Easy to do business, bad place for business

I noticed the other day a tweet from the chair of the Productivity Commission calling attention to the fact that New Zealand once again tops the World Bank’s ease of doing business index.  The top five this year were New Zealand, Singapore, Denmark, Hong Kong, and South Korea.

New Zealand has ranked at or near the top of this index for some time (in fact, ever since it was created about 15 years ago).  From their country note on New Zealand these charts show New Zealand’s data in more detail (the first showing our rank on individual components, and the second our absolute scores) .

ease of doigng business

No doubt there are people in MBIE who know all about why we score poorly on some of these sub-indices, and what could or should be done to improve (and even perhaps, on occasion, why what the World Bank is measuring isn’t necessarily what they think it is).

But New Zealand has consistently scored well on this measure.   That is noted regularly in analyses of our economic performance.  Generally, we want to have a good regulatory etc environment in which it isn’t difficult for someone with an idea, someone spotting an opportunity, to set up and run a business.   I haven’t dug more deeply into the index to understand why, but I was interested to see our one perfect score was on “getting credit” –  this being about business credit, not housing.

Scoring highly in this index is almost certainly better than scoring poorly.  Contrast the top five with the bottom five countries; Libya, Yemen, Venezuela, Eritrea, and Somalia.   But if there is some causation at work in the implied direction (improve your score on this index and your economy is likely to improve) there is probably also some (weaker) causation in the opposite direction: rich and well-governed countries are likely to score better on an index that often looks at sophisticated features of a regulatory system.

Whatever the aggregate story, there is no simplistic one-to-one mapping from a good score on this World Bank index and better economic performance.  New Zealand is the standout illustration of that point.

In this chart, I’ve shown labour productivity (real GDP per hour worked) levels and growth rates for the top 5 countries for the decade from 2007 to 2017, using the most recent version of the Conference Board’s database.  If the benefits of a high “ease of doing business” score show up anywhere in official data it should be here.

ease of doing bus productivity

South Korea wasn’t in the top five a decade ago (in fact, it was only ranked 21st).  Probably the various reforms they’ve done over the last decade, which have improved their score in the World Bank index, have contributed to productivity growth.  That is part of how they have been catching up and converging.

But what I found interesting about the chart is that –  for this small group of countries/territories – the productivity growth pattern has been about what you would expect.  The countries with the highest initial levels of labour productivity had slower growth rates than those with lower initial levels of productivity.  The exception, of course, is New Zealand.

Take a bigger sample and there will be other exceptions (the UK, for example, ranks number 9 and –  after a good couple of decades, but only middling levels of advanced country productivity –  has had a really poor productivity growth performance in the last decade.    But my focus is New Zealand.

We score quite well on all manner of such international surveys.  Take skills for example.  A year or two back, the OECD adult skills data suggested New Zealand workers  were among the most highly-skilled in the OECD.    And yesterday I noticed a report suggesting that New Zealand was in the top 3 countries in the world, behind Finland and Switzerland.

Again, it is presumably better to be near the top of such a list than at the bottom

The WEFFI report, by the Economist Intelligence Unit, looks at policy initiatives, teaching methodologies and the socio-economic environment of 50 countries. It found the five worst-ranked countries to be Egypt, Nigeria, Algeria, Iran and Pakistan.

But it doesn’t seem to bear any relationship to getting to the bottom of New Zealand’s specific economic underperformance –  not just over the last decade, but over most of the last 70 years.

One of the odder features of New Zealand public service life is the number of top-tier public servants who now seem to run Twitter accounts and disseminate material through those accounts.  I’m old-fashioned enough to think that senior public servants shouldn’t really be seen or heard except by Cabinet ministers (to whom they give their advice, and implement decisions taken by political masters).  More pointedly, public servants’ Twitter accounts are at grave risk of being, in effect, party political broadcasts for their masters since senior public servants can’t really be out openly disagreeing with the Minister so anything that is tweeted is not going to upset the Minister or his/her office, and yet it bears the imprimatur of a supposedly-neutral public servant.

On the other hand, these accounts can shine a little light on what top public servants are up to and what causes they are championing.

One of the tweeters is the (fortunately soon to have departed) Secretary to the Treasury, Gabs Makhlouf, who has spent the last eight years presiding over –  perhaps even inspiring –  the degradation in the capacity of what should be the government’s lead economic advisory agency.  In his most recent tweet a few days ago he linked to a piece by the (often stimulating) academic economist Dani Rodrik.    There is a lot to disagree with in Rodrik’s piece, but I just to quote his conclusion.

…economists are well positioned to develop institutional arrangements that go beyond what already exists, their habit of thinking at the margin and sticking close to the evidence at hand encourages an aversion to radical change. But, when presented with new challenges, economists must envision new solutions. Imagination is crucial. Not everything we try will succeed; but if we do not rediscover the value of FDR’s credo – “bold, persistent experimentation” – we will certainly fail.

