Some IMF modelling on NZ

Earlier in the week I wrote about the IMF’s less-than-impressive Article IV report on New Zealand’s economy and economic policy.   As part of the bundle of documents released last Saturday there was the Selected Issues paper – a collection of some supporting research/analysis undertaken by Fund staff to help underpin the Article IV report and Fund surveillance of New Zealand more generally.

On this occasion, there are three such papers.  The one that caught my eye was the first: a modelling exercise under the title


In this paper staff took a Fund model carefully calibrated to capture key features of the New Zealand economy and used it in conjunction with their global model to look at several possible shocks New Zealand might face over the coming years.    There is a piece on possible agricultural shocks (pp19-21) which may interest some readers, but my focus was mostly on the other shocks they studied:

  • a significant growth slowdown in the People’s Republic of China,
  • a significant growth slowdown in Australia, and
  • and a significant (exogenous to New Zealand) change in net migration from (a) the PRC, and (b) separately, from Australia.

They illustrate the estimated transitional effects and report the model estimates for the long-term steady state effects.

The PRC growth shock involves (mainly) materially slower productivity in China, such that 10 years hence PRC GDP is 11.9 per cent lower than the (WEO forecast) baseline.  You’ll have heard New Zealand politicians and other lackeys parrot lines about how New Zealand depends heavily on the PRC for its prosperity etc.  The IMF modellers are having none of it.  Here are the New Zealand economy responses (quarters along the horizontal axis).

sel issues 1.png

On this model, a 12 per cent lower level of GDP in China –  largest trading partner, first or second largest economy in the world –  leaves New Zealand…….every so slightly better off in the long run (but treat that as basically zero).  Oh well, never mind…..I don’t suppose it will stop the lackeys doing their thing, but it is a helpful reminder that, to a first approximation, countries make their own prosperity.

The scenario of an adverse growth shock in Australia is of similar magnitude (Australia’s GDP is 9.3 per cent lower than otherwise in the long-term.  I won’t clutter up the post with the same set of charts for the Australia shock, but suffice to say that the bottom-line results aren’t that different.  This time, a 9.3 per cent sustained fall in GDP in the economy that is our second largest trading partner and largest (stock) source of foreign investment is estimated to reduce New Zealand long-run GDP, but by only 0.03 per cent.  I’d treat that as zero as well.  In both cases, a lower real exchange rate is part of the way the New Zealand economy adjusts, so consumption here is a touch lower (it is relatively more expensive) but overall real incomes generated in New Zealand (GDP) are all but unchanged.

That was interesting, but not really that surprising (in truth, even I might have expected a slightly larger adverse effect).   It was the migration shocks, and the Fund’s modelling of those, which should really garner more interest and scrutiny.  Note that these results have already had bureaucratic scrutiny: the paper notes that

The chapter benefited from valuable comments by the Treasury of New Zealand and participants at a joint Treasury and Reserve Bank of New Zealand seminar.

Both institutions have some smart and critical people.

Here is the shock re PRC immigration

Additional Net Migration Effect in New Zealand. There are permanently fewer migrants to New Zealand from China. There is a 0.1 percent reduction in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 1.0 percent lower.

This shock is added to the PRC growth slowdown shock illustrated earlier.  As the Fund’s model is calibrated, these are the results.  The additional effect of the migration shock is the difference between the two lines in each panel.

sel issues 2

The Fund writes these results up as “a bad thing”

The fall in net migration would exacerbate the negative spillovers to New Zealand
from China. Real GDP would now be 0.7 percent lower than baseline in the long term.

Which is true, of course, on their model.  But, strangely, not once in the entire paper do they mention per capita GDP.  The population in the long-run is 1 per cent lower, but GDP is only 0.7 per cent lower, implying that GDP per capita is 0.3 per cent higher in this “Chinese migration shock” scenario than in the baseline scenario.  That sounds like a good thing, for New Zealanders, not a bad thing, at least in the longer-term.  (Since labour input and GDP both fall by the same amount, it doesn’t look as if this model can deal with endogeous changes in productivity).  For what it is worth, real wages in New Zealand are also higher in this scenario.)

What about the Australian net migration shock?

Additional Net Migration Effect in New Zealand. There are permanently more migrants to New Zealand from Australia. There is a 0.26 percent increase in labor force growth for 10 years in New Zealand, so that the New Zealand population is permanently 2.6 percent higher.

Again, this shock is on top of the sustained slowdown in Australian growth modelled earlier (and thus is probably best thought of as a reduction in the net outflow of New Zealanders to Australia, the income gap having changed a bit in our favour).   Here is the chart of those results.

sel issues 3.png

In sum, the population is 2.6 per cent higher in the long-run and GDP is 2 per cent higher.   The Fund again spins this as a positive story (it appears under the heading “How Net Migration Could Improve Outcomes for New Zealand”) but again completely overlook the per capita story.  In this scenario, real GDP per capita is 0.6 per cent lower than in the baseline.  New Zealanders are poorer (and in the long-run real wages in New Zealand are lower).  It isn’t even as if there is much of a short-term vs long-term story (the GDP effects just build pretty steadily over the 10 year horizon).

These effects become large if you apply them to the scale of the non-citizen migration we’ve had in New Zealand in recent decades.  Cumulatively, they would not be out of line with the observed slippage in New Zealand productivity relative to other advanced countries over that period.

So the headline out of this particular paper should really be “additional migration makes New Zealanders poorer in the long-run, at least according to IMF modelling”, not stuff about how helpful immigration is.  A focus on GDP might make sense if you are building an army (raw numbers matter) or to silly comparisons politicians make.  Other people know that per capita GDP is much the more important variable, relevant to material living standards etc.  On its better days I’m sure the IMF knows that too.

In a way, even in their report on New Zealand the IMF shows glimpses of recognising that high rates of immigration might not be so good for New Zealand (whatever the possible benefits in some other places).  Both in the main Article IV document and in the Selected Issues paper “a remote location” comes first in the list of factors the Fund identifies as constraining New Zealand productivity.  Combine that glimmer of recognition (and I could also recommend to them this piece) with their own published model results suggesting that, at the margin, immigration makes New Zealanders poorer –  recall that this model is calibrated by the Fund to capture what they see as key features of the New Zealand economy) –  and it might have pointed disinterested observers towards suggesting to New Zealand governments that they consider rethinking their enthusiasm for such high (globally unusual) rates of immigration to a relatively unpropitious location.   Instead of which, the Fund (like the OECD) tends to act as cheerleaders for New Zealand immigration policy.

The IMF, of course, is not a disinterested observer.   It knows little distinctive about New Zealand – and New Zealand’s productivity performance has long been an awkwardness, even a bit of an embarrassment, for the international economic agencies.  And it is a global champion of the idea that immigration is good and more immigration is better.  If you think that an unfair characterisation, check out this post (and this more NZ focused) where I unpicked parts of an official IMF paper which purported to show that

If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

What do I actually make of the latest IMF paper?  Not that much to be honest.  I’m sure the authors could probably play around with their model – it is calibrated rather than estimated –  to produce results more suitable to the causes of their masters in Washington.  And since productivity isn’t affected, one way or another, by immigration in this model, I’m certainly not attempting to suggest that these results are somehow reflective of the sorts of channels and models I’ve been championing as central to the New Zealand story.

But when even the champions of high immigration to New Zealand acknowledge that there is not much (any?) New Zealand specific research showing that high rates of immigration to New Zealand, in New Zealand’s specific circumstances (eg remoteness, resource endowments, institutions etc) has been beneficial to New Zealanders over recent decades, it should be a little uncomfortable for the officials and politicians who champion the status quo that one of the leading internation economic agencies, pretty sympathetic to their approach, nevertheless (and without really trying) manage to produce research once again casting doubt on whether on this central tool of economic policy –  probably the biggest structural intervention our governments have done over the last 25 years –  is really working for New Zealanders.

Perhaps someone might ask the Prime Minister or the Leader of the Opposition why they act as if they are so convinced that on this count the IMF is wrong.  (Oh, and they might stop parroting the “our prosperity depends on China” line too.  IMF modelling confirms (common sense) that it simply doesn’t.)


IMF: telling it like it isn’t

Since New Zealand joined the International Monetary Fund almost 60 year ago now –  amid all sorts of controversy we were very late to join – their officials have produced a report (Article IV consultation) on New Zealand’s economy every year or so.  These reports used to be held very closely –  which might have made for more free and frank advice – but these days they are routinely published for most countries (including New Zealand).    I’ve participated in quite a few of these reviews over the years, in New Zealand, in other countries where I’ve worked, and in my time on the board of the IMF.  I increasingly wonder why they bother.  For most countries, there isn’t an obvious gap in the market for economic commentary requiring a supranational agency to fill, and if there is occasionally some really good analysis included with the published report, it is rare for the IMF to be adding very much value.  That has long been so in New Zealand.

The IMF once had a fearsome reputation as a nest of fairly hardline ‘right wing’ economists.   The reality of hard budget constraints can have that sort of effect.  And bankers will put conditions on their loans.

But, of course, the IMF doesn’t really have an independent existence.  It is governed by an Executive Board meeting in near-permanent session, where the clout is held by Executive Directors appointed by, and dismissable by, the governments of larger economies and –  reasoanably enough I suppose –  the actions and words of the IMF tend to reflect the politics and preferences of the shareholders.   It isn’t that the Managing Director is unimportant, but the Managing Director gets and keeps her job, and her effectiveness, by keeping onside with the shareholders.   Good money gets thrown after bad –  in places like Greece, Pakistan, and Argentina –  to reflect these shareholder political preferences.  Sometimes the MDs even have personal political and career ambitions to pursue, in turn usually dependent on the goodwill of major shareholders (bearing in mind that every single MD  –  including the next one – has been from Europe.   Except perhaps on quite narrowly technical points, it doesn’t make sense to think of Fund’s view apart from the politics and preferences of the governments that dominate it.    Like the OECD, that makes it part of the centre-left consensus on most things.

