no near-complete absence of any productivity growth in the last several years (whether under National or Labour).

And so it was some mix of refreshing and depressing (would that it were so in our country) to yesterday read a new paper by the Australian Shadow Assistant Minister for Treaasury on “tackling Australia’s productivity crisis”.  No doubt it helps that the Shadow Assistant Minister was previously a professor of economics at the Australian National University (I wrote about a paper he gave in New Zealand last year here).   And perhaps the political context is different: it is now six years since the ALP was in (federal) office and it is three years until the next election.  And Leigh isn’t the highest profile ALP politician.  Nonetheless, a moderately senior figure in the main opposition party actually went to the effort of writing a serious paper on productivity failures in Australia (not even engaging mainly in gotcha politics –  all the fault of the other lot).   Would that it were so here.  If National doesn’t have any former professors of economics, I’m sure there must be some serious economists around who would be National supporters and might be happy to help, were the party to be seriously interested in addressing –  rather than avoiding –  the issue.

And I don’t say any of this because I agree with Andrew Leigh’s prescriptions.  Mostly I don’t –  in fact, to a first approximation I think he has the wrong mental model of the Australian economy –  but he is a politician showing every sign of trying to take the issue seriously.  Productivity growth is what underpins any long-term sustainable improvement in material living standards.  As he puts it (with his particular left-wing emphases)

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Here is how Leigh introduces his article

At the start of June, the Productivity Commission quietly dropped a bombshell. Australia’s productivity growth had basically stalled. Labour productivity — output per hour worked — was more or less flatlining. After a generation in which labour productivity had grown at almost 2 per cent a year, it had tumbled to just 0.2 per cent.

The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

Note that in the final paragraph of that extract is one difference between Australia and New Zealand.    In New Zealand wage growth has outstripped growth in nominal GDP per hour worked (ie the combination of terms of trade and productivity) for some time, but this is the Australian version of that chart

wages in aus

There is a variety of possible explanations, but the comparable New Zealand chart slopes upwards, not downwards.

But how does the aggregate productivity picture look for Australia?  This is quarterly ABS series of real GDP per hour worked.

aus prod.png

In the last two or three years, the picture is quite as bad (no growth at all) as in New Zealand –  bearing in mind that the average level of productivity in Australia is far higher than in New Zealand.

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century.  In doing so he relies on a recent speech from a senior Australian Treasury official on productivity (another contrast to New Zealand), reporting some research work Treasury had done.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

Go to Quinn’s speech and you find this chart (unfortunately a bit fuzzy)

quinn

The left hand panel is the point Leigh is making.  It doesn’t look very good.

On the other hand, the economywide cross-country comparisons really don’t look so bad at all (and being annual data you don’t see the recent flattening in the way the quarterly chart above shows).

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch (as I’ve used in previous charts and tables for NZ comparisons: US, France, Belgium, Netherlands, Germany, Austria, Denmark, Sweden).

AUs prod 2

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms.   Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work.   It isn’t a good performance at all –  the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process –  but it is a rather different emphasis than in the Federal Treasury chart Leigh draws on.

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years –  all those newly developed iron ore and LNG exports.  There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy).   I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance  (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which –  in this context –  I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders.  Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

aus norway

Australia –  still building up its fresh wave of resource exports –  has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years.  And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article.  There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia.  My own story of Australia’s underperformance is much like that for New Zealand.   Remoteness and distance are huge issues –  perhaps even increasingly important globally –  and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation).  It isn’t just a matter of simple division –  but it is close to it, bearing in mind what else we know about the Australian economy –  to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

There are lots of detailed points in Leigh’s article, some of which seem more compelling than others (I’m not persuaded that getting more people into tertiary education is likely to make much economywide difference, when the people not going now are likely to be those who would benefit least from doing so –  it hasn’t been worth their while to do so). And I’m not convinced he has the right model to think about Australia –  where the bigger issues seem more macro in nature – but it is just refreshing to see a moderately senior active politician actively engaging in thinking about, writing about, talking about, how productivity performance might be markedly improved.  Because, as he says, it really matters to all of us.

Where there is no vision

Michael Reddell National Party, Productivity, Uncategorized

Each year, as a disillusioned voter (pondering being a non-voter, for the absence of credible options) I go to the effort of tracking down the conference speeches of the main party leaders.  What party leaders choose to emphasise, in one of their most-covered speeches of the year, can be telling.  As, of course, can what they choose to omit.  When Labour was in Opposition I never took very seriously talk (eg from Phil Twyford) about  fixing land use regulation and thus materially lowering the cost of housing because the leader never mentioned the issue, including in conference speeches (Jacinda Ardern still doesn’t, in conference speeches or elsewhere).  Of course, there are other speeches and interviews in the course of a year, but the conference speech isn’t just for geeks (see, eg Q&A interviews) or specialist audiences.  Things leaders care about, highlight, and spend reputational capital on tend to be things that get done.  Others things, not so much.

What, then, did Simon Bridges have to say in his conference speech on Sunday?  There was lots of rather sickly shtick –  his wonderful wife, his lively children etc.   And there was a rather strained attempt to suggest that somehow he’d overcome deprivation and disadvantage himself

Because it is the National Party that has shown that a young Ngāti Maniapoto boy from West Auckland, who talks like a boy from West Auckland, the son of a Baptist preacher and a teacher, can grow up to become the first Māori leader of a mainstream party in New Zealand, and the first Māori Prime Minister of our great country.

(I struggle to take seriously that sort of line because “son of Baptist preacher and a teacher” exactly describes me –  our fathers were ministers in suburban Auckland at the same time –  and I’ve never once felt any disadvantage.)

Perhaps he has conveniently forgotten that one of his recent predecessors –  Don Brash –  was the son of a Presbyterian “preacher” and of a mother who left school before high school, or that the first National Party Prime Minister was the grandson of a Yorkshire farm labourer. Or, frankly, that as far as I can see not a single Labour or National Prime Minister has come from any economically-privileged background.  Perhaps there are people in politics born with the silver spoon in their mouth –  the National Party president most notably at present – but that hasn’t been the background of any modern Prime Minister (or major party leader).

There are even some things in the speech that did resonate with me, including many of his criticisms of the current government.  But the centrepiece was, of course, cancer care.  I don’t have a view on the substantive merits of the specific initiative National is proposing, which looks like smart tactical politics, but perhaps rather small beer.   I’m inclined to think health is underfunded (there is a chart and some thoughts in this pre-election post, and the Budget estimate of health spending of 6.1 per cent of GDP this year is pretty much in line with what Labour was envisaging then) even on the basis of our current economic performance) but that wasn’t really his case.

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing –  not a word –  to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments –  led only by National and Labour –  have presided over.    There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) –  and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

What do I have in mind.  Well, of course, there is the shrinking – sideways at best –  share of foreign trade (exports and imports) in GDP, even though successful economies –  ones catching up on the leaders – are almost always marked by a rising foreign trade share.

ex and im

But the simplest starkest chart is the one showing labour productivity growth (or lack of it).

GDP phw mar 19

No labour productivity growth at all for four years now, and barely any for seven or eight (perhaps 1 per cent total growth since 2011/12).     Mediocre or worse as I think the current government is, these failures –  stark even in international comparison (and this isn’t a great decade for global productivity growth) didn’t start with Ardern and Robertson.   Now, sure, National people like to quote growth in per capita GDP but (a) even that was much lower over National’s term than in the previous nine years (lower again now) and (b) to the extent it was respectable for several years this decade, that mostly had to do with reabsorbing workers displaced in the last recession (the unemployment rate falling from about 6.5 per cent to about 4.7 per cent when National left office).  To repeat, as the chart illustrates, there has been barely any productivity growth, and although the unemployment rate probably should be pushed lower (see Reserve Bank underperformance), it is only productivity growth that will underpin sustained growth in material living standards.

National is promising a discussion document on economic policy later in the year.  I’ll look forward to that, and will study it carefully, but at present there is nothing in what they are saying –  and nothing in the Bridges speech –  suggesting that they really envisage anything different from what they did in the previous nine years, the period in which the structural economic indicators languished, even as a pretty muted cyclical recovery was playing itself out.     Some of the specifics Bridges mentions may even make some sense, but (individually or collectively) they aren’t the stuff of a transformational lift in economic performance, of the sort New Zealand –  including our ability to fund cancer treatments –  really needs.  It isn’t clear National has such a vision, let alone any real ideas about how to bring such a transformation about.

Sadly, of course, that does not mark them out from the current government, where we regularly hear about building a more “productive and sustainable” economy, but see nothing specific that might make a credible and useful substantial difference.

MPC appointments: prioritising sex over expertise

Michael Reddell Monetary policy, MPC, Reserve Bank Act reforms

The lawlessness of the Board of the Reserve Bank of New Zealand never ceases to amaze me,  Just in recent years, there was clear evidence that the Board simply ignores the requirements of the Public Records Act.   There was their facilitation of what was almost certainly an unlawful appointment of an “acting Governor” in the run up to the election (decent outcome in the abstract, but unlawful nonetheless).   And, of course, they play fast and loose with the Official Information Act, apparently confident that the Ombudsman is largely toothless.  It is all the more extraordinary in that since 2013 the Bank’s Board has had a senior lawyer as a member.  I’d not paid much attention to him, not knowing anything about him, but when I finally met him last week –  where he told us he “trains judges” – it reignited my interest in just how a senior lawyer makes himself party to so much questionable –  borderline at least – conduct by a public agency.

We’ve seen a repeat of this sort of “the law doesn’t really apply to us” mentality around the release of papers relating to the appointment of the new statutory Monetary Policy Committee.  I wrote about that here.   I’d lodged requests with both the Minister of Finance and the Bank’s Board.  The Minister took a while to respond, but his responses were within timeframes allowed by law (a single extension of time, if that extension takes the deadline beyond the usual statutory 20 days).  The Board, on the other hand, extended, extended, and extended again –  quite unlawfully (Ombudsman advice makes that interpretation quite clear) –  before finally releasing some material a couple of weeks ago.      They did have a fairly junior person apologise for the delay, but that is pretty meaningless (no penalty on them –  even after I complained to the Ombudsman –  and no sense of any serious intention to amend their ways).   And yet these people – the Board –  are supposed to keep the Governor in check (and the government is now proposing to give them even more formal powers).

But this post is mostly about the substance of the MPC appointments.  There are two releases.  The Board’s response is here, and the Minister of Finance’s release is here.

Grant Robertson OIA release on MPC appointments

I know for a fact that neither release is comprehensive (including things I’ve been told privately, things alluded to in what has been released, and rather obvious omissions –  are we really supposed to believe that, eg, the Board chair did not brief the Board on his discussions with the Minister?) but what has been released does quite a lot to flesh out a picture of a process that doesn’t really seem to put anyone involved in a particularly good light.  There are even signs that the Board is taking the Public Records Act a bit more seriously than they did around the appointment of the Governor.   My earlier post on the new MPC is here: these releases answer some of the issues I raised there, mostly leaving me more concerned than I was previously.

