Some economic effects of immigration

Immigration is in the news quite often these days. The government tells us it is planning changes to the rules (in a “having emerged from Covid” world). They’ve asked the Productivity Commission to do a substantial report on New Zealand immigration policy (apparently expected to report after at least some of the government’s policy changes). And, of course, in the short-term while New Zealanders are free to emigrate – to give our government some credit, at least they don’t make departure entirely dependent on the grace and favour of the government as in Australia – it is very difficult for most people who aren’t New Zealanders or New Zealand residents to get into New Zealand at present. There are some compelling human stories (separated nuclear families), but also all sorts of claims about how our individual firms, or perhaps the economy as a whole, might be suffering as a result. Over the last 12 months (to the end of June), there has been a net outflow of 35000 people (New Zealand and foreign) – as a share of the population, the only time there has been a larger net outflow looks to have been in the late 1970s. Quite a contrast to the really big net inflows we’d experienced in the years just prior to Covid.

So it was interesting to see a new research report out from the ANZ economics team looking at “How does immigration affect the New Zealand economy”. As the authors note, it is similar in spirit and technique to a piece the Reserve Bank did back in 2013, which I will come back to later in this post. And has somewhat similar – but probably weaker – results, despite a number of differences, both in data and specification.

It is important to note that (a) these are not highly-detailed structural models of the economy and (b) do not purport to say anything material about the longer-term questions about the economic impact of New Zealand’s immigration policy that are my main focus. The main focus instead is on the impact of some unexpected net immigration over the first two or three years – and the ANZ piece does not even attempt to distinguish between the bits under government control (non-New Zealanders, especially arrivials) and the bits that aren’t (movement of New Zealanders).

Here is how ANZ describes their effort

Net immigration tends to be driven primarily by changes to immigration settings and relative labour market conditions between Australia and New Zealand. At the moment, we can add the pace of border opening. With the
outlook so uncertain, it’s helpful to ask what will happen to the economy if net immigration is stronger or weaker than we expect in coming years. To answer this question we employ a simple model1 that estimates the
relationships between key variables:
 Net immigration
 Growth in residential building consents
 Investment intentions (from the ANZ Business Outlook)
 GDP growth
 House price inflation
 Growth in labour costs
 The change in the 2-year mortgage rate

They use data back to 1998 (not entirely sure why they don’t go further back, but perhaps one of the data series isn’t available further back). Note the problem that bedevils so much of this sort of work. If 20+ years doesn’t sounds too bad (80+ quarters), actually the researchers are trying to distill results from what are really only two events (two complete immigration cycles) and so not too much weight can be put on any particular result.

Note too that the immigration series they are now using (the new 12/16 series mostly) is different in character to the series (the old PLT data) used in earlier work. PLT data used self-reported intentions at the time of arrival/departure, and thus was unaffected by anything that happened after arrival/departure. The 12/16 series – which relies on what people actually did (whether they stayed – here or away – for long) – is importantly different. You might have arrived intending not to stay long, but if conditions while you are here change for the better you may choose to stay. In some respects (but not all) it is (eventually) better data, but the difference is one researchers might want to think about.

I’m also a bit puzzled why – other than advertising their own survey – they used the ANZ Investment Intentions series rather than actual investment data from SNZ.

Anyway, what do the results show? They do a first round suggesting (not very surprisingly) that higher (lower) net immigration is associated with higher (lower) house prices and dwelling consents. Then they attempt to do something a bit more sophisticated and isolate causality. In their words

In this section, we make a few tweaks to the model which allow us to be more definitive about the impact of net-immigration on individual variables like wages.  We can get the answer to the question: ‘what’s the impact of
an X increase in net immigration on house price inflation, holding everything else constant?’
Overall, our findings are consistent with the forecast scenarios – but with the tweaks we’ve made, we can say that our model shows that an increase in net immigration results in higher house price inflation, rather than saying
is associated with higher house prices. That might sound like semantics, but it’s the difference between correlation and causation.

(For those really technically minded there are footnotes on both these model specifications.)

Here are the house prices results

ANZ M 1

They don’t seem to state the size of the shock, but I guess the point they want to emphasise is that the effect is positive. But actually what surprised me was that, on this model and specification, the effect is only statistically significant for a couple of quarters at most (those dotted lines are 90 per cent confidence bands). Even allowing for the fact that the model is looking at house price inflation not house price levels, that seems a bit surprising.

I’m guessing that the results are stronger for dwelling consents, since they say

The results for residential consents showed a strong positive response to higher net immigration. Together, these findings show that higher net immigration generates sizeable upwards momentum in both prices and activity in the housing market.

But they don’t show the results. If so, it would be a little surprising, since the general story has tended to be that immigration shocks boost house prices first, and only later have a large effect on consents.

What about the other variables in the model? They do find a boost to GDP growth, for the first year or so (not at all surprising, since there are more people, whether as workers, consumers, or people needing a roof).

anz m 2

They report no effect (positive or negative on wages). But what about GDP per capita growth?

anz m 3

They describe this is “it doesn’t look like there’s a strong effect”, but given the confidence intervals it would be fairer to say it is no effect at all. And, frankly, that is a surprise (a point I’ll come back to).

The final observation ANZ make that I wanted to pick up on was their observation that they do not find significant impacts on investment intentions. They don’t make anything of it, but if that result were robust – and I’m sceptical – it should be really rather concerning. There is, on this scenario, an unexpected change in the number of people in New Zealand, and there is no impact on firms’ investment intentions, and yet additional workers need additional physical capital (be it a computer, or tools, or a van, or a desk, or an office or whatever?). I’ve shown cross-country data previously suggesting that in advanced countries business investment (as a share of GDP) has tended to be negatively correlated with population growth, so in a way I’m not overly surprised, but the prevailing official New Zealand story surely requires a belief that more people results in more investment, if simply to maintain pre-existing capita/output ratios. I wouldn’t want to put too much weight on this result – which may depend on the specific variable they chose to use, or whatever – but it should be a slightly disconcerting straw in the wind nonetheless.

So what about that 2013 Reserve Bank paper I mentioned earlier? (Disclosure: I was the editor responsible for the paper, and although I asked for some of the specifications in it, all the results are those of the author – now one of the Bank’s key economics managers.)

That Reserve Bank set out to look specifically at the impact of migration on the housing market, as net migration was just beginning to pick up strongly again. In what is described as a “fairly simple model” this is what the author set out to do.

mcd 1

Using the output gap has some attractions and some disadvantages. From a central bank perspective, one is less interested in whether headline GDP rises and more interested in whether migration shocks add to or ease overall resource pressure. On the other hand, output gap estimates are subject to revision, and are actually revised quite a bit (the 2013 series that McDonald used clearly describes the same economy as the Bank’s latest estimate, but with important differences, including that at the time he wrote the Bank’s official view was that the output gap was already slightly positive, while now they think it was still reasonably negative).

These were McDonald’s summary results (noting that the confidence bands here are 68 per cent confidence bands)

mcd 2

In this model, after five years house prices are still 8.1 per cent higher than otherwise after a 1 per cent of population immigration shock.

I guess the key result I always focused on in this paper was the output gap estimates. Immigration shocks in New Zealand over this specific period tend to have added more to demand (including for labour) in the short-run than they add to the economy’s supply potential (but after 3 years and more – recall these are monthly numbers – that effect fades out, leaving the output gap effect basically zero). That has implications for interest rates (in these models the two year mortgage rate, but there is quite a correlation with the OCR). (It is also consistent with at least some initial boost to per capita GDP – see above – since a given pool of resources in being worked more intensively.)

McDonald also looked at arrivals and departures separately (didn’t seem to make much difference) and at movements of New Zealanders and non New Zealanders separately (where there were some differences – notably the output gap effect is zero for New Zealanders, possibly because the comings and goings of New Zealanders are more purely endogenous). There appeared to be some differences by country of origins (arrivals from Europe/UK boosted house prices a bit less, and more slowly, than arrivals from Asia).

The broad thrust of these results should not really surprise anyone. The notion that immigration has added more to demand than supply in the short term was just a standard feature of New Zealand macroeconomic analysis for many many decades (whether historically or in the forecasts/write-ups of places like the Bank and Treasury more recently). That it is so says nothing – nothing at all – about the pros and cons of large scale policy-led immigration longer-term. The short-term effects are more likely to be that way round in a country that mostly imports “people like us” – often people with a reasonable degree of education and skill, often actually New Zealanders – than, say, in a country where a large chunk of migrants are lowly-skilled illegals (again, whatever the long-term case for either sort of immigration).

And yet, if these results shouldn’t surprise, they clearly do surprise many businesses and business lobbyists, operating entirely with a single firm perspective and either unaware of or deliberately choosing to ignore the macro analysis. Here is eminent economic historian Gary Hawke’s take – from a 1981 chapter in The Oxford History of New Zealand.

