Could do better?

Minus the question mark, that is the title of a new and fairly short report undertaken for the Productivity Commission by economists Julie Fry and Peter Wilson on “Migration and New Zealand’s frontier firms”. The Commission itself has been charged by the Minister of Finance with reporting on what could be done about so-called “frontier firms”, and has been casting about for various possible angles (apparently their draft report is due later this week). There is a Stuff article on the Fry and Wilson paper here, which begins this way

Despite its best efforts to become the next Silicon Valley, New Zealand has instead attracted a lot of nice people but very few trailblazers.

There probably have been – and still are – a few with that “next Silicon Valley” type of aspiration, but the key point is more like “lots of individually nice people, but probably not much economic gain to New Zealanders as a whole”.

Fry and Wilson’s own summary runs this way

Fry and Wilson key points

Fry and Wilson themselves seem a bit more sceptical on the economic value (to New Zealanders) of New Zealand’s large-scale immigration programme than they were in their short 2018 book that I wrote about here.

I’m a bit ambivalent about the report, even though – considered broadly – it goes in somewhat the same policy direction as the approach I’ve been championing for much of the last decade. Perhaps that is mostly because the Productivity Commission didn’t offer to pay very much for a report, and so the authors didn’t have the time or resource to consider the issues around the economics of New Zealand immigration in any great depth. A serious look at New Zealand’s immigration policy and the connection to New Zealand’s underwhelming economic performance would require, for example, a full Productivity Commission inquiry devoted just to that issue, but the government determines inquiry topics and I gather they’ve refused to have an immigration policy one done, even though immigration policy is one of the larger discretionary government structural policy interventions in the economy. But I can’t blame Fry and Wilson for that.

But unfortunately the (presumed resource) constraint means that the report really isn’t much more than an initial view that large scale immigration over the last 30 years probably hasn’t done much good for New Zealanders, and that hence somewhat less in future would more likely be beneficial. I don’t disagree – and, of course, have gone further than the authors in my hypothesis about the damage large scale immigration may have done (a story they describe as “plausible but untested”) – but who is the report going to persuade? The report doesn’t seek to engage with a broader academic literature that tends to be quite positive about economic gains from immigration, at least in the advanced world as a whole, or with the advocacy for it – including in a New Zealand context – by outfits like the IMF or the OECD. They might – as I do – think many of these results don’t stand up to close scrutiny (eg on the IMF here, or the OECD here), or may not have much application to a single extraordinarily-remote location, but they neither engage with the papers, not articulate their critiques. There isn’t much New Zealand specific formal research, but somewhat to my surprise, there wasn’t even a reference to the big advocacy piece the New Zealand Initiative did in 2017 (reviewed and critiqued at length here).

But in the rest of this post I wanted to comment mostly on two areas where I wasn’t particularly convinced, even as someone generally somewhat sympathetic to the thrust of the report. The first is the claim – also in those Key Points above – that New Zealand’s policy for attracting skilled migrants is “close to international best practice already”. The authors seem to offer little or no support for this proposition, but even if it were true it would not be particularly reassuring given that (a) we take a lot of migrants, as a percentage of New Zealand’s population, and (b) the evidence suggests that on average migrants are no more skilled than comparable New Zealand cohorts. The large numbers of people who have managed skilled migrant entry as low-level retail or cafe managers, for example, suggests that if this is world best practice, world practice is pretty poor (which in many cases is true no doubt, but that is their problem not ours). But more specifically, we also know that the New Zealand system for granting residency to “skilled migrants” is now strongly skewed in favour of people who are already in New Zealand – explicitly favouring people from abroad with New Zealand qualifications and New Zealand work experience (with bonus points for living in remote corners of this remote country). That favours absorption and integration, but generally not outstanding excellence: our universities generally not being top-tier, and our economy not being some global centre of excellence. It simply isn’t that easy for, say, a young family – parents perhaps good graduates of top 20 overseas universities – to just get residency in New Zealand, not without first relocating temporarily to the ends of the earth on a short-term visa in the hope residency eventually works out. To the extent there is benefit for New Zealand putative “frontier firms” in migration, it some of those sorts of people – with some proven work experience globally – who are likely to be more valuable than some 21 year old student studying at Massey who couldn’t get into Stanford or Cambridge.

