HYEFU bits and pieces

This is getting to be a bit of a half-yearly ritual, but politicians’ words are one thing, and the best professional judgements of our Treasury forecasters are another.   The latter aren’t necessarily very accurate at all, but as their website blares

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy

Heaven help New Zealand you might think, given that both Treasury and the government seem lost in the nebulous alternative reality of the living standards framework, wellbeing budgets, and a grab bag of alternative indicators that may –  or may not –  matter to anyone much other than them.

But they are the official advisors, charged by law with producing independent forecasts twice a year.   And the forecasts I’ve been particularly interested in for a while have been those for the export (and import) share of GDP.  The previous government, somewhat unwisely set themselves numerical targets for the export share of GDP –  reality bore no relationship to the targets.  The current government avoided that particular mistake, but senior ministers –  all the way up to the Minister of Finance and the Prime Minister –  talk regularly about rebalancing the economy and gettings the signals right in ways that lead to more exports and higher productivity.

But here are the numbers, for exports as a share of GDP, from last week’s economic and fiscal update.

exports hyefu 18

You can read the earlier decades in various ways.   If you wanted to be particularly negative you could note that we got to an export share of GDP in 1980 which we haven’t sustainably exceeded since then.  But if you were of a more charitable disposition you might suggest that, broadly speaking, things were still getting better until about 2001 (although you shouldn’t put much weight on that peak –  it was an unusual combination of a year of a very weak exchange rate and very high dairy prices).  But this century hasn’t been good, and this decade has been bad.

As a reminder it isn’t that exports are in some sense special, but that successful economies typically have plenty of growing firms that are producing goods and services that are making inroads in the very big market of the rest of world.  That, in turn, enables us to enjoy for of what the rest of the world produces.   For small economies in particular, exports are typically a very important marker.

If you were of a generous disposition you might note that a temporary dip in the export share of GDP might not have been unexpected, or even inappropriate, for much of this decade.  After all, the Canterbury earthquakes meant that resources had to be diverted to repairs and rebuilding, and resources used for one thing can’t be used for other things.  The exchange rate is part of the reallocative mechanism.  And the unexpected surge in the population, as a result of high net immigration (a good chunk of it changing behaviour of New Zealanders), arguably had the same sort of effect.

But the largest effects of the earthquake are now well behind us, and even net immigration inflows are also dropping back.   And yet the Treasury forecasts –  the orange line in the chart –  show no sustained rebound in forecast export performance at all.   In fact, by the final forecast year (to June 2023) the export share of GDP will be so low than only one year in the previous thirty will have been lower.  Not only is there no sign of a structural improvement –  a step change that might one day see New Zealand exports matching or exceeding turn of the century levels –  there isn’t even a reversal of the decline this decade, which might plausibly be attributable to unavoidable pressures (eg the earthquakes).

For anyone concerned about the long-term performance of the New Zealand economy –  which appears to exclude our political officeholders, who could actually do something about it, but choose not to –  it is a pretty dismal picture.  Something like the current level of the real exchange rate seems to be Treasury’s “new normal”, and absent huge positive productivity shocks that is a recipe for continued structural underperformance.

Still on the HYEFU, I’ve long been intrigued by the Labour-Greens pre-election budget responsibility commitment around government spending (which continues to guide fiscal policy).

Rule 4: The Government will take a prudent approach to ensure expenditure is phased, controlled, and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio.

During the global financial crisis Core Crown spending rose to 34% of GDP. However, for the last 20 years, Core Crown spending has been around 30% of GDP and we will manage our expenditure carefully to continue this trend.

As someone who thinks that there is plenty the government spends money on that just isn’t needed (and eliminating which would, in turn, leave room for some of the areas where more spending probably is needed), this commitment has never really worried me. But then I’m not a typical Labour/Greens voter.

But if it didn’t bother me, it did puzzle me.  Why would the parties of the left, evincing (otherwise) no conversion to the cause of smaller governments, (a) commit themselves to such a relatively moderate share of GDP in govermment spending, and then (b) aim to undershoot that?

Here is what I mean.  In the chart I’ve shown Treasury’s core Crown expenses series as a share of GDP, including the projections from last week’s HYEFU.  I’ve also shown averages for the periods each of the previous three governments were responsible for (thus the former National-led government mainly determined fiscal outcomes for the year to June 2018).

core crown expenses hyefu 18

On the government;s own numbers (and these are pure choices, made by ministers), core Crown spending in the coming five fiscal years (including 2018/19) will be lower every single year than the average in each of the three previous governments, two of which were led by National.   Sure, there was a severe recession in 2008/09 –  not that fault of either main party here –  and then a severe and costly sequence of earthquakes (ditto), but on these numbers government operating expenditure as a share of GDP in 2022/23 will be so moderate that in only two years of the previous fifty (Treasury has some not 100% comparable numbers back to the early 70s) was spending even slightly lower (those were the last two years of the previous government).

It seems extraordinary.

