What does the OECD really have to offer us?

The Organisation for Economic Cooperation and Development (OECD) is often loosely described as “the rich countries club”.  It isn’t an entirely accurate description –  there are several high income oil exporting countries who don’t belong (as well as places like Singapore and Taiwan), and some countries that are members (notably Mexico and Turkey) aren’t particularly high income.     But it is a grouping of mostly fairly advanced fairly open economies (New Zealand’s been a member since 1973).   And the organisation claims to be able to offer useful advice to countries as to how to improve their economic performance.  I’ve become increasingly sceptical of that proposition, especially as regards New Zealand.

On a biennial cycle the OECD’s Economic and Development Review Committee (EDRC) meets in Paris to review each member country’s overall economic performance, and offers some specific advice both on general economic management issues and on specific topics agreed in advance between the secretariat and the country concerned.  I wrote about the process, which draws on extensive staff work, on the day New Zealand was last reviewed in April 2015.

The next review is almost upon us.  The EDRC is scheduled to discuss New Zealand on 20 April, so the draft text is probably already in the hands of New Zealand government agencies.   The final text will presumably be released in late May or early June.  This year’s agreed special topics are “Increasing Productivity”, and “Labour Markets and Skills”.    The latter topic apparently includes the New Zealand immigration system, and when the OECD team came to Wellington last year I participated in a meeting with them, along with various government agency representatives, on some of the strengths and weaknesses of our system.   Historically, the OECD tends to be very strongly pro-immigration –  without much evidence for its benefits, especially in remote places like New Zealand –  and I expect their treatment this time will again reflect that presumption, probably with some suggested tweaks at the margins.   But, as often, the OECD might be able to present some cross-country data on the issues in interesting ways.

Quite what they’ll come up with to increase productivity could be more interesting.   In many ways, New Zealand is a test for whether the OECD has much useful to say.  For a member that was once among the richest and most productive OECD economies and now languishes a long way down the league table, New Zealand has been a bit of an embarrassment to the OECD.  After all, we did an awful lot of what they suggested 25 to 30 years ago.

I’m writing about the issue because a few days ago the OECD released one of their flagship cross-country publications, Going for GrowthThese documents often contain a lot of interesting cross-country comparative material –  data collection and presentation is one thing the OECD defintely does well.  But they also get specific, and have a couple of pages of economic policy priority recommendations for each country.  Since the OECD  must already have written their full substantive report on New Zealand for the forthcoming EDRC survey, one might have expected that the recommendations for New Zealand would be particularly incisive and well-focused, offering suggestions which, if adopted, would clearly help reverse our long-term underperformance.   As they note, labour productivity gaps between New Zealand and the other advanced economies have continued to widen over the last quarter century.   As the OECD’s own chart illustrates, real GDP per hour worked is now about 37 per cent below the average for the countries in the upper half of the OECD  (these are countries from Luxembourg and Norway at the top, to Italy and the UK at the bottom).

So what does the OECD propose for New Zealand?

  1. Reduce barriers to FDI and trade and to competition in network sectors.   Recommendations:  Ease FDI screening requirements, clarify criteria for meeting the net national benefit test and remove ministerial discretion in their application. Encourage more extensive use of advance rulings on imports and improve the publication and dissemination of trade information. Sell remaining government shareholdings in electricity generators and Air New Zealand. Remove legal exemptions from competition policy in international freight transport.
  2. Improve housing policies. Recommendations: Implement the Productivity Commission’s recommendations on improving urban planning, including: adopting different regulatory approaches for the natural and built environments; making clearer government’s priorities concerning land use regulation and infrastructure provision; making the planning system more responsive in providing key infrastructure; adopting a more restrained approach to land regulation; strengthening local and central government emphasis on rigorous analysis of policy options and planning proposals; implementing pricing to reduce urban road congestion; and diversifying urban infrastructure funding sources.
  3. Reduce educational underachievement among specific groups. Recommendations: Better target early childhood education on groups with low participation in such education. Improve standards, appraisal and accountability in the schooling system.To improve the school-to-work transition, enhance the quality of teaching, careers advice and pathways, especially for disadvantaged youth, and expand the Youth Guarantee. Facilitate participation of disadvantaged youth in training and apprenticeships. Students from Maori, Pasifika and lower socio-economic backgrounds have much less favourable education outcomes than others.
  4. Improve health sector efficiency and outcomes among specific groupsRecommendations: Increase District Health Boards’ incentives to enhance hospital efficiency, improve workforce utilisation, integrate primary and secondary care, and better managed chronic care. Continue to encourage the adoption of more healthy lifestyles.
  5. Raise effectiveness of R&D support. Recommendations: Further boost support for business R&D to help lift it to the longer term goal of 1% of GDP. Evaluate grant programmes. Co-ordinate immigration and education policies with business skills needs for innovation.