But there are also lower-level institutional incentives.  The IMF wants to be “helpful”, it wants access, and its mission-team leaders want to be promoted to more important responsibilities.  When dealing with normal countries with reasonably normal governments, there is quite an incentive to make nice, to talk up things the government you are dealing with is fond of, not to make much of consistency through time (governments change after all).  All compounded by the tendency for Fund missions to weigh in on stuff they really don’t know much about at all (staff tend to have a great deal more macro expertise than that on, say, productivity or housing –  reflecting their formal mandate –  and New Zealand being a somewhat idiosyncratic economy, and staff turning over quite quickly, few really know much about New Zealand).

The latest Article IV report for New Zealand was published on Saturday.   Being dropped into a news deadzone (only accentuated by the RWC) presumably the government –  which has its say on timing –  wanted even less coverage than the little attention these reports usually get in New Zealand media.

Which was odd in a way because in many respects the document  –  at least the headline bits –  could have been published by a government PR body.   There was, for example, that talk about the “solid” economic expansion which must have been welcome, at least until one dug down a few paragraphs and found that staff recognised that any relatively decent performance, albeit (as they note) with skewed downside risks is coming only from supportive macro policy (fiscal and monetary), not from any robust long-term foundations.  Oh, and that they thought that the unemployment was now lower than could be sustained.

Lots of policies were deemed “appropriate”, but with little or no supporting analysis it was hard to know why we should agree with the social democrats from Washington.  Last year the Fund seemed keen on a capital gains tax, but this year –  free and frank advisor role notwithstanding –  the waters have apparently closed over that option and it gets no mention at all.  Last year, Kiwibuild was talked of positively, while this year’s report –  written weeks ago –  is left with vague talk of resets, “key programs still need to be calibrated” etc.

It is on the productivity front that the Fund is perhaps the most far-fetched.    Buried deep in the report is this chart (of OECD data)


Which is a chart so bleak it could almost have originated here.

They also note that business investment has been weak this decade.

And yet, like our own government agencies I guess, they include projections in the report suggesting that total factor productivity growth is just about to accelerate away again, and that lots of capital-deepening business investment will also occur over the next five years (projections to 2024).    From a quick glance at global or domestic bond markets, you’d have to think that market pricing doesn’t really agree with the Fund.   Oddly, when they comment explicitly on the productivity projections we are told to expect this renewed growth because of “cost control and efficiency gains”.  Well, maybe…..

But, or so we are told by the IMF, there is in fact a promising productivity-focused policy agenda already being implemented by the government.  Perhaps you missed it. I did.

But here is what the IMF has in mind

Addressing long-standing low productivity growth continues to be a central concern. In this respect, some important first steps have been taken, including the introduction of a new R&D tax credit regime; the creation of the New Zealand Infrastructure Commission to help in closing infrastructure gaps; and the reform of the vocational education and training sector.

and, elsewhere in the same document

Within the greater focus on wellbeing under the Living Standards Framework, the government has a roster of policies to foster productivity growth. These include introducing an R&D tax credit regime, continuing to increase education spending, creating a New Zealand Infrastructure Commission to enhance procurement and delivery and set up of an infrastructure pipeline, using wage increases to further more inclusive growth, and fostering regional development through the Provincial Growth Fund and greater focus on regional immigration to align immigration of skilled labor with employers’ needs in the regions.

Spare us.

In case you are wondering that “using wage increases to further more inclusive growth” appears to be a reference to the government ramping up the minimum wage, combined with some modestly-sympathetic references to the proposed Fair Pay Agreements.  If you think those two will boost TFP growth (whatever you might think of the “fairness” arguments), I’m sure someone has all manner of scam projects to sell you.

Or perhaps it was the Provincial Growth Fund –  which no credible observers thinks is likely to lift economywide productivity –  or fees-free tertiary education (“continuing to increase education spending” –  and last year the Fund was explicitly keen on something like fees-free).  I haven’t focused on vocational education reform, but count me sceptical that it is going to make much sustained difference to economywide productivity.

I get that outfits like the Fund like interventions like R&D tax credits. Perhaps it will even make a difference (although I’m sceptical) but the Fund’s supporting “analysis” seems to be no more than “R&D spending in New Zealand is low, so we should have more government subsidies”, with no analysis for why firms haven’t regarded it as attractive to spend more themselves.  And, who knows, perhaps the Infrastructure Commission will do some good work, but (a) it makes no spending decisions, and (b) the government’s own actual infrastructure choices have been more about keeping the Greens happy than about having a credible chance of enhancing productivity growth.

Oh, and it wouldn’t do to skip the other reform the Fund seems most keen on –  it features in the covering statement.  On housing, they seem still right with the government

The reform of the institutional structure, including the establishment of the Ministry of Housing and Urban Development, should help in implementing housing policies. Further work is needed to complete the agenda, including enabling local councils to actively plan for and increase housing supply growth.

(with no mention at all of initiatives that at least some regard as signficant backward steps)  but they still want action on tax, this time an even flakier option

Tax reform, such as a tax on all vacant land, should also be considered.

Again with no supporting analysis whatever.  (Land value rating would be the more sensible, and feasible, option in that space.)

And, bottom line surely, despite having a spiffy new bureaucracy “house prices are expected to continue rising under the baseline economic outlook”.

The other point from the report that I wanted to touch on here was around the Reserve Bank’s bank capital proposals.   The Fund is keen.

The proposed higher capital conservation buffers would provide for a welcome increase in banking system resilience. The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the banking system.

Of course, there is no supporting analysis for that proposition either. In a a short report perhaps that might be too troubling, except that as I have pointed out before this seems to be a classic example of the Fund simply going with the flow and echoing whatever the authorities happen to favour at the time.    Don’t want to make life awkward for our mates at the Reserve Bank, I suppose.

Here was what I said when the Fund mission released their concluding statement at the end of their visit to Wellington

They are not much more than a couple of sentences in a press release, with no published supporting analysis.  And the Fund almost always backs the authorities – who are the people they talk to mos?t  –  especially when central banks and regulators want to put more restrictions on banks. Why wouldn’t they?  Any economic costs don’t sheet home to them.  But the IMF’s support isn’t without its problem for the Reserve Bank.     Here is what they said

The new requirements would increase bank capital to levels that are commensurate with the systemic financial risks emanating from the dominance of the four large banks with similar concentrated exposure to mortgages, business models and funding structures.

Which, by logical deduction, appears to be saying that current levels of capital are grossly inadequate to the risks the New Zealand banking system faces. But there was no hint of these serious risks in past Financial Stability Report from the Reserve Bank (although they amped up the rhetoric in the latest one), and –  perhaps more to the point –  no hint of that in past IMF Article IV staff reviews or Executive Board discussions.  This snippet is from last year’s Article IV report, published as recently as June last year.

IMF capital

Not a word from staff, from the Board –  or, indeed, fron the New Zealand authorities in their published comments –  of a pressing need for a huge increase in minimum capital ratios.

In other words, take what the Fund says with a huge bucket of salt.    And if, perchance, the Governor has second thoughts and doesn’t go ahead with large increases, probably next year the Fund would be back to tell us that was “appropriate” too.

As I say, I really struggle to see the value of the Article IV reports.  At one level, perhaps that reflects the fact that the Fund is a macro agency, and macro policy has been where New Zealand –  all on its own –  has done pretty well over the last 25+ years (low government debt, low stable inflation etc etc), and where we face hard issues the Fund has little or nothing to offer except the institutional sympathies of the centre-left.  But it isn’t as if New Zealand is the only place where they struggle to add much value, or make much difference to important debates in a timely ways.  If it were wound up – rarely ever happens to international agencies of course –  it is hard to see how the world would be the poorer.  Some officials would be – and I had several very remunerative years on their payroll –  but not obviously the world, and certainly not New Zealand policymaking or economic analysis.

The Fund does often publish some research done in association with the Article IV report in a separate document. They have done so again this time.  I haven’t yet read the paper in full, but on skimming through it there look to be some points worth coming back to later in the week.



Debt: dodgy analysis from the IMF

I should really be doing something else, but I just read Brian Fallow’s column in today’s Herald outlining his views on why the government shouldn’t relax its own fiscal rules.   Reasonable people can differ on that –  and as per my post yesterday I’m certainly not arguing for the government to raise debt levels (per cent of GDP) from here.  But what caught my eye was some IMF “analysis” Brian quoted.

He introduced his article noting that on IMF data (or any other measure you like) New Zealand’s net or gross government debt is quite low as a share of GDP.  On my preferred measure, net debt is about 8 per cent of GDP.    But he goes on

A third reason for being cautious about ramping up government debt is that not all of its obligations are on the balance sheet.

In particular, there is the future additional cost of superannuation and health spending as the population ages.

The IMF has had a stab at calculating the net present value (NPV) of those increased costs out to 2050. We can think of that as how big a pot of money we would need to have set aside, earning compound interest, if those liabilities were fully funded.

It reckons the NPV of the pension spending increase out to 2050 is 54 per cent of GDP. That is $150b in today’s dollars, only partially offset by $38b in the New Zealand Superannuation Fund. The NPV of the expectable health spending increase is even larger, at 66 per cent of GDP.

When those two factors are accounted for, New Zealand is no longer a fiscal outlier, but sits in the middle of the range for advanced economies, between Germany (with its challenging demographics) and Ireland (with its debt crisis legacy).

That sounded interesting, so I dug out the chart Brian appears to be referring to from the latest IMF Fiscal Monitor publication.

IMF fiscal monitor implied debt chart

I don’t know quite how the IMF did their health and public pension numbers, or how comparable their estimates are across countries.  But just take them as what they are (our pension numbers are high because, unlike many countries, we haven’t done anything to raise the NZS age).   Allegedly, New Zealand is now in the upper half of the indebted advanced countries.

But this is a nonsense chart, adding apples and oranges.    It might make some sense if every country had the same starting deficit/surplus, in which case future differences in discretionary spending associated with ageing might be the only difference in the projected future debt paths across countries.