It isn’t as if the economy is grossly overheated (which might suggest a need for considerable caution, since GDP might soon go pop).  Treasury estimates that the output gap is barely positive over the entire projection perion (the numbers so small we might as well just call them zero).   Of course, Treasury (and other forecasters) never forecast recessions, and it seems quite likely that some time in the next five years we will have one.  All else equal, a recession would raise government spending as a share of GDP, but even a 4 per cent loss of GDP in a recession –  which would be pretty severe, similar to 2008/09 –  would only raise the share of spending to GDP by little over one percentage point.   Spending, at the trough of a severe recession, would still be under 30 per cent of GDP –  which was presented in the budget responsibility rules as something they want to fluctuate around, not as an untouchable electric fence.

The only plausible explanation I can see –  after all, the government show no “small government” inclinations when it comes to, eg, regulation –  is the weight they ended up placing on the net debt target.  But that was even more arbitrary than the spending rule.

In isolation, they could spend $5 billion more in 2022/23 and still only have spending as a share of GDP at around the average level of the previous Labour-led government.   Given the low quality of many of the things they are already spending on (fee-free tertiary education, regardless of means or ability, or the Provincial Growth Fund, to take just two examples), I’m reluctant to encourage them.  But it still looks odd.

The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.The Treasury is New Zealand’s lead advisor to the Government on economic and financial policy.

Services exports and economic performance

A couple of pieces I saw yesterday got me thinking again about New Zealand’s services exports and our economic performance.

On the one hand, there was an interesting ANZ report on tourism, which included this chart.

Chart of the week

Spending by international visitors has seen impressive growth in recent years.

International visitor spend by country

tourism

Source: MBIE

And then there was speech on the MFAT website by Catherine Graham, their Economic Divisional Manager.  MFAT doesn’t publish many speeches, so it was interesting to see a bit of an economics angle, even if  it was infected with the government of the day’s propaganda.  Perhaps that was inevitable to some degree in a speech by a public servant, but gratuitous endorsement of the Provincial Growth Fund didn’t seem strictly required in a speech notionally on “small state diplomacy”.

There was a certain breathlessness to the speech

All countries and regions face technological mega trends that are consequential to businesses and governments and affect decisions. Digitalisation, artificial intelligence and automation will increasingly affect wage and employment levels, in developing as well as developed countries. The key difference from the past is that the change – driven by computing power – will occur at an exponential, rather than linear, rate. 

Maybe, although the best guess remains that people who want to work will continue to be able to do so.  Markets adjust like that.  And global productivity growth shows no sign of such a dramatic transformation (for the better).

Also from the breathless side was this

Non-state actors such as the major e-commerce platforms (think Amazon and Alibaba) and the social media giants (think Facebook, Instagram and Google) are each on their own much bigger economically than New Zealand (and many other countries’ economies). How do we navigate our relationships with them as a nation state?

This seems mostly (a) meaningless or (b) wrong.  For example, on checking I learned that the market capitalisation of Facebook was US$390 billion, and its annual revenues were less than US$50 billion.  On no meaningful metric is it bigger than New Zealand, but even if it was there is a fundamental difference between a company and a nation state.  For better or worse, Facebook could be regulated out of existence almost overnight.

But the line that caught my eye, and prompted this post, was a couple of paragraphs later

Continuing to create and leverage smart ideas will be essential for New Zealand’s agricultural sector to keep delivering value to the economy and address broader societal and environmental challenges. Elsewhere in the economy, New Zealand’s success in weightless exports – such as software development, services embedded and embodied in physical products, and the creative arts – are growing apace. It is likely that this trend will be supported by ongoing technological advances.

You’d have thought that a senior economics person in our foreign affairs and trade ministry might have thought it worth mentioning that exports as a share of GDP peaked (in modern times) 18 years ago, or that there has been no growth in the real per capita output of the tradables sector in the same period.

But what about those “weightless exports” specifically?  Here is the time series of New Zealand’s services exports for the last 30 years.

services x nov 18

The 1990s looked quite good, indeed the peak wasn’t even until as late as 2003, but since then it has mostly been downhill.   There was a bit of a pick-up a couple of years ago, but even that doesn’t look to be going anywhere in particular.  The services export share of GDP is currently at a level first reached in 1996.  This is success?

That ANZ chart I started the post with looked quite impressive.  Nominal series over long periods of time often do.  But MBIE now has a nice tourism data dashboard (there is a migration data one coming), with some useful summary charts.  Here are a few of them

tourism mbie3

tourism MBIE 2

and, as a share of GDP –  direct and (estimated) indirect contributions

tourism MBIE 1

(UPDATE: A careful reader points out that these charts, which I directly downloaded from the dashboard, have not translated correctly.  Anyone wanting the correct pictures should go to dashboard itself (link above) and click on the “Overview” menu and then “Economic Contribution”.   As represented above the charts don’t capture the pick-up in tourism in the last couple of years.)

And tourism is by far the largest component of our “weightless exports”.    We all know there are specific services firms doing well, either selling abroad directly or (as Ms Graham notes) with their services embedded in other goods exports, and on the other hand we have the film industry (kept alive on massive direct public subsidies) and the export education industry (aided by substantial implicit subsidies, bundling immigration and work access provisions to the sale of educational services).  The bits that are doing very well, standing on their own feet, just have to be very small relative to the size of the economy, and to the scale of the New Zealand economic challenge (closing those huge productivity gaps).