One can only assume that Makhouf agrees.   But there is just no sign of The Treasury under his leadership having seriously re-thought the New Zealand productivity failure.   If there is any bold thinking (and here “thinking” would be a polite description) it is around avoiding confronting that failure at all, chasing off after the insubstantial living standards framework and the associated “wellbeing Budget”. Feel better, I suppose, even if we can’t do better.  It is perhaps great as a political distraction  –  politicians do that sort of thing –  but we should expect something much better from a premier economic agency than turning away from the most striking economic failure in our history, and playing distraction in the hope no one will notice.  In principle perhaps the two –  “wellbeing budgets” and some serious fresh thinking on productivity, specific to New Zealand –  could both be done, but (a) resources are limited and (b) nothing in any Makhouf speech has ever really suggested a desire, or an ability, to confront the specific productivity challenges here.   One can only wistfully hope –  with no reason for optimism, given who (SSC and Grant Robertson) does the selection –  that his successor will be different.

As for my own alternative story?  I don’t have any particular problem with the rankings people like the World Bank come up with –  from a regulatory perspective doing business in New Zealand probably is easier than in most places – but those indexes just don’t shed light on the salient issues for New Zealand.  Citing them, as anything more than a stepping off point  – “despite this high ranking…..” – is akin to looking for lost keys under the lamppost because that is where the light is, rather because there is reason to suppose it is where the keys are.   From a regulatory perspective, New Zealand probably isn’t a bad place to do business –  although there always many things that could be improved –  but from a more fundamental perspective New Zealand –  most remote significant inhabited land mass on the planet –  looks like a pretty awful place to do business from, in anything much other than utilising the limited natural resources.    Were it otherwise, we’d have seen more investment, more exports (and imports), more globally-oriented firms basing themselves here.

Against that backdrop, actively pursuing an ever-bigger population through a large-scale immigration policy that is championed across the bureaucracy –  including by Makhlouf’s Treasury –  is fundamentally damaging to the longer-term economic interests of New Zealanders as a whole. (And, as I’ve noted, many times before that is so whether the migrants  –  mostly decent and well-motivated people – come from Brisbane, Bangalore, Brahmanbaria, Buenos Aires or Birmingham.)  Unless and until our political leaders are willing to confront this – and at present all parties in Parliament are signed on to one of the largest (per capita) immigration programmes in the world, there is very little likelihood of those high rankings –  ease of business, teaching skills, or whatever –  translating into material living standards to match those in other countries at or near the top of these indices.

Australia faces many of the same issues New Zealand does in this regard, but the economic constraints are –  at least temporarily –  less binding because of the newly-developed abundant mineral resources they are able to bring to market.  It was interesting to read in The Australian this morning that the government there is planning to cut their permanent migration intake.   The reported number would still be high by international standards, but in per capita terms would be only about three-quarters of the target in place in New Zealand –  and that in a country with more opportunities and more wealth.   Of course, the current government is almost certain to lose this year’s election –  and some other aspects of the reported package are just daft (trying to compel immigrants and even students to the regions – so it may never happen.  But it suggests a more serious willingness to engage than has been evident from either main party in New Zealand.

Continuing to look under the lamp post, rather than look for actual diagnostic answers and policy solutions, is just a recipe for keeping on failing economically.

 

 

Working hours

The other day, for some reason, I was looking back at the records of this blog, and got curious about which posts had had the most specific views.  It turned out that for some reason (I think it got linked to overseas) this early post – about how New Zealand’s economy had done relative to other advanced countries since 2007 – was the “winner”.  Rereading the post, I lit upon this chart

hoursanglo

As I noted then

Hours worked are an input (which comes at a cost) not an output, so higher hours worked aren’t automatically a good thing.  There are good dimensions to it, if (for example) people are coming off long-term welfare back into the workforce, or older people are keen and able to stay in the workforce.  Hours worked per capita also gets affected by different demographic patterns –  they will be lower in countries with lots of under-15s or over 70s.  But, equally, part of the story of New Zealand in the last 25 years is that we have managed to limit the deterioration in our GDP per capita, relative to that in other countries, by working more.  Productivity would be better.

Over the full period since 1990, here is the change in hours worked per capita for New Zealand and the other Anglo countries, countries with reasonably similar demographics to our own.

1990 was the year just prior to a recession in many countries, including New Zealand, and is a not uncommon jumping-off date for looking at the experience of New Zealand since the reform era.

Since the post was almost four years old, I was curious whether anything much had changed.     Here is the same chart, using data from the Total Economy Database maintained by the Conference Board.

hours per capita 2019

Something of a recovery in Ireland, but otherwise not much.     The difference between New Zealand and the other countries in the chart isn’t mainly a cyclical story, but even in the last decade a larger proportion of New Zealand’s per capita GDP growth has come from working more hours (per capita).

hours per capita 2019 2

(Interestingly, the UK labour productivity growth record over that decade has been even worse than that of New Zealand.)

I had a quick look at a wider group of advanced economies (OECD + EU + Singapore and Taiwan).   For the full period since 1990 there isn’t complete data for all countries (gaps mostly the former Communist countries of central and eastern Europe), but of the 32 countries for which there is data, hours worked per capita dropped by 1 per cent for the median country (up 16 per cent in New Zealand).    For the more recent period, where there is full data, the median country spent 2 per cent fewer hours per capita working, while in New Zealand median hours per capita increased by 2 per cent.

(For those interested, there is a group of countries  (Singapore, Hungary, Israel, Chile, Mexico, Poland) where hours per capita have increased materially more than in New Zealand over the last decade.)