In fact, some countries are in (cyclically-adjusted) surplus, and some are in (cyclically-adjusted) deficits.     Israel, for example, is estimated to have structural deficits of 3.5 per cent of GDP, and the US is now estimated to have structural estimates of about 6 per cent of GDP.   Israel is much further down that IMF chart than we are, but annual deficits of 3.5 per cent of GDP  (before the effects of additional ageing) soon compound into very large numbers.

And New Zealand?   Here are the IMF’s own estimates of the average cyclically-adjusted fiscal balance for 2018-2023 (their forecast period).

fisc balances IMF

On the IMF’s own numbers we have the largest (structural) surpluses projected over the next few years of any advanced economy.  Structural surpluses of 2 per cent per annum, in a country with high real interest rates, compounds to a very big (positive) NPV really quite quickly.

As it happens, Germany is also projected to be running quite large surpluses. No wonder markets aren’t remotely worried about fiscal/debt risks in either Germany or New Zealand.     You simply can’t sensibly start with today’s debt, add one bit of additional future spending, and not take account of the baseline fiscal parameters that, in countries like New Zealand, mean we already have material fiscal surpluses (on the books, and in prospect).   Fiscal people at the IMF sometimes liked to quip that IMF stood for “It’s mostly fiscal” (the problems, and macro solutions, that is).  But they really should be producing better fiscal analysis than this (even if, perhaps, their main interest is big countries with both high debt and ongoing deficits).

None of which means I think NZS shouldn’t be changed. To my mind –  as voter –  failure to do so is both a fiscal and moral failure.  But, despite those future pressures, by international standards our fiscal position remains very strong, and there is –  objectively –  plenty of time to adjust (even if I personally might prefer the adjustment had already begun years ago).



Visiting economists opine on NZ

Lots of people, even abroad, look at New Zealand’s economy.   For example, there are ratings agencies selling a commercial product to clients, and there are investment funds putting their own and clients’ money at risk.   And then there are the government agencies; notably the IMF and the OECD.

Every year or so, a small team of IMF economists come to visit for their Article IV assessment.  New Zealand isn’t very important to the Fund: we aren’t systemically important, we don’t borrow money from the Fund, and we aren’t even part of any of the country groupings with traditional clout at the Fund (eg the EU or euro-area). And the New Zealand story is complicated –  there aren’t other countries much like New Zealand to compare us against and learn from, and especially not in the Asia-Pacific region (the department of the IMF that covers New Zealand).  There isn’t much incentive for the Fund to spend much time on New Zealand, or to devote their best people to New Zealand issues, or to do much other than pay polite deference to the preferences of whoever happens to hold office (bureaucratic and political) at the time, spout some conventional verities favouring smart government intervention, while burying any scepticism in very careful drafting.    We might deserve better than we get –  after all, we are a member just like all the other countries – but to expect better would be to let wishful thinking triumph over (very) long experience.

But because the IMF’s report on New Zealand is published, and because the mission chief makes themselves available to the local media, the IMF team’s views tends to get some local media coverage.  The latest report – in this case the three page concluding remarks from the just-completed mission –  came out yesterday.

As has become traditional, they tend to laud New Zealand’s cyclical economic performance

New Zealand has enjoyed a solid economic expansion in recent years. Construction and historically high net migration have been important growth drivers. Accommodative monetary policy, increasing terms of trade, and strong external demand from Asia have supported activity more broadly.

As it happens, on the IMF’s own numbers, growth in real per capita GDP in New Zealand over the last five years has been nothing spectacular –  among advanced countries we’ve been the median country and the advanced world hasn’t done that well.  And nowhere in the report do they even allude to the fact that almost all that New Zealand growth has resulted from more inputs, and that productivity growth has been near-zero for much of the last five years.  From an international organisation that emphasises the importance of open trade etc, there is also no mention at all of the fact that exports and imports have been shrinking as a share of GDP.

They also tell us that “the baseline economic outlook is favourable”.   Perhaps, but their own numbers say something a bit different.  Here is a chart of the IMF’s own forecasts for growth in real per capita GDP for the five years from 2017 to 2022.

IMF forecasts

Not only do they forecast New Zealand’s growth rate to slow (whereas the median country’s growth rate is forecast to accelerate) but on these projections we are expected to have one of the slowest (per capita) growth rates of any advanced country over the next five years.  Perhaps there is some productivity miracle embedded in these numbers –  the IMF doesn’t produce the breakdown of their growth forecasts –  but it looks as though they expect another half decade when we drift a bit further behind.  Strangely, none of that showed up in ysterday’s statement.

What of macro policy (monetary and fiscal)?

Here is what they have to say on monetary policy

Current monetary policy is appropriately expansionary. The policy settings are robust to current uncertainties. A precautionary further easing would raise risks of a steeper tightening if inflationary pressures emerged sooner than expected, given that the economy appears to have been operating close to capacity for some time. On the other hand, a premature tightening could prolong price setting below the mid-point of the target range, given persistently low inflation in recent years.

But this is pretty vacuous.   Getting policy wrong is, rather obviously, a bad thing.   But it is nonsense to suggest that current policy is “robust to current uncertainties”.  After all, if inflation ends up staying persistently low,  then not to have eased earlier would have risked inflation expectations falling away, and more people being unemployed than necessary.  All they are really saying is “we believe –  as we have for years, wrongly –  that inflation is about to start rising back to the target midpoint, and if so current policy will prove to have been appropriate”.   But this was the same organisation that only a few years ago was cheerleading for the ill-fated 2014 Wheeler tightening.

(And one might have hoped that the IMF – in principle able to take a longer-term perspectives –  might have been pointing to the risks, of rather limited monetary policy capacity, in the next recession and encouraging the authorities to be taking steps now.)

What of fiscal policy?

The strong fiscal position provides space to accommodate the needs from strong economic and population growth. Compared to the time of the last Article IV Consultation, the updated baseline expenditure path already incorporates higher infrastructure spending and new growth-friendly measures, as discussed below. The continued political commitment to budget discipline and a medium-term debt anchor in New Zealand is welcome. With the country’s strong fiscal position, there is no need for faster debt reduction beyond that outlined in the 2017 Half Year Economic and Fiscal Update. Stronger structural revenues, such as from higher-than-expected population growth, should be used to increase spending on infrastructure and other measures that would strengthen the economy’s growth potential.

This paragraph just exemplifies how the IMF has  –  at least for tame untroublesome countries –  ended up too often as a mouthpiece rehearsing the preferred lines of whoever holds office at the time.   Contrast the tone with these lines from last year’s statement.

Current budget plans appropriately imply a counter-cyclical fiscal stance going forward. Stronger-than-expected revenue for cyclical reasons should be used to reduce public debt.

With not a hint that anything fundamental has changed to justify the change in advice, except the government……

The Article IV mission still seems as mixed up as ever on housing and associated risks.  They’ve been enthusiastic supporters of LVR controls –  never even alluding to the efficiency or distributional costs – as if the basic issue in the housing market had been inappropriate credit availability.    Thus they can write

Household debt-related vulnerabilities are expected to decrease following recent stabilization. Macroprudential policy intervention contributed to slowing household debt growth, and momentum in house prices moderated last year. While housing demand fundamentals remain robust under the baseline outlook, the soft landing in the housing market should continue, reflecting increasing supply and, in the medium term, gradually rising domestic interest rates.

But then later in the report they talk at some length about the various measures –  some concrete, some (at this stage) still promises – the government is planning to affect the housing market.   Perhaps the IMF doesn’t believe those measures will actually do much, in aggregate, but there is no discussion at all about how fixing the housing market would (desirably) actually lower house and urban land prices.  Stress tests the Reserve Bank has undertaken suggest banks can cope with big price falls, but the possibility of such an adjustment doesn’t even rate a mention in this statement.

The Fund is clearly not enthusiastic about the government’s foreign house buyer ban (emphasis added)

The proposed ban in the draft amendment to the Overseas Investment Act is a capital flow management measure (CFM) under the IMF’s Institutional View on capital flows. The measure is unlikely to be temporary or targeted, and foreign buyers seem to have played a minor role in New Zealand’s residential real estate markets recently. The broad housing policy agenda above, if fully implemented, would address most of the potential problems associated with foreign buyers on a less discriminatory basis.

But, as I noted, in the unlikely event that a broad housing policy agenda was fully implemented, it would be likely to lower house prices considerably, which surely should rate a mention from the IMF?

The IMF doesn’t know a lot about structural policies –  ones that might actually make a difference to productivity (indeed, in New Zealand’s case it is either unaware –  or too polite to mention –  pressing productivity failures).  But that doesn’t stop them devoting a fair chunk of a short report to what they call “Supporting Productivity and Inclusive Growth”.   Here, I think it is fair to say, they aren’t entirely convinced.


The proposed minimum wage increases out to 2020 could help ease income inequality.

But do notice the “could” in that sentence.   And the Fund certainly doesn’t seem to buy the story sometimes heard here, suggesting that higher minimum wages will raise productivity (beyond any averaging effect of simply pricing out the lowest skilled people).     And

Free tertiary-level education and training for at least one year could boost human capital.

Notice the “could” again.  And

Tax reform could play an important role in shifting incentives toward broader business investment.

Again…not a great of confidence that these things “would” make a difference.  Then again, there is little sign that the IMF team really understands the issues.

There is also a “should” –  highlighting, diplomatically, something that isn’t happening

The new Provincial Growth Fund should ensure project selection that helps regions to benefit from income gains more in line with the major urban centers.

But even that implies that the IMF see the PGF as primarily an income distribution tool, not one  –  as the government would have us believe –  of lifting the underlying economic performance of the regions.  But scarily, the IMF seems signed on to the idea of the PGF

It can also be an appropriate tool to relieve pressures on the major urban areas by encouraging movement of population into the regions.

It would be interesting to see the IMF’s analysis justifying government interventions to try to encourage people out of the cities.  Ideally, people will flow towards economic opportunities……which either haven’t been there in some of the regions the government worries about, or which the government is in the process of taking away (eg oil and gas exploration).