How do we do by international comparison?

Here are exports of services as a share of GDP for the small OECD countries (I’ve left Ireland and Luxembourg off the chart, but –  for various reasons –  their services export shares are “off the charts” high).  Small countries is the relevant comparator here, as countries with large populations naturally tend to have rather lower foreign trade shares.

services x nov 18 2

Services exports from New Zealand have been shrinking as a share of GDP, and our services export share of GDP was low to start with.   This century to date, only three of these small OECD countries have had more of a fall in the services exports share of GDP than New Zealand has.   And all three of them –  Czech Republic, Slovakia and Estonia –  have in any case managed much faster productivity growth than New Zealand over that period.

Our economy isn’t doing well, no matter how much bureaucrats and politicians like to pretend otherwise, and regardless of whether one focuses on the “weightless” bit of the economy or the rest of it.  We do quite well at employing our people, but then wage rates and productivity are now so modest by advanced country standards –  gaps that simply aren’t closing –  that more people feel the need to work.

And strangely, it seems that MFAT’s Economic Divisional Manager has some inkling of this as she ends this particular part of her speech thus

I strongly believe that earth will never be “flat”, as Thomas Friedman claimed, and that geography remains, to a greater or lesser extent, destiny. Digitalisation is not causing the end of geography as a key determinant of prosperity. Industry clusters, international connections and trade, knowledge exchange and IP transfer are all positively correlated with geographical proximity as well as prosperity – in other words, they are much easier for large countries and countries with land borders to achieve. The catch-22 for small, isolated countries is that they are also the very conditions essential to overcoming the disadvantage of geographical distance. This is a huge challenge for New Zealand, both in terms of international policy but also domestically – currently we see the government tackling this challenge through regional policies such as the Provincial Growth Fund.  

Except that it isn’t some sort of “catch-22”.  It is a constraint that New Zealand officials and politicians need to finally get real about.   If – natural resource based opportunities aside – the best opportunities in the world arise from being in close proximity to lots of other people (as markets, skills networks or whatever), then trying to grow New Zealand’s population as a matter of policy –  lots more people in an unpropitious location –  looks crazy.  Many of the people who come would have been better off to have gone somewhere else (if they could).  And the challenge facing the typical longstanding citizen (native or otherwise) –  to manage top-tier global incomes and living standards – is simply made tougher with each new person our governments bring in.  That is not because of access to jobs (that is a straw man non-argument –  you observe full employment in poor, rich and middling countries) but precisely for the sorts of reasons that Ms Graham of MFAT identifies (even if she apparently has not thought fully through the implications of her observation).

Once were traders

For small countries in particular, foreign trade is a key element in economic prosperity.  Firms in your country develop products and services that people abroad want, and that enables your citizens to consume from the wider range of products and services the rest of the world has to offer.  It isn’t just final products, but trade in intermediate goods and services (inputs to other production) also enables specialisation and the general gains from trade.

Foreign trade wasn’t always important in the islands of New Zealand.  For the centuries after first settlement there was none.  And (although not solely for that reason) the people –  Maori –  were poor.   In modern New Zealand, foreign trade has been critical: 100 years ago there was a widely cited claim that New Zealand did more foreign trade per capita than any other country.  Hand in hand with that, we were among the countries with the highest incomes per capita.

But no longer, on either count.

The latest quarterly numbers out last week did show an uptick in both exports and imports as a share of GDP.  But here is the chart back to 1972 –  annual data, plus the latest quarterly observation.

external trade share

The foreign trade share has been, at best, static for almost 40 years (in most countries they’ve been increasing).  The last few years have seen the trade share the weakest for almost 30 years (and the late 80s construction boom).  I’ve highlighted the only three occasions when exports and imports have averaged 30 per cent or more of GDP: the year to March 1985, the years to March 2000 to 2002, and the year to March 2009.   What was the common feature of those years?   It wasn’t the stellar success of outward-oriented businesses.  It was the (unexpected) severe weakness in the exchange rate: the devaluation of 1984, the period around the end of the dot-com boom when US interest rates were high, and New Zealand (and Australian) dollars were unattractive, and the international financial crisis (and extreme risk aversion) of 2008/09.   Based on the rest of the set of New Zealand policies, those low exchange rates weren’t sustainable, and there was a relatively quick rebound.

What of other advanced countries?

Big countries tend to do less foreign trade (share of GDP) than small countries.  That is no surprise, as there are many more markets and opportunities for specialisation (gains from trading) close to home.  Here are the OECD countries that in 2016 (last year with complete data) had exports and imports averaging less than 30 per cent of GDP.

Australia 21.0
Chile 27.8
Italy 29.0
Israel 28.2
Japan 15.6
Turkey 23.4
UK 29.1
USA 13.3

Of them, Italy, Japan, Turkey, the United Kingdom and the United States are big countries and big economies.    You’d expect to find them on this table, and if anything the anomaly is Germany, with a foreign trade share now in excess of 40 per cent of GDP.