I am not trying to draw any particular policy conclusions from these numbers, just to highlight them.  And it is not as if New Zealanders had been leisured people at the start of the period and were only now getting back to advanced country norms.  In fact, by 2017 we had among the highest hours worked per capita of any of the 40+ countries in my sample (Singapore is off-the-charts high, and South Korea comes second).

As a reminder, hours worked are an input not an output.  High (or increasing) hours worked is generally not some achievement to be celebrated, although there can be some caveats to that.

If the unemployment rate had been particularly high at the start of the period, one might genuinely welcome it dropping. Involuntary unemployment is, almost by defintion, a bad thing.  But when my comparisons started (in 1990) New Zealand’s unemployment rate was about the middle of the pack for the Anglo countries in the charts (by 2007 we had the lowest unemployment rate of any of them).

If you are uneasy that the welfare system accommodates too many people not working who should be providing for themselves, then successful welfare reforms might increase average hours worked per capita and that might then be regarded as a good thing –  whether fiscally, socially or whatever.  The proportion of working age adults on welfare benefits (ie including the unemployed) did drop quite bit in the 1990s and early 2000s.   But it was 10 per cent in 2007 and it was still 10 per cent in 2018.

Tax system provisions (or the interaction with pension rules) can also deter people from working when they might otherwise choose to.  New Zealand has a public pension system that specifically does not deter people from staying in the workforce after age 65 if they so prefer, and between 1990 and 2007 we increased the NZS eligibility age by a whole five years.  Personally, I think that was a desirable change, but the fact remains that high and rising hours worked per capita has not been a complement to some stellar productivity performance and improving opportunities.

In aggregate, more New Zealanders have been working more hours to –  in effect –  offset some of the relative income loss that our disappointing productivity performance would otherwise have led to.    As a country, our tenuous grip on upper-income status (really not much more than upper middle-income these days) is sustained only by working ever harder. That might be, in some sense, an appropriate second-best (for the individuals making those choices, reluctantly or otherwise). It is not obviously any sort of first-best outcome.

Investment,the capital stock and some not-pretty pictures

(For anyone who followed a link looking for my post on the National Party and the PRC, it is here)

A few days ago one of my posts included the chart showing that there has been very little labour productivity growth in New Zealand for most of this decade.  A commenter asked

A question for you on the productivity flat line. Is it reflective of levels of investment? How does the productive capital stock per worker look over the last decade?

And so today I’ll try to step through some of the data that sheds a bit of light on that question.  As background, it is worth bearing in mind that for decades New Zealand business investment as a share of GDP has been relatively low by OECD country standards, especially once one takes account of our relatively fast population growth rate.  The biggest exception was that outbreak of government-inspired wastefulness, Think Big, in early-mid 1980s.  Not all investment captured in the national accounts statistics is “a good thing”.

First, some flow data.  Here is investment as a share of GDP (using quarterly seasonally adjusted data).

investment 1

Lots of houses repaired (Canterbury) and built (nationwide) but once you set residential investment spending to one side. the remaining investment as a share of GDP has been very subdued indeed, not really much higher than during the recession at the end of last decade.

There isn’t an official published series of business investment, so I use the same proxy the OECD does: start from total investment and subtract residential investment and government investment spending.   There is a small overlap there (some government residential investment spending), but with that caveat noted here is the proxy for business investment as a share of GDP.

investment 2

The only times this business investment proxy was lower than at present was in the depths of the two serious recessions (1991 and 2000-10).   And yet over recent years, our population was growing consistently faster than at any time in recent decades.  Businesses tend to invest when there are prospective profitable opportunities –  especially when financing conditions aren’t unduly constraining.  Presumably, those opportunities just haven’t been there in New Zealand in recent years.

My commenter’s question was about capital stocks.  Statistics New Zealand publishes net (of depreciation) capital stock data.  The upside is that there is a good long time series, but the downside is that it is annual data so that the most recent observation is for the March 2018 year.

Here are a couple of stock series, expressed as percentages of nominal GDP.

investment 3 (I don’t know what accounts for the sharp lift back in mid-70s, but you can see the Think Big effect in the early 80s.)

Those were nominal (current price) series.   If we want to look at the capital stock relative to real variables (eg hours worked) we need to use the constant price data instead.  Here is the real capital stock, ex housing, per hour worked.

investment 5

I’m not quite sure what to make of the entire chart – I’m a little surprised there wasn’t more growth in the 1990s –  but for the more recent period it is certainly consistent with the (very weak) productivity picture.

Perhaps as sobering is this simple chart, showing the percentage increase in the real capital stock from the year to March 2008 to the year to March 2018.

investment 7

Pretty significant growth in the non-market component (the bits not subject to market tests, either at the evaluation stage or in operation, and basicially set by government –  central or local) relative to the growth in the market sector non-housing capital stock.  Firms operating in more-or-less competitive markets just don’t seem to have seen the remunerative projects to invest in.   That isn’t in any fundamental sense the “cause” of our really weak productivity growth, but it will be a reflection of the same factors.

On my telling, the persistently high real exchange rate is, in turn, a significant proximate part of that story.

