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.




The social democrats from the IMF

The social democrats from Washington –  the IMF –   have been in town, and today released their preliminary report.  It is quite strikingly different to the last one, released in March last year.    The so-called Concluding Statement, at the end of the team’s 10 days or so in New Zealand, isn’t very long, and can’t cover lots of things in depth, so keep that in mind as you read the rest of this post.

The mission team will have spent a lot of time with Treasury and Reserve Bank staff.  Indeed, the draft of the Concluding Statement will have been haggled over in a meeting with fairly senior officials from the two agencies, and it is pretty rare for the final product to contain anything that those agencies have much disagreement with.  Indeed, Fund missions can get so close to staff in the host countries that even when two countries, reviewed by teams led by the same mission chief, have much the same circumstances, the policy advice will at times differ –  seemingly to reflect what the authorities in the two countries want.  A great example last time round was direct regulatory interventions in the housing finance market, which the IMF has enthusiastically supported here, but had been silent on in Australia.  I’m not sure if the mission chiefs are still the same for the two countries, but checking the most recent concluding statement for Australia, I notice that the inconsistency has persisted.

Rereading the 2014 Concluding Statement the upbeat tone was unmistakeable.

“the economic expansion is becoming increasingly embedded and broad-based”

“with the economy set to continue to grow above trend in the near-term, pressures on core inflation should follow”

“we welcome the RBNZ”s shift toward a policy of withdrawing monetary stimulus, with the clear signal that it expects to increase rates steadily over the next two years”.


(Although no doubt the Governor was pleased with the statement at the time.)

There is, of course, no hint in today’s Statement that the Fund might have misread things that badly last year.  Space constraints I suppose.

But what about this year’s Statement?

I was interested to read that “inflation is projected to rise to within the RBNZ”s target range of 1-3 per cent in 2016, as the impact of the decline in oil prices drops out, and the depreciation of the New Zealand dollar passes through”.  No mention anywhere, at least as far as I could see, of any rise in core inflation towards the mandated target midpoint.  But I guess they are running the same lines the Governor always does –  over-emphasising the one-offs (especially now that the exchange rate has rebounded) and quietly ignoring the persistent undershoot of core inflation.

But in some ways what really struck me about this year’s Statement was the wholesale leap into advocacy of a range of microeconomic and structural policies.  It is a very different emphasis from last year.  I know the Fund has changed mission chief for New Zealand, but surely there should be more continuity in the analysis and advice than this?

What do I have in mind?

Somewhat surprisingly, the Fund weighs in on immigration policy, noting that “continued high net immigration could pose challenges for short-term economic management, but in the longer run would boost growth”. Well, no one will really dispute the short-term demand pressures, but where is the IMF’s expertise in immigration?  How have they concluded that our past immigration has boosted (per capita) growth?  They might be right (or not) but how does it relate to the core macroeconomic and financial stability mandates of the IMF?

The Fund then suggests, in a paragraph on government finances, that “in addition, investment in infrastructure and housing (in high-quality projects) should be accelerated where possible to support higher housing supply in Auckland, and infrastructure improvements”.  Where is the evidence of the central government infrastructure shortfalls?  Government capital expenditure in New Zealand has been among the highest in the OECD, as a share of GDP.  And what leads the Fund to think the government should be building houses itself (only high quality ones  mind)? It all seems rather unsupported, and far from the principal mandate of the IMF.

They note too that “intensifying efforts already underway to boost higher density housing would be welcome”. What gives the IMF the basis for suggesting government policy should be skewed towards higher density housing?  And how does it all connect to macroeconomic stability anyway?

Last year, the IMF was cautious about further regulatory prudential measures –  tools should be “used sparingly and with caution”, but this year they are champing at the bit –  no doubt reflecting the Governor’s new enthusiasm.  After a perfunctory observation that “the impact of the new [prudential] measures to reduce financial stability risks will need to be evaluated”, they rush straight into “but the authorities should be prepared if further steps are needed”.   I suppose that could be seen as just contingency planning, but there is no sense here at all that these interventionist measures could conceivably have costs, or that any benefits might be small.

Last year , there was no mention of tax issues at all, but now not only are “the newly introduced measures to deter speculative investment“ welcomed (those evil  “speculators” at it again –  can’t have them in a market economy) but “and further steps in this direction should be envisaged”.   The Fund apparently favours “a more comprehensive reform to reduce the tax advantage of housing over other forms of investment“  [that would be unleveraged owner-occupiers they were targeting?] and “reducing the scope for negative gearing”.    Many people might agree with the Fund, as a matter of tax policy, but where is the evidence, including the cross-country insights that (these issues are important that) the Fund is supposed to be able to offer?  And where is the consistency from one mission to the next?  If agencies like the IMF have substantive use –  as distinct from a convenient echo of the preferences of the Reserve Bank or Treasury –  it has to be keeping a clear focus on the longer-term issues that matter to macroeconomic and financial stability.