One of my longstanding concerns about the new regime would be that it would largely replicate the dominance the Governor had in the old legislative model (where the Governor was, by law, the single decisionmaker).  Part of the reason for that concern was the statutory majority of internal members of the MPC.   All those internal members owe their day jobs to the Governor, who also decides on internal resource allocations, pay etc.  A really strong Governor might encourage diversity of perspective and challenge. There has never been any suggestion Adrian Orr is that sort of person, indeed rather the contrary.   And the external members are appointed on the Board’s recommendation, but…..the Governor himself is a member of the Board.  And instead of distancing himself from the process, and leaving recommendations to the non-executive directors, the Governor was one of the three man interview panel for the external MPC nominees.    Throw in the code of conduct the Board (Governor a member again) devised and clearly no one remotely awkward was going to get through the screening process.  (Consistent with that, in the four months since the MPC took office, not one of the externals has said a word – that might, in part, be because no media have asked them questions, but there is nothing to stop a more proactive approach.)

Consistent with all this, the Board released the set of questions they used for their interviews with potential MPC appointments.  There wasn’t much sign, from the questions, that the Board was looking for excellence (in anything), but there was certainly nothing in those questions to suggest they were looking for MPC members who robustly challenge, and offer markedly different perspectives over time to, the Governor and staff.

But it was much worse than that.  This is from a Treasury note to the Minister, released by the Minister (note that the Board itself kept this secret)

MPC 1

This is simply staggering, or should be in a country with good quality competent institutions.  And I know Treasury isn’t misinterpreting things, because I was told about this restriction some time ago by a person who was rejected on exactly these grounds –  that they might be interested and knowledgeable enough about monetary policy to be doing some research on it.   By this standard, I guess the Board and Minister (presumably aided and abetted by the Governor) would disqualify (a New Zealand) Ben Bernanke, Janet Yellen or (right now) John Williams, the head of the New York Fed and someone who –  while serving on the FOMC –  has continued to undertake research on monetary policy.   I realise that expertise is going out of the fashion at the ECB (Makhlouf, Lagarde) but their new Chief Economist –  former Irish Governor –  Philip Lane has been an active researcher and writer.  Or one could think of Andrew Haldane at the Bank of England, or….or….or.  Is it now considered a negative –  perhaps a disqualifying consideration  –  if the Reserve Bank’s chief economist was doing research on monetary policy, or does the disqualification only apply to externals, over whom the Governor has less control?  It almost beggars belief that the Minister and Board would get together and disqualify anyone with specific serious expertise in monetary policy from a new Monetary Policy Committee.   Sceptical as I was of the new committee in principle, even I was stunned when I learned of this prohibition.

(And, to be clear, I am not one of those who thinks an MPC should be stacked full of research macroeconomists –  I’d be happy to have a couple of people, of the sort who ask hard questions and have good judgement, with little or no formal economics background at all – just that such people shouldn’t be ruled out in advance.  As it is, the current MPC looks odd in that among its seven members there is not a single one who could really be considered to have a long record of depth of expertise in monetary policy and the New Zealand economy.)

So if the Board, the Governor, and the Minister weren’t looking for in-depth expertise, and weren’t looking for anyone to rock the boat, what were they looking for?   The short answer – suffusing both sets of releases – is women.     In none of the material released to me is there is any discussion about the sorts of expertise that might be sought, or how to build a committee with complementary sets of skills, but there is a great deal of unease –  particularly channelled from the Minister’s office –  about getting women selected (even to point, in some places, where there seemed to be attempts to strongly encourage the Governor to select a woman as his chief economist).  There are records of early approaches by the Board Secretary to get possible women (and Maori) candidates (and a Treasury response which points out that there really aren’t that many adequately qualified women –  not that surprising given how many women did (say) economics honours or masters programmes in New Zealand 30 years ago (in my own honours course at Victoria, the number was either one or zero out of about 15)).    As it is, despite all the huffing and puffing, they ended up with only one women on the shortlist.

There were a couple of other things that were striking.  The Board’s release records various email mentions of trying to identify candidates with legal backgrounds.  This is almost a complete mystery to me, as the MPC has no regulatory responsibilities and the legislation it operates under is pretty straightforward (and the Bank has internal and external legal advisers if things do require any clarification).  The MPC is about cyclical macroeconomics management, and communications thereon.  Someone of a particularly suspicious cast of mind might suggest that a legally-qualified MPC member would be one less knowledgeable person for the Governor to have to bother about.   I’m just genuinely puzzled.

The Board’s release also recorded various exchanges among senior Bank managers about what sort of person might be suitable as an external MPC appointee (they were looking for names to suggest to the Board).  What took me by surprise was the aversion to overseas appointees.  As regular readers know, I do not think we should have (say) a foreign Secretary to the Treasury (or a foreign Chief Justice, or a foreign Governor) but I was always among those at the Bank who saw one of the advantages of moving to a statutory MPC is that it could allow the appointment of one foreign person, bringing a slightly different expertise and perspective to New Zealand monetary policymaking.   It was never clear how feasible this would be –  distance, and relatively low New Zealand salaries being an obstacle –  but it has been tried, and appeared to work, in some other countries.

But that clearly wasn’t the view of the senior management last year.  The then Chief Economist, John McDermott (for example) is quoted as saying

“overseas members would be a logistical nightmare and what is their interest in looking after New Zealand welfare and monitoring the NZ business cycle on a continuous basis? So no from me.”

There is no sign of any of his colleagues or bosses dissenting and no reference to possible overseas appointees later in the any of the documents.  As it is, it isn’t clear how much “continuous monitoring” of the New Zealand economy the MPC members are actually doing (a recent conversation I was party to suggests not much in at least some cases).

Management also debated the issue of whether former RB staff or Board members should be considered (I suspect some might have liked to have Arthur Grimes appointed).  The consensus seems to be (reasonably enough) that there needs to enough distance for such a person to be genuinely external.  For groupies, one can try to guess which names are deleted in this paragraph

MPC 2

Disconcertingly, there are signs that management was open to have serving public servants appointed provided they didn’t currently work for agencies too close to things macro.  There should be an absolute prohibition on anyone working for a government department or Crown entity (other than as an academic) being considered for a part-time external MPC appointment in an (operationally independent) central bank.

The final point I wanted to touch on answered one of my questions from a few months ago.  Writing about the externals I noted

One area where I do have some concern is around the role of the Minister of Finance in these appointments.  In principle, I think the Minister should be relatively free to appoint his or her own preferred candidates, and should be fully accountable for those choices (including through the sort of non-binding “confirmation hearings” –  of the sort UK MPC members face – that I’ve proposed for New Zealand).  As it is, on paper the Minister has no say at all (can reject Board nominees, but nothing more).

But then I’m a bit troubled by the way in which the Board –  all but one appointed by the previous government – ended up delivering to the Minister for his rubber stamp a person who was formally a political adviser in Michael Cullen’s office when Cullen was Minister of Finance (Peter Harris) and another who appears to be right on with the government’s “wellbeing” programme.     They look a lot like the sort of people that a left-wing Minister of Finance –  one close to Michael Cullen –  might have ended up appointing directly.     I don’t think Peter Harris is grossly unqualifed for the role, but I am uneasy that one of the very first external appointees is a former political adviser to a former Minister of Finance of the same party as the one making the appointment.   …. (I don’t think former political advisers should be perpetually disqualified, but it might be more confidence-enhancing had they been appointed by the other party from the one for which they used to work –  thus Paul Dyer, former adviser in Bill English’s office, would probably be better qualified for the MPC roles than any of the recent external appointees.)

I’m left wondering what sort of behind-the-scenes dealings went on to secure these appointments.  I hope the answer is none.  I’d have no particular problem if, while the applications were open, the Minister had encouraged friends or allies to consider applying. I’d be much less comfortable if he had involvement beyond that, prior to actually receiving recommendations from the Board.  It isn’t that I disapprove of politicians making appointments, but by law these particular appointment are not ones the Minister is supposed to be able to influence.    So any backroom dealing is something it is then hard to hold him to account for.

The relevant provision of the Act says just this (buried in a schedule)

Appointment of internal and external members
The Minister must appoint the internal and external members on the recommendation of the Board.

It is very similar to the provision governing the appointment of the Governor.  That provision has been sold consistently as a model under which the Board puts forward a name, and the Minister can either accept or reject the person, but cannot interpose his own nominee.  If the Minister rejects the Board’s nominee, the Board has to go back and come up with another name.  The provision was explicitly intended to leave almost no discretion to the Minister.  (It isn’t a framework I approve of, but it is New Zealand law).

You will recall that in that earlier post I wondered quite how it was that the new MPC just happened to contained two obvious left-wing people, one a former political adviser in the office of a Labour Minister of Finance.  The material released to me answers that question pretty clearly.

I’d assumed that the Board had put up three names to the Minister and he had either accepted them all, or perhaps (though unlikely) had vetoed one name and the Board had then come up with another.   But that wasn’t what happened at all.  Instead, the documents disclose that the Board put up seven names to the Minister for the three external appointeee positions, not ranking or prioritising them at all, and giving the Minister complete leeway to choose any three of the seven.   Actually, they went further than that, in that the Board told the Minister that they had interviewed nine people, and listed the names of each of them, more or less inviting the Minister to suggest that if he didn’t like the seven names the Board recommended he could probably have one of the spare two (since it described all nine as “appointable”).

The documents also make clear that Caroline Saunders was the only woman on the shortlist (or certainly of the recommended seven).    Since Saunders has no background in macroeconomics or expertise in monetary policy, and given that strong focus in the documents on getting women nominees, it is unfortunately hard to avoid the suggestion that she was a “diversity hire” –  chosen for her sex rather than for the expertise she would bring to the MPC.  In the circumstances, how could the Minister not have chosen her?  One would hope it wasn’t so, but –  and this is problem with quasi-quotas –  it is impossible for us, or for her, to be confident that it wasn’t so.  Perhaps over time she will fully justify her selection on the substance, but at present there is no data either way.

Perhaps specialist lawyers will have a different interpretation, but I struggle to see how offering the Minister a list of seven – or even nine  – names and saying “choose any three” is the plain meaning and intention of the legislative text (would offering a list of 50 and saying “choose three” –  if so, the provision is gutted of any meaning and protection?).  The pool of potential MPC members really isn’t that deep in New Zealand and yet –  despite the fact that the law puts the onus on the Board –  we don’t even now know whether we have the best three external people on the MPC.  If this approach is lawful, it must be borderline at best.  (There was, for example, no sign of them adopting that approach to the internal MPC appointees –  there the Minister was given a list of two names for two vacancies, the approach envisaged in the law.)

My own preferrred model remains (the more internationally common) one in which the Minister of Finance is free to appoint whomever he or she prefers to the MPC.  I would complement that with non-binding confirmation hearings of the sort used in the UK.  Under that model, responsibility for the appointment rests clearly with the Minister of Finance, and there is scope for proper parliamentary scrutiny before people take up a powerful role.      Where this (brand new) legislation ended up is that the Minister can appoint his mates, within limits (but pretty broad limits) while pretending that the real choices were made by the Board.

In the end, after months –  not at all consistent with the spirit of the OIA let alone the letter – we did get a fair bit (by no means complete) of information offering insight on the MPC selection and appointment process.  Unfortunately that information tends to cast another shadow over the process, and suggests that the Board –  whose members have no real expertise in relevant areas –  continues to see its primary role as being to accommodate and humour the Governor and, now perhaps, to accommodate and humour the Minister, all behind closed doors.