The general goals seem fine, in as far as they go.  And some of the specifics seem sensible enough too (others –  more R&D subsidies, government encouragement of “more healthy lifestyles”  –  seem distinctly questionable).    But could anyone with a reasonably in-depth understanding of the New Zealand economy and its performance over the last few decades, really think that that list, even if adopted in full, would really make a material difference in turning around New Zealand’s long-term productivity underperformance?   I’m all for fixing the housing policy disaster, but when the OECD talks of the agglomeration gains that might make possible, have they actually looked at the dismal Auckland productivity performance over a period when Auckland’s population has already grown very rapidly?

It is also quite surprising what they don’t mention.   Perhaps macro imbalances, such as our persistently high real exchange rate, or our (typically) highest real interest rates in the OECD, don’t easily fit in a structural policy document –  although they are significant symptoms that a list of possible structural policy remedies needs to notice.

But the OECD does publish as part of Going for Growth quite a range of cross-country comparative data on various structural policy indicators.  Even then there are puzzling omissions.  There is nothing at all, for example, on immigration policy.    And company tax is also missing.   Here is the data from the OECD website on statutory company tax rates for 2016.

company tax rates

New Zealand is in the upper third of OECD countries –  and with a company tax rate well above that group of countries (from the Czech Republic to Switzerland) at around 20 per cent.   I’m all in favour of reducing FDI barriers, for example, but for many firms who might consider establishing here, the likely tax bill is probaly a more significant consideration.  And I suspect it offers more payoff in improving productivity than the health system, whatever the merits of the specifics they propose there.

It was also interesting that the OECD does not mention our labour laws.    It is well-known that our minimum wage is quite high relative to median wages/labour costs. In fact, the OECD again illustrate it in their indicator pack. This is their chart, and I’ve simply highlighted New Zealand.

min wage OECD

It is a quite a stark picture, but doesn’t seem to be a priority issue for the OECD.  Actually, I doubt altering the minimum wage laws offers very much on the productivity front, but even if one is simply concerned about disadvantage (as they very much seem to be) we know that getting people into jobs is the best path towards longer-term economic security.   One needn’t go to the US end of this spectrum, but places like the Netherlands and Belgium aren’t exactly known as bastions of heartlessness, small government or whatever.

Overall, I think the list still suggests the OECD has very little idea what has gone wrong in New Zealand, and hence has little more than a generalised grab bag of ideas to offer in response –  many no doubt quite useful in their own way, but mostly likely to be tinkering at the margins.

Out of curiousity, I had a look at what they had to recommend for the previous country on the (alphabetical) list –  the Netherlands.  It is an interesting country too.  Productivity –  GDP per hour worked –  is above that for the group of countries in the upper half of the OECD.  Indeed for decades productivity levels in the Netherlands have been very similar to those in the United States.  Per capita income lags a bit behind, because Dutch people on average don’t work long hours each year (although the participation rate is high).    But it is, by most counts, a very successful economy.    Real GDP per hour worked is about 65 per cent higher than in New Zealand.

What does the OECD recommend for them?

  1. Lower marginal effective tax rates on labour income.
  2. Ease employment protection legislation for regular contracts and duality with the self-employed.
  3. Reform the unemployment benefit system and strengthen active labour market policies.
  4. Increase the scope of the unregulated part of the housing market
  5. Increase direct public support for R&D  [even New Zealand spends more on this than they do]

Setting aside the OECD’s taste for R&D subsidies, it mostly seems sensible, plausible, and well-targeted.  They  seem to have a better idea what to offer an already rich and successful country in the heart of Europe, than they have to offer a once-rich now-underperforming remote one.   For us, that is a real shame.

One can only hope that when the productivity chapter of the forthcoming New Zealand economic survey comes out, they can offer a more persuasive grounded set of recommendations as to what might make a real difference in reversing our decades of underperformance.