Of the remaining countries, there are

  • Australia, with five times our population,
  • Chile, with more than three times our population, and with the second lowest labour productivity in the OECD (beating only Mexico), and
  • Israel, which isn’t much larger than New Zealand but which –  as I’ve highlighted here previously –  has a similarly lousy productivity growth record.

And all, in one form or another, with severe disadvantages of distance.

There has been a tendency in some circles to excuse New Zealand’s low foreign trade shares by citing distance, but simultaneously a reluctance to take seriously what is implied by that limitation.  If the opportunities for foreign trade from this remote location don’t look particularly good, isn’t there something deeply illogical (or worse) about continuing to use policy (as successive governments have done for last 25 years) to drive up our population –  more people in an unpropitious location?  All the more so when adopting that policy approach also involves driving the real exchange rate up, away from where it would likely settle otherwise.  Not all New Zealanders suffer in the process –  if you run a business geared, in effect, solely towards population growth you may well flourish –  but New Zealanders as a whole have.

For all the occasional talk about rebalancing the economy (from both main parties, at least when they first take office) none of it seems to take any serious account of this constraint.   Which is only set to become more seriously as –  relative to other countries –  the opportunities here shrink with the apparent determination to pursue net-zero emissions targets.  Planting (lots more) is unlikely to be a path to sustained prosperity or higher productivity.

These days, New Zealand’s per capita foreign trade will among the lowest in the advanced world.   Among the rich countries, only (very big) Japan and the United States will be materially lower than us.  It isn’t a mark of a successful economy.  But neither government nor opposition have any real strategy –  or interest? –  in turning things around.

Exports of services: a dismal picture

In my post yesterday, I highlighted the pretty stark divergence in the performance of the tradables and non-tradables parts of the economy.  As the key chart in yesterday’s post illustrated, in the 1990s and into the early 2000s both the tradables and non-tradables sectors were growing strongly, even in per capita terms.   Since then, the non-tradables sector has continued to grow pretty strongly, but there has been no growth at all in per capita tradables sector GDP –  in fact, the current level is almost 10 per cent below the 2004 peak.

One element of the tradables sector that is commonly supposed to be doing well is exports of services: tourism, export education, and the rest.   The government has indicated that it hoped the ICT component would surge ahead and, on some definition or other, be the “second largest contributor to our economy by 2025”.

But how have services exports  actually being doing, as a share of the economy?  Here is the New Zealand chart.

services X june 18

There was really strong growth over the 15 years or so to the peak (marked) in around 2002.  Services exports lifted from less than 7 per cent of GDP to in excess of 10 per cent.  Since then, the trend has been back downwards again –  the current level only a touch above 8 per cent.  And, at that, one of the largest components –  export education – is, in effect, quite subsidised, by being bundled together with the ability to get work rights and residency points.

How have other advanced countries done?

Here is a chart, using annual OECD data, showing (a) New Zealand, (b) the median for those small OECD countries with complete data since 1986, and (c) the median for six small former Communist eastern and central European OECD countries, countries engaged in the sort of catch-up that New Zealand was supposed to experience.

services X 2 june 18

I don’t fully understand what was going in the former Communist countries in the first few years of the century, although since in many there was a big boom in domestic demand and credit, the export sectors (especially the bits not involving FDI) were probably under pressure.   Whatever the story for those countries then, both lots of small advanced countries have seen rising shares of their economies accounted for by services exports over the past decade.  We haven’t.

Here is another way of looking at our experience, looking at the percentage point change in the services exports share of GDP since our peak in 2002.

services x 3 june 18

There were two –  of 34 – OECD countries that saw a slightly larger fall in the GDP share of services exports.  In one case, the growth in goods exports more than offset the fall.  In the other –  Chile –  both goods and services exports shrank as a share of GDP, as happened in New Zealand.

As ever, foreign trade isn’t everything.  But when your per capita incomes and productivity are so far behind the leading countries in the OECD, the typical way in which a country would undergo a sustainable lift would involve a larger share of the economy accounted for by both exports and imports  That just hasn’t happened in New Zealand –  and, of course, neither has there been any catch-up.   Which isn’t surprising when, on the measure I illustrated yesterday, the real exchange rate over the last 15 years has averaged 27 per cent higher than the average level in the previous 15 years.

That higher real exchange rate didn’t get there by chance.  It was the consequence –  mostly unwitting – of deliberate government choices.

On which note, it is nine months today since the election.  In other words, a quarter of the government’s term has gone.  And, as far as I can see, there is nothing in policy announced, or foreshadowed, likely to do anything to close the productivity gaps,  materially alter the real exchange rate, narrow the large average interest differentials, or sustainably increase the export share of our economy so that in turn we can support a larger import share.  Oh, and market prices suggest no confidence that the manifest evil that is the housing market is on the way to being fixed either.

Economic growth within environmental limits

That was the title of a speech David Parker gave a couple of weeks ago.  Parker is, as you will recall, a man wearing many hats: Minister for the Environment, Associate Minister of Finance, Minister for Trade and Export Growth, and Attorney-General.  Since he was speaking to a seminar organised by the Resource Management Law Association, this speech looked like it might touch on all his areas of portfolio responsibility.