“Ironically, the success with which full employment was pursued until the late 1960s led to frequent claims that labour was in short supply so that more immigrants were desirable.  The output of an individual industrialist might indeed have been constrained by the unavailability of labour so that more migrants would have been beneficial to the firm, especially if the costs of migration could be shifted to taxpayers generally through government subsidies. But migrants also demanded goods and services, especially if they arrived in family groups or formed households soon after arrival and so required housing and social services such as schools and health services. The economy as a whole then remained just as “short of labour” after their arrival.

Whatever the possible longer-term microeconomic case for access to a wider pool of skills, a new migrant labourer may ease an individual firm’s constraint or problem – perhaps even a sector’s if they can get a disproportionate share of the arrivals – but large scale migration simply does not ease overall macroeconomic resource pressure.

All that is really a protracted intro to a point I have been toying with. I recall writing a post early last year – probably February – suggesting that the building downside risks to the economy were such that I would be very hesistant to then recommend a significant cut in non-citizen immigration, for fear of exacerbating the near-term economic downturn. For much of last year, my comfort with the pessimistic economic forecasts the Reserve Bank and Treasury were publishing was reinforced by this short-run immigration story: demand effects typically exceed supply effects over the first couple of years so a big net outflow (enforced by Covid border restrictions) seemed likely to exacerbate/extend the economic weakness.

And yet, here we are, borders still closed, still monthly net outflows, significant sectoral dislocations but……the economy at more or less full employment (more jobs filled now than there were early last year, even though fewer people are physically here), and business and consumer sentiment really running rather strongly, investment intentions included.

Where does immigration fit with the story? I’m surprised things are running as strongly as they are but so (presumably, if they have thought about it) must be those constantly rushing to ministers and newspapers to claim that the economic costs of not having access to another migrant labourer are very high (on some rhetoric “threatening our entire recovery”. I’m not trying to suggest that all is rosy about our economy – it clearly is not in any structural sense, but in a short-term cyclical sense (the focus of both the ANZ and RB work) you can’t really complain about things here. The market now thinks official interest rates will/should be on the way back up before the end of the year. Core inflation might even get past 2 per cent for the first time in a decade. Workers often find employers competing for their services.

My honest answer to my own question is that I’m still not clear. I’ve put a lot of weight on the swings in the structural fiscal position – the swing from a near balanced budget 18 months ago to huge cyclically-adjusted deficits now is a really big boost to demand – and official interest rates are lower than they were, all in an economy where the net loss of purchasing power from other factors has been pretty limited (to put it mildly, having in mind the strength of the terms of trade). The short-term macro effects of swings in migration seem pretty clear – need for a roof etc hasn’t changed – so I can only deduce that we’ve had a series of factors at play:

  • fiscal policy (really big boost to demand)
  • monetary policy (modest boost to demand –  through the OCR, little or nothing through LSAP)
  • some slight dampening to demand from restrictions on overseas tourism and export education (most NZ offshore tourist spending seems to have been displaced to additional demand for other things),
  • some boost to net incomes and demand from the rising terms of trade, and
  • a significant dampening to demand from the move from a net migration inflow to an outflow.

It would be consistent with a story in which the overall economy might now be running as strong (cyclically) or even a bit stronger than it was early last year, and one which –  all else equal –  a significant reversal in the net migration flow –  would simply exacerbate (forcing higher interest rates or tighter fiscal policy) rather than relieve.

I’ll have a few thoughts specifically on monetary policy tomorrow.

“Immigration Policy: Economics and Evidence”

That was the title of the presentation at yesterday’s lunchtime seminar hosted by Motu, the economics consultancy/research group. Motu has started up this series of public policy seminars – a laudable initiative, even if the costs mostly seem to be being met a group of sponsoring government agencies. The first such session was a month ago on minimum wages – I never got round to writing about it, but the summary is probably “not as useful or as damaging as is often claimed”. Perhaps it is going to be a theme, since a one line summary of yesterday’s immigration session could be quite similar.

A session on immigration policy is obviously timely, given that the government says it is cooking up changes to various aspects of policy (for which, despite a speech from the minister, there is still no supporting analysis or any details), and in view of the inquiry the government has directed the Productivity Commission to undertake. (On that note, the Productivity Commission recently released an Issues Paper, outlining some of the issues and posing some questions they particularly want submissions on.)

So I went along to the seminar yesterday expecting to be challenged and stimulated by the speaker, David Card from Berkeley (by Zoom). Card has written a lot over the years on immigration, and some of his studies are widely cited. My impression was that he was generally positive about immigration, but then he was mainly writing with the US in mind, and based in greater San Francisco. But clearly a very able guy.

In fact, the seminar was a bit disappointing. I suspect most of that was the fault of the organisers rather than of Card. They’d scheduled the session for 90 minutes, allowing time for some discussion from local panellists and some audience questions, but Card only spoke for at most 30 minutes and was evidently operating to a time slot he’d been given. And although he had made some effort to dig out some New Zealand numbers, none of those numbers would have been news to the New Zealand audience, and he (unsurprisingly) didn’t have much in-depth knowledge of New Zealand or its challenges. But that meant that what he had time to say more generally won’t (I suspect) have added much to anyone’s understanding, whatever one’s view on New Zealand immigration policy. That was a shame.

There were familiar snippets. The stock of foreign born people in New Zealand is high, among OECD countries. There is a lot of variability in net immigration to/from New Zealand (although, oddly, he never touched on the distinction between New Zealanders (not the subject of immigration policy) and others (who are). There were various high-level outcome numbers (employment, incomes) that often don’t look too bad – at least for non-Pacific migrants – but – not stratified by age – often don’t reveal much either.

There was the useful reminder that while there might be a ready (“potentially infinite”) supply of people from poor countries who would move to rich countries if they could, the potential supply of people from rich countries is much more limited. He noted that in the US context – which is quite different from New Zealand – policy settings tend to mean that immigrants are either very lowly skilled (illegals and family reunification) or very highly skilled (“doctors and janitors” – a large proportion of US migrants are apparently in the healthcare sector).

He touched on the perennial question of whether growth in the capital stock keeps up with migrant inflows, and while suggesting that it generally does – especially in the US – he noted that these things needed to be looked at on a case-by-case basis. There is a series of studies in the literature on large shocks to migration – eg French returnees from Algeria, Portugese from Mozambique and Angola, and the influx of Soviet Jews to Israel in the early 1990s. Card talked briefly about the latter case, presenting a chart showing the big surge in investment in Israel in the wake of the influx of people. That is what one would expect – and hope for – but as one of the discussants pointed out, actually it hadn’t tended to happen here (business investment as a share of GDP has been low by OECD standards for decades).

More generally, Israel’s productivity performance has been poor, especially in the 1990s.

israel productivity

But I’m not going to disagree with Card: careful case-by-case analysis really does matter.

I hadn’t known that Card was Canadian, and he did offer some interesting comments on the Canadian experience – they now target about as many non-citizen migrants per capita as we do. As he noted, in the US there is often (correct) talk of the number of Nobel prize winner or entrepreneurs who had been migrants, but experiences different considerably by country, and he noted that Canada had had nothing of that sort of experience, suggesting that Canada’s shift to a skills-based migration approach had, on that sort of metric, been a “failure”. Canada has never been an OECD productivity star – not even 100 years ago when New Zealand and Australia matched the US as richest countries in the world – and the last 30 years have seen their gap to the US widen, despite an immigration policy (a) very similar to New Zealand’s and (b) widely admired.

canada us

And that with all the advantages of proximity (Toronto is closer to New York than Wellington is to Auckland).

(Incidentally, one of Card’s points was about the benefit to migrants themselves, and the question of what weight should be placed on that benefit in national policymaking. Both are fair points/questions. But he noted that his own English ancestors had been dirt-poor when they migrated to Canada in the early 19th century, as an illustration of the gains. I’m sure many of us have similar stories – I like to talk of one particular set of my ancestors who were poor Yorkshire farm labourers when they left in 1860 – but it does rather overlook two things: first, most ancestors of present day English people were also very poor 150-200 years ago, and – at least on the OECD numbers – average productivity in New Zealand, Canada, and even Australia – is now below that in the UK, and that is before getting onto the better of the Latin American countries (Chile, Uruguay and Argentina) in comparison to Spain and Italy.)

He touched on a couple of other aspects that some times pop up in debates around immigration. On fiscal effects, his read of the (limited) literature tended to be that “immigrants contribute a little more than they take out”, but even that result depends on (a) the types of immigrants, and (b) how one allows for the implications of migrants having children, and how well those children do. The fiscal effects of immigration are never an issue I’ve focused on (I don’t think it is a big issue, one way or the other, with the type of migration we’ve mainly had) but did offer some thoughts here on some earlier (too positive) New Zealand estimates (which were done by the firm run by the now chair of the Productivity Commission)

And then there was housing. For me, he got off to a bad start by suggestion that in Wellington “like San Francisco” there was really no more land for building houses – he seemed quite unaware of just how much low value land the Wellington region (and city) has. Card really wanted to play down this issue, and presented some back of the envelope guesstimates suggesting that if our cities allowed development as readily as, say, Houston does, it really wouldn’t make much difference at all to house price inflation in the presence of population growth. It was clear he really didn’t like Houston – even as individuals self-select towards affordable housing in Texas. Believe that if you want, but I suspect it is a guesstimate from a model that takes into account house-building but not land restrictions. (And to repeat, in a first best world the housing market should not be a consideration one way or the other in setting immigration policy, since fresh land would readily and continuously be brought into development at a price not much different to the value of that land in alternative uses.)