And there is, of course, also the extraordinary secrecy as to how much these (possibly) second or third XI externals are being paid.  So much for openness and transparency.

Overselling past reforms

Michael Reddell Fiscal policy

Today is, apparently, the 30th anniversary of the Public Finance Act.    There is a conference being held this weekend at Victoria University to mark the occasion, with all manner of speakers over three days, including various famous figures from the reform era including Roger Douglas, Ruth Richardson, Graham Scott, and David Caygill.

There is nothing particularly wrong with conferences of this sort –  although the ever-present question is how much taxpayers’ money gets spent, one way or another –  but much depends on the extent to which such conferences lean towards on the one hand the self-congratulatory and, on the other, the self-scrutinising and challenging.    There was a conference in Wellington a few years ago to mark the 25th anniversary of inflation targeting and the Reserve Bank Act, and although it leaned to the mutually self-congratulatory, a) it had speakers who seemed to offer greater rigour than this weekend’s conference programme suggests is likely, and (b) even partial sceptics occasionally got a word in.   Time will tell about this weekend’s conference, and I hope that at least the New Zealand academic and public sector speakers make their addresses available more widely.

I have no particular problem with the Public Finance Act, which now incorporates the provisions of the later Fiscal Responsibility Act.  But what consistently irks me is the way a handful of champions of the Act oversell it.   Most prominent among the oversellers in Professor Ian Ball of Victoria, who had a fairly senior role in financial management at The Treasury at the time the Public Finance Act and the Fiscal Responsibility Act were being passed.   And the real prompt for this post was an article he had in yesterday’s Dominion-Post.   Whatever else Professor Ball picked up, or contributed, in his time at The Treasury, he seems to have missed the pretty elementary line, drummed into students from an early age, that correlation is not the same as causation.   And that isn’t the worst of what was on display in the article.

He begins

When New Zealand’s Public Finance Act was passed in 1989, it represented a set of changes that was both radical and untested. Partway through its implementation, in 1992, the Economist published an article describing the changes in a generally positive way, but withholding judgment and concluding: “Time will tell.”

With the act’s 30th anniversary on July 26,  it seems the right moment to consider what time has to say, and whether New Zealanders should, at last, break open the bubbly.

To jump to the end, he thinks we should be breaking out the bubbly.  But why?

Much of his case seems to rest on this

[Government] Net worth now stands at over $134b, equivalent to about 45 per cent of gross domestic product (GDP).

But he makes no effort at all –  not even hinting at more-developed arguments in fuller papers –  to demonstrate why we should conclude that the improvement in New Zealand’s fiscal position stems in whole, or even in large part, from these process-focused pieces of legislation (Public Finance Act and Fiscal Responsibility Act).  He also offers no particular reason to suppose the government net worth of 45 per cent of GDP is somehow optimal, or better than (for example) a number near zero, or even negative  (given that by far the Crown’s largest asset, its sovereign power to increase taxes is not included in these balance sheet calculations, and that the actual taxes supporting the net worth Professor Ball celebrates have material –  large in some cases –  deadweight costs, in an economy that has continued to badly underperform).

And while no one is going to disagree that a decent fiscal position (whatever that means) can be a “source of security” (Ball’s words), the evidence he adduces in support of his claim is less than convincing.

The comparison with other countries is striking – the governments of Australia, Canada, the United States and the United Kingdom all have significantly negative net worth, and in the case of the UK and US the negative net worth is roughly the size of their respective GDPs.

The principles of fiscal responsibility imported into the Public Finance Act from the Fiscal Responsibility Act see positive net worth as a “buffer” to economic and other shocks. So it has turned out.

While net worth declined for only four years after the financial crisis, in the four countries cited above government net worth remains, a decade later, on a downward track. A strong balance sheet apparently allows a much quicker recovery.

But, but, but…..Our recovery wasn’t “much quicker”, let along stronger, than those in Australia (which on some measures didn’t have a recession in the first place), Canada, or the US.  And whether one approves of those choices or not, the fact remains that unlike those countries we didn’t use discretionary stimulatory fiscal policy to respond to the last recession (I argue we didn’t need to because we could still cut interest rates).

Ball continues with his straw men

But has the history of running surpluses resulted in slower economic growth than in the comparable countries that have been incurring consistent deficits?

I’m not sure anyone would think there was such a relationship, but set that to one side.  What does Ball have to say?

Apparently not. The latest World Bank numbers (for 2017) show that the five countries have growth rates between 1.8 and 3.0 per cent, with New Zealand second at 2.8 per cent.

Can he be serious?  A senior professor, former senior official, really thinks one year’s GDP growth data, not even correcting for differences in population growth (hint: New Zealand’s has recently been extremely rapid) is some sort of support for his case about legislation focused on the medium to long term?

Perhaps instead he might consider the productivity record over 30 years?  Of his group of countries, ours has been the worst (to be clear, I’m not suggesting that has anything to do with the PFA, simply that one can’t seriously advance New Zealand “economic success” as support for the PFA).

He moves on to matters social.

Perhaps, then, the impressive fiscal and economic results have been at the expense of the social fabric? By no means are things perfect in New Zealand.

To which he responds

The Wellbeing Budget in May focuses on problems of child poverty and mental health, among many other issues that require government attention and resources. Yet these issues are still able to be addressed while budgeting to maintain a surplus.

Few of the (few) cheerleaders for this year’s Budget would claim it was any more than a start, but since the PFA was never supposed to constrain the size of government (it is mostly about process and transparency), of course it doesn’t stop governments spending more –  wisely and otherwise –  if they choose.

Ah, but we are “happy”

New Zealand stacks up very well, scoring near the top in a number of international rankings of social progress, living standards and even happiness (where we are eighth, ahead of the other four countries).

And yet –  and not because of the PFA –  the net flow of New Zealanders is still from here to other countries.

We then get into the folksy analogies

But do New Zealanders benefit from their government having a strong balance sheet?

It is very like having a strong personal balance sheet. There is a greater ability to absorb shocks or surprises without being forced into taking drastic remedial steps – you can fix the car without having to cut the food budget. This was demonstrated in the way the government bounced back, financially, from the financial crisis and the earthquakes.

As part of managing a shock, a strong balance sheet also enables easier access to emergency debt financing. Coupled with this is the benefit of being able to borrow more easily and more cheaply in normal times, if it is necessary or desirable to do so. This might be useful, for example, if there is a need to invest in infrastructure.

I like a folksy analogy as much as the next person, but you always need to be careful using them to ensure that the key elements of comparison are valid.   Here they mostly aren’t.  Positive accounting net worth means nothing about a sovereign’s access to credit, none of the comparator countries whose fiscal performance he laments have had any problem raising debt, New Zealand bond yields (for other reasons) have been consistently among the highest in the advanced world……and, unlike someone whose car breaks down, governments have the power to tax.  And did I note that there was nothing impressive about New Zealand’s recovery from the 2008/09 recession, and New Zealand’s productivity record this decade is even more dire than usual.

And then, without even really noticing, he rather undercuts his own case.

At the time the Public Finance Bill was going through Parliament, the auditor-general said the reforms “will give effect to the most fundamental changes to financial management practices seen in New Zealand’s history. These reforms are enormous, ambitious, and, in large part, unprecedented anywhere in the world”.

Thirty years on, the act has been amended  several times, but the most ambitious elements remain firmly in place. Notwithstanding the apparent success of these reforms, a number of key elements have been attempted by few, if any, other countries.

Reforms that, 30 years on, have not been followed by many, if any, other countries surely should be deemed to have failed an important test.  Other smart people have looked at those “key elements” and concluded that actually they weren’t so valuable or generally appropriate after all.  It was a bit like that with the Reserve Bank Act and inflation targeting: various countries did take some practices and inspiration from our model, but not a single one followed for long our model of putting all the power in the hands of a single Governor and building an accountability framework primarily around the ability to sack the Governor.  Eventually, even New Zealand changed those bits of law, and moved back towards the international mainstream.

Professor Ball ends this way

In October 2018, the Economist weighed in again, saying: “Only in one country, New Zealand, is public-sector accounting up to scratch. It updates its public-sector balance-sheet every month, allowing for a timely assessment of public-sector net worth.”

Perhaps, ahead of any further changes, this might be an opportunity to raise a glass to celebrate an ambitious and successful act.

I don’t update my personal balance sheet every month.   Superannuation funds I’m a trustee of don’t look at their balance sheets every month.   For what conceivable practical purpose do we have monthly estimates of the government’s financial net worth?  At best, financial net worth is some sort of constraint on governments, not the reason for being –  as in, say, corporate accounts.  I’m not necessarily opposed to having the data, but it looks a lot like an example of giving prominent place to what is measurable (on all sorts of assumptions) and not necessarily to what actually matters.   We don’t even need monthly house price data (although we have it) or monthly productivity data (we don’t, and probably shouldn’t) to highlight these egregious failures of New Zealand governments.  And monthly government net worth data –  or the rest of the panoply of features of the PFA –  has done nothing discernible to improve the actual quality of New Zealand government spending (or taxation).

As I’ve argued repeatedly here over the years, I think fiscal policy outcomes are something that successive waves of New Zealand politicians can take considerable credit for.   We had a bad scare in the mid 80s and early 90s and that clearly played a pretty formative part, both in choices political parties made in successive elections/budgets, and in the legislation (eg PFA/FRA) they’ve been willing to pass –  but my hypothesis is that there is a common explanation for both, rather than causation running from the (facilitative, transparent) legislation to the fiscal outcomes.

I tend to be relatively sceptical of net worth numbers (for governments) and the data often aren’t available for lots of countries for long runs of time.  But I’ve run this chart in an earlier post, looking at net general government (ie all layers of government) financial liabilities.

net debt OECD

Here I’d concentrate on the comparison between the blue line (New Zealand) and the yellow line (the median of small OECD countries). New Zealand’s performance doesn’t particularly stand out relative to those other small countries (or to Australia, which has lower net general government financial liabilities than New Zealand), even though we – like them – even though there is a stark contrast to several of the largest OECD countries (notably US and Japan).

Any story about the successes of New Zealand fiscal policy that tries to put much weight on New Zealand specific legislative reforms needs to grapple more seriously with the experience of other well-governed small advanced countries, and make more effort to demonstrate how our legislation accounts for any (rather more marginal) differences.    It also has to ask how credible is a story that suggests that, say, US fiscal problems result largely from, say, insufficient transparency (and other bureaucratic type solutions).  In that respect, it is a bit like the Reserve Bank Act: it wasn’t responsible for the much lower inflation of the 1990s and 2000s (there were global phenomena at work, including widespread political choices to lower inflation), but was a broadly useful framework for managing a commitment to lower inflation and (at least in principle) being open and transparent about how policy would be conducted.

I guess it is good to be able to be proud of things one was involved in over the course of one’s working life.  But I hope this weekend’s conference is a bit more rigorous, and self-scrutinising, than what was on display to Dominion-Post readers yesterday.   Careful evaluation, careful analysis, should be key inputs to the design and updating of good policy.

 

 

 

 

Prime Ministerial whimsy

Michael Reddell NZ politics, UK

Whimsy more than anything else this morning.