“This country has prospered over the past decade, while other economies have suffered”

Or not.

The title to this post was taken from the latest column from veteran political journalist Barry Soper.  Apparently he had had some readers get in touch, not entirely convinced by his PRC-related articles earlier in the week.

They all ignore the fact that this country has prospered over the past decade, while other economies have suffered.

The Key Government’s management of the global financial crisis has been lauded but without the free trade agreement, signed in the Chinese capital as the final act of the Clark Government, this country wouldn’t be where it is today.

The puerile keyboard warriors’ bile is too vile to repeat but it seems to be based on envy, that the Chinese, after generations of deprivation, have shown the world they can compete and are a force to be reckoned with.

I’m not sure quite what he bases these assertions on (although it is the sort of line that less well-grounded champions of Beijing, including former Foreign Minister, Murray McCully, have repeatedly tried to run).  “Be grateful, peasants” seems to be the tone, for the CCP in Beijing has graciously bestowed its bounty upon you.

I don’t want to waste much time on the alleged PRC success story.    When you do so much damage to yourself, and then stop the self-destruction, of course you’ve got plenty of ground to make-up, and with half-decent policies you can do some of that quite quickly.   Here are the latest Conference Board productivity estimates.

China GDP phw feb 19

The PRC……not even half the levels of Korea or (decades of underperformance) New Zealand, not a third of Taiwan or a quarter of Singapore.     Who could possibly envy that sort of performance?  There was no obvious reason why China could not have matched the performance of Korea, Japan, or Taiwan.  Except that they chose to adopt, and continue to run, a system that consistently produces poor economic results.

But what I was really interested in was the assertion that New Zealand has had a really good economic performance over the last decade “while other economies have suffered”.  I guess if Greece, or even Italy, is your benchmark it isn’t too far wrong.  But then almost everyone does better than those troubled euro-crippled economies.

One comparison I like, and which I’ve run before, is between New Zealand and the United States.   Were there anything to the “we owe such a debt to Beijing, and have done so well ourselves” story, an obvious place to look might be a comparison with the United States.  After all, the US was the epicentre of the financial crisis itself, their central bank got to the limits of what it could do, and no one thinks Beijing someone “saved” the US.   And yet here is how real GDP per capita compares across the two countries since late 2007, when the last recession began.

US and NZ comparison GDP

We’ve mostly done very slightly better than the US over the decade or so, but there really isn’t much in it.   Certainly not a case of the US suffering and us “prospering”, whether thanks to Beijing or any other cause.

And to the extent we’ve done a touch better, it certainly isn’t reflecting stronger productivity growth.  The data are indexed to 100 in 2007.

US nz productivity

It isn’t just an us versus the US comparison either.  Over that decade, real GDP per hour worked rose by 4.4 per cent, but in the median OECD country productivity growth was 8.9 per cent.

And if Beijing and the (so-called) free trade agreement were the source of any special New Zealand prosperity, exports might be an obvious place to look.  Except that over the previous decade New Zealand exports actually fell a little as a share of GDP.  In the United States, and in all but a handful of other OECD countries, exports became a larger share of the economy.

Even on more purely cyclical measures, New Zealand still doesn’t stand out (at least on the good side).  The unemployment, for example, has come down a long way, but it is still quite a bit above the lows reached before the recession (at a time when demographics will be tending to lower the “natural” rate of unemployment).    In the United States, by contrast, the unemployment rate is below pre-recession levels. That is also true across the G7 as a whole, the EU as a whole, and the OECD as a whole (individual bad euro-area countries notwithstanding).

And if you don’t like the idea of comparing against the US –  even though it was the centre of crisis, and doesn’t owe anything in particular to Beijing –  here is how we’ve done against another group of countries, each now with productivity levels similar to those in New Zealand (and few doing much trade with the PRC).   Since all these countries started (in 2007) with productivity well behind global frontiers, all should have been able to do okay even if productivity growth at the frontier (eg US and northwest Europe) slowed.

small countries

Many did pretty well.  As for us – Beijing (alleged) beneficence notwithstanding –  either worst or second worst depending on your preferred measure.

As I noted earlier on, there are countries that have done a great deal worse than us.   But the suggestion that we have “prospered” over the last decade –  in some way materially outstripping the rest of the advanced world –  isn’t just a myth. It is worse than that.   And the people who run the story, whether as senior journalists or senior politicians should know better.

Countries mostly make their own prosperity.  We once did –  those decades when we really did lead the world.    We could again, although that might involve facing facts.  But these days politicians and their acolytes in the media seem more interested in playing distraction; in this case continuing to corrupt our system, supported by motivated fantasy stories about our (alleged) success and our (alleged) debt to Beijing.

 

1984 and all that

Eric Crampton of the New Zealand Initiative yesterday sent out a couple of tweets drawn from some pages a reader had sent him from Wellington’s evening newspaper of 18 July 1984.    The general election had taken place on the 14th and the foreign exchange market had been officially closed for a couple of days as everyone awaited resolution of the political disputes around who would take responsibility for the by-now-inevitable devaluation.  The outgoing (but still caretaker) Prime Minister finally buckled and a 20 per cent devaluation was announced on the 18th.   It marked the beginning of almost ten years of pretty thoroughgoing economic reforms, the legacy of which (good and ill) is still with us today.