There is just one element of this structural agenda the IMF is sure of, as both the IMF and OECD have been for years.

The agenda appropriately focuses on lifting R&D spending in New Zealand to 2 percent of GDP. An R&D tax credit, if well designed, would be an efficient instrument to support R&D spending in the business sector.

Note that change of wording: “would”.   I guess such a scheme “will” put money in the pockets of some firms.  But whether it encourages more worthwhile R&D –  and surely the most worthwhile R&D must already be being done –  is another matter.   And there is no sign that the IMF has ever considered what structural reasons there might be why firms in New Zealand –  or considering being in New Zealand – haven’t found it profitable to undertake more R&D spending.   Astonishingly, writing about in a country with a real exchange rate persistently out of line with widening productivity differentials, there is no mention of the real exchange rate at all.  And if anything is IMF territory, surely it would be exchange rates?

In the end, these days I wouldn’t think better or worse of a policy position because a visiting IMF team favoured it, or opposed it.  After all, on macro policy quite possibly the position they hold today will be reversed next year (as we’ve seen happen on fiscal policy).  On other things, they show little sign of having thought hard about the New Zealand issues.  That’s a shame, but it seems to be a fact of life now.


Donald Trump & lessons from NZ’s economic boom of 1996-2001

Late last week I was scrolling through a story about the IMF’s latest comments on the US economic outlook, short-term and more medium-term.   As the story reminded readers

The Trump administration says its economic platform — including cutting corporate and ­income taxes, boosting infrastructure spending and reducing regulations — will push growth up to a sustained rate of 3-4 per cent a year and cut unhealthy government debt levels.

At present, the Federal Reserve’s FOMC members collectively think potential GDP growth rates in the US are a touch under 2 per cent per annum.

The IMF has just finished its Article IV “mission” to the US (the US Treasury and the Fed being each a few blocks’ walk from the IMF), and released the team’s Concluding Remarks.   The Fund is, understandably, (more than) a bit sceptical about prospects for such an acceleration in the rate of growth of potential output.  But they are international public servants, and the US has a lot of clout on the Fund’s Board –  and, what is more, the Administration is currently looking to cut back US funding of various international organisations.

So the IMF can’t just come out and talk about the unlikelihood of any sort of large-scale acceleration of potential economic growth because of (a) a fundamentally unserious President, with little interest in policy and no apparent ability to deliver on an agenda anyway, or (b) a US Congress which has, if anything, (and on a bipartisan basis) lower approval ratings than the President, or (c) the corrupting influence of vested interests.  Instead, the Fund has to fall back on fairly bloodless technocratic arguments and illustrations.   But one thing they should be able to bring to the table is authoritative use of perspectives from other countries –  the Fund, after all, undertakes monitoring and surveillance of virtually every country’s economy, other than North Korea.

And whereas I’ve never seen a chart in the IMF’s Concluding Remarks for New Zealand, there were five in last week’s US document, four of which looked quite useful.  A couple even found their way into the Wall St Journal, and given how little attention the IMF’s view on the US usually get in the US, that probably counts as success.

Little old New Zealand was even singled out in one of the charts.

IMF growth accelerations

Looking at advanced countries since 1980, the IMF found this smallish sample of cases where countries had achieved at least a one percentage point lift in potential output growth (per working age adult) that lasted at least five years.    On this chart, New Zealand’s experience over 1996 to 2001 looked pretty impressive –  fourth best seen among IMF advanced countries in the last 35 years.

But it was a bit puzzling.   I sat around the Reserve Bank’s Monetary Policy Committee table right through that period, and “startingly impressive economic performance” wasn’t one of the descriptions that came easily to mind.     Even though the Fund’s asterisk describes us as “coming from recession” during that period, it was actually one that began at the end of a (pretty strong) four or five year recovery, encompassed another mild recession, as well as some chaotic monetary policy, an odd mix of fiscal policy, and towards the end of the period, increased marginal tax rates and a considerable slump in business confidence.    Through quite a bit of volatility, interest rates and the exchange rate fell a long way.

But perhaps I’d missed something, through getting too close to the short-term ups and downs.  So I dug out the data and had a look.

Perhaps if the IMF had had a quick look at this chart first, they’d just have left New Zealand off the chart (I’ve used the average of our two GDP measures, and the official HLFS working age population data).

Real GDP per WAP

Nothing stands out about that 1996-2001 period (average growth for which is highlighted in orange).  By our standards. it wasn’t a bad period, but it wasn’t obviously one I’d be wanting to send other countries’ officials and ministers to learn from.  There was no acceleration in real growth, let alone a sustained one.

But I had read carefully the labels on the IMF chart, and they were using “potential output growth” (per working age adult).  The problem with “potential output” growth is that it isn’t directly observable, and even years later it often hard to get a reliable handle on.

The OECD publishes estimates of potential output growth for its member countries including New Zealand.  And one can back out IMF estimates of potential output growth because they publish output gap estimates (actual growth adjusted for the change in the output gap is potential output growth).   Adjusting both for growth in the working age population produced this chart.

potential growthThere isn’t anything startling about 1996 itself, but at least on these measures potential output growth in the late 1990s was estimated to have been stronger than before or since.

So over the period the IMF highlights, actual real GDP growth (per working age person)wasn’t anything out of the ordinary, but the international agencies think that potential growth (per working age adult)  was pretty impressive  –  more of an acceleration than seen almost anywhere in the advanced world in modern times.

One possible reconciliation could be that New Zealand went into a severe recession during this period, leaving lots of excess capacity (but lots of underlying potential growth, as trend productivity grows rapidly).  It does happen –  it was part of the story of the US in the 1930s for example.

But that certainly doesn’t look to have been the story here.

Labour util

The unemployment rate was a bit lower in 2001 than it had been in 2006, and the labour force participation rate was a bit higher.

Another way to try to make sense of what was going on is to look at:

  • growth in the capital stock (per working age person)
  • growth in multi-factor productivity,
  • growth in hours worked per working age person, and
  • growth in labour productivity (real GDP per hour worked).

Here is the growth of the real capital stock per working age person, shown in two different ways –  the total capital stock, and the capital stock excluding residential dwellings.

cap stock

The period from 1996 to 2001 certainly saw stronger growth in the capital stock (per person) than in the previous period, and thus there is something to the IMF point about growth in potential during this period being somewhat influenced by the previous recession.    But even on this measure, nothing really stood out about the period.  Growth in the capital stock was no faster than it had been at the end of the previous boom, and was lower than we experienced in the last few years prior to the 2008/09 recession.

What about multi-factor productivity growth?   Measured properly, this is stuff everyone is after –  more outputs for the same inputs.    This is annual growth in the OECD’s measure of MFP.

MFP growth

Nothing stands out about the 1996 to 2001 period (consistent with the IMF chart itself, in which the contribution of MFP growth is all but invisible).

Here is (HLFS) hours worked per working age person.

hours worked

Again, nothing stands out about the 1996 to 2001 period.  There had been a big contribution in the previous few years, as demand recovered, drawing more labour back into employment, but by the period the IMF is focusing on there is nothing notable.

And, finally, what about labour productivity (growth in real GDP per hour worked)?    Here, at last, perhaps there is something to the IMF story.


Using the average of the two real GDP measures, labour productivity growth actually was a bit faster in this period than in, say, the five year windows either side.     Even by New Zealand standards (among the weakest productivity growth in the OECD over 45 years) it is not that strong a performance, but the recovery in investment growth (see capital stock chart above) must have made a helpful difference for a time.

I got to the end of all this reassured that I hadn’t in fact missed any great lift in New Zealand’s economic performance over 1996 to 2001.  People are simply better to look at our actual experience, rather than the IMF or OECD estimates of unobserved “potential”.  Perhaps the other country examples the IMF cited work better?

I don’t suppose Donald Trump will be taking any notice of the IMF’s analysis or advice,  but if any minions do pay some attention to the IMF piece, the Fund’s use of the New Zealand case won’t do anything to lift anyone’s confidence that the IMF really has anything very compelling to offer.   Sadly, they didn’t have much useful to offer us either (here and here).


The IMF’s paper on New Zealand immigration

The International Monetary Fund (IMF), like their counterparts at the OECD, tend to be big fans of immigration.  And if some is good, more is generally better.  If immigration in some times or places make a lot of sense, it probably should do so in all times and places.  Or at least that is the sort of tone that often pervades their documents.   There is, no doubt, a variety of reasons for these stances –  some good, some less so – but it can’t hurt that these organisations are made up largely of highly-paid economists who have themselves left their own countries to ply their trade in some of the richer and more comfortable capitals of the world.   Theirs is, typically, a migrant’s perspective, rather than that of a citizen of a recipient country.  And no one doubts that migration typically, or an average, benefits the migrant.  If it didn’t, then mostly they wouldn’t move.

Last year, the IMF was out championing the potential gains from immigration in one of their flagship publications, the World Economic Outlook.    I wrote here about the work they were highlighting –  some empirical estimates suggesting some rather implausible things.

If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

Come to think of it, the model also implies that if 20 per cent of New Zealanders moved to Australia (oh, they already have) and an equivalent number of Australians moved to New Zealand, we could soon be as wealthy as Australia is now, simply by exchanging populations.   Believe that, as they say, and you’ll believe anything.   (Since the New Zealand Initiative also drew on this IMF work in their advocacy piece on New Zealand’s immigration policy, I also touched on the Fund research here.)

Last week, the IMF released their Article IV report on New Zealand.  In the main text, there is a pretty typical, but not very specific, tone around the generally beneficial effects of high rates of immigration to New Zealand.    The Fund’s Board happily went along, noting among other things.

Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

As I noted last week, there was no hint of what these benefits might be, or how they might be “leveraged”.

But buried deep in the package of papers released with the Article IV report was an annex with some interesting empirical research on the economic effects of immigration. It can be found starting on page 39 of the report document.     These annexes, or what used to be called “selected issues” papers, involve someone on the Fund staff team doing some more in-depth work on a topic of relevance to the specific member country.  Topics are usually agreed with, and may be suggested by, the national authorities (in practice, the Reserve Bank and Treasury).   I commend those agencies for asking for, or agreeing to, this work.