I’m no great Boris Johnson fan –  except perhaps as newspaper columnist and (presumably) after-dinner speaker –  but I am a fan of Brexit, and really hope (against hope) that he is able to make it happen, in a way that really sets the UK free of the European Union.  Between his own inconstancy and the opposition of much of “elite” Britain, what actually happens is anyone’s guess.  One possibility –  not inconsistent with any of the possible Brexit outcomes –  is that Johnson isn’t Prime Minister for very long at all. A vote of no-confidence could be lost.  An election could happen (and at present UK polls have the vote split four relatively even ways, in an FPP system).

I was once a close student of interwar British politics (as a geeky teenager I knew the make-up of every interwar Cabinet) and knew that Johnson’s only predecessor as a foreign-born Prime Minister, Bonar Law, hadn’t lasted long –  only 211 days in 1922-23.    But although Law had the shortest tenure for a very long time (only one other British Prime Minister since 1900 has served less than a year), he didn’t have the shortest tenure.   In 1827, George Canning last only 119 days (and then died) and his successor Viscount Goderich lasted not much longer, only 130 days.

And it was here that the contrast with New Zealand struck me.   We’ve had Premiers and Prime Ministers since 1856, 40 of them in total.   Here is the list of shortest-serving Prime Ministers.

Henry Sewell 13 days
Francis Bell 20 days
William Hall-Jones 57 days
Mike Moore 59 days
Thomas McKenzie 104 days
George Waterhouse 143 days
Daniel Pollen 224 days

Some were in the very earliest days (Sewell was the first Premier), but four of them were in the 20th century, one as recent as 1990.  (There were other people who served very short terms who also served longer terms –  Keith Holyoake in 1957 is the most recent example – so these statistics are for total time as Premier/Prime Minister.)

Why the difference?   I’m not sure.  For most of our history, our political systems look pretty similar –  up to 1950 we even had two chambers –  although they’ve diverged more recently (MMP here, the Fixed Parliaments Act in the UK).   At least since 1890, as the party system crystallised, we haven’t changed governments particularly frequently.  Perhaps a three year term makes a difference –  Mike Moore and Keith Holyoake (and John Marshall and Bill English who served a bit longer, but less than a year) each took office on the brink of an election.  But I suspect most of the difference must be more idiosyncratic.   For example, Hall-Jones and Bell took office (effectively as acting Prime Ministers, but legally as PM) when Seddon and Massey died in office. But when Savage and Kirk died in office, there was simply an acting Prime Minister until the Labour Party confirmed a new permanent leader.

It turns out that deaths in office is one of the things that distinguishes the UK record from New Zealand’s.  Seven UK Prime Ministers have died in office –  one assassinated –  but the most recent of those was in 1865 (Palmerston).  Others  –  including Law –  died just a few days after leaving office.   But in New Zealand the following Prime Ministers have died in office, all after 1865 – Ballance, Seddon, Massey, Savage, and Kirk (and none of them particularly old).   Ward died fairly shortly after leaving office.   So much for the young and robust new country….

In a similar vein –  and I did say this post was whimsical – look at how long British and New Zealand Prime Ministers have lived for.   James Callaghan and Alec Douglas-Home lived to 92, Churchill to 90, Edward Heath to 89, and Margaret Thatcher to 87.    All of them lived longer than anyone who has ever served as Prime Minister of New Zealand.   George Grey remains our longest-lived Prime Minister, and he died (at 86) in the 19th century (1898).  He is closely followed by Walter Nash, also 86, who died more than 50 years ago.  The next three – Robert Stout and the short-serving Bell and Hall-Jones – were 85 and 84, but they were (at minimum) almost a century ago, and we (rightly) make a lot of improving life expectancies.   If Jim Bolger lives for another two years, he will overtake Grey, but even then the UK will still have had five second half of the 20th century Prime Ministers who will have lived longer than anyone who has held office as Prime Minister in New Zealand.

And finally, reflecting on increasing life expectancies, improved health care, and renewed expectations of people working later in life, I was struck by this mini-table (like almost everything in this post, thanks to Wikipedia)

PMs

Nash was the most recent of those and he left office almost 60 years ago now.  The Brits also beat us for the oldest person to leave office as PM (Gladstone).

Not much about US politics appeals to me, but it is interesting to note the contrast with the US where age doesn’t appear to be such a barrier to (much more demanding) office, be it Pelosi (79), Trump (73), Biden (76), Sanders (77), Reagan (69 when he became President), Warren (70) or whoever.

The US does look a bit idiosyncratic –  but should it, given life expectancy etc? Perhaps there is still time for Don Brash (78)?

PRC may never match other advanced countries

Michael Reddell China, Productivity

There was an article in the Wall St Journal last week, by their economics writer Grep Ip, that attracted a reasonable amount of attention.    Ip made the argument, that really should be uncontentious, that on current policies and institutions, the People’s Republic of China is unlikely ever to catch up –  in productivity or per capita income terms –  with the advanced countries, whether in Europe, east Asia, or North America.     The (worth reading) article is behind a paywall, but here is his key chart.

Ip 1

Despite having shot themselves in the foot so badly in the 1950s and 1960s –  such that there were absolutely huge convergence possibilities open to them by the late 1970s – the economic catch-up and convergence of the PRC has been distinctly underwhelming.     And since the economic and political model now being adopted is again increasingly Party/state dominated, the prospects for anything like the sort of productivity growth required to match the advanced economies appear slim.   Absence of the rule of law and of an efficient market-led allocation of resources –  with market disciplines working effectively to correct the inevitable bad calls firms will make –  will do that to your country.    The sheer size of the PRC also makes continued export-led growth harder to sustain, even if the PRC were playing by some genuine approach of free and open trade.

As the article notes, charts like the one above draw on official data, and there are real doubts about whether the official data are accurately representing average PRC incomes (for example, this paper, to which Ip makes reference, suggesting as much as a 25 per cent overstatement).   Credit booms also not infrequently see GDP per capita and productivity measures during the boom rather higher than actually proves to be sustainable.

Ip’s article is consistent with a line I’ve run in several posts over the last few years, noting –  as I put it most recently –  that by all reasonable standards the PRC remains an economic failure.  My most recent post along those lines was late last year.   Here is some of that post:

….the People’s Republic of China (and more specifically, the Chinese Communist Party, that our leaders are so keen to cosy up to) has overseen a really poor economic performance.  It is, more or less, what one might have expected knowing that the rule of law would be absent, markets wouldn’t be allowed to function effectively, state subsidies (of all sorts) would be rampant, and so on.  It could have been worse, of course –  there was the utter chaos, misery, and (for a time) mass starvation from the late 1950s to the mid 1970s.  The handful of other remaining Communist-ruled countries are worse.   But even having stopped doing so much active destruction, the PRC results are unimpressive.  Any other conclusion surely invites that American line about the soft bigotry of low expectations.

Of course, it isn’t the line the PRC would have one believe.  And it suits too many politicians in the West to talk up China as a stunning economic success story.  But it isn’t.  Development economists, left and right, will talk up the hundreds of millions of people who’ve moved above the poverty line.  And that is great, except that (a) it was the CCP that did its utmost (perhaps unintentionally) to put them back below the poverty line in the first place, and (b) getting above the poverty line is a pretty feeble standard against which to judge the economic performance of a country that for centuries matched or exceeded the best material living standards anywhere.

Angus Maddison’s great collection of historical GDP per capita estimates is a typical starting point for such comparisons.    He reports estimates for some countries every few hundred years from year 1 AD, and then more frequent (increasingly annual) estimates for more countries in more recent centuries.  In 1 AD the estimates he reports had Italy with the highest material living standards, followed by Greece.  China was about the level –  or a bit ahead –  of most other places in Europe.   In 1000 AD, China was top of the rankings –  not by much, but it was number 1.  That shouldn’t be any great surprise to anyone who recalls the various Chinese inventions ahead of the discoveries of such things (printing presses, paper money, even very big ships) in the West.   By 1500, China was a bit behind Italy and Belgium, but not much different to most of the rest of western Europe (all well ahead of what is now the United States).

Scholars spill a lot of ink debating why China went into such severe relative decline…..    Whatever the precise mix of explanatory factors that slippage happened.   In 1850, Maddison’s estimates have Chinese GDP per capita at about a quarter of that in the UK and the Netherlands, and less than 40 per cent of his “Western European 12 countries” average.  By 1900, estimated per capita GDP was only about 15 per cent of that in the highest income countries.

But perhaps as importantly, in 1900 China’s GDP per capita is estimated to have been about half that in Japan, and just a bit behind that in Taiwan (by then a Japanese possession).   As late as 1870, China had been not far from the GDP per capita in a range of Asian countries/territories for which Maddison now has estimates –  about on par with Korea, Taiwan, and Thailand, and a bit behind Japan, Hong Kong and Singapore.

And this is what they’d been further reduced to by 1976, the year Mao died.  I’m using the Conference Board’s PPP estimates, and have shown a mix of countries –  mostly east Asian and European, but with a few other interesting cases (eg Israel –  brand new in 1948) thrown in.

china 1

Such utter self-destruction and failure.  It wasn’t done by outsiders.  It wasn’t as if the PRC had faced uniquely bad external threats.  It was like economic suttee, with the depraved indifference of mass starvation thrown into the mix.

And how does the picture look today, with the Conference Board’s 2017 estimates.

china 2

The PRC has rocketed past the Philippines and Sri Lanka, and still trails the rest of this pack rather badly.   And this isn’t Tanzania or Rwanda, but a country that was once –  for centuries –  among the highest living standards anywhere in the world.  A country in a region where South Korea, Japan, Taiwan, and Singapore now manage advanced country living standards –  one of those a country that struggles to get international recognition and under constant threat from the PRC.

From the Maddison estimates, in 1980 the Soviet Union –  a region never at the forefront of material living standards –  had GDP per capita about the same ratio to that in the western European countries that China has today.  In fact, about where China was –  in relative terms –  in 1850 (see above).  It is a simply dismal economic failure in a country –  controlled by a Party –  that would have so much potential were its people ever to be free, to ever be properly governed with the rule of law rather than the rule of Xi.

For the same countries, here are the real GDP per hour worked estimates.

china 3

It really is an astonishingly poor performance.  Or at least it would be unless you’d been told in advance that Japan, Singapore, Taiwan, and South Korea would establish market economies with the rule of law, sound governance etc etc (and none of it perfect) and that the PRC would remain a land where the (Communist) Party actively rules.  Then, the outcomes are probably much as one might expect –  China lags very badly behind, to the disadvantage of its people, even if to the enrichment (power, money) of its rulers.

On the IMF’s full list of countries, the PRC now ranks 79th (out of 187) in the GDP per capita (PPP) stakes.  Average real GDP per capita is a touch behind that in Iraq (yes, I was surprised) and the Dominican Republic, and a little ahead of Brazil and Macedonia.  Perhaps China’s growth rates are faster than those places, at least if one (a) believes the official data for the Xi period, and (b) discounts the massive distortions and misallocations associated with one of the largest credit booms in history.      But there is no sign of Chinese per capita incomes catching those of the leading countries any decade soon (if things unwind nastily, the gaps would even widen a bit for some years).