In passing, I’ll note that he clearly doesn’t live in Wellington.  He introduces his speech lamenting that New Zealand had just had its hottest summer on record.  Most Wellingtonians –  no matter how liberal (indeed, I recently heard an academic working on climate issues make exactly this point) – revelled in a summer that for once felt almost like those the rest of New Zealand normally enjoys.   The sea water was even enjoyably swimmable not just bracing or “refreshing”.

But the focus of his speech is on economic growth.

First he highlights some of New Zealand’s underperformance.

New Zealand has enjoyed relatively strong nominal economic growth over recent years, bolstered by strong commodity prices, population growth and tourism. More inputs, mostly people, have been added into the economy but, with population growth stripped out, per capita growth has been poor at about 1 per cent per annum.

That underperformance has been the story of decades now.   And poor as the growth in per capita real GDP has been, productivity growth –  real GDP per hour worked –  has been worse.  In one particular bad period, over the last five years or so, labour productivity growth has been close to zero (around 0.2-0.3 per cent per annum on average).

Parker is obviously aware of this, beginning his next paragraph “we also have a productivity problem”, but seems more than a little confused about the nature of the issue.

Capital has been misallocated, including into speculative asset classes such as rental housing, rather than into growing our points of comparative advantage.

But…….your government (rightly) keeps telling us that too few houses have been built, laments increases in rents etc.   If we are going to have anything like the rate of population growth we’ve run over recent decades (let alone the last few years) ideally more real resources would be devoted to house-building, not less.  Simply changing the ownership of existing houses doesn’t divert real resources from anything else, or even use material amount of real resources.

The Minister goes on

We aim to diversify our exports and markets as we move from volume to value. We want to change investment signals so more capital goes towards the productive economy rather than unproductive speculation.  Where we need immigration, it will be more targeted.

That last sentence sounds promising, even tantalising.  But it doesn’t seem consistent with the Prime Minister’s rhetoric, with Labour Party policy on immigration, or with the (in)action of the government on immigration policy to date.     Our large-scale non-citizen immigration programme runs on unchanged, complemented by the big increases in recent years in the numbers here on short-term work visas.    A reduced rate of population growth would reduce the extent to which real resources needed to be devoted to meet the –  real and legitimate –  needs of a fast-growing population.

The Minister also makes a bold claim

I am an experienced CEO and company director. I know from experience that we can achieve economic, export and productivity growth within environmental limits.

No doubt, as absolute statements, those claims are true. But surely the relevant question is “how much?”     After all, the message Labour and the Greens were running in the election campaign was that what apparent economic success there had been in recent years was built on “raping and pillaging” the environment –  water pollution, offshore oil exploration, emissions etc.   And yet, as the Minister notes, even that “economic success” didn’t add up to much: weak per capita GDP growth, almost non-existent productivity growth, no progress in closing the gaps to the rest of the advanced world.  And what of exports?

exports 2018The past 15 years have been pretty dreadful, and the last time the export share of the economy was less than it was in the March 2017 year was the year to March 1976 –  back in the days when (a) export prices had plummeted, and (b) the economy was ensnared in import protection, artifically reducing both exports and imports (our openness to the world more generally).

In the Minister’s own words

But economic management over recent years has put pressure on our social wellbeing and our environment. 

So how, we might wonder, is a greater emphasis on environmental protection going to be consistent with the economic growth, and the exports and productivity growth that David Parker says the government aspires to?

As Minister for Economic Development and for Trade and Export Growth, my priorities reflect the reality that our economic success will be underpinned by a more productive, sustainable, competitive and internationally-connected New Zealand.

It is great to see growth in the value of output from our productive sectors. The Government wants to work with them to ensure that the right conditions are in place for firms to thrive and trade, and that we maximise the value of the goods we produce, and encourage high-quality investment in New Zealand. We want our sectors and regions to realise their full potential.

Economic growth and trade helps us create a greater number of sustainable jobs with higher wages and an improved standard of living for all New Zealanders.

However, the Government is clear that economic growth cannot continue to be at the cost of the environment. This is not idealism: it is grounded in common sense. Protecting our environment safeguards our economy in the long term – our country has built its economy and reputation on our natural capital.

I’m not arguing against improving environmental standards, perhaps especially around fresh water.  Improvements in the environment are typically seen as a normal good: as we get richer we want (and typically get) more of it.  But those gains usually come at some (direct) economic cost.    Major change isn’t just wished into existence.

In some places, perhaps, these changes are easier than in others.  If the tradables sector of your economy is, in any case, in a transition  away from heavy industry to, say, financial or business services (perhaps the UK experience), you are naturally moving from industries that might otherwise tend to pollute heavily towards those that don’t.  And farming –  and land-based industries –  might be a small part of the economy anyway.

But this is New Zealand.  And in New Zealand probably 85 per cent of all our exports are natural-resource based, and total services exports (even including tourism) are no higher as a share of GDP than they were 15 or 20 year ago.  Not very many new industries seem to find it economic to both develop here, and then remain here.   We –  and the Minister –  might wish it were otherwise, but up to now it hasn’t been.  Instead, what export growth we’ve had has been in industries where the government is often –  and perhaps rightly –  concerned about the environmental side-effects.

