My 12 year old daughter has been teaching herself Welsh – a recent birthday present was a good Welsh-English dictionary – we’ve recently been watching a rather bleak Welsh detective series together, and this year she has also become (unlike her father) a bit of a rugby (“rygbi” in Welsh apparently) fanatic so I promised her that if Wales made the World Cup semi-finals I’d do a Welsh-themed post. That’s economics rather than rugby though.
One of the themes of much modern economics literature is things about cities, location, agglomeration, distance and so on. According to Eurostat data, London has the one of the very highest GDPs per capita of any region in the EU¹. The two largest cities in Wales – Cardiff and Swansea – are each less than 200 miles from London. And yet estimated GDP per capita in Wales is only about 40 per cent of that in London and 75 per cent of that in the EU as a whole (71 per cent of the UK as a whole). Productivity in Wales (GDP per hour worked) might be about that of New Zealand.
And yet Wales has much the same policy regime as London. Much the same regulatory environment, same income, consumption, and company tax rates, same currency (and interest rates and banks), same external trade regime, same national government (and as I understand it the Welsh regional administration doesn’t have control of very much), and the same immigration regime. Most of the people are native English speakers (even many of those who also speak Welsh).
Huge populations are free to move to Wales. There are 66 million people in the UK who face no regulatory obstacles to doing so. They could set up firms in Wales. So – for the moment – could people in most of the EU, and all legal migrants to the United Kingdom (with no particular ties to any other UK region) could move to Wales. It isn’t open borders but in practical terms it is much closer to it than almost any sovereign state.
And yet……by and large they don’t. The population of Wales today is only 50 per cent larger than it was in 1900 and only about 5 per cent of the population is born outside the British Isles. Here is the share of Wales in the total population of the Great Britain.
Wales used to have things going for it: plenty of room for sheep (wool and meat were two of our big exports to the urban population of the UK), the world’s largest slate industry, and coal (lots of it) and the associated iron and steel (the latter booming from the start of the 20th century) industries.
But not, it appears, very much at all these days. There is some tourism, some electricity exports (to the rest of Britain) and, of course, a variety of other industries. It all generates tolerable living standards. albeit supported by significant inward fiscal transfers. Unemployment is low, and (by New Zealand or London standards) house prices are fairly low – Swansea (second biggest city) has median house prices around $350000. But people in the rest of the UK, migrants to the UK, and – importantly – actual/potential entrepreneurs don’t seem to find it terribly attractive. Perhaps it would be different if it were an independent country – the Irish company tax regime is apparently eyed up by some. But as it isn’t, one gets a cleaner read on the pure economic geography effects.
It is interesting to wonder what might have happened to Wales if it were an independent country and, all else equal, had had control of its own immigration policy. What if they’d adopted a Canadian or New Zealand immigration policy – or something even more liberal – 20 years ago? Since there are plenty of places in the world much poorer than Wales (or New Zealand), and Wales itself is a small place, presumably they’d have had no trouble attracting people – at least modestly qualified people from places poorer, or less safe, again: China, India, South Africa, the Philippines (to name just four significant source countries for New Zealand). Even if many of the migrants initially saw Wales as backdoor entry to England, if New Zealand’s experience is anything to go by (become a citizen here and you can immediately move to much wealthier Australia) most wouldn’t. Presumably the Welsh building sector would have been a lot bigger, but it isn’t obvious that many more outward-oriented businesses would have chosen Cardiff or Swansea over London or Paris or Amsterdam, even with the rest of Europe more or less on the doorstep.
Tasmania is another interesting example. Like Wales, it shares essentially the same policy regime (taxes, currency, external trade, most regulation) with the sovereign country it is a part of, in this case Australia. There is unrestricted mobility for people within Australia, and external migrants – including those from New Zealand – can as readily settle in Tasmania as anywhere else in Australia. Hobart always looks like a really nice place.
Oh, and the population share of the total country is also small. But the fall in the population share has been much sharper than for Wales.