Taiwan, Korea, Japan, and Singapore are genuine economic success stories –  catch-up and convergence more or less as the textbooks suggested was possible.  Cause for celebration in fact.   The PRC?  Anything but.  Being big doesn’t change that –  even if it gives geopolitical clout to a lagging middle income country –  it just means more people are failed by their rulers (and by those in countries such as ours who give the rulers aid and comfort, pander to them, or simply cower in a corner).

New material again.

As regular readers know, I am a trenchant critic of the failure of successive New Zealand governments to lift our own average productivity performance.  Decade after decade we slip further behind first the leading advanced country group and then, increasingly, most advanced countries.  But bad as our performance has been, on the Conference Board estimates –  which may overstate things quite materially for the PRC (see above) –  average labour productivity in the PRC is about 36 per cent of that in New Zealand (and about 20 per cent of the United States and other leading advanced economies).  In fact, average labour productivity is barely half –  on official figures –  that in Russia.

One other way of looking at these things is to look at where the PRC is now and see how far back one has to go to find when other advanced economies had the same level of productivity.   Compound growth can make quite a difference quite quickly, also a pointer to the economic possibilities for the people of China, were the CCP ever to abandon power and a proper market-led, law-governed, country were to emerge.

For example, on official numbers, the average level of labour productivity in the PRC is now (2018) US$15.3 per hour (converted at PPP exchange rate).    That is probably about where New Zealand –  productivity growth laggard among advanced countries –  was in the early 1950s.    The range of goods and services produced or consumed is, of course, very different from New Zealand in, say, 1952 –  despite its low productivity, PRC consumers still have access to the goods generated at the technological frontiers.

Here is summary table for some of today’s advanced economies, drawn from the Conference Board numbers, with two columns, one using official PRC numbers and one allowing for the possibility, per Ip’s article, that the PRC numbers might be materially overstated.

Ip 2

There is a certain consistency of message: the PRC –  a country heir to a civilisation that was for a long time the most technology-advanced in the world – is perhaps 70 or more years behind: achieving levels of econommywide productivity now that frontier countries were achieving around the time of World War Two.  None of the east Asian countries were doing particularly well at the start of the 20th century, but the PRC is also now 40 or 50 years behind the leading east Asian economies (in South Korea’s case – productivity lower than New Zealand –  “only” 25 years or so).   The PRC is where embattled Taiwan is estimated to have been in 1981.  That isn’t dirt poor, but it isn’t very good either.

But that is what PRC economic failure looks like.     Perhaps they’ll catch-up, but nothing in modern economic history suggests that a statist model like the PRC could make that sort of leap.  Just possibly, in another 20 years the PRC might catch up to where some of the laggard advanced countries are today –  “rich” in some absolute sense –  but by then of course the frontiers will have most likely have moved much further on.

Contemplating trade restrictions and industry protection

Michael Reddell Australia, Regulation, Trade

I’m just back from a family holiday in sunny south-east Queensland.  Being a New Zealander, I have a visceral fear of snakes, but as we saw them only in the zoo, one could concentrate on the upsides of Australia.   Seriously good newspapers for example.  Daily surf swims in the middle of July.  Plastic bags in plenty of shops (Queensland seems to have outlawed – the very useful –  thin supermarket bags but not others).   And, of course, one could look around, and read the papers, and contemplate what productivity and higher material living standards really mean.  It was a while since I’d been in Brisbane, and the central city certainly had a look and feel more prosperous than what one finds in Auckland (or Wellington).

At the turn of the century, GDP per hour worked (PPP terms) was about 31 per cent higher in Australia than in New Zealand, and on the latest OECD estimates than gap is now 41 per cent.    And it isn’t as if Australia itself is some stellar productivity performer.  (Those with longish memories may recall a time barely 10 years ago when there was serious political talk of closing the economic gaps with Australia, but –  as a result of policy choices of both National and Labour governments –  the gaps have just widened.)

I couldn’t see state-level GDP per hour worked data for Australia,  but there is GDP per capita data.  The gaps between New Zealand and Australia aren’t as large for per capita income as for labour productivity, simply reflecting the longer hours the typical New Zealanders engages in paid work over their lifetime.  For Australia as a whole, GDP per capita (PPP) terms is “only” 34 per cent higher than in New Zealand.  In Queensland –  with below average state GDP per capita –  that gap is “only” about 25 per cent.   Even a 25 per cent difference purchases a lot of (say) cancer drugs, new cars of whatever other public or private goods and services people aspire to.  I’m sure the Australian health system has its problems, but I was struck reading three papers a day over 10 days not to see stories about health underfunding.    And yet the (various levels of ) Australian governments spend a smaller share of GDP (35 per cent) than New Zealand governments do (38 per cent).

So there was sun, surf, papers, productivity in Queensland.  And there was another thing I always look out for abroad.

trout 2

I prefer fresh but the little supermarket near where we were staying “only” had smoked.  Not, in this case, the Australian product but (so I was surprised to notice when opening the packet) Norwegian.

trout 3.jpeg

The wonders of a global market and all that.   But just not in New Zealand.

There are, of course, plenty of trout in New Zealand –  all descendants of trout introduced in the 19th century (it isn’t exactly a native species).  In fact, some of the trout species in Australia was introduced from New Zealand.

But if there are lots of trout in New Zealand, the only way you can consume any is to go and catch one yourself, or make friends with someone who fishes for them and who will gift a trout to you.   It is as if I could only consume milk if I owned a cow or had someone close by who would give me milk.  Perhaps the first half of that sentence did describe much of the world prior to the 20th century, but even then the sale of milk wasn’t banned.  But the New Zealand government has for decades now banned the sale of wild trout.

When I went looking, I discovered that the sale of other trout isn’t outlawed in New Zealand, but as a recent regulatory impact statement prepared by the Department of Conservation put it.

The sale of trout (except for wild trout) is allowed in New Zealand. The reason it is not available for sale is because there is no way to obtain trout to sell – trout farming, selling wild trout, and importing trout are all prevented by legislation or the CIPO.

(that’s a customs import prohibition order).  The prohibition extends to smoked trout.  Here is the latest version of the restriction, just renewed a few months ago.

Read literally, clause 4(1)(b) appears to suggest that the imports for sale are only prohibited if they are for amounts of less than 10 kgs.

trout 4.png

That can’t have been what was intended, but it appears to be what the law says. [UPDATE: I misread it.]

There was a policy process undertaken last year that led up to the government’s decision to renew the import ban.  It was weird policy process, described thus

There has been no public consultation on the options covered by this paper. The views of the various interest groups are well known to officials, but there may be Treaty implications if a firm decision was taken without formal consultation with iwi. The nature of the issues mean that a decision has to be made as to which set of interests should be given precedence.

Officials –  of course –  consider they know all that needs to be known.  And quite Treaty issues arise in respect of foreign trade in a species itself introduced to New Zealand is beyond me –  but fortunately I’m no longer a public servant.

Of the official agencies that were consulted, MFAT actually favoured allowing the import restriction to lapse. I’m not usually a fan of MFAT –  and had Beijing objected for some reason, no doubt they’d have taken the other side –  but well done them on this one.  It isn’t a good look when New Zealand prattles on about open trade, rules-based orders, when it maintains in place a near-absolute prohibition of the importation of an innocuous, but tasty, food product.

I guess no one looks to the Department of Conservation for high quality and rigorous policy analysis, especially on economic issues.  Their RIS on the trout CIPO did nothing but reinforce those doubts.

The entire official case for the prohibition of imports of trout (and, by implication, for continuing restrictions on domestic trout farming –  although that isn’t the focus of this particular policy process) appears to rest on supporting the recreational trout fishing industry.

22. The import prohibition and the prohibition on the farming of trout are aimed at protecting the New Zealand wild trout fishery.

Like, for example, banning deer farming to protect hunting of deer in the bush?  Or pig farming?  Or salmon farming?

The officials even acknowledge that (for example) allowing the sale of salmon has not led to widespread salmon poaching, and that other countries successfully manage to have wild trout fishing and trout sales.  But, they plaintively suggest, New Zealand is somehow different.   For example

If imported trout could be sold, the illegal sale of wild trout would be much more difficult and costly to detect.

Which is, of course, not an argument for maintaining the existing restrictions but for removing both import and domestic sales (and farming) restrictions, not continuing to run industry assistance to a small tourism sector –  somewhat akin to the protection that used to be offered to the New Zealand car assembly industry or the New Zealand television assembly industry.  You get the impression reading the document that the DOC officials have simply got all too close to their mates in Taupo, and are subject to regulatory capture.

The documents contains this paragraph

42. The Government’s objectives in regard to the issues examined in this paper can be summarised as follows:
• Maximise recreational and tourism values of wild trout fishery
• Maximise employment and economic values of wild trout fishery
• Maximise economic growth and employment opportunities in the wider economy
• Provide for maximum consumer choice in purchasing decisions
• Minimise risk of friction in negotiations with trading partners.

These objectives are not referenced to any fuller document in which “the government” makes its case, and they have the feel of being made up on the fly with little or no supporting analysis.   They go on to state

43. The interactions between these issues mean that it is not always possible to progress all of these objectives simultaneously. Actions that could advance some of the objectives may restrict progress on other objectives. Decisions on which objectives should be given precedence therefore need to be made by elected Ministers.

In a way, of course, that is true.   If your goal is to maximise the size of the protected sub-industry, whether buttressed by direct subsidies (think film), import bans (trout), domestic production of a related product (trout farming ban) it will conflict with overarching goals about consumer choices and economic efficiency (as well as that lesser goal about living the words about a free and open economy with respect to trading partners).  But, as in so many industries in the past,  that tension should be resolved in favour of the consumer and of economic efficiency.  In this case, it isn’t even clear that there really is much of a tension.  DOC’s RIS offers not the slightest evidence that allowing imports of trout meat (smoked or otherwise), or even allowing domestic farming of trout, would make any difference whatever to the number of North American anglers who come to Taupo.  Perhaps on the domestic side there might be a smaller number of trout fisherman…….in the same way that a much smaller proportion of us milk house cows, collect our own eggs, or whatever than we once used to.   The only “value” really being protected here is that people who don’t go fishing shouldn’t be able to eat trout in New Zealand.  If that is a values-based policy framework, it is a pretty weird one.  Logically, one might apply the same daft policy to native fish too.

It is really quite shoddy advice, in support of shoddy policy.   As one gets to the end of the RIS one gets the impression a reasonable number of government departments are beginning to conclude that the policy around trout is a nonsense and should eventually be revisited.   But it isn’t clear that DoC is among them –  then again, they are probably brought up to dislike all introduced species (may not even be too keen on people, disturbing that natural environment), and they simply aren’t the agency that should be responsible for an issue of industry protection policy and interfering with the ability of New Zealanders to easily consume a safe and lawful product.

There was petition last year seeking to introduce trout farming in New Zealand.  Whether it gets anywhere, only time will tell, but it is hard to be optimistic when the current government extended the existing import ban again only last year.   Perhaps New Zealand consumers will have to hope that foreign governments will take up the issue more seriously, and put more sustained pressure on the New Zealand government to remove the barriers between consumers and trout (more cheaply and efficiently than holidaying abroad).