Of course – and here I think Fry and Wilson probably agree – not that many top tier foreign people are likely to want to live and work here (as distinct from the boltholers), but lets not get complacent that our current skilled migration system is really fit for purpose, whether as to target number or conditions of entry (and although it isn’t dealt with in this report, a lot of our residency grantees don’t even come in via the skilled migrant pathway).

(On that “not that many top tier foreign people are likely to want to live and work here”, see my doubts expressed a few years ago about the the-new Global Impact Visas. Rereading that old post yesterday, nothing in what we have seen and heard of the scheme’s operation so far would lead me to materially alter my view of the prospects.)

The Productivity Commission over the last couple of years has emphasised quite a bit a desire to see New Zealand-based firms investing more beavily in technology. I’ve been uneasy about this line of argument because at times the Commission has seemed to put the cart before the horse, not digging deeply enough to understand why the New Zealand economy is underperforming and more profitable business opportunities aren’t apparent. This emphasis seems to carry over to the Fry and Wilson report – no doubt delivering something consistent with what the client was looking for. There are several pages (in what is really only a 30 page report) on opportunities (“very significant upside productivity potential”) if only we made it materially harder for firms to hire foreigners.

The predominant mechanism they seem to have in mind – whether in relation to students, working holidaymakers, or RSE workers (there is a whole section on the fruit industry) – is that if labour is harder and more expensive to get, firms will invest in technology. On the one hand, they seem to be buying into a model in which immigration has driven down wage rates (for which the evidence, considered broadly – as opposed to a few concentrated subsectors – is quite thin; in New Zealand wages have risen faster than GDP per hour worked over the last few decades). But there are also disconcerting parallels with a couple of very shaky arguments. Back in the disinflationary 1980s there was sometimes an argument used (in the UK and here) that a high real exchange rate – pretty much an inevitable part of a transition towards low inflation – was really quite good because it would encourage strong firms to invest more heavily in advanced technology etc to retain competitiveness. There was never much sign of that in the aggregate. And more recently we here claims that materially increasing minimum wages, from already quite high (relative to median wages) levels, will itself boost productivity and stimulate investment in technology. There might be some of that – firms will look for ways to mitigate the forced increase in labour costs – but there is no evidence in support of it as some sort of economywide pro-productivity strategy. And so I’m also uneasy when this argument is applied so simply to immigration. Perhaps there is something to it at an individual firm level, but it is unlikely to hold much at an economywide level. (Relatedly, much of the discussion in the paper seems to be about average labour productivity, and very little about the – conceptually more important – total factor productivity. One can raise labour productivity in ways that still leave the overall economy worse off – Think Big in the 1980s was probably such an example.)

The authors seem to favour a much lower level of non-citizen immigration to New Zealand (on average over time), not just nipping and tucking in a few individual migration approval streams. But if so, then their paper seems to neglect a rather important adjustment channel. As they note, historically New Zealand economists tended to emphasise the significance of the short-run demand effects of migration (and the well-established point that the short-run demand effects tend to outweigh near-term supply effects plays an important part in my own story). But if immigration by non-citizens is cut back markedly and for a prolonged period we would expect to see a reduction (perhaps a quite significant one) in the real exchange rate. And – to take the fruit industry as an example – a lower exchange rate might well more than outweigh any sector-specific wage effects from reduced access to migrant workers, leaving no particular incentive for the industry to invest more aggressively in technology to replace labour (for the existing tradables sector this is my story of how adjustment works once reform is done not just to an indvidual firm – deprived of access to labour – but at an economywide level). It isn’t that I really disagree with the Fry and Wilson direction of policy, but their analysis seems a bit too simple, and also inclined to treat the existing structure of the economy as a given (whereas on my argument I think we would, over time, see quite a different mix of sectors).

Fry and Wilson end their paper with some specific post-Covid suggestions for the government

fry and wilson 2

I’m sceptical that the 4th bullet has any content to it, although the broad direction of their recommendations isn’t one I’m uncomfortable with. My own suggestions (from a speech a few years ago) are along somewhat similar lines.

reddell immigration specifics

Finally, in their paper Fry and Wilson note of my views

While plausible, Reddell’s hypothesis has not been tested empirically. However, it is
possible that the natural experiment provided by the Covid-19-induced border closure will
enable more solid conclusions to be drawn.