In opening, the paper notes

Over 1990-2014, net migration measured as annual net flow of foreign born
population averaged about 0.9 percent of previous-year population, which is around twice the OECD average


In New Zealand both inflows and outflows fluctuate markedly over time, which has a resulted in more volatile net migration compared to most other OECD countries.

The IMF’s own starting presumptions are clear.

The educational attainments of New Zealand’s migrant population suggest that
migration policy has contributed to raising human capital

They include a chart showing that, relative to other OECD countries, a larger proportion of New Zealand’s migrant have a university degree, but appear unaware of the OECD skills data that shows that, even so, the average skill level of immigrants has still been lower than the average skill level of natives.

But the focus of the paper is on two quite separate pieces of empirical analysis, one focused specifically on cyclical effects in New Zealand, and the other focused on longer-term growth and productivity effects, but not specific to New Zealand at all.

The modelling of the cyclical effects appears to be very similar to some research work published by the Reserve Bank a year or so ago (the paper is here, and my discussion of it is included in this post), which distinguished between net migration flows between New Zealand and Australia, which are heavily influenced by what is going on in the Australian labour market, and other net migration flows.

For the “other” migration they find exactly the sorts of results one would expect, and which researchers in New Zealand have pretty much always found (going back many decades).   For these migration shocks, the demand effects tend to outweigh the supply effects in the short to medium term,   This is a point that seems to be repeatedly lost in the current popular debate on immigration.  Migrants aren’t just workers, they are consumers (and need new capital stock).  So in the short to medium term immigration shocks tend to lower unemployment (and increase the “output gap”).  All else equal, in the short to medium term, they increase inflation pressures.

Both the IMF and the Reserve Bank’s researchers find something a bit different for migration between New Zealand and Australia that is associated with Australian labour market shocks (proxied by changes in Australian unemployment).    Reduced net flows to Australia are associated with slightly higher unemployment (and lower employment) in the short-term –  and, thus, presumably weaker inflation pressures.

Unfortunately (and perhaps they were pressed for space), the IMF left out the critical point that the Reserve Bank’s researchers had acknowledged

the Australian unemployment shock could capture other indirect demand effects. There are common drivers of labour market movements in Australia and New Zealand, and these common drivers mean that the Australian and New Zealand unemployment rates typically co-move. A high Australian unemployment rate is reflected in higher unemployment in New Zealand, but also high net immigration.

In other words:

  • similar international shocks often hit both New Zealand and Australia.  When they do, Australian unemployment rises, and (net) fewer New Zealanders go to Australia, but New Zealand unemployment also rises, not because of the change in the immigration numbers but because of the international adverse shock itself.
  • Australia is also the largest trade and investment partner for the New Zealand economy.  Thus, any downturn in Australia (whether home-sourced or global) will reduce demand for New Zealand goods and services, and perhaps investment in New Zealand by the many Australian companies operating here.  All else equal, those effects will weaken demand and employment, and raise unemployment, in New Zealand.  At the same time, (net) fewer New Zealanders will be moving to Australia.  The estimates in the Reserve Bank and IMF models capture the combined effects of all this, not just the effects of a change in immigration flows between New Zealand and Australia.

On my reading, the safest conclusion remains –  as it always has –  that increased net migration inflows (especially if they arise from things exogenous to the New Zealand market –  whether global events or New Zealand policy changes) increase pressure on local resources in the short to medium term. But if, at the same time, demand in one of our major markets is also weak, the overall effect (of the weak international demand and the increased immigration) will not necessarily be to require higher interest rates.  If we could have one without the other, there would be a cleaner test.  With the Australian flows, no one has yet done the research to enable us to do so.

The second half of the IMF paper looks at “how migration affects growth, factor accumulation, and productivity in a sample of OECD countries”.      This is similar to what the IMF did in the paper they published last October (see above), and relative to that paper it has some pros and cons.

The downside is that it uses a smaller sample of OECD countries (this time only 14, whereas the earlier paper used 19).  And whereas in the earlier paper, all the countries were already advanced market economies in 1990 (when the data start), this one includes Hungary.   Unlike the earlier paper, this paper also includes Luxembourg, which complicates things because a large proportion of Luxembourg’s workforce doesn’t actually live in Luxembourg, so making sense of their data is harder than usual (there is, for example, a very large gap between GDP –  stuff produced in the country –  and GNI – income accruing to residents of the country).

On the other hand, the earlier paper only looked at GDP per capita, and simply hand-waved about where the large suggested gains from migration might be coming from, suggesting that we might expect to find a boost to total factor productivity (TFP) growth.  By contrast, in this exercise for the New Zealand Article IV the Fund’s researchers look specifically at productivity measures, both labour productivity and estimates of TFP.

The modelling exercise does not produce results for any individual country; rather they are average results across this pool of very different countries.   Here is the summary table from the IMF’s paper

imf migration results

Tables like that can be a bit hard to read.   On GDP per capita, the results suggest that over this period and for these countries on average

“a net migration flow of 1 per cent of total population is associated with an increase in output of nearly 1.5 – 2 per cent, driven by an increase in both employment and the capital stock”

That sounds good (and, if still implausibly large, not inconsistent with the results in the earlier IMF paper).   But note that there was no mention of productivity gains in that quote.   We’ve seen these sorts of results, in different types of models, in Australasia before.   Since migrants tend to be relatively young they, for example, tend to have a higher average labour force participation rate than natives (not too many 80 year migrants).   One can get a boost to GDP per capita, at least for a time, even if there are no gains in productivity, and if there are no gains in productivity there are no long-term gains to natives.  This was the sort of result the Australian Productivity Commission suggested in its recent report on immigration.

So what did this particular IMF cross-country empirical exercise suggest about productivity effects?

For labour productivity, you can compare the two lines ‘output” and “hours”.  On one specification, output and hours increased almost identically (so no labour productivity effects at all, and in the second specification of the model, output increases less than hours (1.54 vs 1.72).   We don’t know if that difference is statistically significant, but lets assume not.  At best, immigration produced no gains to labour productivity, across these particular 14 countries, in the last 25 years.

And what of TFP?  The authors report those results directly.  In both specifications, the coefficients are negative, but not statistically significant.  Again, at best, no TFP gains from immigration across this pool of countries over the last 25 years.

I’ve previously showed simple scatter plots suggesting that the correlation coefficient between immigration –  using the immigration data in the previous IMF study – and TFP growth, cross-country, is negative –  the outlier in the top right is Ireland, and as this post illustrated, Irish immigration growth came several years after its TFP surge.


As I said, this new IMF work isn’t a New Zealand specific result.  But it might have been nice if the IMF authors, in a New Zealand focused paper, had included a chart or table highlighting how New Zealand’s experience compares to the average finding.  For example, of the countries in the study, only Luxembourg had higher net immigration (as a share of population) over the same period, and over the period we’ve had moderate per capita income growth, very weak labour productivity growth (third lowest of these countries over this period) and pretty disappointing TFP growth by international standards.  You would have to suppose that we look like an outlier (relative to this model, over this period).      Of course, there may be others things at work –  a relatively simple model like this can’t capture everything –  but if you are an international agency wanting to use international research findings to buttress a policy choice of a New Zealand government, surely you owe it to readers –  whether interested citizens, or officials and politicians –  to provide some detail on how New Zealand’s experience looks to compare to the general results of your model.

As I’ve said repeatedly, I’m quite comfortable with the idea that migration at some times and in some places will benefit natives of the receving country/region.  These particular results aren’t that encouraging on the score (no productivity gains on average), even for the larger group of advanced countries as a whole in modern times.  But if migration benefits natives economically in some times and places –  as it no doubt did in 19th century New Zealand –  there is no reason why that automatically translates to a conclusion that all cross-border migration anywhere and at any time is beneficial.  In fact, even in this study, a finding of no productivity gains (labour or TFP) across the whole sample must mean that, even if the model is robust, some countries will have had positive experiences and others negative.  My suggestion is that New Zealand’s has been negative.  Nothing in the IMF results challenges that.

Having said that, it was good to have the work done.  I hope the authors considered extending or refining it, and if they are still working on New Zealand issues to drawing out more explicitly how New Zealand’s experience is best explained.

The IMF opines on the economy

The International Monetary Fund (IMF) was out yesterday with two major reports on New Zealand.    One was the Financial System Stability Assessment, the conclusion of the quite infrequent (the last one for New Zealand was in 2004) FSAP programme of reviews of the regulation of countries’ financial systems.  I haven’t read that document yet, but from media accounts there are some recommendation I’d agree with (eg deposit insurance, as second-best) and a great deal (mostly derived from the “nanny knows best” starting point) that I’ll have more problems with.

But this post is about the Article IV report –  the (typically) annual review and assessment of a member country’s macro economy.

Once upon a time, these reports were simply confidential advice to the government.  These days, at least for countries like ours, it is all out in the open.  And, partly in consequence, there often isn’t that much to see.  The IMF might be a prestigious organisation full of rather highly-paid economists, but it is striking how weak their surveillance reports often are.   Perhaps there just isn’t a gap in the market that can usefully be filled by a handful of Washington-based economists looking at our economy for a couple of months a year.

The challenge is compounded by the fact that no one much cares about New Zealand.  We are small, in an age when the IMF is heavily-focused on systemic risk, global spillovers etc.    We aren’t in Europe –  still over-represented at the Fund –  or from one of those Asian countries where governments are hyper-sensitive about anything the Fund says.    It is decades since we had an IMF (borrowing) programme ourselves.  And, whether this is cause or effect I’m not sure, but for decades no one here has paid much attention to the Fund.  As an example, our capital city newspaper this morning has some coverage of the FSSA, but really nothing at all about the Article IV report.  If a tree falls in the forest, and no one is around to hear it, does it make a sound?    (By contrast, when I was at the Board of the IMF, my Australian boss was very exercised about each year’s Australian Article IV report.  He’d get phone calls direct from the Treasurer about it, and the serious Australian media gave the reports a lot of coverage.)