 

Disclosing regulatory actions

Michael Reddell insurance, Regulation, Reserve Bank

I haven’t followed the CBL saga very closely at all. (Disclosure: until the end of 2014 I was a member of the Reserve Bank’s Financial System Oversight Committee, which advised the Governor on prudential policy matters, including insurance prudential supervision.  That Committee rarely dealt with individual institution issues, but nonetheless was part of the overall atmosphere around the Bank’s approach to regulatory and supervisory issues.)

But the one aspect of the CBL story I had paid attention to was the decision by the Reserve Bank in 2017 to ban CBL from telling shareholders, policyholders (actual or prospective), or other creditors of the Bank’s regulatory actions and interventions (specific directions).  It seems extraordinary to say that managers and directors of a company cannot tell their owners –  the people they actually work for – about important developments affecting their (the owners’) company.   It runs against most canons of what we understand about the importance of trust, or disclosure, and of the relationship between principals (owners) and agents (managers and directors).

I also haven’t yet read the full report the Reserve Bank commissioned on its handling of the CBL affair (and remain sceptical that a report commissioned by Bank management –  and which apparently sought no outside perspectives – was likely to be even close to a definitive assessment).  But I did turn to the short chapter 15 (from p136) on “Confidentiality and Disclosure”.

In that section, the reviewers outline the relevant parts of the legislation that the Reserve Bank was using, and was constrained by.   They refer first to Section 135 of the Insurance (Prudential Supervision) Act covers the protection of data supplied to the Reserve Bank for prudential purposes.  This provision is not actually very relevant here: it is mainly designed to ensure that the Bank –  and Bank staff –  can’t, by accident or intent, treat confidential information lightly.     And even then, the Bank itself can choose to release material in a number of circumstances, including these two

(c) the publication or disclosure of the information, data, document, or forecast is for the purposes of, or in connection with, the performance or exercise of any function or power conferred by this Act or any other enactment; or
(e) the publication or disclosure of the information, data, document, or forecast is to any person that the Bank is satisfied has a proper interest in receiving the information, data, document, or forecast; or

Section 136 also allows the Bank to approve publication.   And so stories that suggest that the Reserve Bank was not free to publish information about its concerns or its actions, under pain of potential heavy fines, are just not correct.  The reviewers themselves run this quite misleading line.

The confidentiality obligation on the Bank is an onerous one. Officers and employees of the Bank, and investigators, are liable on conviction to up to three months’ imprisonment and/or a fine up to $200,000 if they do not comply with this provision.

Rogue or cavalier employees are (rightly) at risk.  The Bank itself has considerable protections and freedom of action (again, largely rightly so).

The reviewers then turn to the (much more relevant) provisions around the disclosure of the giving of directives.  In July 2017, the Bank issued to CBL Insurance a direction covering a variety of matters, operating under section 143 of the Act.   Section 150 of the Act makes it an offence for anyone to disclose (other than to directors and advisers of the directed entity) that a direction has been given.      Again, there are substantial fines for breaches.  But, again, this provision of the Act did not constrain the Reserve Bank, because the Bank itself is free to disclose the existence of the direction, or to allow others to disclose the fact of the direction.

The Bank itself has subsequently sometimes sought to imply that really the confidentiality of the directions was CBL’s choice, arguing (factually correctly) that when in February 2018 CBL requested that the confidentiality restriction be lifted, the Bank agreed.    But that looks a lot like distraction. It is clear that, whatever the views of CBL managers and directors, in July 2017 the Reserve Bank was insistent on keeping the fact and content of the direction confidential. It acknowledged as much in a response to an OIA request from NBR in April 2018.

The Reserve Bank’s self-chosen reviewers (the one with some expertise in the field being a former Australian insurance regulator) backed the Reserve Bank’s call on this point.

It was appropriate to maintain confidentiality over these steps. Matters were at a fact-finding stage. The Bank had serious concerns that warranted action, but it had not yet gathered the relevant information, tested it with CBL, and arrived at a sufficiently informed position. Obviously public disclosure of the fact of an investigation or initial concerns that have not yet been tested would be highly damaging to the reputation of CBL and to the value of its parent.

Except that by this time matters don’t seem to have been just at the fact-finding stage.  Rather, the direction imposed specific restrictions on CBL Insurance’s business –  the sort of action the Reserve Bank never engages in lightly (and, as the rest of the report apparently elaborates, coming after several years of concerns and fact-finding).

The reviewers go on to defend the Reserve Bank, arguing

The primary reason for confidentiality is that the Bank, quite correctly, is cautious about releasing information on any licensed insurer (or licensed bank) that may affect public confidence in the licensed company until the Bank is sure of its position. The confidentiality requirement, however, creates a quandary for the boards of listed companies who have a continuous disclosure obligations under NZX rules/Corporations Act 2001 (AU) rules.

In the CBL case, the position is also confounded to some extent by the fact that CBL Insurance is a subsidiary of the listed entity, CBL Corporation, which itself is not licensed.

Given the risks to public confidence in a licensed insurer if the Bank is carrying out an investigation or otherwise querying the credentials of an insurer before anything is proven, it is entirely appropriate for the Bank to maintain confidentiality by not making any public disclosures itself and also exerting control over any potential disclosures by the insurer.

Expressed another way, it is important that the Bank retain the power to intervene at any time in the affairs of an insurer. The Bank has to be able to recognise and choose to act early on any potential risk issue that it identifies and it also has to be able to stand back, without adversely affecting public confidence in the insurer, if the potential risk is not realised.

Before concluding

The Bank’s actions in relation to confidentiality and disclosure in 2017–2018 were appropriate.

We do not consider there was any earlier occasion when it would have been appropriate for the Bank to make public disclosures.

The lack of disclosure at the time of interim liquidation can be said to have been awkward for shareholders because, with no prior disclosure by the Bank or CBL, they were deprived of information that they may well have judged to be relevant to their position as investors. Arguably it was also awkward for policyholders, but that is a secondary matter in the eyes of investors.

On that point we note that CBL Corporation issued two relevant press releases in August 2017. In the first, on 18 August 2017, it disclosed concerns by the Gibraltar FSC over Elite’s claims reserves, the Gibraltar FSC’s reference to possible inadequacy of CBL’s claims reserves, and announced a reserve adjustment. The CBL Corporation share price reacted at the time, falling some 30%, but a week later there was a second press release that promoted the company’s prospects and gave a purported explanation for the claims reserving adjustment. The share price recovered by around 10% and then remained more or less static until suspension of trading in February 2018.

It is the policyholders, however, to whom the Bank owes its responsibility, not the investors. The Bank’s essential prudential concern always must be that policyholder promises can be honoured, irrespective of the fate or views or fortunes of shareholders.

I’m not entirely persuaded, on a number of counts.  And I say that even though it is quite plausible that the way the Reserve Bank handled this specific aspect of the affair (non-disclosure) might have been in accord with common supervisory practice.

Here it is worth having a look at some of the specifics of the New Zealand act.  For example, the purpose provisions in the legislation

IPSA 1

When this legislation was being planned I argued that only the first strand should be included, and recall arguing explicitly that having “promote public confidence in the insurance sector” could, at some future date, be used to defend keeping real problems secret, in ways that might support short-term confidence, but would risk undermining long-term confidence in the sector and in the regulation/supervision of the sector.  That seems like a valid concern.  But even with that provision in the legislation, it provides no clear guidance on whether specific regulatory interventions should be kept secret, since the goal is not to protect individual firms, but with a sectoral focus.  And if one believes in the efficacy of supervision –  I tend to be sceptical –  knowing that the regulator is (a) on the ball, and (b) not hiding stuff, is most likely to support a sound and efficient sector over time, and support public confidence in the bits of the sector where such confidence is warranted.

The Act next has a long laundry list of “principles” –  no hierarchy, no weighting, no nothing (the sort of list Paul Tucker, in his book on delegated power, including to central banks, frowned on).

IPSA 2.png

But they are still worth mentioning because, contrary to what the reviewers imply, the New Zealand framework is not exclusively built around policyholder protection; indeed, even the one bullet that explicitly mentions policyholders puts the “public interest” as of equal importance.  As importantly, look down a couple of rows and you find another principle:  “the desirability of providing to the public adequate information to enable members of the public to make those decisions” (ie regarding insurance), which might argue for as much transparency as possible.  In short, you could pick any approach you like out of these purposes and principles (which makes it bad legislation from a citizen perspective –  albeit beloved by officials), and none of these specific considerations are discussed by the reviewers in considering the disclosure/confidentiality issues around CBL.  At least from the wider public perspective, that was a missed opportunity.

It is worth bearing in mind that as a society we have generally come to favour the continuous disclosure approach various stock exchanges have now adopted. Inside information is supposed to be kept to an absolute minimum, with owners being presumed to be entitled to know of any material developments affecting their companies.  Shareholders provide the capital than underpins the provision of services and markets, including those in insurance.  Continuous disclosure provisions typically have a carve-out where disclosure is prevented by law, and that is what the parent of CBL Insurance relied on in this case (that NBR OIA I linked to earlier has the text of email exchanges with CBL’s lawyers on non-disclosure to the market).   In this case, there was no automatic protection for information about the Reserve Bank’s direction –  which was highly relevant to shareholders, and others dealing with the company and its associates – since the Reserve Bank had full discretion to allow the fact of the direction to be disclosed (an option it explicitly rejected in an email dated 22 August 2018).

In this case, it may well have suited both the Reserve Bank and CBL managers/directors to keep the directions confidential, but their interests are not necessarily representative of either the public interest, or of the specific interests of the owners of CBL, or those dealing with the company. It isn’t even clear that their preferences aligned with the interests of policyholders, here or abroad: rather it is a paternalistic approach that says that the supervisor is better placed to look out for the interests of policyholders than are (actual or potential) policyholders themselves.  The evidence for that proposition seems slim –  including, in this particular case, based on what we read of the Bank’s handling of CBL over several years.

There are no easy or straightforward answers to these issues, which is why it would be valuable to have a fuller, and more open, exploration of the issues.    In principle, I believe it would be better –  including reducing the risk of the supervisory being morally liable for any later losses in a failure event –  for the default presumption to be that any use of formal direction (or similar) powers by a prudential regulator should be disclosed by that regulator, and should be subject to usual continuous disclosure provisions in the case of listed entities.     The alternative both corrodes public trust in regulatory agencies –  what are they up to that we don’t know about? –  and corrodes the trust that needs to exist, and be robustly nurtured, between managers/directors and owners and creditors of private business entities

But there are risks to adopting this approach.  The ones I’m concerned about – at least in the insurance sector –  aren’t some sort of market panic (runs on insurance companies don’t have the meaning they do for banks).  The share price of a listed entity might fall sharply –  but that seems an appropriate possibility –  and people might become more reluctant to deal with the firm (ditto, at least until after hard questions have been adequately answered).   My concern is more that disclosure might make the supervisory entity more reluctant to act when it should, and more reliant on moving into the non-legal shadows, relying on pressure and threats of direction.  Perhaps too we would risk seeing courts more actively involved as the regulated entity sought injunctions to stop a supervisor using directive powers?     Those are real risks that need debating, but they should not be conclusive arguments, especially when the alternative involves the regulator and managers/directors getting together to keep highly valuable information from shareholders (whose money is mostly at stake), policyholders, prospective policyholders, and other creditors.