(For a more optimistic take on the OECD’s recommendations for New Zealand, see Donal Curtin’s assessment.)

 

 

Still no better than middling

The Minister of Finance greeted yesterday’s GDP numbers with the claim that

“While growth has softened in this latest quarter, the continuing trend is [with] consistent ongoing growth ahead of most other developed countries.

In the case of total GDP, that is no doubt true.  It is what happens when your country has had population growth of 2.1  per cent in the previous year.

But where do we sit in terms of growth in real GDP per capita?

The OECD doesn’t have data yet for all member countries, but here is how our GDP per capita growth compares, focusing on the December 2016 quarter over the December 2015 quarter, for the countries there are data for.

real GDP pc 12 mths to dec 16

And here is the same data for the full year to December 2016 over the full year to December 2015.

real gdp pc ann ave to Dec 16

Neither comparison is intrinsically better than the other.  Between them, really the best one can say is that New Zealand has been no better than the median country over the last year or so.  That’s nothing to write home about…….especially as our data suggest we’ve had negative productivity growth over the last year (whether one uses the point to point or annual average measure).   That means all our pretty modest per capita GDP growth over the last year has resulted from throwing more labour and more capital at the economy, and (less than) none at all by using resources smarter and better.

But according to the Minister

“This week’s statistics on economic growth and our external accounts show the benefit of the Government’s sensible, consistent economic management,” Mr Joyce says.

New Zealand Initiative on immigration: Part 7 Productivity and all that

Today I’m continuing on with the New Zealand Initiative’s chapter four, on the (claimed) economic benefits to New Zealanders of large scale non-citizen immigration. I don’t have the appetite to try to comment on every questionable claim in the report, so I start with a section headed “Agglomeration –  Bigger is Better?” in which (despite the question mark) the Initiative appears to position itself firmly behind not just the proposition that immigration is good for us, but also the proposition that a bigger population is good for us.

There is no good evidence I’m aware of for the latter proposition.  At a more informal level, I illustrated in this post that large countries (by population) haven’t grown faster (per capita income or productivity) than small countries.  And, of course, consistent with this impression, we have seen many more small countries emerge in the last few decades.

What there is little doubt about is that within countries people and economic activity tend to organise themselves in ways in which the higher productivity activities are increasingly more often found in larger cities.  Cities exist in substantial part because it was found economically advantageous for them to do so.  But it isn’t all that way, by any means.  Natural resource based production tends to occur where the natural resources are –  be it farming, oil and gas extraction, mining, or whatever.   And the observation that within countries an increasing share of high value economic activity is undertaken in cities, tells us little or nothing useful about comparative national economic performance, given the successful co-existence of highly productive large and small countries.

The Initiative seems keen to take the other view

Places, cities in particular, with large, dense populations face lower transport costs in goods, people and ideas. It is cheaper to supply capital or consumer goods and find good workers; there is a better network for knowledge exchange across people.  All vital components of economic growth. The existence of ‘agglomeration economies’ has been established in a number of studies. A meta-analysis of 34 studies found that the positive effects of spatial concentration on productivity remain even after controlling for reverse causality.  Another meta-analysis highlights the importance of considering the various mechanisms through which agglomeration can produce benefits.  New Zealand’s low economic productivity is partly explained by our small population, says Phillip McCann based on economic geography and urban economics.

But, as they acknowledge, I’ve pointed out what appears to be a pitfall in the argument in the New Zealand context, at least when it is used to back encouraging large numbers of new people into Auckland –  what I’ve termed, the 21st century Think Big strategy.

Reddell contends that Auckland’s failure to produce significantly higher growth
compared to the rest of the country contradicts this explanation.

Recall that Auckland’s GDP per capita has been falling relative to that of the rest of the country for the last 15 years, and is quite low relative to that in the rest of the country when compared with other main cities in other advanced countries.  Not only hasn’t Auckland outperformed, it appears to have quite badly underperformed.  One could throw into the mix another point I’ve made previously: there is no major outward-oriented industry (exporting or import-competing) based in Auckland.  It has the feel of a disproportionately non-tradables economy, servicing (a) the rest of the country, and (b) the physical needs of its own policy-driven growth.

How does the Initiative respond to this point?

However, a recent report highlights how standard measures can understate urban productivity differentials and estimates that Auckland’s firms have labour productivity 13.5% higher than firms in other urban areas.