Oh, and of course, the other challenge for those reviewing New Zealand is the features that stand out, and which haven’t readily and convincingly been explained.  Thus, we have a lot of reasonably good micro policies, we have pretty good government finances, a floating exchange rate, low and stable inflation, sound banks, high levels of transparency, and low levels of corruption.     And yet……having once been among the very highest income countries in the world, we now languish.  International agencies find Venezuela’s decline easy to explain.  New Zealand’s not so much.

But with all the resources at their command, including the benefit of being an organisation with data and perspectives on all the countries in the world, none of it really excuses the mediocre quality of what gets dished up each year.  Or the inconsistency from one year to the next.   Last year, for example, we were told that raising national savings rates was “critical” –  and it was reported that the NZ authorities agreed –  but this year there is barely even any mention of the issue.

This year we are served up some mix of regurgitated PR spin about how well New Zealand is doing, and when it comes to policy suggestions we get a grab-bag of bits of conventional wisdom, or favoured centre-left policy positions, without any discernible sign that the authors (or their reviewers in Washington, or the Fund’s Board) had any sort of robust framework (or ‘model’) for thinking about the New Zealand economy.

It isn’t easy to excerpt a fairly lengthy report, and often it is the omissions that are more striking than what is in the report itself.      Thus, the release opens with this

Since early 2011, New Zealand has enjoyed an economic expansion that has gained further broad-based momentum in 2016, with GDP growth accelerating to 4 percent, and the output gap roughly closing. Reconstruction spending after the 2011 Canterbury earthquake was an important catalyst, but the expansion has also been supported by accommodative monetary policy, a net migration wave, improving services exports, and strong terms of trade.

On its face, that all sounds quite good.  But countries don’t get rich by rebuilding themselves after disasters –  that reconstruction process mostly displaces resources from other, typically more productive and prosperous uses.   They don’t get rich through monetary policy either, valuable a role as it has in short-term stabilisation.  And although services exports grew quite strongly for a while (a) little or none of it was high value products (lots of tourism, and students pursuing immigration access at PTEs), and (b) in a world in which services exports are becoming steadily more important (as illustrated in eg this recent IMF working paper), for New Zealand services exports as a share of GDP are materially lower than they were 15 years ago.

In fact, you could read the entire Article IV report and not find any mention of the fact that, with total population growing at around 2 per cent annum and working age population growing at around 2.7 per cent annum, per capita income growth in the last few years has been pretty unimpressive.  And you’d find no mention –  explicit or by allusion – to the almost five years that have now passed since we saw any labour productivity growth in New Zealand.   I guess that would have undermined the relentless good news story the Fund staff seemed determined to tell.

Perhaps more surprising is the treatment of the external sector of the economy, typically a subject of considerable interest to the IMF.  Readers of the Article IV report in isolation would have no idea that exports (and imports) as a share of GDP have been falling –  not just this year, but for some time on average.  Nor would they appreciate that per capita real GDP of the tradables sector has shown no growth at all for more than 15 years.     The report does note that an overvalued real exchange rate is probably an obstacle to faster growth in the tradables sector, but again there is no hint of any sort of integrated understanding of what is going on with the real exchange rate, and what might make some difference in future.

The complacency, and weak analysis, carries over to the labour market.

The unemployment rate fluctuated around the natural rate of unemployment of 5 percent in 2016

But there is not a shred of analysis presented to suggest that the NAIRU for New Zealand is now anywhere near as high as 5 per cent.  It would be very surprising if it were that high, whether in view of continuing very weak wage inflation, the history of the last cycle (in which unemployment got to 5 per cent fairly early in the recovery), and changing demographics which are appearing to lower the NAIRU.  Oh, and not forgetting that our Treasury has published its own estimate of the NAIRU, at something close to 4 per cent.

The Fund isn’t really much better on the housing market.   They are all very interested in the various tweaky tools the government and its agencies have applied in the last couple of years (LVR limits, tax changes etc) and – contrary to many of the pro-immigration people in New Zealand –  they are at least quite clear that rapid increases in population are contributing directly to high house price inflation.    But there is no simple and straightforward observation that, at heart, the house price issue is a matter of regulatory failure, and that the current government (like its predecessors) has done little or nothing to fix the problems. Instead, we get banalities along these lines

Tighter macroprudential policies, higher interest rates, lower rates of net
migration, and increasing housing supply should help moderate house price inflation and stabilize household debt vulnerabilities in the medium term.

If you don’t change the fundamental structural distortions that gave rise to the problem in the first place, it is a little hard to take seriously the idea that things will come right even “in the medium term”.  You would not know, reading this report, that almost nothing substantive has been done to free up the market in urban land.    An organisation with the benefit of cross-country perspectives and databases might usefully have pointed out that this is an obstacle not just in New Zealand but in Australia, the UK, much of the east and west coasts of the US, and other places besides.  The silence might suit the current government, but it also makes the Fund complicit in the failure.  The Fund’s Board considered the material in the Article IV report on housing. They observed, in conclusion, that

Recognizing the steps being taken by the authorities to address the demand-supply imbalance in housing markets, Directors generally highlighted that further tax measures related to housing could be considered to reduce incentives for leveraged real estate investments by households. Such measures could help redirect savings to other, potentially more productive, investments and, thereby, support deeper capital markets.

Except that very little has actually been done on the supply side, and not much has been done to change the medium-term “demand-supply imbalances”.      Perhaps there is a place for tax changes (I’m sceptical, including that any changes would make much difference –  where else have they?) but the Board didn’t even seem to recognise that inconsistency in their own advice.  Do we have too many houses in New Zealand or too few?  Most people, rightly, would say “too few”  (a good indicator of that is the ridiculously high prices).    And yet the Fund Board thinks that a greater share of investment should go into other things, and a smaller share into housing?????   (As it happens, I agree with that, but only on the basis that we have much slower population growth, something there is no hint of in this report).

Buried deep in the report, is a recognition of some of the longer-term challenges facing New Zealand.

New Zealand’s structural policy settings are close to or mark best practice among
OECD economies, but persistent per capita income and productivity gaps remain. Income is lower than predicted by these policy settings, by an estimated 20 percent. Growth in labor productivity has declined, with multifactor productivity growth slowing from the early 2000s, and capital intensity has stagnated recently.

One could question even those details.  I wrote a bit about our structural policies a few weeks ago, as illustrated by the OECD’s Going for Growth publication.  There are plenty of areas in which we are well away from best practice, and overall at best you could probably say that our structural policies aren’t bad by OECD standards.  But there is no doubt that productivity levels are far lower than most would have expected based on those policies.

What does the IMF propose in response?   They reckon remoteness is a problem and for some reason, despite that, still seem very keen on lots of immigration.  But here is the rest of their list:

  • Targeting housing supply bottlenecks more broadly would safeguard the
    attractiveness for high-skilled immigration and business.
  • More central government property taxes, the proceeds of which would be distributed to local authorities.
  • Trade liberalization could help to strengthen competition and productivity, including in the services sectors.
  • Tax incentives for private R&D spending
  • As discussed during the last Article IV mission, there is also scope for tax reform to raise incentives for private saving and discourage real estate investment as a saving vehicle

And that is it.

I’d certainly support fixing up the land supply market and foreign trade liberalisation.  I’m a lot more sceptical of the other items.  And what about, for example, our high compayn tax rates?  But my real challenge to them is twofold:

  • first, where is the model or framework that explains how the absence of these policies is at the heart of New Zealand’s disappointing long-term economic performance (because it feels more like a grab bag of ideas they picked from one person or another), and
  • second, how large a difference do they really believe these measures, even if they were all implemented flawlessly, would make?     Without much more supporting analysis, they have the feel of playing at the margins, as if they felt obliged to offer up some suggestions, any suggestions.

A year ago, the Fund seemed quite taken with the idea that the persistent gap between our interest rates and those abroad was an important issue (they even cited approving my own paper on this issue), but that flavour seems to have disappeared this year.  And when they allude briefly to our high interest rates it is to fall back on the discredited risk premium hypothesis.

Of course, the government is just as much at sea.   The NZ authorities get to include some responses in the Article IV report.  In this section, they begin thus

The government’s ongoing Business Growth Agenda (BGA) aims to help overcome the disadvantages of distance and small market size, in particular by deepening international connections, with a focus on increasing the share of exports in GDP to 40 percent by 2025, and diversifying the export base.

Just a shame that, if anything, things have been going backwards on that count, and show no signs still of progress.

And, finally, from the final paragraph of the Executive Board’s assessment

Directors agreed that measures to lift potential growth should focus on leveraging the benefits from high net migration and interconnectedness.

But there is nothing in the report to show what these benefits might be (recall that the focus here is on potential growth, not the short-run demand effects), let alone what “leveraging the benefits” might involve (generally, I thought the IMF was uneasy about leverage).   I guess it is just an article of faith.

It is pretty depressing all round.  Supposed international experts fall for the spin, and can offer nothing very profound on even the longer-term challenges.  Our own government agencies seem to be at sea, or just happy to go along.   Our representative on the Board of the IMF  – no longer a public servant, but now the (able) former chief (political) policy adviser to John Key – was happy to go along.  In his statement to the Board, published as part of the package of papers, he observed

As staff observe, New Zealand’s structural policy settings are close to, or mark, best practice. Lifting productivity, in the face of New Zealand’s small size and isolation, therefore requires incremental reforms across a broad range of areas. Recognizing this, the Government has established the Business Growth Agenda as an ongoing program of work to build a more productive and competitive economy,

When various major OECD countries have productivity levels 60 per cent above ours, who are they trying to fool in pretending that we have policy broadly right, and just need to keep tinkering (“incremental reform”) at the margin?

As part of the package of material released with the Article IV report, there is an interesting empirical annex on immigration.  It isn’t well-integrated with the report itself, and I will cover it in a separate post.  The annex probably should have had some publicity in the local media, given the salience of the issue in New Zealand debate at present.