In his speech, the Minister declares that as Minister for the Environment improving the quality of freshwater is his “number one priority”.  I might have hoped that fixing the urban planning laws was at least up there, but lets grant him his priority for now.    How does he envisage bringing about change?

In environmental matters there are only three ways to change the future – education, regulation and price. Of these the most important for water is regulation

And regulation comes at a cost, reducing the competitiveness of firms and industries that are no longer free to do as they previously did.  The best presumption then has to be that future growth in affected sectors will be less than previously, and less than it would otherwise have been.  Sometimes, regulatory and tax initiatives spark brilliant new technologies enabling industries to move to a whole new level.  But you can’t count on that.  You have to work on the assumption that regulation costs.  Those costs might be worth bearing, but you shouldn’t pretend they aren’t there.

The same will, presumably, go for including agriculture in the emissions trading system, however gradually.   Relative to the past, firms facing such a price will no longer be as competitive as they otherwise would have been.    And experts tell us that as yet there are few technologies for effectively reducing animal emissions –  other than having fewer animals.

And then, of course, there are the direct bans.  The ban on new offshore oil exploration permits hadn’t been announced when the Minister gave his speech, but it will –  by explicit design –  reduce output in the exploration sector and, over time, in the domestic production of oil and gas.    It might be –  as some of the government’s acolytes argue – “the thing to do”, “leading the way”, “this generation’s nuclear-free moment” [that one really doesn’t persuade if you thought the Lange government’s gesture was a mistake too], but it must come at an economic cost to New Zealanders.  An economy totally reliant on the ability to skilfully exploit its natural resources, consciously and deliberately chooses to leave some chunk of those –  size unknown –  untapped.

Again, over the course of the last 45 years –  the period of that exports chart –  we’ve had a lot of oil and gas development.  All else equal, our economic performance can only be set back without it – not perhaps this year, or next, but over time.  And it all adds up.

Reading through to the end of the Minister’s speech there is simply no credible story for how he, or the government, expects to be able to do all these things and still see some transformation in the outlook for per capita GDP growth, or growth in productivity or exports.  Indeed, there is nothing there to explain why the outlook won’t be worsened by the sorts of initiatives –  each perhaps worthwhile in their own terms.

It might be different if the government was willing to do something serious about immigration policy, rather than just carrying on with the bipartisan “big New Zealand” strategy.   When natural resources are a crucial part of your economy –  and everyone accepts they still are in New Zealand –  then adding ever more people, by policy initiative, to a fixed quantity of natural resource is a straightforward recipe for depleting the stock of resources per capita, and thus spreading ever more thinly the income that flows from those natural resources.

It is pretty basic stuff: Norway wouldn’t be so much richer per capita than the UK –  both producing oil and gas from the North Sea –  if Norway had 65 million people.  And if Norway decided to get out of the oil and gas business –  leaving underground a big part of their natural resource endowment –  they’d be crazy to drive up their population anyway.    But that is exactly the thrust of what the New Zealand government is doing between:

  • what is aspires to do on water,
  • its ambitious emissions targets, in a country with very high marginal abatement costs, and
  • the ban on new oil and gas exploration permits

even as it keeps on targeting more non-citizen migrants (per capita) than almost any other country on the planet, and as the export share of GDP has been under downward pressure anyway.

It is not as if there is a compelling alternative in which export industries based on other than natural resources are thriving, boosted immensely by the infusion of top-end global talent, in ways that might make us think that natural resource industries could easily be dispensed with and a rapidly rising population was putting us on a path to a more prosperoous, productive, and environmentally-friendly future.  Its been a dream, or an aspiration, of some for decades.  But there is barely a shred of evidence of anything like that happening in this most remote of locations.

It might all be a lot different if the government was willing to step aside from the “big New Zealand” mentality, or put aside for a moment fears of absurd comparisons with Donald Trump –  recall that (a) our immigration is almost all legal, and (b) residence approvals here (per capita) are three times those in the US (under Clinton/Bush/Obama).

If the government were to move to phase in a residence approvals target of 10000 to 15000 per annum (the per capita rate in the US), with supporting changes to work visa policies, we’d pretty quickly see quite a different –  and better –  economic climate.   We’d no longer have to devote so much resource (labour) to simply building to support a growing population –  houses, roads [rail if you must], schools, shops, offices.  All else equal our interest rates –  typically the highest in the advanced world –  would be quite a bit lower, and the real exchange rate could be expected to fall a long way.  I don’t think there is a mention in the whole of David Parker’s speech of the real exchange rate, but it is a key element in coping successfully with the sorts of transitions the Minister says he aspires to.   Farmers, for example, will be able to compete, even with tougher water regulations, even with the inclusion of agriculture in the ETS.  And more industries in other sector will find it remunerative to develop here, and remain based here.  We’d actually have a chance of meeting both environmental and economic objectives instead of –  as the government would see it –  having consistently failed on both counts.