Oh, and he observed that across the variety of types of models, the effects of immigration on the labour market (positive or negative) tended to be pretty small.

And that was the end of the presentation.

There were three panellists: Dave Maré from Motu itself who has done various micro studies over the years on immigration in New Zealand, Julie Fry who has written quite a bit in the last 7 or 8 years and was recently co-author of a contentious piece for the Productivity Commission, and Nik Green the director of the Productivity Commission’s immigration inquiry. There were a few interesting snippets in their remarks:

  • Maré noted that for all the research that had been done it was hard to find strong evidence of much good or bad stuff resulting from New Zealand’s immigration. He noted that ideally you really want people who are different from natives – to complement us – but that a qualifications-based approach wasn’t necessarily the way to achieve that. And, on that note, he seemed very sceptical of the “literal and engineering approach” taken to granting visas, with the heavy focus on immediate short-term gaps.
  • Fry noted that she had first worked on immigration at Treasury 30 years ago when the new immigration policy looked like a one-way bet, really only offering upside. Her conclusion was that reality was a lot less clear, noting that although we had attracted “lots of nice people” there had been no dramatic economic gains. But she was at pains to stay on the liberal side of the debate, noting that naysayers needed to be confronted, and wasn’t it a good thing that Covid had shown we could have crazy house price inflation without immigration.
  • Green didn’t say much, but did note questions around the increasing reliance on temporary migrants, as well as explicitly referencing my points around the macroeconomic imbalances New Zealand immigration may have contributed to over many years.

Card’s response was brief, and centred on a chart of GDP per employee for the Anglo countries over the last 10 years or so, indexed to a common starting point. His point seemed to be that immigration hadn’t made much obvious difference to any country’s productivity story – which might possibly be so, but it seemed an odd basis on which to rest such a claim (being poor relative to the other Anglos, we’d have hoped to be catching up, growing faster).

And then he presented a chart of population densities by OECD country, in which – of course – the three OECD countries most focused on targeting high immigration have among the lowest population densities. I’m pretty sure there are good reasons why people don’t live in most of Canada or Australia…….and there seemed to be no reference to economic geography in any of this anecdote.

Then there were questions from the floor.

Eric Crampton tried to get a ringing endorsement of high migration by asking if we shouldn’t just believe overseas research, noting that water flows downhill everywhere. Card – having previously explicitly noted the need to look at experiences case by case – noted that such a question was “a little above my pay grade”. But then he went on to make the weird claim that New Zealand was an “extraordinarily open economy” – when our trade shares are very low for a small advanced country – and that in such an economy wages should simply be set globally (labour supply not making much difference). Nonetheless, actual New Zealand wages are low by OECD standards, commensurate with low rates of labour productivity here.

There was the useful note that – in New Zealand, and the Anglo countries, but often not in Europe – kids of migrants educated in the host country tend to do pretty well.

There was another question from the floor – from a fairly eminent figure – about regional effects, in which it appeared to be suggested that actually rising house prices in Auckland, even if driven by migration, might be a good thing as they allowed natives to sell up and move to nicer places elsewhere in the country (the questioner, raised in Auckland, deemed most places nicer). It seemed a really bizarre question, especially if – as the consensus tends to be – big cities are the cutting edge of innovation and income growth. Card avoided that specific question, but actually seemed quite cautious on the cities point, noting that although incomes in big cities tend to be higher it wasn’t clear how much of that was causal, and suggesting that the true effects might be quite modest (globally, I was a bit puzzled by that given the huge differences – especially in Europe – in GDP per capita in big cities vs the rest of the respective countries.)

That question prompted Julie Fry to throw in the observation – with which I totally agree – that the policy (adopted by the NZ government) of trying to steer migrants regionally does not work and should be stopped. (It also tends to lower the quality of the average accepted migrant, by selecting for willingness to go to the provinces rather than ability.)

The final question was about crime and migration. Here again, Card was cautious and noted that different places had different experiences (noting challenges especially in Sweden and Denmark). He noted that in the US per capita crime rates of migrants were lower than for natives – while noting, in effect, that per capita might not count for much if you are the victim of an individual – with (as in so many other variables) regression towards the mean in the second generation. Eric Crampton added the similar New Zealand experience, noting correctly that it isn’t that surprising since one needs a criminal record check etc to be a migrant to New Zealand.

It was an odd session. Perhaps some people in the audience got something out of it, but I’d be surprised if anyone got much. It was interesting to see the near-complete absence of much enthusiasm – whether from Card or the local panel – for large scale immigration as something economically transformative (recall that not many years ago MBIE was telling us – and ministers – immigration to New Zealand was a “critical economic enabler”). One was left wondering why then the New Zealand government should be running one of the very largest per capita immigration programmes in the world – perhaps the more so when the natives are leaving and governments refuse to fix the housing/land market – when the programme has long largely been economic in motivation.

But – as with the Commission’s Issues Paper – there was a lot missing from the discussion, including a lack of any engagement with the possibility that even though wages in New Zealand have done well relative to producttivity, large scale immigration, in our specific circumstances, may have contributed to the deeply underwhelming productivity and foreign trade performance.

(It was a seminar day. I went on from the Motu event to a presentation at Treasury of the BERL work done for the Reserve Bank on “the Maori economy”. Even the speaker noted that “the Maori economy” is not a “separate, distinct, and clearly identifiable segment” of the New Zealand economy, and so one was still left wondering why they’d spent the money. I won’t extend this post with a lengthy account of a fairly underwhelming session, but will leave you with the data that simply staggered me. According to the report, in 2018 35 per cent of the total income of Maori households came from welfare benefits and other state direct assistance, up from 21 per cent in 2013. For the rest of the population BERL reported that the share was 9 per cent in 2018, down from 13 per cent in 2013. I’d have been reluctant to believe it, but so it appeared to be.)

Immigration policy for New Zealand post-Covid

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

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

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

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

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

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

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

visa 1

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

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

visa 2

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

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

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

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

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

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

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

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

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

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

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

What should they be doing?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(a) real interest rates, and (b) NZers’ migration

No, I’m not getting back into some routine of daily posts, and on this occasion the two topics don’t even have anything to do with each other, but are just a couple of a leftovers from things I was looking at over the last couple of days.

In my fiscal posts this week I’ve noted that the government is consciously and deliberately choosing to run cyclically-adjusted primary fiscal deficits in the coming year larger (probably much larger) than we’ve seen at any time since the end of World War Two. I noted in passing that although people are conscious of stories of large fiscal deficits under Robert Muldoon’s stewardship, in fact a large chunk of those deficits was interest payments, and this in an era when inflation was high, sometimes very high. When nominal interest rates are high just to reflect high inflation, the resulting “interest payment” is really more akin to a principal repayment. Back in the day, various people – especially at the Reserve Bank – did some nice work inflation-adjusting various macro statistics.

But just to check my point I put together this graph

real NZ bond yield since 70

What have I done here?

  • got the OECD’s series for long-term nominal bond rates that goes back to 1970 (this will mostly be 10 year bonds or thereabouts, although for a time in the late 80s we were not issuing bonds that long),
  • for the period since 1993, subtracted the Reserve Bank’s sectoral factor model measure of core inflation,
  • for the period up to 1993, subtracted a three-year centred moving average of the CPI inflation rate.

So for almost entire period prior to 1984 real New Zealand government bond yields were negative.

This is, of course, not testimony to different patterns of desired savings and investment, but (mostly) to financial repression. Until 1983 government bond yields were administratively set and – much more importantly – most financial institutions were simply compelled by law to buy and hold government securities (often 25 per cent of more of total deposits). The costs were borne by depositors.

It is also worth noting that pre-1984 the government was also borrowing, at times heavily, directly from the retail market, at times offering real interest rates well above those shown here. And the government was also borrowing, again at times quite heavily, from abroad. In some of those markets, inflation was a big chunk of the headline interest rate, but in none of the major borrowing markets were government borrowing rates by then as repressed as they were still in New Zealand.

Finally, note that in the chart I have compared a 10 year bond yield to a one year inflation rate. But at least since 1995 we have had a direct read on real government bond yields through trading in government inflation indexed bonds. As this chart shows, the pattern over that period is very similar,

IIB yields since 95

Developments in the last few months are interesting, but that is something for another day.