My interests are really less on the specific CBL case –  although specific cases help focus attention –  than on thinking about potential problems with banks at some future date.  There are very similar powers in the Reserve Bank Act re the confidentiality of directions to banks, and the issues get even more complicated because (a) bank runs are a real issue, (b) our bank supervision legislation does not have a depositor protection focus, (c) the disclosure regime has been designed to encourage creditors to take responsibility for themselves, (d) the proposed deposit insurance regime is very limited in scale, and (e) most of our banks are subsidiaries of foreign listed entities (can the Reserve Bank enforce directions on Australian parents?).  My own prior is that the world’s banking regulators do not have such a stellar record that we should be entrusting them with such powers of coerced silence, preventing companies telling their shareholders and creditors etc that they are subject to directions from the regulatory authority.  Perhaps the best thing might be more directions, made public at the time they are given as a matter of routine, so that markets, media, and the public can learn to weigh and evaluate the significance or otherwise of the issues and risks the regulator is highlighting.

I’m sure mine is a minority position, and I’m putting the issue out there as much as anything to try to encourage some reflection and debate on the issues.  In reality, perhaps the issues are not be black and white (in general –  although each specific involves final decisions), but regulators need to demonstrate that they have earned the trust, and extensive powers, reposed in them.   And our laws, and the applications of them, should be framed against principles of open government, accountability for regulatory agencies, and a belief that –  within government and within firms –  sunlight is typically the best disinfectant.

On which note, it is now the school holidays and we are heading off to find some sunshine and warmth.  Most likely there won’t be another post here until 23 July.

 

 

Police: cosying up to tyrants, ignoring NZ law

Michael Reddell China, NZ politics

I’ve already written about the slow and painful efforts to get Police to reveal details of the visiting professorship they had allowed one of their senior officers to take up at the PRC People’s Public Security University (the university of the Ministry of Public Security).

The day after the belated Police response finally arrived, a reader sent me a link to another example of the New Zealand Police cosying up to the regime in Beijing.  Here was the whole of my initial post:

A reader sent me the link, and this is what Google Translate generates:

Guangzhou Municipal Public Security Bureau and New Zealand Oakland Police Department signed a friendly cooperation arrangement
Source: Guangzhou Municipal People’s Government Foreign Affairs Office published:2019-05-05 17:51

guang 1.png

guang 3.png

To celebrate the 30th anniversary of the conclusion of the international friendship city relationship between Guangzhou and Auckland, and to strengthen the police cooperation between the two cities, Yang Jianghua, deputy mayor of Guangzhou and director of the Municipal Public Security Bureau, and the assistant police chief of the Auckland City Police Department of New Zealand on April 29 Lena Hassan ( Naila Hassan ) signed a “friendship and cooperation with the Guangzhou Public Security Bureau Auckland, New Zealand Police to arrange the book” in the Guangzhou Municipal Public Security Bureau. It is reported that this is the first time that the Guangzhou police and foreign police have signed a cooperation intention, which indicates that the law enforcement agencies of the two places will formally cooperate in police exchanges and police training.

“Police exchanges” with the Guangzhou branch of the Ministry of Public Security………..  Surely this cannot mean that MPS officers will be let loose with law enforcement powers in New Zealand?  Surely…..

I looked on the Auckland police website, I looked at the Minister of Police’s website, and I looked at the main Police news releases page, and there was nothing about this deal.

I wonder if Police, or their Minister, were ever planning on telling New Zealand citizens and voters about their deal with the PRC domestic repression apparatus?

Yesterday, I mentioned the Gestapo, but one doesn’t need to invoke (quite valid) Nazi comparisons with the People’s Republic of China.   Would Police – or elected governments – have thought such friendship and exchange deals were appropriate with the domestic security forces of the Soviet Union, or Pinochet’s Chile, with Galtieri’s Argentina, with apartheid South Africa, or……or…..or……

It just should not be.  And it clearly isn’t the case that this is just normal stuff (“everyone does it”) –  it is the PRC side that stresses that this is the first such arrangement for Guangzhou.

I’m not fond of the phrase “social licence”, but if it must be used this is an example of how government agencies –  allegedly working for our interests –  risk forfeiting theirs.

I will be lodging an OIA requesting details of this agreement.

And so I did, on 8 May.   I asked Police for

1. Text (in English and – if it exists – Chinese) of the recent agreement signed between the Guangzhou bureau of public security and the Auckland police district.  

Copies of

2. Any advice re the agreement to the Minister (and/or his office)

3. Any consultation with other government agencies on it.

4. Any internal position papers evaluating the possibility of this agreement, including any risks, and pros and cons.

And I had an acknowledgement of my request the next day.  So far, so proper.

I heard nothing more for a couple of weeks and then I had this from Police in Auckland.

Good Morning  

We have received your request for information

Before we can process this request we require some form of photo ID.  The best is a photo of your driver’s licence and a photo of you holding your licence.

Now, I’ve been using the Official Information Act for years and had never had such a request.  In fact, Police has responsed to my earlier OIA just a few days previously (very slowly but) without asking for photo ID.  Apparently, agencies are allowed to check that someone is entitled to make a request, but Police by then had my address, my phone number, and I’m in the telephone book (and readily Google-able).

Anyway, I went back to them and asked them for the statutory basis for their request, noting that Police had responded to earlier requests without photo ID.  I heard nothing more.

A few days later (27 May), I had a letter from a Senior Sergeant in Auckland, extending my request by a couple of weeks (beyond the statutory 20 working days), to 18 June.  He claimed they needed the additional time because of the “consultation we need to do on your request”.  That extension was probably lawful (albeit only because it looks as though it had taken almost 20 (calendar) days for anyone Police to really look at the substance of the request).

And then on 20 June, I had another letter for Senior Sergeant Housley (who is the Auckland District Police OIA co-ordinator), this time extending the request to 18 July, citing the need for “further consultation”.      That argument was already wearing thin, but what really bothered me was that it is against the law to extend OIA requests if the extension is made after the statutory 20 working days has passed.  The Ombudsman has been quite explicitly clear on that.

Nothing in the OIA prevents multiple extensions being made, providing any extensions are made within the original 20 working day time period after receiving the request. For example, if an agency notifies the requester of a one week extension, and then later realises that a two week extension is actually necessary, a second extension may be notified as long as the original 20 working day time period has not yet passed.

In this case, not only had the 20 working days passed when the second extension was made but so had the deadline on the first extension.  I went back to Senior Sergeant Housley and pointed out that his extension was unlawful, but (unsurprisingly) I got no response.

This morning, I finally had a letter from Senior Sergeant Housley substantively responding to my request, politely thanking me for my “patience”.   And what little they released –  and, in fact, what little they held, gives the lie to the claim that “consultations” and “further consultations” were necessary.   All they released was the text of the agreement (see below), the substance of which the PRC side had been boasting of two months ago, and all they withheld was advice from MFAT on the wording of the agreement (which can’t have been very long, and which I never expected them to release –  standard OIA exceptions: my interest had been mostly in seeing who, if anyone, had been consulted.   I have now lodged a complaint with the Ombudsman about (a) the unlawful second extension, and (b) the dubious claims about “consultation” and (especially) “further consultation”.  But this is the Police…….in a well-functioning system, you’d hope a Police force would fall over itself to act lawfully, spirit and letter.  Then again, I guess this is modern New Zealand, where complying with the law seems like an optional extra for too many public agencies.

What of the substance?  Here is the agreement itself (Chinese and English), and Mr Housley’s letter.

Letter of Friendship Between Auckland Police and Guangzhou

Letter Mr Reddell July 2019

There are a few things of note in the (short) agreement itself (and any Chinese-speaking readers might like to check that the Chinese version says the same as the English version, both of which are signed).

First, it is pretty clear that the initiative for this must have come from the PRC side.   The first version of the agreement is in Chinese, and the English version is clearly a not-particularly-colloquial version/translation (“Based on joint benefits and laws in both countries, the two participants accept to exchange…” is clearly not something written by a native English speaker).

It is pretty easy to see what is in it for the PRC.  They have whole webs of organisations and agreeements designed to tie people, institutions, and countries more closely to their odious regime, lending a (hitherto) good name to one that should be held in very low esteem.  And New Zealand has clearly been a soft touch, and so (recall the initial release) the Auckland Police will have made a good place to start for a first such agreeement.

But what on earth is in it for New Zealanders?   Police officers hot-footed it to Guangzhou –  presumably at taxpayers’ expense –  to do the kowtow and sign up to an agreement that dignifies the repressive law enforcements mechanisms of the PRC as somehow akin to a Police force in a (hitherto) free, open and democratic society.  To what end, other than the typically craven approach of the New Zealand “establishment” –  more deals, more party donations, improved electoral prospects for Phil Goff?

Second, the substance, such as it is

guangzhou

It is a simple question really that Police make no attempt to answer: what benefits will the New Zealand Police –  supposedly responsible, via ministers, to the New Zealand public gain from their cooperation and exchanges with Guangzhou, a force that acts to enforce the will of the CCP (and where presumably no officer can serve if they are suspected at all of sympathies with –  say –  Christianity, Islam, Falun Gong, let alone the rule of law and democracy).  This force operates just over the border from Hong Kong, where civil liberties have already been jeopardised, aided and abetted by the Police.  Won’t all the senior officials the Auckland Police delegation were pandering to likely be CCP members?

And what of the letter I got from Police?

Among the things I found interesting is that there was no advice at all of this agreement to the offices of the Minister of Police or the Minister of Foreign Affairs.  I suppose most likely Police simply anticipated the preferences of our politicians –  after all, last week Ron Mark was signing up to a defence agreement with the PRC (quite extraordinary: we sign a defence agreement with a country that openly talks of seizing a free and democratic country by force).

Perhaps more worrying –  but perhaps not surprising, given the widespread Wellington view of Police competence and capability –  is that I was told there was no position paper or similar reviewing pros and cons, risks and opportunities etc that an agreement with the odious PRC forces might entail.   So what happened?  Did Guangzhou Police simply take someone in Auckland to lunch and sweet talk them into flying over to sign up?  It can’t quite have been that bad surely, but this simply isn’t proper or prudent policymaking.

But then they made up a rationale on the fly.  Recall that none of this was documented before the agreement was signed, it was simply in a letter to me dated today.

There is no formal ‘position paper’ in existence evaluating the possibility or the ‘pros and cons’ of the Letter. However the Police position is that 2019 will mark the 30th anniversary of the sister city relationship between Guangzhou and Auckland – Auckland’s longest standing and most successful sub-national partnership in China.

This relationship has been significantly strengthened as a result of the Tripartite Economic Alliance that was signed in 2014 between Auckland, Guangzhou and Los Angeles. The relationship between the cities goes back to the time of the gold rush in New Zealand, when many Chinese came across to New Zealand with a significant number finally settling in Auckland. Latest statistics indicating that up to one in three greater Aucklanders are likely to identify as Asian by 2038. Close transport connections (twice daily direct flights between the cities), the immense trade and significant crime connections make the relationship between Guangzhou and Auckland crucial to both cities. Other areas Police would benefit from this relationship include, training, narcotics and economic crime investigations.