I don’t think that is so. Most importantly, for a natural experiment you really want New Zealand immigration policy changed with all else unchanged, but this year too much has changed all at once for any sort of read, let alone a clean one. Among those changes, the differential ways different countries have handled Covid, massive fiscal stimulus (which, all else equal, tends to put upward pressure on the real exchange rate), most other countries also closing their borders to a greater or lesser extent, and a big disruption to key elements of our tradables sector. Oh, and all parties expect – political parties seem to champion – a return to the immigration status quo ante just as soon as possible.

For anyone wanting to read more of my story, there is this older paper from 2013, a speech on related topics from 2017, and a chapter in a recent book on New Zealand policymaking in which I look at some of the issues around New Zealand’s long-term economic underperformance, with an emphasis on the notion that however sensible large scale immigration may be for some countries, it seems not to have been more recently so for a remote land heavily reliant on a fixed stock of natural resources, and with few or no asymmetric shocks having worked in our favour for 100 years or more.

15 thoughts on “Could do better?

  1. ““lots of individually nice people, but probably not much economic gain to New Zealanders as a whole”” – that is a description of my family – arrived 2003; currently ten of us including the grandchildren.
    It is good reading a discussion about immigration that is not pure emotion. The policy is set by the govt and their duty on all issues is to search for what in the long term is best for New Zealand. Getting the message across that some is good and too much is bad seems lost on our politicians and journalists
    The recommendations made by Fry & Wilson and by you seem reasonable although I’d debate your first two and enthusiasically support your 6b. Demanding 20% of expected income up front makes sense – it would dissuade employers who are just trying to import 3rd world wages and it ought to massively speed up processing work visas for genuinely essential experienced skilled workers.

    Liked by 1 person

    • Well, many would tell you that you can’t import 3rd world wages. The minimum wage rates are set in concrete by legislation.
      That argument is clap trap except perhaps in Auckland where there are plenty of brothels and Indian Liqour shops that get away with it. Certainly can’t in the ag sector.

      Liked by 1 person

      • Lots of courier self employed companies pretty much being paid below minimum wage for the hours, effort, costs including the uniforms they have to carry themselves.

        Liked by 1 person

  2. Thanks Michael for this post. I hope that the appropriate decision makers take notice of the NZIER report and your commentary. I am concerned that the opportunity the current crisis has provided for resetting various policy settings is/has been wasted.
    A good start would be removing the generous work-rights for international students as this is causing a number of imbalances. TOP had a policy of also removing post study work-visas and instead graduates would have to meet the criteria for a skilled work visa. What are your thoughts on that?

    Liked by 2 people

    • I don’t like the bundled subsidy to NZ universities that post-study work rights involve. I’d probably be happy to give some sort of preferential points (in an application for residency) for anyone with a good degree (honours or better) from a top-200 university anywhere (which comes back to the point in the post that if we are going to encourage immigration we shouldn’t skew things to favour people already here for work/study).

      Liked by 1 person

      • Unfortunately other more attractive destinations like Canada and Australia do offer those bundled work Visas, so either we are in the market to compete with those better institutions or we just relegate our Universities to decaying unmaintained hulks

        Liked by 1 person

      • Rundown and unmaintained universities do not encourage anyone to want to study there. Can’t get quality without cash.

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      • When other businesses do badly or change their methods to use fewer workers and buildings they shrink or close down. NZ has monuments to its economic past: disused gold mines, churches changed into dwellings and workshops, closed down schools in depopulated rural areas. Why not close down a few universities?
        An industry can be kept going with govt bribes – why not candlestick making with every foreign worker offered potential citizenship?
        Our universities exist because to an extent they are are centres of excellence but also because they teach subjects such as literacy and basic knowledge that ought to be taught at school and lastly to make money from foreigners. Foreigners chose to study in NZ because of our reputation for quality and also because they are attracted by potential residency. Judging by the non-university private tertiary education colleges that used to be so successful until INZ tightened its rules, there is no level of rundown and disfunction that cannot sell itself overseas so long as a NZ working visa is attached.

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    • – Auckland is booming but it’s the struggling regions that contribute most exports and tourist destinations.

      Can’t see how you can blame Auckland for the struggling regions when we are booming. Clearly tourists spend up big in Auckland and just have nowhere to spend their spare cash in the regions. Perhaps the regions should offer paid activities rather than just free scenery?