My second brief topic this morning was sparked by a strange quite-long article in the New York Times yesterday headed “New Zealanders are Flooding Home: Will the Old Problems Push Them Back Out”. A lot of work seemed to have gone into it, and some of the individual anecdotes were not uninteresting (and in the small world that is New Zealand, one of the recent returnees was even someone I’d once worked with) but…….no one (do they have factcheckers at the NYT?) seemed to have stopped and checked the numbers. It took about two minutes to produce this graph that I put on Twitter yesterday.

NZ citizen migration

Using the official SNZ estimates, the problem with the story was that arrivals of New Zealanders had not really changed much at all – a bit higher than usual in the March 2020 year, and then lower than usual in the most recent year. There has, of course, been a big change in the net flow of New Zealand citizens but……..that is mostly the very steep fall in the number of New Zealanders leaving. That reduction – over the March 2021 year – is, of course, not surprising in the slightest given (a) travel restrictions to Australia for much of the year, and (b) travel restrictions and/or bad Covid in much of the rest of the world.

But, on official estimates, there simply is no flood of New Zealanders returning home. None.

This morning I looked a little more closely, and dug out the quarterly (seasonally adjusted) version of the data.

nz citizen migration quarterly

It is, of course, much the same picture, but what surprised me a little was the upsurge in (estimated) arrivals back in late 2019, pre-Covid. Here it is worth remembering that until a couple of years ago our PLT migration data was based on reported intentions at the time of arrival, but the 12/16 approach now used looks at what actually happened. It looks as though some New Zealanders who had come to New Zealand in late 2019, probably not intending to stay, ended up doing so, voluntarily or otherwise, once Covid hit. So they are now recorded as migrant arrivals in late 2019 even though at the time they would not have thought of themselves as such.

But it does not change the picture: there is no flood, or even a little surge now, in returning New Zealanders. A problem with the 12/16 approach is that the most recent data is prone to quite significant revisions (and that is particularly a risk when the normal patterns the models use aren’t likely to be holding, but there is nothing to suggest there is a significant influx of returning New Zealanders happening.

There will be always be natives who’ve spent time abroad returning home. It happens even in rather poor and downtrodden countries, and it happens here – always has, probably always will. That adjustment isn’t always that easy, plenty of people often aren’t sure for a long time that they’ve made the right choice. Covid means a few different factors have influenced some of those choices for some people. But there is no “flood”, just a similar to usual (or perhaps now smaller than usual) number of returnees, coming back to a New Zealand of extraordinarily high house prices and productivity levels and incomes that increasingly lag behind a growing number of advanced economies. Those persistent failures – and the indifference of our main political parties – should be worth a story. But not the non-existent flood.

At least 60 per cent

Dating back to before they took office in 2017, Labour’s stance on New Zealand immigration policy hasn’t been particularly clear. There was the 2017 policy, announced under then-leader Andrew Little, that was sold as being likely to make a big difference, but once one looked into the details (see link earlier in the sentence) it was clear it was designed not to do so. But then the leader changed, and little was heard of the policy on the campaign trail (people close to Labour told me that Ardern had made clear that she wasn’t that keen on the policy). Labour and New Zealand First then became government, explicitly agreeing to operate on Labour’s immigration policy, but apparently – so a NZ First minister told me – with an agreement to revisit the policy mid-term. If so, not that much of substance ever seemed to flow from that, although in early 2019 there was (ill-advertised) agreement in principle to changes down the track in how the residence programme was designed and run.

Then, of course, Covid intervened. There hasn’t been much non-citizen immigration at all since then, but no one envisaged that as a permanent model. And, of course, Labour secured an absolute majority at the last election, and selected a new Minister of Immigration.

Last month, the government finally got round to asking the Productivity Commission to do an inquiry into immigration policy. (I say “finally” because whether or not one approves of something like the current approach to immigration policy, that policy has clearly been one of the largest government economic policy interventions over several decades now, and the evidence-base around the economic effects of this large intervention, in the specific circumstances of the New Zealand economy, is disconcertingly light.) But then we are given to understand that the government has made up its mind anyway (which is, of course, their right as the elected government, but seems an odd ordering, when you’ve been in government for getting on for four years).

Here was the Prime Minister in her speech last week (emphasis added)

In terms of immigration going forward, last week we announced that the Productivity Commission will hold an inquiry into New Zealand’s immigration settings.

The inquiry will focus on immigration policy as a means of improving productivity in a way that better supports the overall well-being of New Zealanders.

The inquiry will enable us to optimise our immigration settings by taking a system-wide view, including the impact of immigration on the labour market, housing and associated infrastructure, and the natural environment.

This will sit aside existing work being led by the Immigration Minister around reforms to temporary work visas and a review of the Skilled Migrant Category visa.

In fact this Monday Minister Faafoi will be outlining the case for change in New Zealand’s immigration policy in a speech in Wellington.

But let me be clear. The Government is looking to shift the balance away from low-skilled work, towards attracting high-skilled migrants and addressing genuine skills shortages in order to improve productivity.

So I looked forward to reading the Faafoi speech, with interest tinged with scepticism. Specially invited guests, some from out of town, must have looked forward to it too – even if for some their interest might have been tinged with apprehension. There are a lot of champions of large-scale non-citizen immigration out there – from the Green Party (who seem keen on importing supermarket workers) to much of the “big end” of town.

As it happens, Mr Faafoi was apparently sick yesterday, and so the Minister for Economic Development Stuart Nash got the job of reading Faafoi’s speech, and was reportedly then unable to answer most questions.

The speech itself seemed to have been downgraded – the PM had trailed it as making the “case for change”, but the minister’s heading was simply “Setting the Scene”. But it was barely even that. I guess we came away with the message that “we are determined not to return to the pre-Covid status quo”, but there was almost nothing of the how – no specifics at all – and very little, in any sustained sense, about the why. There was no evidence in the speech of any rigorous thinking, analysis or research from officials – the sort of work one might normally hope for (especially for a government four years in) in advance of policy decisions and announcements. Particularly unkind observers suggested that the speech was more in the nature of “an announcement about an announcement”, of the sort that has become all too familiar. In fact, we were told that “we’ll be engaging with you [who?] over the coming months to test our thinking”, suggesting there just isn’t much there yet.

And I say all this as someone who might, possibly, be somewhat sympathetic to some elements of the broad direction the government might be heading in around immigration (even while being highly sceptical of Stuart Nash’s statist centralised approach to business and the economy, and prone to scoff every time I read another reference to the vaunted Industry Transformation Plans, in which bureaucrats take the lead in (purporting to) shaping the future of one industry after another (a tourism one got a mention last night)).

There isn’t much point trying to unpick Faafoi/Nash’s speech bullet point by bullet point (for some unaccountable reason it appears on the Beehive website with every sentence a bullet point). But in this post I just wanted to address a claim made in the speech.

High levels of migration have contributed to 30 per cent of New Zealand’s total population growth since the early 1990s.

The “early 90s” is not only when the current broad approach to immigration was being introduced, but it is also when the current official population series begins.

Now I’m sure that one of the first things MBIE officials tell each Minister of Immigration is that to talk of “migration” isn’t very helpful in a policy context. There are inflows and outflows of New Zealanders and non-New Zealanders and the only bit policy controls is about the movement of non-citizens (arrivals, and departures for those on limited term visas). So in a speech on immigration policy, one might expect that the Minister of Immigration would focus his analysis on the movement of non-citizens. And that offers a quite different picture than the one Faafoi/Nash painted in the speech.

Here is a chart showing net non-citizen migration as a percentage of New Zealand’s population growth for each calendar year from 1991 to 2019 (I left off 2020 because the net migration numbers for that year are still estimates and the SNZ model for estimating these things for very recent periods isn’t great in normal times, yet alone Covid times)

non-citizen contrib

Not even in 1991 was the contribution of non-citizen net migration quite as low as 30 per cent, and 1993 was the last time the contribution (to a first approximation, the contribution of immigration policy) was below 60 per cent. Of the year to year variation, some represents variation in the number of non-New Zealand migrants, but much represents variability in the (net) out-migration choices of New Zealanders (mostly to Australia).

There are plenty of people who will think the numbers in the chart are a good thing. I don’t, given what we know about the continuing long-run bleak underperformance of the New Zealand economy. But whether or not you welcome these trends, they are the (relatively) hard data. For decades now – well, prior to Covid – New Zealand’s pace of population growth, which is among the highest of the OECD countries, has been largely an immigration-policy-driven phenomenon. No OECD country envisages a larger share of population growth coming from non-citizen immigration, and most envisage a far smaller share. And if anything, these data are likely to understate the true population consequences of immigration, since the median migrant tends to be relatively younger, and the children of those migrants – themselves New Zealand citizens – will have further contributed to the growth of the population.

Rapid (policy-led) population growth in such a remote location appears to have impeded the prospects for any reversal of the decades of productivity underperformance. It has skewed the economy inwards, persistently overvaluing the real exchange rate and thus crowding out potential export industries. Wage growth in New Zealand has been weak, but that isn’t directly some immigration phenomenon – such discussions, including the Minister’s, consistently ignore the demand effects of high immigration – and the data show that, for the economy as a whole, wage growth has tended to run quite a bit ahead of growth in the economy’s earnings capacity (nominal GDP per hour worked).