Anyway, here were Eric’s tweets

(Click on the right-hand side of the first page and you can read a “fake news” story from 1984, how the Evening Post fell for a Michael Cullen hoax press release.)

Eric’s tweets sent me down to the garage and my box of old newspapers from (in)auspicious days.  I didn’t have that particular one, but I did find one from a couple of days earlier.  In that paper there was an advert for a competition offering as a prize a microwave with a retail value of $1495 –  $4800 in today’s money.   Whether you run with Eric’s microwave advert or mine, there is no doubt some things are dramatically cheaper (in real terms) than they were then.  Of course, for many technology items that will be true everywhere; it isn’t primarily a New Zealand story. Actually, flicking through that old paper it was the car prices that surprised me more: a two-year old Ford Cortina advertised for $18995 ($61000 in today’s money).   The New Zealand car assembly industry then really was very heavily protected.

Eric notes “we forget too quickly what a mess the place was in”, which reads a little oddly when he did not, I gather, come to New Zealand for another 20 years.  But setting that quibble to one side, and taking on board my own youthful enthusiasm for most or all of the reforms being done at the time (most of which still seem right and/or necessary), I think that with the benefit of hindsight the picture is rather more mixed than perhaps Eric suggests.

On the macro side, the problems were all-too-evident.  Fiscal imbalances were large and the balance of payments current account deficit was large.  If debt levels (government and external) weren’t that high by the standards which too much of the advanced world has since become used to, they were a huge departure from New Zealand’s post-war experience.  Inflation was partially suppressed by a series of freezes –  although Muldoon had lifted the price freeze a few months earlier –  supported by a series of interest rate controls, which were undoing the partial financial liberalisation of the 1970s.   Outside the control of any government, the terms of trade had been trending down for 20 years, and New Zealand material living standards and productivity had been falling behind those nearer the upper ranks of the OECD group.   We were still in the construction phase of that disastrous set of wealth-destroying government sponsored energy projects known as “Think Big”.  And if protective barriers were slowly being removed –  for example, CER was inaugurated the previous year –  it was a slow and halting journey at best. High protective barriers not only made many goods unnecessarily expensive to New Zealand consumers, but acted as a heavy tax on actual and potential New Zealand exporters.  Much about the tax system was in a mess.

And yet, and yet.

The unemployment rate in June 1984 (from Simon Chapple’s work backdating the HLFS) is estimated to have been 4.4 per cent.  Right now it is 4.3 per cent –   and 4.3 per cent is well below the average for the last 20 years, while the 1984 was well above the comparable average.

Or house prices.  I started looking to buy a first house a few months later, in early 1985.   Single 22 year olds could do that sort of thing in those days.  Yes, concessional Reserve Bank staff mortgages would have helped, but I recall looking at various houses in Island Bay and Newtown for about $80000.  That’s less than $250000 in today’s money.   The same houses now look to be perhaps $750000.    That mess was created by some of the post-1984 reforms.

Or productivity.  In that old newspaper I dug out of the garage I found a post-election op-ed written by Len Bayliss, then a leading New Zealand economist.  Among the five major economic challenges he identified for the new government was this

Fifth –  extremely poor productivity growth, and more recently GDP growth, have been the subject of a series of economic reports since 1962.  As a consequence of this poor performance, other countries’ living standards have risen more than New Zealand’s.

The worst single period for productivity growth in New Zealand history was in late 1970s, but even 35 years ago people knew that the problems were much more deep-seated.   Unfortunately, of course, the productivity gaps are now larger than they were in 1984. On OECD estimates of real GDP per hour worked, in 1984 we were close to the levels in Iceland, Ireland, and Finland.  These days, we are far behind each of them.   We were only about 10 per cent behind the UK in those days, and now they are about 30 per cent ahead of us.    Things might not be in such a “mess” nowadays –  disorderly macro imbalances and weird interventions –  but the economic bottom line still makes sorry reading.   No champion of change in 1984, told all the policies that would be adopted and the huge measure of macro stability achieved, would have predicted that we’d have drifted further behind by 2019.

Perhaps especially if they’d been given the additional information of what would happen to New Zealand’s terms of trade over the subsequent decades – the turnaround (outside any government’s control) starting just a couple of years after the reform period got underway.

TOT annual

The devaluation in July 1984 was a huge part of the economic narrative at the time.  There was a strongly-held consensus, among local officials, local commentators (it is explicit in that Len Bayliss article) and international agencies, that the New Zealand real exchange rate had become persistently out of line with fundamentals, and that a substantial and sustained depreciation would have to be a significant part of putting the economy on a better-footing.   It was, among other things, a repeated and urgent theme of the numerous meetings I attended, as a junior note-taking official, in late 1984.

And here are the two OECD measures of New Zealand’s real exchange rate.

RER 84

I’ve marked the 1984 devaluation.  In real terms, it proved very temporary indeed.    It would be great if really strong and sustained productivity growth had supported a structural increase in the real exchange rate.  But that, of course, hasn’t been the story.  Once we got through the disinflation period –  when it was reasonable to expect some temporary periods with a high real exchange rate –  it seems to reflect the same sort of domestic demand pressures that have given us persistently among the very highest real interest rates in the advanced world.

