Immigration policy for New Zealand post-Covid

It must be quite a challenge for Rotary clubs to maintain a regular roster of speakers. Four years ago someone at the Wellington North Rotary Club had heard about my ideas on immigration policy and New Zealand’s lamentable economic performance and they invited me along to tell my story. The text I used then is here. A little while ago they invited me back and when we discussed what I might talk about I agreed to pick up where I’d left off in 2017 – at the very peak of the then immigration surge – and reflect on a better immigration policy for New Zealand as and when the borders eventually reopen (in the year to April, SNZ estimates a net outflow of about 9500 non-New Zealanders who’d been here for some substantial period of time.

So I spoke to them yesterday. One can’t cover everything – or even anything much in the depth the subject warrants – in 20-25 minutes, but for those interested my text is here.

Sadly, of course, the stylised facts of New Zealand’s economic underperformance haven’t changed for the better over the intervening four years. Productivity levels remain low and growth weak. Business investment has been pretty sluggish around low rates, and if anything the export/imports shares of GDP have probably fallen a bit more (even before Covid at least temporarily cut both further). Our real exchange rate stayed high, and if long-term real interest rates have fallen they were/are still well above those in almost all other advanced countries.

What has changed, for now anyway, is the substantially closed borders, which mean that it is very hard for most non-New Zealanders (Australians aside) to get in. No one envisages, or wants, current arrangements – or anything like them – to be permanent, but it does mean the conversation and debate starts from a rather different place than it might have a few years ago.

Perhaps what hasn’t changed so much is that much of the media debate – and apparently the political interest – seems to be on short-term visa holders. And almost every day now we hear stories from employers complaining about how hard it is to get staff, holding the border restrictions responsible.

It isn’t surprising that there has been some dislocation, disruption, and difficulty for some firms. After all, the borders were basically closed overnight, for public health reasons, and that disrupted a lot. That included typical sources of labour firms had become used to tapping, but it also included changes in the patterns of consumption demand (and the derived demand for labour). Add to the story, of course, the surprising pace of the overall economic rebound – spurred by huge fiscal deficits (not just last year when they were needed, but now when they aren’t) – which has led some economists to conclude that the economy and labour market are now operating at very close to full capacity. At full capacity you would hope it wasn’t always easy, or cheap, to find staff (on the other hand, it might be relatively easier for people to find jobs).

I don’t intend to make this a long post, but before running some quotes from my speech, I thought I’d include a couple of charts with some data that surprised me a bit when I dug it out. The first is the number people here on two of our main short-term work visa programmes – Essential Skills visas (a label that really should be in quote marks, or prefaced by “the so-called”) and Post Study Work visas.

visa 1

I knew the government had offered visa extensions in many cases, but if you’d asked I’d have guessed that total numbers would have dropped anyway as a reasonable number of people went back home. But, in fact, the numbers here – in these two most skills-focused categories – are almost the same as they were at the start of last year. And numbers on both visas are a lot higher than they were even five or six years ago.

Now, there have been material drops in the numbers here in a couple of other categories (both series quite seasonal).

visa 2

And those patterns are pretty much what I’d have expected. People have gone home as they’ve finished courses of study, or working holidays, and few/no new people have arrived. But on the working holiday front remember the counterpart – not too many New Zealand young people will have been heading off on their OEs over the last 15 months or so. The types of jobs (here) the two groups might have been looking for may have been a bit different – so some real mismatch issues in some places/roles – but it isn’t as if there are fewer potential workers overall.

As I noted in my speech – bearing in mind the rapid growth in short-term visa numbers in the run-up to Covid.

No doubt some firms have specific difficulties from the sudden dislocation. But there is something wrong with the story when it is seriously claimed – and this is the implication of what so many of these businesses are saying – that a low productivity economy, achieving underwhelming productivity growth, needs more and more immigrant workers each year just to function effectively.   Such a story might – just might – have a modicum of plausibility if this was a dynamic fast-growing economy where more and more firms were finding more and more opportunities to successfully compete on a world-stage.  But that is nothing like New Zealand’s story.  

And, as I’ve noted previously, most OECD countries are not only more productive than New Zealand they are also less reliant on migrant labour. Many business concerns reflect – understandably so – the (sometimes quite legitimate) perspective of a company, but economic policy management is about a country, and the two are quite different.

All that said, one of the points of my speech was to argue that the longer-term immigration settings, around residency approvals, matters far more to economic performance than the rules around limited period work visas. At 45000 residency grants a year, in 22 years the population will be heading for a million more than otherwise (by contrast, at peak there are about 100000 people here on Essential Skills and Post-Study work visas). If you believe in the enabling economic power of immigration, or think that in New Zealand’s case large-scale non-citizen immigration has been quite damaging economically, that is really where one should focus. Open borders people do – in principle, they’d allow (almost) anyone in, to stay. And so do I.

Here is the text from the last couple of pages of my speech on the way ahead

A couple of weeks ago the Minister of Immigration gave a speech foreshadowing changes to policy settings around immigration, apparently with a focus on the limited period visas.  There were no specifics, and there was no supporting analysis.   There are probably some sensible changes that could be made, but like their predecessors, this government seems all too fond of having officials and ministers decide who should be able to use migrant labour, where and when.  I’d rather go in the opposite direction and get officials out of things as much as possible. 