People – and firms – could choose to go to Tasmania but, by and large, they choose not to. It is, after all, quite a way from Melbourne, and you can neither drive nor take a fairly-speedy train. And unlike Wales, Tasmania is close to nothing else: Cardiff is much to closer to Dublin, Paris, Brussels, Amsterdam or even Frankfurt than Hobart is to Adelaide or Sydney. Perhaps even more than Wales, the economic opportunities seem to be mostly in the natural resources (and no big new developments there in recent decades) and a few niche industries that might be there because the founder happens to like living there. GDP per capita in Tasmania is just under 80 per cent of the whole of Australia average.
One could also do an interesting thought experiment as to what might have happened if Tasmania had been an independent country and had its own immigration policy. Even had they just adopted the same policy as Australia did, almost certainly their population today would be materially larger than it now is (Tasmania now has three times the population it had in 1900, while Australia as a whole has more like seven times the 1900 population). Being even smaller than Wales they’d have had no trouble attracting people. But – even more so than for Wales – you are left wondering how many more outward-oriented businesses would have chosen to stay based in little Tasmania (few enough outward-oriented businesses are based in even the big Australian cities).
Are there lessons for New Zealand. Our population has increased almost sixfold since 1900. In that time, we’ve fallen from (roughly) the highest GDP per capita anywhere to somewhere badly trailing the OECD field – and maintaining even that standing only by work long hours per capita.
It looks great to the strain of “big New Zealand” thought that has been around since Vogel at least. But to what end, for New Zealanders?
Think of one last thought experiment. What say we’d agreed a completely common immigration policy with Australia and held that in place for the last few decades? More or less exactly the same number of people would probably have come to Australasia in total, but what do we supposed would have been the split between Australia and New Zealand. It seems only reasonable to assume that a much larger proportion would have gone to Australia (than did). After all, even those who went to Australia had a choice of Tasmania if they wanted cooler climes and a slightly slower pace – but, to a very large extent they didn’t. And we know what New Zealanders themselves – who had ties to this physical places – were choosing over the last 50 years, as hundreds of thousands left for the other side of Tasman.
And had that happened – and perhaps New Zealand’s population was 3 million not almost 5 million – is it likely that any fewer market-driven outward-oriented businesses would be based here than are today. The land, the water, the minerals and the scenery would all still be there. And how much else is there?
As a best guess, if by some exogenous policy intervention there had been another two million people – of moderate skills etc – put in Wales, or another half million in Tasmania, it is difficult to have any confidence that average real incomes in either place would be any larger than they are now. Most probably, they’d be worse off – as say, the residents of Taihape probably would be if some exogenous intervention put another 5000 people there. Having put an extra couple of million people in New Zealand – more remote than Tasmania, much more remote than Wales – and not seen the outward-oriented industries, based on anything other than natural resources growing – we might reasonably assume we (New Zealanders) are poorer as a result.
Smart people are almost always a prerequisite to high incomes, but globally the top tier of incomes seems to focused on industries located in or near big cities, near big population concentrations, or on (finite) natural resources. You can earn a very standard of living from finite natural resources – it is the edge Norway has over the rest of Europe – but it looks pretty insane to confuse the two types of economies (when you have no realistic hope of transitioning from one to the other) and spread natural resource based wealth much more thinly by using policy to actively encourage rapid population growth.
From a narrow economic perspective – and it isn’t of course, the only one the matters – the best thing for people from a lagging economic performance area is to leave. It is what people did from Taihape or Invercargill, from Ireland for many decades, and (more recently and on a really large scale) what people did from New Zealand as a whole. Governments can mess up that picture. In a way the Welsh are fortunate to have a rugby team but not an immigration policy, at least had they had the misfortune to have had policymakers like New Zealand’s.
- Technically Luxembourg tops the table, but since a very large chunk of Luxembourg’s workforce doesn’t live there the numbers aren’t particularly meaningful (sensible comparisons need to take account of all the – typical modest-earning – support services populations need/use where they live).
croaking cassandra 
I love the ‘concept’ of this post, Michael. It’s a family blog post.
LikeLike
Up until now I have ignored Brexit. I didn’t want to get immersed in their problems. It their problem and they seem incapable of fixing it.
