The Productivity Commission last week released a report done for them by David Skilling on “frontier firms”. That is the topic of the Commission’s latest inquiry, handed to them by the Minister of Finance. Personally, I reckon the topic is mis-specified and will tend to drive people to focus on symptoms more than causes, but I’ll come back to that in more detail at some point.
Skilling was formerly Executive Director of the former (somewhat centre-left) New Zealand Institute and these days runs a consultancy, based in the Netherlands, with a focus on small advanced economies. I’m a bit under the weather today so in this post, I wanted to touch on only two points from his report.
The first was to draw attention to footnote 10
10 The one policy foundation setting that I identify as having had a meaningful impact on New Zealand’s productivity performance and the development of frontier firms is with respect to immigration (or more precisely, the absence of a strategic migration policy). The substantial net migration inflows that New Zealand has received over the past 25 years has been a strong source of support for headline GDP growth, but has created a series of distortions and pressures in the New Zealand economy: infrastructure and cost pressures, greater residential real estate demand (with implications for allocation of investment capital), downward wage pressure that deters business investment, as well as upward exchange rate pressure. An explicit immigration policy that was focused on quality and filling skills gaps, with lower gross inflows, would create a more supportive environment for higher levels of international engagement by New Zealand firms (although the transmission mechanism to outcomes is more indirect than those discussed in the body of this paper).
There isn’t much about policy that I agree with Skilling on – and find it strange that in a 30 page report with an emphasis on the tradables sector, this is the only mention of the exchange rate – but, as you can imagine, I agree with much of that.
And the second was about this chart
of which he observes
This seems to be the case in small advanced economies also. One of the striking characteristics of successful small advanced economies is their reliance on large firms, with a disproportionate representation of small economy MNCs in measures such as the Forbes Global 2000 (Exhibit 6).
I wasn’t particularly familiar with this listing, so went and had a look. But I also had a look at a wider range of countries. For his paper, Skilling uses the IMF classification of advanced economies, focusing on those with a population under 20 million. However, that grouping leaves out the central and eastern European countries (the Baltics, Hungary, Czech Republic, Slovakia, Slovenia) that are both OECD and EU members, and which are either catching or already overtaking New Zealand in terms of labour productivity (all but Hungary have had faster productivity growth than New Zealand since, say, 2007 – just prior to the last recession).
I’m not really going to dispute what I take to be one of Skilling’s propositions, that a successful New Zealand would probably see more large and internationally successful firms. Nonetheless, it is perhaps worth noting a few things:
- the Forbes listing is of public companies. That’s fine; it is what it is. But the implied market capitalisation of Fonterra makes it large enough that were it be tomorrow transformed fully into a listed company, it would almost certainly make the list (five Greek banks, with a combined market cap less than Fonterra make the list). If anything, Skilling is too kind about Fonterra – which has woefully underperformed the marketing pitches of 20 years ago – but big and international it still is,
- while we are the only advanced country in Skilling’s chart not to have a company in the list, none of the Baltics nor Slovenia nor Slovakia has an entrant either. The Czech Republic and Hungary (both about twice our population) have one and two respectively, in the Czech case a power company that appears to have a market capitalisation not much larger than that of Meridien,
- Iceland and Luxembourg are both small successful advanced countries; the former has no entrants on the Forbes list, and the latter quite a few (more per million than any of the countries shown).
- Portugal and Greece are not that successful small advanced countries, and both have several entrants on the list.
I guess A2 and Xero are increasingly not New Zealand companies, but appear large enough that they could well have shown up on a listing like this.
There are always going to be pitfalls in any illustrative indicator – this one simply happened to catch my eye – but if I agree with Skilling that it makes sense to pay attention to other small advanced economies in trying to make sense of the New Zealand story (and of our constraints and policy options), starting from where we are now, it is probably at least as useful to think about the central and eastern European countries – and Israel, which does quite well on various of Skilling’s indicators but has productivity very similar to ours – as the more traditional western European ones.