Earlier in the week I wrote about the IMF’s less-than-impressive Article IV report on New Zealand’s economy and economic policy. As part of the bundle of documents released last Saturday there was the Selected Issues paper – a collection of some supporting research/analysis undertaken by Fund staff to help underpin the Article IV report and Fund surveillance of New Zealand more generally.
On this occasion, there are three such papers. The one that caught my eye was the first: a modelling exercise under the title
TRADE, NET MIGRATION AND AGRICULTURE: INTERACTIONS BETWEEN EXTERNAL RISKS AND THE NEW ZEALAND ECONOMY
In this paper staff took a Fund model carefully calibrated to capture key features of the New Zealand economy and used it in conjunction with their global model to look at several possible shocks New Zealand might face over the coming years. There is a piece on possible agricultural shocks (pp19-21) which may interest some readers, but my focus was mostly on the other shocks they studied:
- a significant growth slowdown in the People’s Republic of China,
- a significant growth slowdown in Australia, and
- and a significant (exogenous to New Zealand) change in net migration from (a) the PRC, and (b) separately, from Australia.
They illustrate the estimated transitional effects and report the model estimates for the long-term steady state effects.
The PRC growth shock involves (mainly) materially slower productivity in China, such that 10 years hence PRC GDP is 11.9 per cent lower than the (WEO forecast) baseline. You’ll have heard New Zealand politicians and other lackeys parrot lines about how New Zealand depends heavily on the PRC for its prosperity etc. The IMF modellers are having none of it. Here are the New Zealand economy responses (quarters along the horizontal axis).
On this model, a 12 per cent lower level of GDP in China – largest trading partner, first or second largest economy in the world – leaves New Zealand…….every so slightly better off in the long run (but treat that as basically zero). Oh well, never mind…..I don’t suppose it will stop the lackeys doing their thing, but it is a helpful reminder that, to a first approximation, countries make their own prosperity.
The scenario of an adverse growth shock in Australia is of similar magnitude (Australia’s GDP is 9.3 per cent lower than otherwise in the long-term. I won’t clutter up the post with the same set of charts for the Australia shock, but suffice to say that the bottom-line results aren’t that different. This time, a 9.3 per cent sustained fall in GDP in the economy that is our second largest trading partner and largest (stock) source of foreign investment is estimated to reduce New Zealand long-run GDP, but by only 0.03 per cent. I’d treat that as zero as well. In both cases, a lower real exchange rate is part of the way the New Zealand economy adjusts, so consumption here is a touch lower (it is relatively more expensive) but overall real incomes generated in New Zealand (GDP) are all but unchanged.
That was interesting, but not really that surprising (in truth, even I might have expected a slightly larger adverse effect). It was the migration shocks, and the Fund’s modelling of those, which should really garner more interest and scrutiny. Note that these results have already had bureaucratic scrutiny: the paper notes that
The chapter benefited from valuable comments by the Treasury of New Zealand and participants at a joint Treasury and Reserve Bank of New Zealand seminar.
Both institutions have some smart and critical people.
Here is the shock re PRC immigration
Additional Net Migration Effect in New Zealand. There are permanently fewer migrants to New Zealand from China. There is a 0.1 percent reduction in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 1.0 percent lower.
This shock is added to the PRC growth slowdown shock illustrated earlier. As the Fund’s model is calibrated, these are the results. The additional effect of the migration shock is the difference between the two lines in each panel.
The Fund writes these results up as “a bad thing”
The fall in net migration would exacerbate the negative spillovers to New Zealand
from China. Real GDP would now be 0.7 percent lower than baseline in the long term.
Which is true, of course, on their model. But, strangely, not once in the entire paper do they mention per capita GDP. The population in the long-run is 1 per cent lower, but GDP is only 0.7 per cent lower, implying that GDP per capita is 0.3 per cent higher in this “Chinese migration shock” scenario than in the baseline scenario. That sounds like a good thing, for New Zealanders, not a bad thing, at least in the longer-term. (Since labour input and GDP both fall by the same amount, it doesn’t look as if this model can deal with endogeous changes in productivity). For what it is worth, real wages in New Zealand are also higher in this scenario.)