The tempo of news being reported here has intensified. I haven’t paid that much attention to it, but last week decided to look up the wikipedia description of it. Find out what its all about. According to the wikipedia tome, the driving force was/is immigration. what caught my attention was the demographics. Interesting. Worth the read.
extract
According to researchers based at the University of Warwick, areas with “deprivation in terms of education, income and employment were more likely to vote Leave”. The Leave vote tended to be greater in areas which had lower incomes and high unemployment, a strong tradition of manufacturing employment, and in which the population had fewer qualifications.[108] It also tended to be greater where there was a large flow of Eastern European migrants (mainly low-skilled workers) into areas with a large share of native low-skilled workers.[108] Those in lower social grades (especially the ‘working class’) were more likely to vote Leave, while those in higher social grades (especially the ‘upper middle class’) more likely to vote Remain
According to Thomas Sampson, an economist at the London School of Economics, “Older and less-educated voters were more likely to vote ‘leave’ […] A majority of white voters wanted to leave, but only 33 per cent of Asian voters and 27 per cent of black voters chose leave. There was no gender split in the vote […] Leaving the European Union received support from across the political spectrum […] Voting to leave the European Union was strongly associated with holding socially conservative political beliefs, opposing cosmopolitanism, and thinking life in Britain is getting worse”.[7] Econometric studies show that “education and, to a lesser extent, age were the strongest demographic predictors of voting behaviour”. Support for leaving was linked with “poor economic outcomes at the individual or area level” and with “self-reported opposition to immigration, but not with exposure to immigration
https://en.wikipedia.org/wiki/Brexit
LikeLike
The driving force for Brexit is national sovereignty, control of borders being part of that. Be very wary of relying on anything from Wikipedia, just by their choice of who to quote they corrupt the discourse. Same with google. Try a wiki search on global warming; they have decided what you are to believe, what to think. A veritable Ministry of the Truth.
Try a Google image search for American Inventors.
LikeLike
“” Being even smaller than Wales they’d have had no trouble attracting people.”” According to Wikipedia Tasmania is 3 times larger and the sentence makes no sense since logically a larger place would be more attractive. Since immigrants have a strong tendency to go to the biggest cities maybe Cardiff having a larger population than Hobart might be more relevent than landmass.
LikeLike
Sorry not to have been clearer: my point was that Tasmania has a smaller population than Wales, and a large scale immigration policy might involve attracting only 5-10k migrants a year. They’d have no problem at all attracting that many of the sort of migrants NZ gets.
LikeLike
For years it has been said that New Zealand and Australia are two countries united by Tasmanian jokes…..and even recent Nobel Laureate Michael Kremer has pointed out the economic problems of Tasmania (Kremer, Michael (1993) “Population growth and technological change: one million B.C. to 1990” Quarterly Journal of Economics 108 681-716. He emphasised that isolation prevented exposure to major ideas, ensuring aboriginal Tasmanians were bypassed by technological advances relative to aboriginal people in the rest of Australia.)
Several economists have recently argued that the information revolution has lead to an increased level of matching of well trained people to high productivity firms in a small number of super cities. David Card (et al) and Barth (et al) have argued that this is a major cause of inequality in OECD countries – a widening of between-firm productivity levels which is reflected in rising between-firm wage inequality. Autor has documented the declining wage premium of middle-educated workers in these major supercities, along with outward migration of middle-educated cities to less productive places. This phenomena would be consistent with your story about Hobart and Cardiff; they struggle to keep their best workers and firms when both find it more appealing to migrate to bigger and more productive centres. It is also noticeable that there is an increasing climate premium for climate advantaged cities within countries, suggesting borders matter: if interational migration is hard, fewer people undertake it than internal migration to the best climatic or most highly paying areas of a country.
A slightly different way of saying this is that third rate economists live in third rate cities and earn third rate incomes. That has been my own experience, and I imagine it is true in many other professions. You try for the big time in a central location and if you can’t compete you retreat back home or go somewhere else at a lower income. At some level I wonder if this is part of the NZ problem: the most productive people are disproportionately attracted offshore to higher incomes and more challenging work, leaving the rest at home. (Of course, not all of the highly talented people leave; just a large share.) Think of how many of NZ’s best economists have left the country to work in famous universities around the world (for example, seven out of the last eight people awarded the NZAE Distinguished Economist award work offshore at well known universities, the well deserved exception being John Gibson).