This is, frankly, rather naughty.  The Motu study in question produces revised estimates of labour productivity in Auckland relative to the rest of the country that are not dissimilar to the estimates of the ratio of nominal GDP per capita in Auckland relative to the rest of the country.  No one has questioned that GDP per capita in Auckland is higher than that, on average, in the rest of New Zealand.  But, by international standards, the margin is quite small.  And, more importantly for this debate, the margin has been shrinking, even though the theoretical literature the Initiative seeks to rely on suggests it should have been widening.  More people, from increasingly diverse places, generating more ideas, and as a result selling more stuff here and abroad, and investing to support those sales prospects.  But it just hasn’t been happening.  Instead, immigration policy has been putting more and more people in a place that doesn’t seem to have been producing the expected returns.  And we know that New Zealanders, who presumably are best-placed to assess opportunities and prospects here, have (net) been leaving Auckland.

Frankly I was a bit surprised the Initiative didn’t have a more effective response to these indicators of Auckland’s underperformance and the troubling questions they appear to raise about the economics of New Zealand’s immigration programme.

The next section in the chapter is headed “Macro impact and how we measure it”.  As they note

As a measure of living standards, GDP is not without its faults, but it does indicate how much a nation can produce and, ultimately, consume.  The effect of immigration on GDP can be difficult to disentangle. There is little contention GDP increases with more immigration – that countries produce more with more people is a no-brainer.
Of more interest to economists is GDP per capita – how much the pie is growing relative to the number of people taking slices.

I’d add that the impact on the GDP per capita of natives is, or should be, of particular interest when it comes to considering immigration policy.

There is a surprisingly limited empirical literature on this point.  There is a variety of papers which set up (calibrate) models for how the authors think the economy works, add an immigration shock, and then  –  surprise surprise –  find that the model produces much the answer one expects.    Papers in this class cover the range of results.  Some are set up in ways that produce gains to natives of recipient countries, through some of the sorts of channels Initiative authors cite.  But others, allowing for say fixed natural resources or sluggishly adjusting capital stocks, find that emigration tends to benefit the natives left behind, and slightly dampen the prospects of those in the recipient countries (the modelling the Australian and New Zealand Productivity Commissions used a few years ago in their review of the trans-Tasman relationship worked that way).  In the recent Australian Productivity Commission report on immigration, the modelling work assumed that productivity growth in Australia would be mildly adversely affected by continuing relatively large immigration inflows (there is a somewhat jaundiced, but not inaccurate, summary here).

But in terms of straightforward empirical analysis of effects on GDP per capita or productivity, there isn’t a large pool of relevant papers (and none at all focused on New Zealand, even though we’ve had one of the largest planned immigration programmes anywhere, over a long period of time).

The Initiative authors refers to two papers.   The first they summarise thus

A study of 22 OECD countries from 1987 to 2009 found migrants are not just attracted to countries with higher prosperity, they also help bring it about.

That sounds promising.    The actual results don’t quite match the promise.

The authors estimates four different version of their model. In each case, they show results for how GDP per capita respond to net migration, net migration responds to GDP per capita, and how the unemployment rate and net migration respond to each other.

Here is the impulse response function chart from the first version of the model

boubtane etc model 1

The solid line is the central estimate, and the dotted lines are the confidence bands.

There is a statistically significant response of GDP per capita to a change in the migration rate in the first year after the shock, but everything beyond that is (a) statistically insignificant, and (b) slightly negative –  ie below the zero line.   No one would be surprised by a positive effect in the first period, since in the short-term demand effects from unexpected immigration inflows will typically exceed the supply effects.  But over the medium-term, there is no evidence here of a sustained boost to per capita income.  The pictures from the other three versions of the model all look much the same.

Before moving on, I should briefly highlight two other points about this paper:

  • it uses net migration, whereas most of the theoretical arguments for possible gains from immigration relate to inflows of non-natives (new ideas, new skills etc).  For most countries, the difference isn’t that important, but for New Zealand it is very important.
  • one of the key things the paper sets out to show is that immigration does not materially affect the unemployment rate.  This is a point that the Initiative and I are at one on, and  –  for what it is worth –  the results of the paper suggest, as we would expect, no statistically significant effect.

The Initiative then moves on to some recent empirical work (Number 8, October 2016) by several IMF staff researchers, which built on another recent paper, by Ortega and Peri, but focused only on advanced countries.