There are some odd features to the statement.  In one place, they say that “stress tests  indicate that the sector [banks] can withstand “a sizeable shock to house prices, the terms of trade and economic activity”, but then a page or so later they observe “financial system stress tests suggest it is able to withstand –  at least in the short-term  –  adverse developments related to China spillovers, dairy prices and the housing market”.  I think the final haggling session with officials must have missed something, and will be interested to see if the “in the short-term” caveat reflects something coming out in tomorrow’s FSR.

The other odd feature is this “on the one hand, on the other hand” paragraph

Monetary policy has been focused on the primary objective of price stability. Only if financial stability risks become broad based and prudential policy is insufficient to contain them, then using monetary policy to ‘lean against the wind’ could be considered as part of a broader strategy to rein in financial stability risks. Even in this case, the benefits would need to be weighed against the output costs and the risk of policy reversals.

They would have been better simply to have left it out.  Monetary policy in New Zealand has no statutory basis for pursuing anything other than medium-term price stability, and it hasn’t even been doing that overly well.  Having already had only an anaemic recovery, partly because of an overly cautious Reserve Bank, and two policy reversals –  a record for the OECD –  the IMF might have been better advised to simply urge the Reserve Bank to do its job –  deliver inflation consistently around the middle of the target range.    When they get back to the office, perhaps the mission staff could talk to Lars Svensson, currently at the IMF, about the attractions (or otherwise) of using monetary policy to “lean against the wind”.

The Concluding Statement wraps up with a discussion of Medium-Term Policies.   Last time round, they had a balanced, but high level, discussion which noted structural imbalances between savings and investment (by definition, since the current account has long been in deficit], and noted that structural measures might be needed “to address the savings-investment gap”.    Probably reflecting the IMF’s limited expertise in the area, it went no further, and did not even attempt a diagnosis as to whether any issues might more probably be found on the savings side than the investment side.

But this time round savings is confidently identified as the problem.  We have, according to them “chronically low national saving” and “raising saving is the key to addressing this vulnerability”, “in particular household saving”.    They don’t back any of this up, they don’t suggest reasons why private savings behaviour might be inappropriate, or identify policy distortions that are creating problems.  Instead, they jump straight in to solutions

comprehensive measures to encourage private long-term financial saving should be considered, including through reform of retirement income policies. Options include changing the parameters of the Kiwisaver scheme—e.g., default settings, access to funds, and taxation—to increase coverage and contributions while containing fiscal costs, and adjustment of parameters of the public pension system. This could help deepen New Zealand’s capital markets and broaden options for retirement planning.

“Broadening options for retirement planning” fits how with the Fund’s mandate, or expertise?  Did they recognise that New Zealand already has both a low elderly poverty rate and fiscal expenditure on public pension that, while rising quite rapidly, is not high by international standards?

Did they, for that matter, even attempt to back up the claim that New Zealand has “chronically low national savings”.    If you are going to compare national savings rates, you really have to use national income as the denominator (ie savings of residents relative to the incomes of residents) .  In this chart, from the OECD database, I’ve compared New Zealand’s net national savings rate (as a percentage of net national income) to the median for the other Anglo countries (Australia, Canada, Ireland, US, and UK).

net savings

Both lines are below the median for the OECD grouping as a whole – although in the most recent year we were almost bang on the OECD median –  but over 25 years our net savings rate has simply fluctuated around the median of those countries most culturally similar to us.  Where is the “chronic” savings problem?    And given how strong our public accounts are –  better than those of any of the Anglo countries other than Australia –  how likely is that our feckless private sector is behaving as irresponsibly as the IMF mission staff suggest?   Perhaps Treasury has updated its view again, but I was involved in an exercise a couple of years ago in which Treasury made a pretty concerted effort to look for areas where policy might be driving down private savings rates (relative to those in other countries).  They looked hard, but it was a pretty unsuccessful quest.

And, finally, here is the IMF”s last paragraph

Despite the implementation of successful structural reforms in the 1980s, productivity levels have remained low compared to OECD peers. To raise productivity, the government’s business growth agenda has identified a number of policy priorities. Specifically, the Productivity Commission has highlighted the need to raise productivity in the services sector (which accounts for 70 percent of the economy). Measures include boosting competition in key sectors such as finance, real estate, retail, and business and other professional services; and leveraging ICT technology more intensively, including by enhancing skills.

I thought, and think, that most of the reforms of the late 1980s and early 1990s were in the right direction.  But a sceptic might reasonably ask what is the definition of “success” when productivity gaps have not just remained large, but widened further since then.  Perhaps more importantly, what is this paragraph doing here?  Long-term income convergence issues aren’t really in the IMF’s remit, and the IMF doesn’t seem to have anything useful to offer on the subject.  The paragraph is little more than an advertorial for the Business Growth Agenda –  itself so far signally unsuccessful in lifting exports or closing productivity gaps –  and the Productivity Commission.

We really should expect something better, and more authoritative and more focused, from the IMF.  Perhaps it will come with the full report in a couple of months time, but I’m not optimistic.