When the government finally gets round to specifics one can only hope their policy decisions are based on better analysis, including the some robust economic analysis of the specific New Zealand experience, than was evident in the speech last night.

And when the champions of mass-migration splutter at the general thrust of the government’s aspirations, perhaps they might offer some thoughts on what it is about New Zealand that means that – in their view – we need to be uniquely heavily dependent on large scale non-citizen immigration.

Could do better?

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

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

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

Fry and Wilson’s own summary runs this way

Fry and Wilson key points

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

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

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

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

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

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

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

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

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

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

fry and wilson 2

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

reddell immigration specifics

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

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

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

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

Productivity, and politicians who no longer care

I was reminded again the other day both how (absolutely) poor even advanced countries were not that long ago, but also how (relatively) rich New Zealand was. I was reading a fascinating book on Ireland’s (rather shameful) history in World War Two and stumbled across a snippet suggesting that “there were nearly 170000 licensed radio sets in Ireland on outbreak of war”, in a country of almost three million people. On digging around a bit, I found that in New Zealand, then with 1.6 million people, we’d had 317509 licensed radio sets in 1939 (then, apparently, third highest in the world per capita). The licence fees in the two countries appear to have been very similar.

The standard compilation of historical estimates of per capita GDP – that of Angus Maddison – is consistent with my radio anecdote. In 1938/39 GDP per capita in New Zealand was more than twice that in Ireland, with New Zealand in the very top grouping (New Zealand, UK, USA, and Switzerland).

How times change. As even Irish official statisticians acknowledge the idiosyncracies of Ireland’s corporate tax system substantially distort Irish national accounts statistics, but doing whatever adjustments are possible (eg the Irish modified GNI measure) or looking at consumption statistics it is clear that these days Ireland is producing considerably better material living standards than New Zealand is. In terms of standard productivity measures – the OECD’s real GDP per hour worked data – they probably went past us in the mid-1980s.

The OECD productivity data go back as far as 1970. By then, we’d already had a couple of decades of relative decline – even though for most countries, including New Zealand, the 1950s and 1960s had seen really impressive absolute growth rates. Of the 23 countries for which the OECD has 1970 data – not all of them (including New Zealand) then part of the OECD – real GDP per hour worked here was just over 95 per cent of that in the median OECD country. We were a touch behind France and a touch of the UK. These days – pre-Covid – real GDP per hour worked is about two-thirds of the median for that same group of 23 countries.

By far our worst decade since these data start was the 1970s. In that decade we had, by some considerable margin, the slowest growth in labour productivity of any of the countries the OECD has data far. Unfortunately, since then there has never been any sustained period when we have regained ground relative to the OECD pack, and if anything the gaps have widened further.

Relative optimists might look at the New Zealand experience this century and observe that there hasn’t been any material slippage relative to the leading bunch of OECD countries.

But that shouldn’t really be any consolation when:

  • the absolute rate of productivity growth has been so poor (our average annual rate of productivity growth for the nine years to 2019 has been a bit worse than our dismal performance in the 1970s –  see above),
  • we’ve managed no catch-up relative to the leading bunch, even though their productivity rates  –  problems at the frontier –  have also been disappointing to say the least, and
  • our performance relative to other countries that aspired to catch-up has also been dreadful.

I first got systematically interested in New Zealand’s woeful record in a stint at Treasury from 2008 to 2010, in the course of which I was heavily involved with the then-government’s 2025 Taskforce – the one supposedly about catching up (in terms of material living standards) with Australia by 2025. I wrote most of the Taskforce’s first report in late 2009 and in doing so I noticed, and reported that, of the former Communist countries of eastern Europe, Slovenia had then just passed us in terms of real per capita GDP, that Slovakia had real GDP per hour worked approaching that of New Zealand.

There have been some data revisions since then, but if we look at current estimates of real GDP per hour worked, in PPP terms, for 2007, we find that Slovenia was indeed about 5 per cent ahead of New Zealand, although the gap to Slovakia was a bit larger (10 per cent) than those earlier estimates suggested. There are eight former Communist countries in the OECD. In 2007, real GDP per hour worked in New Zealand was already only 16 per cent ahead of the median of those countries, that margin have narrowed markedly in the previous decade. Perhaps that earlier catch-up wasn’t too surprising or alarming – if you stop hobbling your economy and get rid of the state-dominated Communist system, you are almost certain to bounceback to some extent.

But where are things now?

Real GDP per hour worked, 2019, $US PPP
Slovenia 45.2
Slovakia43.8
Lithuania42.5
New Zealand42.2
Czech Republic42.0
Poland41.0
Estonia40.8
Hungary37.7
Latvia37.0

Last year we were really just middle of the pack among these countries, and in another couple of years – on policies, practices, whatever in New Zealand and other countries – you’d have to assume we’ll be struggling to stay ahead of Hungary and Latvia for long. In terms of growth rates over the last decade, Hungary was the laggard of the former Communist countries – still grew faster than New Zealand, but not by that much – but it should be slim consolation if we just manage to stay ahead of Hungary.

Not once previously in the history of modern New Zealand has any of these countries previously had productivity or income per head performances to match those of New Zealand. They still lag quite a way behind the north-west European leaders – although the gap is closing. The standout isn’t them catching up, but us failing.

It isn’t just those former eastern bloc countries. At the turn of the century, New Zealand could console itself that if Korea was growing rapidly, real GDP per hour worked was still not much more than half that of New Zealand. On recent rates of growth, they will move ahead of us in another year or two. Or Turkey – with a history of unstable undemocracy, macroeconomic instability and so on. The old Ottoman Empire was the 19th century’s “sick man of Europe”. In 2017, for the first time in modern history, real GDP per hour worked in Turkey moved ahead of that in New Zealand.

But it isn’t all bad news I guess. If you really want to find advanced countries that have done less well than New Zealand – poorer/less productive and with a slower productivity growth rate – I can offer you Greece and Portugal. But falling on those sorts of comparisons is really head-in-the-sand stuff.

But….in the midst of an election campaign, occurring in probably toughest economic times for an election campaign since 1990, is there any sign that (a) any political parties, or leading figures in parties, care about this dire long-term economic performance, or (b) have either any serious ideas, or a commitment to getting and adopting serious ideas, about making a difference? If there are any such signs I must have missed them.

Presumably, if pushed and at some level, the people grappling for office must know that productivity really matters – here was my story why and how. It is about underpinning higher wages (without pricing people out of the market), about underpinning more leisure opportunities, improving access to better healthcare, underpinning improvements in life expectancy, and underpinning the consumption of the bits and pieces of consumer society that most of us seem to value. Perhaps if you are an extreme Green you might have an excuse not to care about productivity – or, at the other end of spectrum, a zealot for the New Conservatives – but for the rest it is hard to see, at least if they are serious about anything more than simply occupying office.

Perhaps one can find slight and partial excuses for our politicians. After all, it is not as if the government’s self-proclaimed premier economic advisers, The Treasury, have been firing on all cylinders, generating a steady stream of searching analysis and research with suggested solutions to our decades of economic failure. Then again, as things are set up why would they? Successive National and Labour (and even NZ First) Ministers of Finance have had no real interest: bureaucrats respond to incentives to, and the State Services Commissioners have played their part in appointing as Secretary to the Treasury people who weren’t likely to rock the boat.

But, at best, it is a partial explanation, not an excuse. Real political leaders set the agenda, with ideas of their own, drawing on the expertise of others, and demanding – or promising – much better from the public service. There is no sign of any of that at the top of either of our main parties (and, mostly, the others don’t really matter much, but they don’t seem any different either). I’m sure they are all nice people, but what are they doing – or promising – that might make a real difference, in reversing the decline in our relative material living standards, not just for the next year or two (borrowed money, redistributing a static or shrinking pie) but for the next generation or two (your kids and mine, our grand children etc). Short answer – on the evidence of years and years, and on the evidence of what parties are talking about and promising in this campaign – NOTHING. It is shameful. (And it is also not much excuse to suggest there is no huge groundswell of public anger, demanding something better: we don’t expect voters to engage on real GDP per hour worked, but don’t we hear again and again complaints about gaps in what productivity and growth makes more readily possible – health, housing standards and so on?)

Instead, any (expressed or public) concern seems to be limited to same predictably small group. There is me, here – and in a longer-form treatment here. There is Paul Conway, formerly of the Productivity Commission – where he led their work in this area, before frustration got the better of him – and now at BNZ, and there is Kerry McDonald, former economist, former head of Comalco, former leading company director. McDonald’s latest speech pulls no punches in its title, Our Economic Disaster and the Tragedy of NZ’s Political Leadership. And not much beyond that. The point isn’t that the three of us would agree of everything – we wouldn’t – but that our politicians and senior officials, our political parties, aren’t even engaged on the issue at all, let alone on serious options for making a difference.