The focus on where firms choose to locate may be underemphasised in your thinking on migration. People in low income regional areas (Gisborne or Greymouth on a local scale; maybe NZ, Wales and Tasmania on a global scale) don’t earn much because they don’t have the opportunity to work at really good companies. One of the interesting findings from Kukutai and Pawars’ study of the outcomes of Maori and non-Maori New Zealanders living and earning in Australia is that not only do they earn much higher wages than Maori and Pakeha choosing to remain in NZ (as they work at more productive firms and earn higher wages) but the disparity between Maori and non-Maori is much less in Australia than in NZ. (Maori earn slightly less than averge Australians; Pakeha slightly more). Perhaps the unfortunate truth is that we don’t know how to attract and develop enough good firms in NZ, so it is easier to migrate to Australia to get a high income than wait for productivie firms to migrate here. With this in mind, I must confess that I always threaten to fail my Otago students if they don’t migrate to Austalia, because it shows they haven’t learnt anything from me; but the university doesn’t allow me to deliver on the threat. Still, most would be financially better off if they took this advice, and migrated to a place where better firms are located, and sought jobs there.
Andrew
Autor, D. (2019) “Work of the past, work of the future.” AER Presidential address 2019.
Barth, E., Bryson, A., Davis, J. C., & Freeman, R. (2016). It’s where you work: Increases in the dispersion of earnings across establishments and individuals in the United States. Journal of Labor Economics, 34(S2), S67-S97.
Card, D., Heining, J., & Kline, P. (2013). Workplace heterogeneity and the rise of West German wage inequality. The Quarterly Journal of Economics, 128(3), 967–1015.
Kukutai, T and Pawar, S. (2013).A Socio-demographic Profile of Māori in Australia, NIDEA Working PapersNo.3, University of Waikato, National Institute of Demographic and Economic Analysis.
LikeLiked by 1 person
Interesting and perceptive comments as ever Andrew. I’m embarrassed to admit that a couple of names on that NZAE list I had not even heard of https://www.nzae.org.nz/award/distinguished-fellows/ (altho it is also pretty clear that the criteria for the awards must have changed after 2007).
I think the issue of firm location is absolutely central (incl to my story). Migrants would happily move to Hobart or Napier if there were firms wanting to base themselves and grow there. But, as with the NZ story generally, when clever firms start here they are usually more valuable based somewhere nearer the centres of global activity.
I’m a bit more sceptical about the “smartest people leaving” story as any sort of material part of the explanation for our underperformance.
(Oh, and I think you sell yourself and your considerable talents somewhat short.)
LikeLike
An interesting post thank you.
There may be some interesting comparisons to also be made within the provinces and territories of Canada as they appear to have:
– a reliance on natural resources (of varying value i.e. oil and gas for some, agriculture, fisheries and tourism for others)
– high population growth driven by external immigration (although not in every case)
– in the case of Alberta and British Columbia, populations and demographics similar (including city sizes, distribution and agglomeration) to New Zealand
For British Columbia in particular the proximity to the ‘North West’ of the United States (which has a population about 2/3rds of Australia’s), high population growth driven by net immigration a fixed stock of natural resources (forestry, fishing etc.) would likely make it quite analogous to New Zealand’s experience I would have thought? Has British Columbia similarly ‘under-performed’ what it otherwise may have hoped to have achieved if it were not for different policy settings from Ottawa?
Does your theory (in that high levels of immigration in areas for which the primary economic driver is natural resource extraction results in less than stellar economic performance) hold in the case of these sub-national entities?
Unfortunately Canada has already exited the RWC so I may need to wait four more years for such a post!
LikeLike
Interesting questions, which I’ll have to think about more (not knowing the Canadian data particularly well). Bear in mind that untangling the story can be complex – a province with newly-developed abundant natural resources (eg tar sands) can both do well and have strong population growth (success will attract people) – it is just that there per capita gains will not be as great as if the natural resource gains were spread over fewer people (this is, more or less, the Australian story).
Looking at somewhere like Nova Scotia thru the same lens as I looked at Wales and Tasmania would probably give much the same story (and were they independent and running their own liberal immigration policy then – all else equal – the Nova Scotians would probably be poorer than they in fact are – one of the lowest GDP per capita Canadian provinces.
LikeLike