IMF advocacy for immigration: some caveats

The other day I came across mention of a chapter in the IMF’s latest World Economic Outlook on the economics of immigration.  It turned out to be only half a chapter (from page 183) but it had some interesting discussion and material.  It probably won’t surprise anyone that although immigration is a long way from the IMF’s core responsibilities, the Fund is pretty gung-ho on the benefits.  My own stance is, of course, more skeptical: I doubt the economic benefits to recipient countries are typically anywhere near as large as the enthusiasts make out, and in New Zealand’s specific case I think the evidence increasingly suggests that high rates of immigration in the post-war decades (continuing to today, as strong as ever) have been detrimental to the economic fortunes of New Zealanders as a whole.

Whatever the truth is, the IMF might want to be a little more careful as to how they present the material in support of their claim.  The World Economic Outlook is one of the flagship documents of the Fund, widely circulated and discussed (including at the Executive Board level) before release, not just some obscure researcher’s working paper.

And so I was interested to find this

There is a positive association between long-term real GDP per capita growth and the change in the share of migrants (Figure 4.16, panel 1).

I noted the careful wording (“association” rather than “causal relationship”) and went looking for the chart.


Which left me a little puzzled. The text said there was a relationship, illustrated by this chart, between increases in migrant numbers and real GDP per capita growth.  But the chart itself showed only a relationship between total real GDP growth and immigration.  That sort of positive relationship was hardly surprising –  growing migrant numbers raises the population, which tends to raise total GDP –  but the interesting question was surely about per capita growth.  And it wasn’t just a labelling error –  it was easy enough to reproduce the Fund’s chart, showing what the labels said it showed.

And so I started digging around.  The IMF uses a group of 19 advanced countries, the choice presumably limited by data availability (so, for example, Belgium, Italy, Iceland, Japan and Korea –  among advanced OECD countries –  aren’t included).  And they focus on 1990 to 2010, presumably also to ensure that all the data (for some of the background modelling) was available.  And rather than total migrant numbers, they look only at migrants over 25.  In the charts that follow, I just follow their basic approach/time period.  In terms of country selection, I’d note just two caveats: first, a large part of Luxembourg’s GDP is produced by people who don’t live in Luxembourg but commute in each day (so GDP per capita can be a bit misleading) and in Ireland the corporate tax system has helped contribute to a huge gap between GDP and GNI –  and it is the latter that measures income accruing to the Irish. Finally, it is worth noting that more than half the countries in the sample are in the euro, and 1990 to 2010 covered the period of convergence to the euro, and then the full effects of imposing a common interest rate on quite different economies.

With those methodological notes out of the way, what did the chart of growth in GDP per capita over 1990 to 2010 look like when graphed against the change in the migrant share of the (over 25) population over that period?


The red dot (hard to see, but lower right) is New Zealand.  The outlier (top right) is Ireland.  Excluding Ireland, there is almost no relationship at all, and certainly not one that would pass any tests of statistical significance.

And in case you do want to include Ireland, bear in mind that the big surge in immigration to Ireland came after the most rapid growth in GDP, or GDP per capita.


Over 1990 to 2010, Ireland’s strong growth in real per capita GDP was pretty clearly not caused by immigration.

GDP per capita has its limitations, and the Fund –  and most immigration advocates –  typically argue that the most valuable gains from immigration arise from improvements in productivity. So using, the Fund’s period, the Fund’s sample of countries, and the Fund’s immigration variable, what did the (simple bivariate) relationships look like with, first, real GDP per hour worked growth, and then (often regarded as the best sort of productivity growth) multi-factor productivity (MFP) growth?

(In all these chart’s I’m drawing GDP and productivity data from the Conference Board’s Total Economy Database.)

Here is the relationship with real GDP per hour worked.

imf migration and gdp phw.png

Again, New Zealand is in red (lower right) and Ireland is the outlier.

This relationship might not be very statistically significant either but –  at least excluding the Irish outlier –  if anything it runs in the wrong direction for the IMF story.  Over this period, and on this particular measure/sample, there was a modest negative association between immigration and labour productivity growth.

And what about MFP growth?


That relationship, especially excluding Ireland, is even more negative than the one for labour productivity.  And just to confirm that even on MFP, the immigration surge in Ireland came well after the best of the MFP growth.


All in all, on these measures, for this sample of countries, over this period, there doesn’t seem to be much left of the IMF’s story.  Yes, immigration obviously tends to make economies bigger in total, but there is little sign in the informal analysis that it has made them more productive, and thus made the average individual citizen of the recipient country better off.

Of course, where it can the IMF likes to rest its claim on more sophisticated analysis than that.  Later in the chapter, they report that

Recent research suggests that migration improves GDP per capita in host countries by boosting investment and increasing labor productivity. Jaumotte, Koloskova, and Saxena (2016) estimate that a 1 percentage point increase in the share of migrants in the working-age population can raise GDP per capita over the long term by up to 2 percent.

The recent IMF “spillover note” that is drawn from is available here.  The authors use much the same countries, the same immigration variable, and the same sample period as in the WEO analysis above.   They also focus on the level of real GDP per capita, and the level of productivity, not just growth over a particular period.  Their approach has a number of advantages over earlier studies (including the focus just on advanced countries) and as the Fund notes, the estimated real GDP per capita gains are less than in some previous studies.

I’m not a technical modeler, so I’m not going to try and unpick the paper on those grounds.  My simple proposition is that the results do not, even remotely, ring true.

Here is a chart from the paper showing the stock of migrants in the sample countries.


Think about France and Britain for a moment.  Both of them in 2010 had migrant populations of just over 10 per cent of the (over 25) population.  If this model was truly well-specified and catching something structural it seems to be saying that if 20 per cent of France’s population moved to Britain and 20 per cent of Britain’s population moved to France (which would give both countries migrant population shares similar to Australia’s), real GDP per capita in both countries would rise by around 40 per cent in the long term.  Denmark and Finland could close most of the GDP per capita gap to oil-rich Norway simply by making the same sort of swap.    It simply doesn’t ring true –  and these for hypothetical migrations involving populations that are more educated, and more attuned to market economies and their institutions, than the typical migrant to advanced countries.

(The study produces similar results for real GDP per person employed, but they do not test the relationship with either GDP per hour worked, or with MFP.  The authors suggests that the gains from immigration come through an MFP channel, but this seems doubtful –  especially over this period, and this sample, given the bivariate MFP growth chart above).

There are other reasons to be skeptical of the results in this IMF paper.  Among them is  that there is a fairly strong relationship between the economic performance of countries today and the performance of those countries a long time ago.  GDP per capita in 1910 was a pretty good predictor of a country’s relative GDP per capita ranking in 2010, suggesting reason to doubt that the current migrant share of population can be a big part of explaining the current level of GDP per capita (and some of the bigger outliers over the last 100 years have been low immigration Korea and Japan and high immigration New Zealand).    In fact, I’ve pointed readers previously to robust papers suggesting that much about a country’s economic performance today can be explained by its relative performance 3000 year ago.  How plausible is it that so much of today’s differences in level of GDP per capita among advanced countries can be explained simply by the current migrant share of the population?

And then, reverting to bivariate charts (but one from a relatively recent IMF working paper)


Total hours growth is not just determined by immigration, but differences in immigration rates account for a large part of the differences in population growth, and growth in total hours worked, over long periods of time such as those in this chart.  There is just no sign, over that period and those countries, of the longed for link between productivity growth (here MFP/TFP) and growth in anything remotely linked to differences in the volume of immigration.

To revert just briefly to the IMF WEO chapter, one of the advantages of looking at just 18 or 19 countries is that the authors should be able to illustrate their point, at least impressionistically, by reference to individual pairs of countries.  If nothing else, it is a bit of a realism check, but it can also help make the overall story seem more persuasive. But there is nothing of that in the IMF’s discussion and advocacy.   And nor is there any effort to deal with what might reasonably look like problems for the story.  The two countries with the largest increases in migrant share over 1990 to 2010 were Ireland and New Zealand.  In Ireland, as I’ve shown, the immigration clearly came after the peak productivity gains –  perhaps a case of sharing the gains, but hardly one where immigration looks causative.  And New Zealand, well….readers know the New Zealand story.  In 1990 we were supposed to be well-positioned to catch up again with the other advanced countries –  the sort included in the IMF sample –  and we had a big migration surge (by international standards of pretty good quality migrants) and yet over the full 20 years we’ve had among the lowest productivity growth rates (labour and MFP) of any of these countries.

Perhaps there are some other countries, or country pairs, where the intuitive case is more compelling.  It is shame the IMF didn’t put in the effort to find them

The IMF at sea on New Zealand’s (lack of) growth

As I noted yesterday, the IMF released several “selected issues” background papers in association with the release of the New Zealand Article IV report.  These papers are usually a little more in-depth than the main report, and the topics chosen reflect some mix of the expertise and interests of the people on the staff team and the priorities of the New Zealand agencies involved (Treasury and the Reserve Bank).  In my experience, the efforts of the team are often spread too thinly and so unfortunately not many of the papers have added very much to the understanding of the macroeconomic issues facing New Zealand.

The papers this time are:

  • Prospects for potential growth in New Zealand
  • House prices, household debt, and financial stability in New Zealand, and
  • New Zealand – Options for Tax Policy Reform

It would be interesting to know whose initiative the last paper was done at.  My guess is that Treasury may have reacted to the Fund’s anguishing about savings with the comment “well, show us what might actually make a difference”.   Unsurprisingly, the Fund doesn’t conclude on an optimistic note:

while there is some ambiguity on the effectiveness of tax incentives to raise private savings, short of the introduction of a compulsory savings scheme there are no alternatives to providing incentives.

There are real doubts our policies will work, but……we have to do something.  Not exactly reassuring.