One area where it looks as though there is some overlap in the policy prescriptions of Conway, McDonald, and Reddell is around immigration, and a sense – more strongly put at least in my case – that decades of high rates of non-citizen immigration, often not of people who are particularly highly-skilled, has not served us at all well in lifting productivity, even though the official case for high immigration to New Zealand asserted that it was a “critical economic enabler”.

I illustrated earlier in this post how the central and eastern European countries have been catching up and overtaking New Zealand. In this chart I’ve shown the populations of New Zealand and the median of these eight OECD countries this century, drawn from the World Bank/UN data.

e europe sept 20

Or this table of population growth rates this century

Population growth, per cent, 2000-19
Lithuania-20.4
Latvia-19.2
Estonia-5.0
Hungary-4.3
Poland-0.8
Slovak Republic1.2
Czech Republic4.0
Slovenia5.0
New Zealand27.5

All these countries have birth rates below replacement (generally lower than New Zealand’s) and all have had outward migration of their own citizens – us primarily to Australia, the Europeans mostly to western Europe. The big difference is that New Zealand – alone – has pursued rapid population growth as a matter of official policy, aggressively running one of the largest (per capita) official immigration programmes on the planet.

(As I’ve argued in numerous previous posts, rapid population growth isn’t necessarily inconsistent with rapid productivity growth, but rarely if ever has rapid population growth been a recipe for sustained rapid productivity growth – arguably the 19th centuries colonies of settlement, with abundant land may have been exceptions. Much depends on the opportunities, and locations matter. And yes, although Korea now has very modest population growth, Turkey’s population growth has been rapid.)

But, even amid the Covid disruptions – which could have been a great opportunity to stop and rethink – no political party seems interested in revisiting whether New Zealand’s large scale immigration policy has worked in the economic interests of New Zealanders as a whole, and all the media chatter is about getting going again with the supply of relatively lowly-skilled workers from abroad into the New Zealand labour market. There is no sign it has worked for New Zealanders for the past 25 years, and no obvious reason to suppose that will change for the better now.

But our political “leaders” show no sign of caring, at least about anything beyond the latest stories of firms in low-wage industries wanting a resumed supply of people willing to work at….low wages.

Perhaps there is an alternative credible model for thinking about how to reverse sustainably our decades of underperformance. But if so, you wouldn’t know it from listening to our politicians, or their officials.

People from poorer countries will come if we let them

The Herald business columnist Liam Dann had a curious column out yesterday.  When I first saw it online it had a more right-on headline [UPDATE: “Woke wonderland – how a new narrative has changed NZ”] (I didn’t read the article until my wife started quoting bits to me) but it now has the headline “NZ’s population prediction was out by 30 years – the price we are paying”.

Dann had been prompted to write the article by stumbling on a 2004 SNZ release from 2004 which apparently “forecast” (more likely, it was the medium “projection”) New Zealand’s population to get to five million in about 2050.  As it is, it appears that milestone will be reached within the next few months.

The bit that the current headline deals refers to was this

Now I can’t get past the notion that this miscalculation holds the key to many of our social infrastructure problems in 2019.

If that was the population assumption policy makers were using, then of course we have a housing shortage … of course our roads, our hospitals and our schools are crowded.

I’m a bit ambivalent on that point.  After all, it isn’t as if the projections haven’t been updated, regularly, since 2004.    And one could quite reasonably make the point that this specific issue isn’t primarily about surprisingly rapid population growth, as about successive waves of central and local governments (including the current ones) that have made too much of the system not responsive to population surprises.  Planners control where houses can (mostly can’t) be built and most of them have a deeply-held aversion to an increased physical footprint for cities, let alone competitive market processes to determine where and when development occurs.   We still don’t have congestion charging in our major cities.  And so on.  And so the pressures fall on house/land prices and in various forms of congestion or queuing.

All that said, if we were to take as more-or-less given the RMA and associated development constraints then Dann does have a point.  After all, it was the same political leaders who have repeatedly refused to act to free-up land supply etc (and in doing so were, just possibly, reflecting public preferences) who also oversaw the immigration system which has resulted in such a rapid rate of population growth.  The immigration system is much easier to tweak, to manage trend inflows of non-New Zealand citizens, than the entrenched land use issues are to fix.   In that sense blame a series of active (and, more often, passive) choices by our political leaders.

Using official SNZ data, here is how our population has changed since September 2004 (September years are the latest annual data).

population since 04

Over the full period, the population has risen by (an estimated) 842000.   Take natural increase (births less deaths) and the large net outflow of New Zealand citizens (another 315000) and you’d have been left with a pretty small rise in the population  (less than 4 per cent in total, over 15 years).

That is simply an illustrative scenario.  In the absence of large non-citizen immigration, the rate of natural increase would have been lower (immigrants, once here, have children too).  Whether the outflow of New Zealanders would have been any different is hard to know.  My own view is that there would have been a slightly smaller outflow of New Zealanders (consistent with my model, in which economic prospects here would have been improved), but there are alternative hypotheses in which some more New Zealanders might have left (wanting the brighter lights a NZ of five million could offer, but one of four million could not).

But to a first approximation, if you regard the land regulation situation as largely frozen, then almost all the subsequent pressures can be ascribed to the choice to keep on with large scale non-citizen migration regardless.  Even if you thought it really could be quite readily changed and it was just venal politicians who refused to do the right thing, then knowing that and still supporting large scale immigration (and recall that ours is among the very largest in the world per capita) is akin to knowingly inflicting the resulting house prices, congestion, queues etc on New Zealand.   It isn’t as if other countries have been so good at fixing those land (related issues).   And officials and outside observers knew these issues were a problem 15 years ago.

Of course, having raising the issue Liam Dann –  pillar of the establishment –  is keen to assure his readers that he does not, not for a minute, oppose immigration.  Thus his claim

in my lifetime this country has been vastly improved by more people and more cultural diversity.

I get the impression he must be almost 50 so presumably he is talking about immigration since about 1970.   In reality though, between about 1974 and the end iof the 1980s there wasn’t much immigration, so we are mostly talking about the last 30 years.    I can’t share his optimism, particularly about the raw numbers, in a country that has continued to drift further behind economically over that period, and whose firms have failed –  in aggregate –  to find new products/markets abroad (even though external trade is a key element in any prospective improvement in our relative prosperity).

Anyway, at this point Dann launches into a paean to the better New Zealand we now are that, to me anyway, seems more than a little detached from reality.  We are told that

Something structural has changed.

New Zealand just isn’t a place people want to leave any more.

Except of course (see above) a net 300000+ people have: just imagine if a net 7.5 per cent of the American population had left the US in 15 years.

Now a little later on, Dann does concede that any reduction in net outflows isn’t entirely good news

Australia becoming a lot less friendly to New Zealanders has influenced our net migration rates. It’s not nearly as easy to enjoy the easy life across the Tasman as “Bondi bludgers”.

In other words, poeople may still want to leave, but it is harder to do so.  And it isn’t just about the caricatured “Bondi bludger” but about the difficulty of your kids getting established and ever getting citizenship etc.  New Zealanders are worse off as a result of those tougher Australian policies.

It is also worth pointing out that New Zealanders go to Australia when the Australian labour market is strong.  It hasn’t been that strong in the last few years, after commodity prices peak and the mining investment boom began to pass.  That isn’t good for Australians, and it certainly isn’t good for New Zealanders who might want to take advantage of the higher productivity and higher material living standards abroad.

And, as it happens, the outflow has been picking up again.  Here is the net outflow of New Zealand citizens from the new SNZ migration data.

outlfow to AUs

It certainly isn’t a record outflow, but the increase is now becoming quite pronounced.  Not exactly a tale consistent with a wonderful New Zealand.

But when he talks about the migration choices of New Zealand citizens, Dann is just warming up.    The real story on his telling is

New Zealand finds itself being cast as the “woke” capital of the world.

and

We failed to see what a desirable place New Zealand has become in the eyes of the world.

Complete with all manner of gushy references to the idea that, for example

the UK and US media simply can’t get enough of the notion that this country is a liberal paradise.

Now I’m not going to deny that there are sections of the world media who seem particularly enamoured (for reasons that largely escape me) with our Prime Minister.

But….the surge in net migration this decade mostly happened on the watch of the previous lot, that outflow of New Zealanders has (and it is almost entirely coincidental) increased in the couple of years the current government has been in office, and in case Dann hasn’t noticed, the residence approvals targets haven’t changed much in 20 years now, and actual approvals have been undershooting target in the last couple of years (probably less because of lack of interest than because of processing delays by MBIE).   Because the headline target hasn’t changed much in 20 years, while the population has grown quite a bit, residence approvals for non-citizens are quite a bit less now, in per capita terms, than they were in, say, 2004 (Dann’s reference point).