And then there is foreign trade.  A narrative at the time was the heavy protection had resulted in New Zealand’s foreign trade shares of GDP falling, or failing to grow.  The overvalued exchange rate (see above) further impeded the prospects of potential export industries, probably only partly offset by the various (highly questionable) export incentives and subsidies.

And yet

trade shares feb 19

I’ve circled the data for the years to March 1984 (latest actuals when the devaluation happened) and for the year to March 1985.  There was, as you would expect, a short-term boost to the nominal trade shares on account of the devaluation, but of course that didn’t last.  But if we take the subsequent 33 years together, there is just no sign of foreign trade having become more important to the New Zealand economy  (as it happens, exports as share of GDP in the year to March 2018 were almost identical to those in the year to March 1984).  Only one other OECD country has not seen the export share of GDP increase over that time.

I don’t want to kick off a futile debate about whether the reforms should have been done.  I’m still squarely in the camp that most should have been.  But, equally, nothing is gained by pretending to a degree of economic success we haven’t achieved.   We’ve shared –  with every market economy (and probably the non-market ones too) –  the rapid declines in the cost of various technology goods and services.  All of our own doing, we’ve managed to bring about, and sustain, an impressive level of macroeconomic stability.   But, equally all of our own doing, we’ve managed to rig the housing market against the current (and next) young generation, and despite reducing or removing all manner of protective barriers (and even getting other countries to do something similar for stuff New Zealand firms exports), foreign trade shares are no higher now than they were on that momentous day in 1984.  And, as for productivity, poor –  and rightly alarming –  as it was then, all indications are that it is worse now, and there are no signs of  those gaps beginning to close.

The New Zealand economy isn’t in some disorderly mess at present.  But if it is perhaps more orderly, it is failing nonetheless.

The PM’s economic plan

I read the Prime Minister’s economics speech yesterday. I wasn’t impressed.  There is simply no sign that she cares one jot about New Zealand’s decades of underperformance or that she has any sort of analytical framework (herself or from her advisers) for even thinking about the issue.  It may be repetitious to say so –  as a reader this week suggested –  but the utter unseriousness about our ongoing relative decline really matters; perhaps not directly or much for many people my age or older, but for our kids, and their future kids.  Including for the question of whether the next generations even stay, rather than joining the million or so New Zealanders (net) who’ve left over recent decades.

She continues to perpetuate what are little more than lies

“…on key economic measures the Government is delivering”.

That would be the economy with no productivity growth, with foreign trade flat or falling as a share of GDP, and with houses that are increasingly unaffordable to younger generations.  Some delivery.

She runs a fairly conventional story about risks in the global economy, and keys off a line from the IMF Managing Director suggesting that “policymakers need to make greater efforts to prepare for the slowdown”, noting that “that is a message we are heeding”.

That’s why our economic plan includes the following key planks:

  • Doubling down on trade and broadening our trading base to protect our exporters and economy
  • Reform of skills and trade training to address long-term labour shortages and productivity gaps in the New Zealand economy, and to make sure we are prepared for ongoing automation and the future of work
  • Changes to tax to make the system fairer
  • Addressing our long-term infrastructure challenges
  • Transitioning to a sustainable carbon-neutral economy
  • And of course investment in wellbeing, because this is inextricably linked to our economic success too.

Not one of those strands really has anything much to do with coping with a cyclical downturn (getting onto the Reserve Bank to deal with interest rate lower bound might,or even arguably something around fiscal policy), but even if one takes them as the components of a longer-term economic strategy it is underwhelming at best.

Take trade, nothing the government is doing (and there is a page of it in the speech) is any different than the previous government was doing.  You might approve of that approach or not, but the point is that during the term of the previous government foreign trade fell as a share of GDP.  The latest Treasury forecasts, prepared on current government policy, didn’t suggest any reversal.

No one supposes that a capital gains tax is going to make any material difference to the productivity/efficiency of the New Zealand economy.  As the Prime Minister says, the goal there is “fairness” –  which might be a perfectly reasonable argument, but there is no credible story in which it makes us in aggregate materially better off as a country.

Despite its appearance in the list, there was nothing in the speech about those “long-term infrastructure challenges”.  Lots has been spent on infrastructure over the last 15 years – when productivity growth was feeble, tailing off to non-existence, so why should we (or her audience) think things will be different now.  And is there any sign of using the infrastructure we already have more efficiently –  eg congestion pricing in Auckland (and perhaps Wellington)?

As for the carbon-neutral economy, that might on some tellings be a worthy or even noble objective.  But the government’s own consultative document last year reported estimates that achieving that goal would cost anything between about 10 and 20 per cent of 2050 GDP.   Some people dispute those estimates, but I’ve not seen any credible story in which New Zealand’s aggressive pursuit of carbon-neutral would make us economically better off.

As for “investing in wellbeing”, I guess she has to include at least one reference to this vacuous project. But it, after all, involves a de-emphasis on economic performance, not lifting that performance.  In discussing wellbeing in her speech, she is openly complacent about GDP growth, rather than giving any sense that we really need to be doing a lot better (productivity etc) if many of the other aspirations society has are to be met.