Last year, I ran several posts (including this column) making the point that rapid population growth –  mostly the consequence of immigration policy –  was the single biggest factor behind the continued growth in, and high level of, carbon emissions in New Zealand over recent decades.  In other words, we had made a rod for our own back and then –  through the process of driving up the real exchange rate –  made it even more difficult and costly to abate those emissions without materially undermining our standard of living.  OIA requests established that neither MBIE nor the Ministry for the Environment had even explored the issue.

It wasn’t a popular view, but I stand by the argument.  In a country still very heavily dependent on natural resources, if you care about the environment, and about “doing our bit” on carbon emissions, it is simply crazy to keep on actively driving up the population.  Doubly so, if you think you can do so and still improve productivity, export growth, and overall economic performance.  The Productivity Commission is due to release soon its draft report on making the transition to a low emissions economy.  I hope they have been willing to recognise, and explicitly address, the integral connection to immigration policy in the specific circumstances New Zealand faces.  Not wishing to confront the connection –  an awkward one for the pro-immigration people on the left in particular –  won’t make it go away.

Our rather moribund economy

The quarterly national accounts data were out yesterday.  They made pretty underwhelming reading.

There was the (rather modest) growth in per capita GDP

pc GDP mar 18

This expansion –  dating from around 2010 –  has been quite a lot weaker than the previous two growth phases.  In the chart you can see that almost every peak for the last 25 years has been lower than the one before.   And for the last year – full year 2017 over full year 2016 – we managed only 0.8 per cent growth in real GDP per capita.   Growth has been slower than that only in the midst of the last two recessions.

At least real per capita GDP grew, you might say.  But hours worked per capita (whether measured by the HLFS or the QES) grew by a touch over 0.8 per cent over that same period.  In fact, there was no growth in labour productivity at all.

Here is my standard labour productivity chart, averaging the different possible combinations of QES and HLFS hours data and production and expenditure GDP data.

productivity mar 18

There has been no productivity growth at all in the last year, and in the last five years ( the grey line relative to the orange line) average annual labour productivity growth has been only around 0.3 per cent per annum.   And this in an economy that the previous government liked to boast –  and the new government seemed happy to concede –  was doing pretty well.  Productivity growth is the only sustained basis for long-term improvement in material living standards.   We have very little of it –  even as we start so far behind most other advanced countries.

Perhaps our firms have been managing more success in taking in world markets?

There was bounce in the terms of trade –  dairy prices were improving –  so nominal exports as a share of nominal GDP did improve.

x share of gdp

Unfortunately, it looks like another of those series in which each peak is a bit lower than the one before it.    And services exports –  the wave that was much talked of a year or two back –  look to be dropping away again.  Exports of services –  often talked of as the way of the future –  first got to the current level (share of GDP) in 1998.

I don’t often show charts of export volumes.  As a share of GDP such charts aren’t very meaningful.  But one can compare growth rates, in this case for the last decade, since just prior to the 2008/09 recession.

x and gdp real

Over the decade as a whole, export volume growth has barely kept pace with the unimpressive growth in real GDP, and even the services surge in 2014/15 only ‘made up’ for the severe underperformance of that sector in the previous few years.   Recall that, for a country with a small population, New Zealand’s export share of GDP is very low to start with, and over this decade there has been no progress in closing that gap (something probably an integral mark of any sucessful policy programme to close the overall productivity gaps).  The result isn’t very surprising given how out of line with relative productivity our real exchange rate has become, but it can be (soberingly) useful to see the hypothesis confirmed in the data.

And one last chart.  Here is the proxy for business investment spending as a share of GDP (total investment less government and residential investment).

business investment to dec 17

Yet another chart in which each peak seems lower than the one before it –  and this in a country where, with very rapid population growth at present, one might have hoped to see a temporarily larger than usual share of current GDP going to business investment, to maintain the capital stock per worker.   But no.    If anything –  and there is noise in the series so I wouldn’t make anything much of it – things may have been falling off again in the last few quarters.

These weren’t outcomes the previous government showed any sign of caring about.   In Opposition, Grant Robertson would regularly release statements when the national accounts came out lamenting the relatively poor performance.  In office, there was no statement yesterday.  And despite the occasional ritual obeisance to the idea of lifting productivity performance, there is no sign that government –  or their Treasury advisers –  has any serious idea how such outcomes might be brought about, or any very serious commitment to trying.

 

Exports in a cross-country perspective

Across the advanced world, exports have been becoming a larger share of most countries’ GDP.  This chart shows the median export share for OECD countries going back to 1971.

export % of GDP OECD

The OECD only has complete data for all its member countries since 1995, but in that time total exports as a share of total OECD GDP have risen from 19.5 per cent to 28.3 per cent.

There is some short-term variability –  I’m not sure what explains the 2016 dip –  but the trend has been pretty strongly upwards.  That’s encouraging: trade (imports and exports, domestic and foreign) is a key element of prosperity.

For quite a while, New Zealand’s performance was very similar to that of the median OECD country

export %

and then it wasn’t.    The last time New Zealand’s export share matched that of the average OECD country was around 2000/01, when our exchange rate was temporarily very low (and commodity prices were quite high).   At very least, we’ve been diverging for 15 years now, although it looks to me that the divergence really dates back at least 20 years to the early-mid 1990s.