And why might we doubt that Stephen Colbert (or, on the other side, Donald Trump) or the Guardian really have anything much to do with our population growth?  Well, try this chart from the new MBIE immigration dashboard, showing the top five countries for residence approvals.

R1 Residence Decisions by Nationality (1)

Four of these five countries are materially poorer than New Zealand is (and the UK, once the leading individual source country, while richer and more productive is now down to equal 4th).  Mostly people migrate when (a) the options are better for them abroad, and (b) the potential recipient country allows them to do so.  That seems pretty consistent with the New Zealand story not just now, but throughout history (think of the UK migration from say 1870 to 1970, a period when wages here were typically higher than those in UK, or of Pacific migration in the 60s and 70s).

And if there has been an increase in the (typically small) net number of US migrants since Trump, well there has been a fall in the net inflow of Brits since the Brexit vote.

trump migration.png

In combination, net arrivals from the UK and US are now about one-third of what we were experiencing from 2004 to 2007.   So much for the pulling power of the “woke paradise” rhetoric.

As just another area where our rules matter quite a lot, the MIBE data says that we now have about 200000 people here at any one time on temporary work visas.    In 2012 that number was about 100000.   That’s non-trivial share of the roughly 500000 growth in population (all needing accommodation etc) in that period.

Towards the end of his article, Dann’s sunlit uplands narrative continues

Now more than ever New Zealand has some control over that destiny.

We can choose to turn the immigration tap up or down with policy settings.

We have choices because we can rest assured that the demand is there.

Except that for most of the last 150 years it has been so.  When you are a relatively rich country –  and one that is not given to coups or civil wars and speaks the global language  – of course people will want to come.  In what we often think of as the dark years of the late 70s and early 80s plenty of people would happily have come, it was just that we chose not to let them (and reasonable people can debate that economic or social merits of that choice).    We could elect the antithesis of Jacinda Ardern and while Colbert, the Guardian and the Washington Post might not like it, it wouldn’t materially alter the broad level of interest in moving from a much poorer country (eg India, South Africa, Philippines) to quite a rich (if remote) one.

I remain convinced that we would be better off economically, and probably politically/socially as well, to be targeting a much lower rate of non-citizen immigration (perhaps 10000 to 15000 residence approvals per annum).  If we did, the population would probably level out near five million.   Without compelling evidence of incipient rapid productivity growth –  of the sort missing for at  least 70 years –  that would play better to the limited economic opportunities in this remote corner of the world.  And, as it happens, it would leave us not far below the size of the median country globally.

As it is, the existing planning ranges for residence approvals expire at the end of this year.  As I highlighted earlier in the year, the government is apparently looking at quite an overhaul of the system (although no hint they were looking at lower numbers).  The number of Cabinet meetings before the end of the year must now be dropping away quite fast.

Rygbi

My 12 year old daughter has been teaching herself Welsh –  a recent birthday present was a good Welsh-English dictionary – we’ve recently been watching a rather bleak Welsh detective series together, and this year she has also become (unlike her father) a bit of a rugby (“rygbi” in Welsh apparently) fanatic so I promised her that if Wales made the World Cup semi-finals I’d do a Welsh-themed post.  That’s economics rather than rugby though.

One of the themes of much modern economics literature is things about cities, location, agglomeration, distance and so on.  According to Eurostat data, London has the one of the very highest GDPs per capita of any region in the EU¹.  The two largest cities in Wales –  Cardiff and Swansea –  are each less than 200 miles from London.  And yet estimated GDP per capita in Wales is only about 40 per cent of that in London and 75 per cent of that in the EU as a whole (71 per cent of the UK as a whole).  Productivity in Wales (GDP per hour worked) might be about that of New Zealand.

And yet Wales has much the same policy regime as London.  Much the same regulatory environment, same income, consumption, and company tax rates, same currency (and interest rates and banks), same external trade regime, same national government (and as I understand it the Welsh regional administration doesn’t have control of very much), and the same immigration regime.  Most of the people are native English speakers (even many of those who also speak Welsh).

Huge populations are free to move to Wales.  There are 66 million people in the UK who face no regulatory obstacles to doing so.  They could set up firms in Wales.  So –  for the moment –  could people in most of the EU, and all legal migrants to the United Kingdom (with no particular ties to any other UK region) could move to Wales.  It isn’t open borders but in practical terms it is much closer to it than almost any sovereign state.

And yet……by and large they don’t.  The population of Wales today is only 50 per cent larger than it was in 1900 and only about 5 per cent of the population is born outside the British Isles.  Here is the share of Wales in the total population of the Great Britain.

wales 1

Wales used to have things going for it: plenty of room for sheep (wool and meat were two of our big exports to the urban population of the UK), the world’s largest slate industry,  and coal (lots of it) and the associated iron and steel (the latter booming from the start of the 20th century) industries.

But not, it appears, very much at all these days.   There is some tourism, some electricity exports (to the rest of Britain) and, of course, a variety of other industries.  It all generates tolerable living standards. albeit supported by significant inward fiscal transfers.  Unemployment is low, and (by New Zealand or London standards) house prices are fairly low –  Swansea (second biggest city) has median house prices around $350000.  But people in the rest of the UK, migrants to the UK, and –  importantly – actual/potential entrepreneurs don’t seem to find it terribly attractive.  Perhaps it would be different if it were an independent country –  the Irish company tax regime is apparently eyed up by some. But as it isn’t, one gets a cleaner read on the pure economic geography effects.

It is interesting to wonder what might have happened to Wales if it were an independent country and, all else equal, had had control of its own immigration policy.  What if they’d adopted a Canadian or New Zealand immigration policy –  or something even more liberal –  20 years ago?   Since there are plenty of places in the world much poorer than Wales (or New Zealand), and Wales itself is a small place, presumably they’d have had no trouble attracting people –  at least modestly qualified people from places poorer, or less safe, again: China, India, South Africa, the Philippines (to name just four significant source countries for New Zealand).   Even if many of the migrants initially saw Wales as backdoor entry to England, if New Zealand’s experience is anything to go by (become a citizen here and you can immediately move to much wealthier Australia) most wouldn’t.  Presumably the Welsh building sector would have been a lot bigger, but it isn’t obvious that many more outward-oriented businesses would have chosen Cardiff or Swansea over London or Paris or Amsterdam, even with the rest of Europe more or less on the doorstep.

Tasmania is another interesting example.  Like Wales, it shares essentially the same  policy regime (taxes, currency, external trade, most regulation) with the sovereign country it is a part of, in this case Australia.  There is unrestricted mobility for people within Australia, and external migrants –  including those from New Zealand –  can as readily settle in Tasmania as anywhere else in Australia. Hobart always looks like a really nice place.

Oh, and the population share of the total country is also small.  But the fall in the population share has been much sharper than for Wales.

wales 2

People –  and firms –  could choose to go to Tasmania but, by and large, they choose not to.  It is, after all, quite a way from Melbourne, and you can neither drive nor take a fairly-speedy train.   And unlike Wales, Tasmania is close to nothing else: Cardiff is much to closer to Dublin, Paris, Brussels, Amsterdam or even Frankfurt than Hobart is to Adelaide or Sydney.  Perhaps even more than Wales, the economic opportunities seem to be mostly in the natural resources (and no big new developments there in recent decades) and a few niche industries that might be there because the founder happens to like living there.   GDP per capita in Tasmania is just under 80 per cent of the whole of Australia average.

One could also do an interesting thought experiment as to what might have happened if Tasmania had been an independent country and had its own immigration policy.  Even had they just adopted the same policy as Australia did, almost certainly their population today would be materially larger than it now is (Tasmania now has three times the population it had in 1900, while Australia as a whole has more like seven times the 1900 population).  Being even smaller than Wales they’d have had no trouble attracting people.   But –  even more so than for Wales –  you are left wondering how many more outward-oriented businesses would have chosen to stay based in little Tasmania (few enough outward-oriented businesses are based in even the big Australian cities).

Are there lessons for New Zealand.  Our population has increased almost sixfold since 1900. In that time, we’ve fallen from (roughly) the highest GDP per capita anywhere to somewhere badly trailing the OECD field –  and maintaining even that standing only by work long hours per capita.

wales 3

It looks great to the strain of “big New Zealand” thought that has been around since Vogel at least.  But to what end, for New Zealanders?

Think of one last thought experiment.  What say we’d agreed a completely common immigration policy with Australia and held that in place for the last few decades?  More or less exactly the same number of people would probably have come to Australasia in total, but what do we supposed would have been the split between Australia and New Zealand.   It seems only reasonable to assume that a much larger proportion would have gone to Australia (than did).  After all, even those who went to Australia had a choice of Tasmania if they wanted cooler climes and a slightly slower pace –  but, to a very large extent they didn’t.  And we know what New Zealanders themselves –  who had ties to this physical places –  were choosing over the last 50 years, as hundreds of thousands left for the other side of Tasman.

And had that happened –  and perhaps New Zealand’s population was 3 million not almost 5 million –  is it likely that any fewer market-driven outward-oriented businesses would be based here than are today.   The land, the water, the minerals and the scenery would all still be there.  And how much else is there?