Which brings us to skills, which gets 2.5 pages in the speech, apparently a prelude to whatever specific reforms are being announced next week.  Labour has long been keen on pushing the line that a significant part of lifting productivity in New Zealand involves lifting “skills”.  I guess it sounds good –  whether workers or firms, who is likely to object.

Except, of course, that OECD cross-country comparative data suggests that adult skills levels in New Zealand are already among the highest in the OECD.   I wrote about this in a post a couple of years ago, and here are some of the charts and text.

Here is how our adults scored on literacy.

oecd literacy 2

And numeracy

oecd numeracy

And on “Problem-solving in technology-rich environments”

oecd problem solving

Looking across the three measures, by my reckoning only Finland, Japan, and perhaps Sweden do better than New Zealand. Perhaps there is something very wrong with the way the survey is done, and it is badly mis-measuring things, but those aren’t usually the OECD’s vices. For the time being, I think we can take it as reasonably solid data. And the broad sweep of the cross-country results makes some sort of rough sense: typically the poorer countries are to the left of the charts (relatively less highly-skilled).

And when the OECD lines up the skills scores against the productivity data one of the largest gaps (lagging productivity) is for New Zealand   The cross-country scatter plots don’t show a tight relationship by any means, but they do tend to suggest that the skills and talents of our people aren’t what holds New Zealand back.

Sure, it looks as though our schools could usefully focus on teaching maths better, and no matter what the aggregate scores some individuals will almost always lag behind.  But as some sort of centrepiece of an “economic plan”  skills just isn’t an obvious place to start.   The Prime Minister and her advisers might find it more rewarding to start with areas in which New Zealand more visibly stands out: persistently low rates of business investment, persistently high real exchange rates, and persistently high (relative to other countries) real interest rates.  But I guess confronting some of those stylised facts might raise questions about economic policy over recent decades that they would rather avoid.

In the midst of her section on skills, these sentences caught my eye

Take the building sector for example. We know we need more tradies and they are just not coming through fast enough.

That’s absolutely no reflection of the people who are involved in the sector – far from it. What it is, is a damning statement that the system has been left to drift, to muddle through.

Perhaps, but count me a little unconvinced.  Here is Quarterly Employment Survey data on construction sector jobs as a share of total filled jobs, back to 1989.

construction jobs.png

There are roughly twice as many people employed in construction as there were in 2002, and the increase in the share of the total workforce is really huge.   I’m not convinced it is a particularly helpful sign that 9 per cent of our total workforce has to be employed just building houses and shops for each other, but it is what happens when policymakers have turbocharged population growth.  Perhaps more relevantly, the construction sector is highly cyclical –  globally –  and if I were counselling a young person about possible career options I’d be suggesting that a construction sector workforce as high as 9 per cent of the total isn’t that likely to last for long. But no doubt the Prime Minister sees things differently.

If there is any sign of a plan, it isn’t one that is going to do anything to lift our economic performance, in the short or longer-term.   All indications are that the Prime Minister doesn’t care.  More worrying is the possibility that neither do many of her audience –  comfortable successful business figures, mostly doing well out of an economy skewed increasingly inwards.

Someone needs to cut through the indifference of the political and economic establishment.  But it won’t be the Prime Minister’s party –  or her allies or the National Party.

Bridges and the State of the Nation

I mostly went looking for the text of Simon Bridges’ “state of the nation” speech yesterday to see if there were any signs, at all, that the Leader of the Opposition was going to confront New Zealand’s appalling productivity growth performance.   He had, after all, been Minister of Economic Development only 18 months ago.  There weren’t.

I’ll come back to economic performance and economic policy later, but the rest of the speech had some interesting snippets.

There was a long section on law and order.  There was plenty of rhetoric but one line in particular caught my eye

I am determined that under the next National Government, New Zealand will become the safest place to live in the world.

Wow, I thought, that sounds like a bold promise.  I don’t carry crime data around in my head, so I went looking.   Reporting and collection differences muddy cross-country comparisons of the incidence of crime, and for a full comparison you’d want to look at the full gamut of violent crime, theft and so on.   But the most comparable data across countries is that for the homicide rate.   Here are the homicide rates (per 100000 people) for advanced countries, using UN compilations of data.

homicides

Dreadful as any intentional homicide is, New Zealand doesn’t rank too badly, just a bit better than the median of this group of countries.  But Simon Bridges says that under the next National government, New Zealand will be the safest country in the world.   Say they come to office next year, and are in office for nine years.  That means he thinks that within ten years, they can take steps that will lower New Zealand’s intentional homicide rate by just over two-thirds, to match the record in places like Singapore, Japan and Luxembourg.

I ran this chart in a post late last year, using NZ Police data.

murders

Cutting our murder rate by more than two-thirds would involve getting, and keeping, it, down to the very lowest individual years managed in the last 100 years or so.   It would be laudable goal…….at least if Mr Bridges had any serious and plausible ideas about how to do it.  And the sort of change that really would support, over time, a much lower prison population.   Fifteen murders a year would still be fifteen too many, but even that seems like a tall order, even with an ageing population.  Mr Bridges promises that National will “continue to put forward the ideas” between now and the election to make his “safest place to live in the world” vision a reality.  Count me a bit sceptical, but I’ll watch with interest to see if there is some substance there.