The study finds that a 1 percentage point increase in the share of migrants
in the adult population can raise GDP per capita by up to 2% in the longer run and that the benefits from immigration are broadly shared across the income distribution.

As it happens, I wrote about this paper , somewhat sceptically, when it was first released, in conjunction with the IMF’s World Economic Outlook, late last year.

Here is the summary version of why the results simply don’t ring true.

This chart is from the paper (here “migrants” is the foreign-born share of the adult population)
stock-of-migrants

And this was my comment last year.

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

Or, we could turn it around, and think about New Zealand’s actual experience.  Let’s say that the foreign-born share of New Zealand’s adult population increased by 10 percentage points since 1990 –  I can’t quickly find the exact numbers, but it is likely to have been in that order of magnitude.  If this model is correctly specificied – and recall that New Zealand is included in its sample –  that should have given us a huge lift in productivity and GDP per capita, say by around 20 percentage points.  In fact, of course, despite having had probably the largest non-citizen immigration programme of any of these countries in that period (Israel, for example, isn’t in their sample), our productivity (GDP per hour worked –  the metric the IMF authors use) has slipped further behind that of other advanced countries.   Yes, perhaps there were lots of other particularly bad offsetting policies undermining New Zealand’s prospects –  but over this period international agencies, including both the IMF and OECD, repeatedly stated that they thought we had pretty good policies in place.

Of course, as I noted on Friday, my main interest is New Zealand.  If immigration to and among other countries has been productivity-positive, that is something to celebrate, but there is little evidence that it has been so for New Zealand.

One could take the critique and questions a bit broader.  For example, note how the gains arise in this study.  It is from having a large (increased) share of foreign-born people in one’s population.  But immigrants age, have children etc.  Without a continuing inflow of non-citizen migrants, any initial boost to the foreign-born share will erode quite steadily over time.

The US offers an interesting case study.  Around the time of World War One, about 15 per cent of the US population was foreign-born.  Immigration restrictions imposed in the 1920s, and in place for the following forty years, saw the foreign-born share of the US population fall to around 5 per cent by around 1970.  There was nothing comparable in other large migrant recipient countries (eg Australia, New Zealand, Canada).  All else equal, if the IMF model was correctly-specificied, this huge reduction in the foreign-born share should have resulted in a substantial deterioration in the absolute and relative producitivity position of the United States.  There is simply no evidence I’m aware of to support such a proposition (and, in fact, historical estimates suggest that the US had some of its strongest productivity growth in history during these decades).

In my earlier write-up of the IMF paper I noted that

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

If this is the strongest empirical support advocates of New Zealand’s approach to immigration can adduce, those who have been inclined simply to go along should surely be rethinking their unquestioning support for the policy approach –  whatever merits it may or may not have for some other countries.  I’m aware of a tendency for New Zealand Initiative people to think that the onus of proof isn’t, or shouldn’t, be on them, so obvious and “morally right” is the case for immigration.  Quite where the burden of proof lies is probably more a political one than an economic one, but one might hope that the advocates could produce more evidence, or sustained analysis of the New Zealand case, than is evident in the New Zealand Initiative’s economics chapter.  Especially when the policy approach they support has been tried for more than 25 years, and when even they concede some puzzles about New Zealand’s economic performance in that time.

The authors of the IMF paper, and the earlier Ortega and Peri, paper, hypothesise that the gains from immigration come largely through a total factor productivity (TFP) channel.  Although they never explicitly say so, The Initiative seem to share this perspective, with all their talk of ideas, innovation, alternative perspectives etc.  The IMF researchers didn’t test the connection between immigration and TFP.     But in my earlier post I included this chart, using the same foreign-born population share data the IMF did.

imf-mfp

If anything, over the period they looked at, the relationship was negative –  a larger increase in the foreign-born population share was associated with weaker TFP/MFP growth.  New Zealand is the red dot in the chart.  The outlier –  in the top right hand corner –  was Ireland, which looks more positive for the IMF/Initiative story, except that as I also showed in that earlier post, it is quite clear that the surge of migrants into Ireland came several years after the surge in TFP growth.

And, on the topic of TFP growth, in a post last week I illustrated again just how weak New Zealand’s TFP growth has been relative to that in other advanced economies.    Surely, serious think-tank advocates of New Zealand’s large scale non-citizen immigration policy would want to engage with this sort of record, and the apparent inconsistency with the connections they have hypothesised?