In summary this is an extension to the sister city relationship. With the proposed growth in the Asian population in Tamaki Makaurau over the next two decades this letter of friendship will enhance the relationship and benefit both Guangzhou Public Security Bureau and Tamaki Makaurau Police as it will present opportunities for each of us to learn from our colleagues.

Much of which is simply weird.   We have a national Police force, not (unlike, say, the UK system) a city-based one.  What is the national Police force doing signing up agreeements with odious foreign forces to support the sister-city partnership signed up by some elected local body politicians?   Recall, that the current Auckland mayor substantially funded his last campaign with large anonymous “donations” including from an auction of works of Xi Jinping.  Goff was one of those who nominated the CCP-aligned Yikun Zhang for a royal honour, for what amounted in effect to services to Beijing.   This agreement has the feel of something that the Mayor’s office will have liked.  Perhaps it will help with this year’s fundraising?

And what about all that puffery about the Gold Rush?  We had German immigrants back to the 19th century and it didn’t make the first Labour government any keener on dealing with the Gestapo.   Perhaps the Senior Sergeant and his bosses didn’t notice that whatever the “Asian” share of the population 20 years hence, “Asia” is not the same as the PRC, not even all immigrant ethnic Chinese come from the PRC, and many who did come want to be free of the clutches and mindset of the PRC.  The PRC –  not China, but the PRC/CCP –  is a threat more than an opportunity, at least to anyone with a modicum of integrity and morality.

And, once again, what does the Auckland wing of the New Zealand Police think they are going to learn about policing from their friends in Guangzhou?  Whatever it is, seems unlikely to be in the best interests of New Zealanders.

There is a level at which it is tempting to just ignore these things.  Individually, I don’t suppose the agreement means very much.   Bad as Police are in many respects, they aren’t quite yet the Guangzhou bureau of public security, and this agreement is isolation won’t change that much.  But it all speaks of a mindset in which our establishment agencies and individuals seem to have lost any real sense of right and wrong, of fundamental decency, and recognising odious regimes when they see them.   Yes, there need to be basic, formally correct, relations with the PRC, as with a bunch of other dreadful regimes, but we simply shouldn’t be signing friendship agreements, declaring ourselves “strategic partners”, of offering to help make their dreadful regime even more effective in what it seeks to do.  Do our leaders –  politicians and Police – really live by any values other than deals, donations, and the bonhomie (and self-delusion) that goes with cosying up to such a regime?  Not on the evidence of agreements like this.

Oh, and the Official Information Act really does apply to Police to.  Our Police –  unlike China’s – are supposed to be subject to the law, not subject to the Party.

 

Failing statistics

Michael Reddell Statistics

I’ve had a series of points about New Zealand official statistics running round in my head and the list finally got long enough I thought I’d turn it into a post.

Most prominently, of course, there is the 2018 Census debacle.  Almost 16 months on there is still no data published, as the SNZ efforts to compensate for their own systematic failures by trying to fill in the gaps go on.   We still have to wait another two months before we begin to see some results at last.    Consistent with the deeply attenuated nature of public sector accountability in New Zealand, no one has resigned, no one has been sacked.  No one has even offered a genuine and heartfelt apology.  It should be simply remarkable that the Government Statistician, Liz McPherson is still in her job.  Instead, when the nature of the debacle was already apparent, McPherson was reappointed to a second term.   If she knew there were going to be problems –  eg underfunding – she had a moral obligation to have made that clear and to have considered resigning and going public if the issues weren’t dealt with.  If she didn’t know, she shouldn’t be in the job anyway.

There doesn’t seem to have been a parliamentary inquiry into what went wrong, and we still haven’t even had the report from the reviewers that McPherson herself appointed to review how her organisation has handled things (due to SNZ this month, although who knows when we  –  the public  – will see it).   One wonders if the reviewers will note SNZ’s apparent greater focus on various right-on political causes than on doing the basics well.  Probably not –  it isn’t the way to get future review-type appointments.

(Here I will largely skip over questions about whether it is really appropriate for the coercive powers of the state to compel us all to tell the state whether we are able to wash or dress ourselves.  I am seriously contemplating a rare act of civil disobedience at the next census, simply refusing to answer such grossly intrusive questions.)

But, having mentioned the SNZ priority on trendy causes, there is the Indicators Aotearoa New Zealand project I wrote about here.   Dozens and dozens of indicators about New Zealand (reminder to SNZ “New Zealand” is the name of the country), some perfectly sensible and already published, and others strange, vacuous, almost impossible to measure meaningfully (in one or two cases all three).   You might recall this extract from the table

indicators

where, for example, only Maori “spiritual health” (whatever it is) seemed to matter.  Or where if descendants of Croatian immigrants don’t speak Serbo-Croat that is somehow a problem for New Zealand, the New Zealand government, or (indeed) those individuals.  Or where our statistics thinks a ‘strong sense of belonging and connection’ to New Zealand is something they should measure.  I was born here, most of my great-grandparents were born here, and I don’t need Ms McPherson to try to tell me whether or not I’m a proper New Zealander –  even though being “a New Zealander” is not, and never will be, my primary “identity”.

Eric Crampton captures some of the lunacy of it all in a recent tweet

A couple of weeks ago a reader drew my attention to an International Monetary Fund graphic about which countries were meeting which international statistical standards (collection, publication etc).   Here is the summary chart

SDDS.png

drawn from this page.    The two most advanced standards are SDDS (Special Data Dissemination Standard) and SDDS Plus.    There are some lower level standards (the two shades of green) and then there are the countries outside the standards altogether.  Eyeballing the map, that would be (of independent countries) Cuba, North Korea, Turkmenistan, South Sudan, Somali, and…….New Zealand.   You can read all about SDDS here –  76 countries have signed up to it since 1996.

I have some history on this issue.  When SDDS was first launched, in the internal bureaucratic discussions on such matters I never regarded New Zealand signing up as a priority, and said as much.  At the time, from memory, it was mostly for advanced countries, and we were  (a) small, (b) having no trouble attracting international buyers for New Zealand dollar securities, and (c) these were still the days in the immediate wake of our far-reaching reforms.  Why would we need to sign up to such international agency bids for relevance (might have been the gist of my sentiment). At the time, from memory, I probably still adhered to the official RB view of “who wants a monthly CPI; there are more important priorities”.  In those days, we could not subscribe to the standard because, unlike most OECD countries, we had neither a monthly CPI nor a monthly industrial production series.  We still don’t (I’m not sure if the entry rules have changed though).    Both represent fairly significant gaps, and more recently (perhaps five years ago) even the Reserve Bank came round to the view that a monthly CPI would be desirable.

At one level, our continued failure to meet the requirements for these international standards doesn’t matter very much.  No one supposes we are, say, Zambia or Tajikistan.  Our statistics are honest, even if there are significant gaps.  We still don’t have problem selling New Zealand dollar securities.    But when –  as they do –  governments and officials parrot on about “rules-based orders”, the importance of international standards, it does look at least a little embarrassing not to be part of these, not very onerous, international standards.  And economic analysts would actually use data like a CPI or an industrial production series.

And then, of course, there are other weaknesses in this area. Our quarterly national accounts numbers –  which themselves have material gaps (no quarterly income measure of GDP) –  are released more slowly than those of almost any OECD country (and, of course, are still subject to significant revisions even then).

Talking of the IMF and statistics, another reader pointed out to me recently that New Zealand seems to have been reduced to accepting technical assistance from the IMF on some aspects of our financial statistics.   Not a big issue in its own right perhaps, but I was a bit surprised nonetheless –  technical assistance (foreign aid) from the IMF has usually been something for underdeveloped and emerging countries –  especially as I knew the Bank had had a temporary secondee from the IMF a few years ago, who seemed to do a lot of work on these specific areas.  Just seems symptomatic of the not-overly-job New Zealand is doing these days around official statistics.  I guess decades of poor productivity growth really does show up in choices –  whether about cancer treatments, and things nearer to public goods such as official statistics.

My final statistics gripe for the day relates to the immigration statistics. You will recall that last year SNZ, together with Customs, MBIE, the government, and no doubt under pressure from airlines/airports etc, got rid of departure cards.  With them went one of the key short-term economic indicators (PLT migration numbers) analysts have used for decades to track short-term economic developments.  Not only is migration more important here (larger, as share of population) than in most advanced countries, but there are big cyclical fluctuations in migration (of the sort not seen in most advanced countries), largely because of the relatively free access New Zealanders have to Australia.

SNZ led the official chorus trying to tell us that the new world would be better for everyone.  It was never going to be, and I pointed this out in several posts before the final decision was made.  Sure, using passport data to work out whether or not people actually stayed (or left) long-term would produce better long-term indications of actual movements, but only with a very long lag, and in the meantime we would lose all useful short-term information on the movements of New Zealanders.  Their model estimates for the short-term were always going to have such large margins of error –  perhaps especially around turning points –  that any signal was going to be very hard to discern from the noise.  SNZ tried to tell is it wasn’t so, and when the new data starting coming out a few months ago, they continued to release prominent monthly commentaries, emphasising the signal.  And they did the same thing in each successive month even as the inevitable substantial revisions threw the numbers around.

But they seem to have finally realised that there is a problem.  On Thursday evening, I received a consultative document from SNZ inviting comment on “options for release of international migration data”.  It is a rushed affair –  they want comments within a week, much faster than normal official consultations.  I couldn’t see the document on their website but there was no indication they wanted it kept confidential either.

As I have noted to SNZ in my response, there is little sign (still) in the document that they recognise the importance of immigration changes in the short-term economic developments in New Zealand (the official who sent out the document is a demographer and the main interest seems to be in the needs of fellow demographers).

Anyway, they are now toying with dropping monthly data altogether, with releasing data only quarterly (even if there was monthly data in each release), and with dropping high frequency commentary on the net migration numbers (the latter is a move I would support –  SNZ commentary to date has fed an inappropriate reliance on highly questionable numbers).     Fortunately, they do note that they are not looking at options such as only releasing data with a six months plus lag (when the revisions have started to settle down), or release data only annually –  good of them, but extraordinary that such options even get a mention, in a country where migration data makes such a difference (including in the political debate), and where good and timely data should have a priority.

(For what it is worth, I have gone back to them urging them to keep monthly data, released monthly, with a short lag, but released straight onto the website without commentary.  The data may be poor –  and that is SNZ’s responsibility –  but there is no good reason for them to sit on data which could be made available, for analysts to make of it what they can, even recognising that the signal to noise ratio is very low.)

I could go on –  there is, after all, the breathless enthusiasm for the IDI, with little apparent thought about where such tools might lead – but won’t today.

The bottom line looks like a mix of problems.  There probably has been underspending on official statistics over the years (public goods have few vested interests to champion them), as well as some misplaced priorities (whether coming from ministers or officials). which in turn encourages a champing at the bit for apparently smarter, apparently cheaper, alternatives –  be it the Census or the migration data or whatever.  But before thinking about throwing more money at the problems, there needs to be some real accountability –  the Government Statistician in particular, but also successive Ministers of Statistics.  If we are going to do government well, two aspects of that should be serious accountability –  if you stuff up badly at the top, and especially if there is no contrition –  you should lose you job –  and doing official statistics excellently.   New Zealand is failing on both counts (and, of course, the failure on accountability runs much more broadly than SNZ),