The headline from the Bridges speech was around the promise to index the income thresholds in the tax system.  It would be a welcome, but well overdue, reform if someone finally does it.  But I wondered about some of the details.  This is how Bridges explained what they are proposing.

We will amend the Income Tax Act to make sure income taxes are adjusted every three years in line with the cost of living.

Within a year after every election, Treasury will advise the Government on how much the tax thresholds should be adjusted to account for inflation.

That means income tax thresholds will increase every three years to stay in line with the cost of living.

The first change will be in 2021 and relate to the tax years of 2018, 2019 and 2020.

We will include a veto clause so the Government of the day can withhold the threshold changes in the rare circumstances that there is good reason to do so.

But it will have to explain that decision to New Zealanders.

But why not

(a) adjust the thresholds every year, and

(b) adjust them automatically, with the formula written into the Income Tax Act?

After all, we manage to adjust (for example) NZ Superannuation rates automatically each year.

One of the arguments for indexing the thresholds is to reduce the ability of politicians to use occasional adjustments to present themselves as giving a tax cut.  The Bridges model –  adjustments only every three years, and only on the basis of the Minister of Finance responding to a Treasury recommendation – still seems to keep too much of that potential intact.  Adjusting for inflation will be in ministerial gift, not simply an automatic calculation routinely notified to taxpayers (according to legislative formula) by the Commissioner of Inland Revenue.

I’m also uneasy about this idea that the Minister could reject a specific  indexation recommendation.  First, if the adjustment were being done annually, the amounts involved are so small there could be no compelling reason not to proceed (with triennial adjustments the amounts get chunkier). And, second, we don’t apply this approach to (say) New Zealand Superannuation payments.  What the statutory formula says goes.

If a government thinks there is a persuasive case to raise tax rates –  and from time to time that may be necessary or appropriate –  they should be willing to come to Parliament and make the case in an open and transparent way.  That is, for example, what they have to do if they want to lower (real) NZS payments.    Inflation shouldn’t be able to be used to be used as a silent cover, enabling governments to grab more (real) revenue.

And then there was the economy.  Simon Bridges devoted a lot of space to it in his speech but there was very little serious content.  What it all boiled down to was:

(a) when we were in government our economy was a rockstar (he doesn’t use the word, just ‘one of the best performing in the developed world’)

(b) Labour is raising taxes

(c) Labour is doing wasteful spending (fee-free tertiary education and the the Provincial Growth Fund), and

(d) National would reverse the Auckland fuel levy, and any capital gains taxes, and not increase other taxes in a first term.

(It was notable that despite the talk of wasteful spending –  with which I agree with him on the specifics –  there were no promises to unwind those measures.)

And that’s it.  There was no suggestion of an economic reform strategy –  not even ideas to come –  or even a need for one.  Things would, it appears, be fine if only we had lower (Auckland) petrol taxes and no capital gains taxes.

So, as an aide memoire for Mr Bridges and his economic team, lets remind ourselves of some key New Zealand data.  I ran this table a couple of weeks ago

GDP per hour worked
USD, constant prices, 2010 PPPs
1970 1990 2017
New Zealand 21.4 28.6 37.2
Netherlands 27.4 47.5 62.3
Belgium 25.0 46.7 64.6
France 21.7 43.3 59.5
Denmark 25.1 44.8 64.1
Germany 22.3 40.7 60.4
United States 31.1 42.1 63.3
Median of six 25.1 44.1 62.8
NZ as per cent of median 85.4 64.9 59.2
Source: OECD

When Mr Bridges’ parents were young, New Zealand was still among the very richest and most productive countries on earth.    His children are born into a country where average productivity levels are barely 60 per cent of those in the top tier of the OECD.

And what happened under the government in which he was, by the end, a senior minister.

real GDP phw dec 18

Barely any productivity growth at all in the last five or six years (and allowing for the lags, and the fact that the current government has done little, the most recent year’s data reflects those some policy frameworks and choices).  We dropped further behind Australia over the last decade, and various eastern European countries –  never previously close to us in the last 150 years –  are either snapping at our heels or overtaking us.   Well done them.  Shame on us (and the succession of governments and oppositions).

Successful economies tend to trade a lot with the rest of the world.  Early in their last term, the National Party in government knew this –  reflected in the (slightly wrong-headed) targets for much higher exports as a share of GDP).   Here is the actual and forecast data (for exports –  the import chart isn’t that different) from the most recent Treasury HYEFU.

exports hyefu 18

Foreign trade as a share of GDP has been shrinking this century – under both National and Labour governments –  and nothing Treasury can see suggests that underperformance is about to be reversed.

But in two pages of speech text about the economy there was not a mention –  not even a hint – of any of this.  Of course, none of this is as immediately topical, or offering political mileage, as a possible capital gains tax.  But a serious leader might at least be able to point to the need to do so much better on the economic performance –  material standard of living – front.

It is only about 19 months until the next election.  Sadly, there is no sign from this speech that a future National goverment would be any more serious about reversing our relative economic decline than their predecessors –  of whatever stripe –  for the last 25 years.  Worse still, they seem to have given up believing there even is an issue.