As a best guess, if by some exogenous policy intervention there had been another two million people –  of moderate skills etc – put in Wales, or another half million in Tasmania, it is difficult to have any confidence that average real incomes in either place would be any larger than they are now.  Most probably, they’d be worse off –  as say, the residents of Taihape probably would be if some exogenous intervention put another 5000 people there.  Having put an extra couple of million people in New Zealand – more remote than Tasmania, much more remote than Wales –  and not seen the outward-oriented industries, based on anything other than natural resources growing – we might reasonably assume we (New Zealanders) are poorer as a result.

Smart people are almost always a prerequisite to high incomes, but globally the top tier of incomes seems to focused on industries located in or near big cities, near big population concentrations, or on (finite) natural resources.   You can earn a very standard of living from finite natural resources –  it is the edge Norway has over the rest of Europe – but it looks pretty insane to confuse the two types of economies (when you have no realistic hope of transitioning from one to the other) and spread natural resource based wealth much more thinly by using policy to actively encourage rapid population growth.

From a narrow economic perspective –  and it isn’t of course, the only one the matters – the best thing for people from a lagging economic performance area is to leave.  It is what people did from Taihape or Invercargill, from Ireland for many decades, and (more recently and on a really large scale) what people did from New Zealand as a whole.   Governments can mess up that picture. In a way the Welsh are fortunate to have a rugby team but not an immigration policy, at least had they had the misfortune to have had policymakers like New Zealand’s.

 

  1.  Technically Luxembourg tops the table, but since a very large chunk of Luxembourg’s workforce doesn’t live there the numbers aren’t particularly meaningful (sensible comparisons need to take account of all the  – typical modest-earning –  support services populations need/use where they live).

America and Argentina

A couple of weeks ago I saw, somewhere or other, a link to a short column (“America’s Argentina Risk”) by the prominent economist Kaushik Basu.

Kaushik Basu, former Chief Economist of the World Bank and former Chief Economic Adviser to the Government of India, is Professor of Economics at Cornell University and Nonresident Senior Fellow at the Brookings Institution.

In his column he tells us that he migrated to the United States in 1994.  But you don’t have to read the column to get the impression that he isn’t overly taken with the direction of his new country –  with rare exceptions (I’ll mention one below), Argentina is usually only invoked these days (indeed for most of the last century) with a “don’t become like Argentina”, or “we are all heading to the dogs, like Argentina” sort of tone.   Of the making of books and articles about Argentina there is, it seems, no end (I have a large pile of them on my shelves).

My own first impressions of Argentina were the military regime tossing dissidents out of planes over the ocean and then the invasion of the Falklands.  Not all its modern history has been quite that bad, but it doesn’t seem to have much to its credit whether on broader governance or economic performance.   It isn’t, say, Somalia or Zimbabwe.  But that isn’t saying much.  On the IMF metrics, Argentina’s real GDP per capita (PPP terms) now slots in between those of Mexico and Belarus.  In another few years even the PRC might have caught up.

It wasn’t always thus.  And that is Basu’s starting point.

During the first few decades of the twentieth century, Argentina was one of the world’s fastest-growing economies. It also had talent flowing in, with more immigrants per capita than virtually any other country. As a result, Argentina was among the world’s ten richest countries, ahead of Germany and France.

To illustrate the Germany and France point

arg 1

France and Germany were big and powerful countries, but they weren’t exactly top of the top tier per capita league tables.  Here is a chart from one of last week’s posts.

1900 GDP pc

And here is how Argentina compares to the United States, from when the annual data begin through to (almost) the present.

arg 2

There is short-term volatility and probably still some measurement issues in the earlier decades (you can safely ignore that blip up in the early 1890s (around the time of a massive credit boom and nasty bust, one that almost brought down Barings Bank)).   Argentina was managing about 80 per cent of the incomes in the US from the mid-1880s until about World War One.  Thereafter, there were really only a succession of steps further downwards every few decades.  These days, Argentina is barely a third of the US. It is sufficiently bad that its real GDP per capita is now only about half New Zealand’s.

As Basu puts it –  with a similar tone to the one I noted earlier

What followed was not so much a recession as a slow-motion slowdown, the scars of which are visible even today. Argentina thus became a cautionary tale of how a wealthy country can lose its way.

Thus far, no real argument.

But according to Basu this is all the result of an anti-immigrant mentality in Argentina since the 1930s and the US risks heading towards Argentina-like outcomes because of Trump “stoking fears of immigrants and foreigners”.  Basu’s is a model in which very high rates of immigration caused Argentina’s decades of quite impressive economic success and, at least by implication, any turning away from such a model threatens all such good outcomes.   (He does mention tariffs in the 1930s once, but clearly doesn’t see that as a major party of the story, since there is no mention for example of Trump’s use of tariffs in his jeremiad about the US).

There is rather a lot that is questionable about this story.

But perhaps most obviously, Basu’s story about the decline in immigration to Argentina was more or less mirrored in the United States.  Here is a couple of charts from a 1990s journal article (summarised here) reporting a historical immigration policy index for a range of countries (not including New Zealand).  Positive scores mean an active bias towards immigration (aggressive promotion, subsidies etc), zero means neutral (in this case, open doors but no active policies one way or the other) and negative scores involve increasingly intense restrictions.   Here are the charts for Argentina and the United States.

On this metric, policy in the US was consistently less encouraging than that in Argentina, Argentina’s immigration policies had become progressively less positive even in the decades of greatest economic success, and the tightening in policy from World War One was greater in the US than in Argentina.

The slowdown in immigration to Argentina was real.  Here is the foreign-born share of the population

250px-Non-native_population_in_Argentina.png

And in the United States in the 1970 census the foreign-born share of the population was just under 5 per cent.

Here is a chart of migration to the US

US migration.png

Net migration to the US plummeted after World War One and remained low for decades (and if you are impressed by the subsequent rise, recall that US population now is more than three times what it was in 1914).

And yet…..was it not in the decades after World War One that the US continued to move to its leading position in the world economy.   Were not the 1930s –  for all their other problems –  the decade in which the US recorded the strongest TFP growth ever (on that measure, the 1920s was the second fastest)?

I am not, repeat not, arguing that markedly slowing immigration to the US was in any sense the cause of those US economic outcomes, but it is somewhat staggering to find a leading economist suggesting that (lack of) immigration was a major explanation for Argentina’s decline when, writing about the US, he pays no attention to the sharp decline in US immigration at much the same time, when the US went on to be the only New World economy still in the very top tier of economic performers today (and even today –  whether under Bush, Obama or Trump – immigration to the United States is pretty modest in per capita terms).  Here is another chart from last week’s post.

GDP phw 2018

Whatever you might think of Trump –  and I’m no fan on any count –  it is hard to see the US yet being pushed down the ladder.

(Argentina’s real GDP per hour worked is 27.)

As it happens, Basu also appears to be unaware that Argentina now has one of the most open immigration policies of any country in the world.   It is all laid out here.   It is pretty easy to migrate lawfully and as for those who arrive unlawfully there is no discrimination re the provision of things like health and education services, and it seems that you have to do something really rather bad to be deported, and the government is keen to offer opportunities to illegal migrants to regularise their status (and stay).  As the open borders advocates who wrote the description note

“Argentina does not have truly open borders, but it comes remarkably close”.

This regime has been in place for 15 years now.

And yet very few people migrate to Argentina.  An OECD study last year looked at the role of immigration in Argentina, but noted

The number and characteristics of immigrants in Argentina suggest that their current economic impact is positive, but not large. As immigrants represent less than 5% of the population, their role in the country’s economy is certainly less pronounced than it was during the first half of the 20th century.

Net migration to Argentina remains exceedingly low.  I’m not sure why –  there are worse places in the world –  but a reasonable hypothesis might be that migrants flock towards success (which is a pretty sensible approach for them and their families) rather than being determinative of that success.   Argentina hasn’t found the model of economic success.   (It is an interesting question why, say,  economic migrants from Africa don’t try Argentina, but then one might reasonably wonder whether the liberal approach (whether to residence or welfare entitlements) would last long if there really were such a substantial influx.)

One could take various tacks from here.  One could illustrate the way most –  but not all – of the more successful economies in the last century haven’t been ones that consistently encouraged large-scale immigration.  Or that flat or even falling populations and/or absence of much immigration, don’t seem to have held back the various countries (from South Korea, Malaysia, the Baltics, Romania, Chile, Uruguay that 15 years ago had similar average levels of productivity to Argentina –  of those countries, only Venezuela and Mexico have done worse than Argentina.  Even Russia –  also similar average productivity-  has done better.

And there are various other questionable bits in Basu article – eg he seems to be championing holding up global interest rates. But I think I’ll leave the article here.  There is much to dislike about Trump, much to worry about in the wider world, but the economics behind the claim that the US is at risk of heading Argentina’s way just don’t seem to stack up.