The potential growth paper has a few interesting charts, and recognizes the probable importance (as a symptom)  of the ex ante savings/investment imbalances [1] that have given us persistently high real interest rates (relative to those abroad) and a real exchange rate that has been persistently out of line with medium-term fundamentals.  But the authors don’t have much of substance to offer on the way ahead.  They, like everyone else, can see the gaps between us and the world, but they don’t seem to have a “model” –  a way of thinking about or understanding the issues – that can usefully help respond to the specifics of New Zealand’s underperformance.

They believe

there are few if any low hanging fruit in terms of reform……..however, there may be targeted areas for improvement

They claim that

increasing New Zealand’s international exposure is a major aspect of productivity oriented reforms

but the actual list of reforms, and the evidence or arguments connecting them to the desired outcomes, is thin (and sometimes questionable), to say the least

  • “directly enhance innovation through greater expenditure on R&D”
  • “increase labour productivity through education”
and a couple of ideas picked up from last year’s OECD report
  • user and congestion charging for infrastructure, and
  • “more frequently update immigration targets and skill shortage categories”

The final paragraph of the whole paper begins by noting that there are “no obvious liberalization policies at hand”, and then lapses into the rather trite (because there is nothing to back it)

efforts would have to be made to exploit opportunities for greater international integration in order to boost competitiveness and overcome the disadvantage of distance

But for all this, in its apparent enthusiasm to accentuate the positive the IMF actually understates just how poorly New Zealand has done in recent years (or decades).   In particular, I was surprised to find this assertion in the report, citing the experience over the period 1995 to 2012.

Compared with other OECD countries, New Zealand’s TFP growth performance compares favorably

I was taken aback by this claim, and wondered what I had missed, so I went to check the data on the OECD website.  The OECD compiles TFP estimates for only 20 of its member countries.  Here is the total growth in TFP for each of them for that 1995 to 2012 period.

oecd tfp growth 95 to 12

We’ve been the lower quartile country for that whole period.  The only four countries which did worse over that period are either in the euro or tied to it (Denmark), and three of them (Spain, Italy, and Portugal) have had a simply atrocious economic performance in recent years.  If one looks as just the most recent 10 year period for which the OECD has data (2003 to 2013) we were actually second worst of all these OECD countries.

Estimating TFP growth rates involves a model – a way of estimating the contribution of capital and labour to growth, isolating the resulting TFP residual.  The OECD’s approach isn’t the only one, and I’m not sufficiently expert in the field to offer an opinion on which approach is best.  One other big international database that reports TFP estimates in the Conference Board, which produces estimates for a much wider range of countries.

I had a quick look at 37 pretty advanced economies for which the Conference Board reports complete data.  For the IMF’s chosen period –  1995 to 2012 –  there were only seven countries that had recorded less TFP growth than New Zealand had done  (the ones who did worse than us on the OECD measure, and Chile, Norway, and Greece (for whom the OECD reports no data).  So even on this measure, for this range of countries, we’ve been no better than a bottom quartile performer.  The Conference Board has data for all 37 countries as far back as 1989-  and since then, only Spain, Portugal, Greece, Turkey and Hungary have done worse than us.

The Conference Board reports estimates up to 2014.   Here is how those 37 countries have done over the most recent 10 years for which they have data, 2004 to 2014.

conference board TFP 04 ot 14

The picture doesn’t really change.  It is, perhaps, a little less bad than on the OECD’s ranking, but again we’ve been no better than a lower quartile performer.

TFP isn’t the be-all and end-all, and for minerals producers in particular it can be driven downwards in periods of high commodity prices (because less accessible, or lower grade, resources are (profitably) mined).  But there is really no way of looking at the New Zealand performance and reading it as any sort of good news story.

It is surely about time that the elites –  be it leading offshore agencies like the IMF and OECD, or our political and bureaucratic ones –  began to recognize, and state openly, just how consistently poor New Zealand’s economic performance has been, and to acknowledge just how limited or inadequate the policy responses they put up to deal with it  are, and have been.   Identifying policy responses might be hard –  although I reckon that a major reorientation of our immigration policy would go a fair way –  but the first step is an honest assessment that recognizes that what we have been doing simply hasn’t been working.  And it is no use falling back on “but its nice place to live” – as I’ve noted previously, Uruguay looks to have nice beaches – or “but lots of people want to come here” –  well, of course, poorly performing as we have been, we are still richer than China, India, South Africa or the Philippines.  The better test is what our own people are doing – and they just keep on leaving, even though the hurdles to doing so (in Australia in particular) have been getting higher

[1] They even approvingly cite my 2013 paper.






The IMF Report: saving and vulnerability

The IMF released its latest Article IV report on New Zealand yesterday.  There are also some background research papers released with the report, and I might come back to look at them later.

There aren’t material surprises in the IMF’s views in the full report, which builds on the Concluding Statement released at the end of the staff mission here last November.  My comments about that statement (here) were fairly critical, noting both the marked change in the messages from one review to the next, and the fairly limited evidence base for many of the policies the Fund was recommended –  quite a few of which were a considerable distance removed from the core business, or expertise (macroeconomic policy and financial stability) of the International Monetary Fund.

Today I wanted to focus just on the Fund’s claim that there is a major policy problem as it affects savings in New Zealand, a proposition on which much of the rest of the report rests.  The Fund talks of a “chronically low national saving” rate, and worries about the vulnerability that allegedly results from a net international investment position (NIIP) of around -65 per cent of GDP.  In the Fund’s Board discussion, we read that “Directors agreed that raising national, and in particular private, saving is critical to reducing external vulnerabilities from the still heavy reliance of offshore funding”.  Note the strong words:  action is “critical”.

I’ve shown a version of the following chart before.  It is common to present charts of net national savings as a per cent of GDP, but to do so involves two errors: first, the numerator is net but the denominator is gross (the difference is depreciation), and second, the numerator refers to savings of New Zealanders and the denominator refers to economic activity occurring within New Zealand, whether owned by foreigners or New Zealanders.  A more conceptually meaningful approach is to do as I do here: compare the net savings of New Zealanders with the net national income of New Zealanders.  Here it is shown all the way back to 1970.

net savings to nni feb 2016

Savings of New Zealanders (public and private combined) as a share of income have been consistently lower than the median of the whole group of OECD countries.  But there is a very diverse range of experiences, and cultures, within the OECD group.  I’ve also shown the comparison with the median of the five other, probably more culturally similar, Anglo countries (US, UK, Canada, Australia, and Ireland).  Over the 45 year period, mostly we don’t look much different from the Anglo median –  we did worse in the years of very large fiscal deficits in the late 70s and early 80s, but other than the experiences are pretty similar on average.     Where is the evidence of a chronic savings problem?  And it is no defence simply to focus on private, or (worse) household savings: first, the boundaries between household and business savings are blurred, and second, the private sector takes account (typically implicitly) the savings behavior of governments over time.  New Zealand governments have done less badly than most for some decades.

The IMF makes no systematic effort to identify reasons why national savings rates might have been as they are.  Instead, they mostly repeat old lines that don’t have much basis to them.  For example, they assert that an overwhelming proportion of household assets are in the form of housing, even though new Reserve Bank estimates –  published almost a year ago –  make clear that that claim was never justified.  After all, relative to population, there is now a consensus that we have too few houses not too many.  The Fund also asserts that there is something wrong with the tax treatment of housing, but appears to make no effort to illustrate, whether in a cross-country or time series context, how that has contributed to national savings behavior.  They urge changes to Kiwisaver and the NZS, but again make little effort to illustrate how policy parameters in these areas explain savings behaviour.  All in all, it seems like a rather weak basis on which to rest quite strong policy recommendations.

The other aspect of this issue which they just seem to take for granted is the alleged vulnerability that the NIIP position gives rise too.  Buried deep in an Annex to the report, they do produce a chart making clear that there has been no worsening trend in the NIIP position for over 25 years –  the negative position tends to widen in boom times and narrow in downturns, but has fluctuated around a pretty stable trend level.  At present, the negative NIIP position is actually below (less negative) than the average since 1988.

The report has no analysis of the nature of the vulnerability that this NIIP position gives rise to –  even though addressing this vulnerability is considered “critical” by staff and Board.  And it gives no example of any country, anywhere, ever,  in which a stable (but quite high) negative NIIP position over 25-30 years has been (causally) followed by a crisis.  I’m pretty sure there are none –  and remind that IMF that for most of its first 100 years, New Zealand’s negative NIIP position was materially larger than it has been over the last 25 years, again without ending in crisis.  There are plenty of cases where a rapid worsening in the NIIP position over a few years led to trouble –  Spain, Ireland, and Greece are three recent advanced country examples –  but that is a very different situation from the New Zealand situation in recent decades.  As has been the case for many years, the IMF simply seems to struggle to come to grips with New Zealand.

Most of the negative NIIP position is represented by (net) banking system borrowing from abroad.  But that creates serious macroeconomic risks only if the assets that are financed by the overseas borrowing are of poor quality.  Often that is the case when foreign debt is rising quickly  –  but that hasn’t been the New Zealand story.  Perhaps the Fund believes that the New Zealand banking system is shaky?   But Directors noted that “the banking system is resilient and well-supervised” –  the resilience conclusion is certainly backed by the Reserve Bank’s own stress tests, which I discussed at length last year.

New Zealand deserves better quality analysis and insights from its membership of the IMF than it has had in the main part of this report.

The report also contains brief sections headed “Authorities’ views” –  the wording of which will have been approved by our Treasury and the Reserve Bank.   I was surprised to find that “the authorities agreed that raising national saving was an important policy objective”, going on to state that the authorities would “consider measures to boost private saving….in the future”.  There isn’t much elaboration of the point, but the statement itself was something of a surprise.  Last I had heard, the Minister of Finance was very sceptical that there was a “national saving problem” in New Zealand, and particularly that there was an issue materially amenable to policy remedies.  If one can’t convincingly identify policy distortions that materially lower national saving rates relative to those in other countries, it is hard to see a good case for policy interventions to encourage people to save when, on their own, they would not.    It would be interesting to know what was behind this latest, apparent, change of view.