      – Excessive, low value immigration is a disaster.

      Aged care, tourism and international students are our largest industries and they need low skilled labour. Can’t really have old people drooling on carpets and sleeping on a pile of doo and tourists needs cleaners. Lots of them.

      – Immigration inflates house prices but much of the increase in house prices reflects the large tax subsidy to investors in housing, compared with savers.

      The reality is that the 1 million Kiwis that live overseas buy in NZ using offshore incomes and do borrow in NZ to buy property in NZ because many will plan to come home one day.

      – High volume – low value tourism is destructive. It adds little economic value but puts serious pressure on the environment and fundamentally erodes New Zealand’s desirable features.

      Those low value tourists are also your agri fruit pickers and part time hospitality workers. Those industries are now struggling and fruit is rotting on trees.

      – Deliberate policy targeting of savers and savings is politically expedient but bad policy, and damaging, economically and socially.

      The world is awash with cheap Central Bank printed cash. Can’t do much other than allow interets rates to fall.

      – Low productivity is a critical weakness, contributing to low incomes, low tax payments and low living standards – and welfare dependency.

      Easy to fix. Stop our factories from shutting down even if it requires government subsidies to keep them running. Productivity does not care about profitability anyway.

      – The windfall gains from Auckland house prices should be substantially taxed, to fund critical National projects, such as restoring river water quality and more effective social programs. River water quality is a disgrace!

      It is a disgrace to force Aucklanders to fund the regions mess. They created the mess themselves. Nothing to do with Auckland.

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  3. Interesting discussion as just this morning I read about this.

    https://www.formuslabs.com/

    Its about the exciting work being done in NZ by Kiwis. Its a Major and yet when the wanted more funding they went to the Silicon Valley.

    WHY?

    I wrote and pointed out that the Kiwi taxpayer had subsidized via the university much of this work and yet when it came time to add more value and help the company grow the generous taxpayer was thrown over in favour of already rich Californian democrats.

    As of now, I have not had a reply.
    Surely we should back ourselves.
    Our stock exchange could do with the investments, our super scheme could bankroll them and benefit all the taxpayers longterm and even minnows like myself would love the chance to invest in this.
    But no it seems we just pay and pay for these people to run away with all the gains.

    We actually need some rules around how Universities reward the taxpayer.

    Liked by 2 people

  4. “when they wanted more funding they went to the Silicon Valley. WHY?”

    Maybe because there are no billionaire angel investors sitting around in Auckland waiting for investable ideas to drop by. Great tech startups from anywhere in the world go to Silicon Valley when they need funding because that is where the money is. Investors with serious high-risk money to invest in tech startups go to Silicon Valley because that is where they will find great ideas from all over the world.

    This is one of the fundamental problems that NZ faces. It is not really a distance problem: investors and inventors could come from around the world to Auckland almost as easily as to California. But they don’t, and nothing that the Government can do will change that. These things are largely happenstance: we do not have a significant film industry because of anything the Government has done; we have a film industry because Peter Jackson grew up in Wellington and likes living here, and other film people have gravitated to where Peter Jackson is. (The industry may now be self-sustaining, perhaps, although Government action could certainly destroy it. But Government action did not create it, and could never have done so.)

    Our host understands that, and pays attention to policy changes that might help to offset to some extent the problems of being “a remote land heavily reliant on a fixed stock of natural resources”. We need to develop policies that make the best of our endowments, rather than simply wishing that we had better endowments.

    Liked by 1 person

    • I agree, it is not about the distance. I have attended a number of Tripartite Business conferences held between Los Angeles, Auckland and Guangzhou. At every conference the Americans would remark how close NZ was to Los Angeles compared to some of their travel times throughout the US and how surprised they were on arrival that the flight times was relatively short.

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  5. I have been looking around Waimate, There isn’t much growth there (3 second hand shops close together) but the farmland looks pretty well utilized. Dairy farms have Filipinos but their houses remind me of a company office set in a field. The Big Smoke says it has always been hard to get people to work on farms.

    I’m intrigued by George Megalogenis suggestion that immigration is “the fifth pillar of the open economy”.

    We are told immigration is driven by a “growing economy” and “needed skills”. He says “this isn’t an employer putting his hands up; this is being driven by a middle class in India and China – they are choosing us. The politicians don’t control it..” As a result they get an extra million a decade.

    Like

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