What about the Australian net migration shock?
Additional Net Migration Effect in New Zealand. There are permanently more migrants to New Zealand from Australia. There is a 0.26 percent increase in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 2.6 percent higher.
Again, this shock is on top of the sustained slowdown in Australian growth modelled earlier (and thus is probably best thought of as a reduction in the net outflow of New Zealanders to Australia, the income gap having changed a bit in our favour). Here is the chart of those results.
In sum, the population is 2.6 per cent higher in the long-run and GDP is 2 per cent higher. The Fund again spins this as a positive story (it appears under the heading “How Net Migration Could Improve Outcomes for New Zealand”) but again completely overlook the per capita story. In this scenario, real GDP per capita is 0.6 per cent lower than in the baseline. New Zealanders are poorer (and in the long-run real wages in New Zealand are lower). It isn’t even as if there is much of a short-term vs long-term story (the GDP effects just build pretty steadily over the 10 year horizon).
These effects become large if you apply them to the scale of the non-citizen migration we’ve had in New Zealand in recent decades. Cumulatively, they would not be out of line with the observed slippage in New Zealand productivity relative to other advanced countries over that period.
So the headline out of this particular paper should really be “additional migration makes New Zealanders poorer in the long-run, at least according to IMF modelling”, not stuff about how helpful immigration is. A focus on GDP might make sense if you are building an army (raw numbers matter) or to silly comparisons politicians make. Other people know that per capita GDP is much the more important variable, relevant to material living standards etc. On its better days I’m sure the IMF knows that too.
In a way, even in their report on New Zealand the IMF shows glimpses of recognising that high rates of immigration might not be so good for New Zealand (whatever the possible benefits in some other places). Both in the main Article IV document and in the Selected Issues paper “a remote location” comes first in the list of factors the Fund identifies as constraining New Zealand productivity. Combine that glimmer of recognition (and I could also recommend to them this piece) with their own published model results suggesting that, at the margin, immigration makes New Zealanders poorer – recall that this model is calibrated by the Fund to capture what they see as key features of the New Zealand economy) – and it might have pointed disinterested observers towards suggesting to New Zealand governments that they consider rethinking their enthusiasm for such high (globally unusual) rates of immigration to a relatively unpropitious location. Instead of which, the Fund (like the OECD) tends to act as cheerleaders for New Zealand immigration policy.
The IMF, of course, is not a disinterested observer. It knows little distinctive about New Zealand – and New Zealand’s productivity performance has long been an awkwardness, even a bit of an embarrassment, for the international economic agencies. And it is a global champion of the idea that immigration is good and more immigration is better. If you think that an unfair characterisation, check out this post (and this more NZ focused) where I unpicked parts of an official IMF paper which purported to show that
If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term. Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap. It simply doesn’t ring true – and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.
What do I actually make of the latest IMF paper? Not that much to be honest. I’m sure the authors could probably play around with their model – it is calibrated rather than estimated – to produce results more suitable to the causes of their masters in Washington. And since productivity isn’t affected, one way or another, by immigration in this model, I’m certainly not attempting to suggest that these results are somehow reflective of the sorts of channels and models I’ve been championing as central to the New Zealand story.
But when even the champions of high immigration to New Zealand acknowledge that there is not much (any?) New Zealand specific research showing that high rates of immigration to New Zealand, in New Zealand’s specific circumstances (eg remoteness, resource endowments, institutions etc) has been beneficial to New Zealanders over recent decades, it should be a little uncomfortable for the officials and politicians who champion the status quo that one of the leading internation economic agencies, pretty sympathetic to their approach, nevertheless (and without really trying) manage to produce research once again casting doubt on whether on this central tool of economic policy – probably the biggest structural intervention our governments have done over the last 25 years – is really working for New Zealanders.
Perhaps someone might ask the Prime Minister or the Leader of the Opposition why they act as if they are so convinced that on this count the IMF is wrong. (Oh, and they might stop parroting the “our prosperity depends on China” line too. IMF modelling confirms (common sense) that it simply doesn’t.)