I would favour two main changes.  First, I would reverse the decision a few years ago to allow students to work while here. If you are here to study, study, don’t compete at the low end of the labour market.   And I would get governments out of approved lists, or even salary thresholds, and replace it all with a model in which any employer could hire a person on a temporary work visa but that visa would be

  • Subject to a fee, payable to the government (perhaps $20000 per annum or 20 per cent of the employee’s annual income, whichever is greater). That sets a clear and predictable test for whether non-New Zealand recruits are really required, and a genuine incentive on employers to search for and develop New Zealanders (especially for less well-paid positions).
  • Subject to a term limit (no individual could be here on one of these visas for more than three years, without at least a one year return home)

But despite the headlines these short-term work visas are still the second order issue.  Much more important is whether the government is willing to make any significant changes to the residency programme, or whether business as usual will shortly be resumed.

Neither the government nor the Opposition seen willing to engage on that issue.  And if the government deserves a little credit for very belatedly asking the Productivity Commission to report on the New Zealand immigration model, strangely they seem to be proposing to make policy before the Commission reports.

What should they be doing?

First, we need to explicitly recognise that the residency programme (the driver of medium-term policy-led population growth) itself comprises several different types of people. 

It includes people we are never going to restrict.  If your daughter does an OE in London and finds a British man to marry, he’ll be entitled to move here permanently.  No one would want to restrict those numbers, and there is no quantitative limit. 

It includes those we take in as refugees.  There is no economic motive for the refugee quota, it is all about humanitarianism.  

But the bulk of the programme is purely discretionary.  And the numbers involved have borne no relationship to the rather limited (highly productive) economic opportunities here.

There are all sorts of myths about migrants to New Zealand.  By international standards the skill levels mostly aren’t too bad – being a distant island means you really only get in legally, and it is an economics (rather than family) driven programme.  But the skill levels aren’t spectacular.  And why would they be?  Much as New Zealand is a pleasant enough, and peaceful, place to live it is (a) remote, and (b) now not very prosperous, and (c) small.   The smartest and most ambitious and most driven of the potential migrants are much more likely to go to other migration-welcoming countries if they can get in.  A country whose own people leave en masse isn’t a great advert for abundant economic opportunities.

And we aren’t even ruthless about demanding highly-skilled people.  We run specific programmes for people from Pacific countries who don’t have the skills/education to qualify as skilled migrants.  And we give extra points to people who are willing to live outside the main centres, even though the main centres are where most of the economic opportunities and higher paying jobs are.  We structure the system to subsidise NZ universities, by favouring applicants with NZ degrees and work experience even though NZ universities are nowhere near best in the world, and NZ’s economy is a low productivity beast.   And so on.  There is talk from time to time about attracting the best tech people, but why would they come here – small, remote, not very wealthy, no great universities, no relevant centres of expertise or funding, and so on? 

And so we bring in lots of pretty-average people, adding nothing systematically to NZers’ prospects   There is nothing wrong with being “pretty average” – that’s most people – but it isn’t going to do anything to transform our productivity performance.  Hasn’t so far, and no reason to suppose it will any decade soon.

New Zealand’s economy could do such much better.  But all the signs are that it probably can’t match the best with a population that is growing rapidly – much more rapidly than the productivity frontier countries.  Distance hasn’t been defeated and if anything may have become more important.  There is lots of wishful thinking around the New Zealand debate, but any serious confrontation with the stylised facts of New Zealand’s experience, augmented with the experience of other former settler societies, is that large-scale immigration just hasn’t helped for a long time.  You might think the US is an exception, but it isn’t really.  It was – like us – one of the handful of richest countries in the world 100 years ago, and despite having had much more rapid population growth than European countries (and no ravages of war or communism) the gaps have narrowed.     Denmark is probably the standout performer today.  

If political parties were serious about reversing the decades of relative productivity decline – and there is no sign of it – there is a variety of things mutually reinforcing things that should be done, which together would prompt much more business investment and a more outward-oriented economy: 

  • We should take a much more open approach to foreign investment – I’d remove all controls in respect of investors from OECD countries.
  • We should be lowering the tax rate on business investment – our company tax rate (which matters a lot for foreign investors) is in the upper part of the OECD range, and what you tax you get less of.
  • We need to free up land use, within our cities and across the country.

One could list other things (GE issues for example).

But most importantly, we need to end the delusion – for that is what it is – that a very remote country, which lots of its own people leave, which has fallen steadily behind an increasing number of other countries, and where foreign trade is shrinking as a share of GDP, is a sensible place for government policy to promote large scale immigration.  It wouldn’t make sense for Taihape; it doesn’t make sense for New Zealand.    Immigration policy is one of the largest structural policy interventions in our economy.    And now – before we reopen the borders – is the time to act.

So let’s not go back to granting huge numbers of residency permits.  Cut out the Pacific quotas – no reason to favour people from those countries any more than those from (say) Britain and Ireland (that we once favoured), and cut back the total approvals to, say, 5000 to 10000 really highly-skilled people (if we can find them) with no preferences given to NZ qualifications and experience, simply looking for the best and most energetic.  Add in refugees and the spouses/partners of New Zealanders, and you’d be looking at an overall number of residency approvals each year of 10000 to 15000.  In per capita terms that would be a similar rate to the US. 

Successful countries make their economic success primarily with and for their own people.  We can again do it here. We have talented and fairly well-educated people, we have reasonably open markets, we have a history of innovation, but distance really works against us and we will mostly prosper by doing better and smarter with (and investing more heavily in) the natural resources we have – things that really are location-specific.  Lots of other bright ideas are, and will be, dreamed up by people here.  But if those ideas work well, they’ll typically be much more valuable abroad.   You may not like it – neither do I really – but it is what experience shows.  We’d be foolish to simply start up the same old model and expect better results in future.