Once upon a time –  well before these charts –  New Zealand traded internationally much more than most other countries.   With a high share of exports in GDP, and a high GDP per capita, a common line you find in older books was that New Zealand had among the very highest per capita exports of any country.    These days, not only is GDP per capita below the OECD median, but so is our export share of GDP.

Small countries typically have a larger share of exports in their GDP than large countries.  That isn’t a mark of success for the small country, just a reflection of the fact that in a small country there are fewer trading partners.  If your firm has a great world-beating product and yet is based in the US quite a large proportion of your sales will naturally be at home.  If your firm is based in Iceland or Luxembourg, almost all your sales will be recorded as exports.  US exports as a share of GDP are about 12 per cent at present, but divide the country into two separate countries and even if nothing else changes the exports/GDP shares of both new countries will be higher than those of the United States.   The median small OECD country currently has gross exports of around 55 per cent of GDP  (New Zealand 26 per cent).

On the other hand, we also expect to see countries that are far away do less international trade than countries that are close to other countries (especially countries at similar stages of economic development).   That isn’t just a statistical issue, an artefact of where national boundaries are drawn.  Distance is costly –  there are fewer economic opportunities for trade.     That has become over more apparent in recent decades as cross-border production processes have become much more important: in the course of producing a complex product, component parts at different stages of assembly may cross international borders (and be recorded as exports) several times.   This has been a particular important possibility in Europe, and has been part of the success of formerly-Communist countries like Slovakia.    Distance is an enormous disadvantage –  enormous distance (such as New Zealand suffers) even more so.

The OECD is now producing data on the share of domestic value-added in a country’s exports.  The data only go back to 1995, and are only available with quite a lag (the latest are for 2014) but you can see the difference between New Zealand’s experience and that of the median OECD country.

value-added

These opportunities (gains from trade that weren’t economically posssible a few generations ago) generally aren’t available to New Zealand based firms.  Then again, a widening in this particular gap isn’t the explanation for the divergence between New Zealand’s export performance over the last decade and that of the median OECD country (since the gap hasn’t widened further).

New Zealand has just been doing poorly.

Here is one comparison I found interesting.

nz vs fr

France has more than ten times the population of New Zealand and yet its foreign trade share now exceeds that of New Zealand.    The United Kingdom –  similar population to France –  also now has a higher trade share than New Zealand.   And the difference isn’t just down to components shuffling back and forth across frontiers in the course of manufacturing (eg) Airbus planes.  New Zealand’s exports have a larger domestic value-added share than those of the UK or France, but adjust for that and all three countries now have export value-added shares of GDP of around 21 per cent.  In a successful small country you would expect –  and would typically find –  a much higher percentage.

Remoteness looks like an enormous disadvantage for New Zealand, at least for selling anything much other than natural resource based products  (even our tourism numbers aren’t that impressive by international standards).   Here is the comparison with another small remote country, Israel  (it is both some distance from other advanced country markets, and made more remote by the political barriers of its location/neighbours).

nz vs israel

The Israel series is more volatile than New Zealand’s –  probably partly reflecting the extreme macroeconomic instability in the Israel earlier in the period –  but the overall picture is depressingly similar (and that in a country where R&D spending is now around 4 per cent of GDP).    The other similarity with New Zealand: very rapid immigration-driven population growth, into an economically difficult location.  As I’ve illustrated in previous posts, Israel has struggled to achieve much productivity growth and has a similarly low level of real GDP per capita.

Looking back over the last few decades, it is sobering to note that natural-resource dependent advanced economies are foremost among those that have struggled to achieve higher international trade shares of GDP.    It isn’t some sort of fixed rule: if, like Australia, vast new deposits of minerals become economically exploitable, a remote natural resource dependent economy can see its export share of GDP rise.  And if you have enough natural resources and few enough people, you can be very well-off indeed, even if the export share of GDP isn’t rising (Norway is the only OECD country where exports have’t risen at all as a share of GDP since 1971).  But if you are very dependent on natural resource exports –  and that dependence doesn’t seem to be changing –  then you’d probably want to be very cautious about actively using policy to drive up the population unless –  as with Australia –  there are new waves of nature’s bounty to share around.

New Zealand –  apparently structurally unable to secure rapid growth in exports based on anything other than natural resource –  looks not only like the last place on earth, but the last place in the advanced world to which it would make sense to actively set out to locate ever more people.  And yet is exactly what one government after enough does, apparently blind to paucity of economic opportunities here.    They might wish it was different, and perhaps one day it even will be, but for now there is just no evidence to support their strategies.  Every year, in following that course, governments make it harder for New Zealanders as a whole to prosper.

Oh, and what changed in the last 20 years or so –  to go back to that second chart?  After 20 years of quite low levels of immigration, active pursuit of large non-citizen immigration targets became a centrepiece of policy again.   Without great economic opportunities here –  already or created by the migrants –  that renewed population pressures just made it even harder, despite all the good work on economic reform in the previous decade –  for outward-oriented firms to succeed, and made the prospects of ever closing the income and productivity gaps to the rest of the OECD more remote than ever.