Sadly, simply ignoring the actual record in New Zealand seems to be par for course in the economic chapter of the Initiative’s report.

To their credit, they devote a couple of pages of the report to my hypothesis around the contribution of immigration policy to New Zealand’s longer-term economic underperformance (pp 39 and 40 for anyone interested).  As they note, I have argued that

  • “given New Zealand’s continued heavy dependence on natural resource based exports, New Zealand might not be a natural place to locate many more people, while still generating really high incomes for them all”, and that
  • high levels of non-citizen immigration have helpd explain persistently high real interest and exchange rates, in turn deterring business investment, especially that in the tradables sector, and thus tending to undermine productivity growth.

But they don’t really know what to do with these ideas, and so end up largely ignoring them.  There is simply nothing more, in this section or in the rest of the report, on the issues around a natural resource based economy, that is very distant for major markets/suppliers/networks etc.   New Zealand may have many things in common with other advanced economies, but this is one probably very important difference.

And when it comes to New Zealand’s dismal long-term productivity record, the limit of their comment is this

New Zealand productivity has been less than stellar for a long time – a concern to many economists and policymakers.

And that’s it.  There is no attempt at all to engage with the data, or to tell some alternative story of economic management and prospects over the last 25 years or so, in which for example, non-citizen immigration has played a more favourable role.

There is a little bit more on real interest rates –  why they’ve been so persistently high relative to the rest of the world.

The hypothesis also cannot fully explain why the real interest rate has not converged to the rest of the world. Reddell says competing theories explaining the high real interest rate, such as a risk premium associated with New Zealand investment, do not fit with the evidence either, in particular with the persistent strength of the real exchange rate. He contends that the only explanation currently on offer is that the repeated shocks to domestic demand – not fully recognised in advance by market participants – must have been a big part of the story.

Clearly, the Initiative don’t find my story persuasive, but there is simply no attempt to explain why, or to pose a credible alternative hypothesis for one of the most striking features of New Zealand macro data in recent decades.

The best they seem able to come up with is to point out that any sustained demand pressures will tend to put upward pressure on real interest rates.  And that is quite correct of course.  An economy with very strong productivity growth, and the associated investment in support of it and consumption in anticipation of the future income gains, will tend to have high real interest rates (relative to those abroad).    And no one much will regard that as problematic –  rather it is a mark of the success of the economy.

But that hasn’t been the New Zealand story. Business investment has been quite low as a share of GDP (especially given our population growth) and productivity growth (labour or total factor) has been low.  There is little, or nothing, to suggest that the high relative interest rates we’ve experienced in New Zealand over the last 25 years have been a desirable market-led phenomenon.  They look anomalous not just relative to other countries, but also relative to our own underwhelming economic performance.

Here is the Initiative’s attempt to fend off my analysis

The concerns raised by Reddell would apply more broadly than just on immigration. For example, tourists are foreigners who come to New Zealand, purchase our currency and goods, and use infrastructure (they require accommodation, drive on the roads, may require police assistance, add waste to landfills. etc.). Hence, tourism also puts pressure on the real interest rate and real exchange rate.

As I’ve already noted, any persistent demand pressure –  whether from exports or the domestic economy – will, all else equal, tend to put upward pressure on local interest rates.

But except for population-driven pressures (in a country with a modest savings rate) we just haven’t had such pressures.  As I noted just before, business investment has been lower than we might have hoped, exports as a share of GDP have been sideways or backwards, and the consumption share of GDP has been flat for decades.  What hasn’t been flat has been the population, and particularly the foreign-born population, the direct consequence of government immigration policy.    Take their tourism example.  SNZ has data on the average daily stock of foreign travellers in New Zealand(boosting domestic demand) and the average stock of New Zealand travellers abroad (easing domestic demand), going back to 1999.     There are more foreign travellers here than New Zealanders abroad, on average, but the numbers aren’t large.  In 1999, there were on  the average day  16000 more foreign travellers here than New Zealanders abroad.  Last year, that number was 54000.    38000 (net) more travellers here is a helpful addition to net exports, and some pressure on demand.   But

  • the overall export share of GDP is less now than it was in 1999
  • from 1999 to 2016, there was a net inflow of 759000 non-citizen migrants to New Zealand.

That is both a very large number, and a direct government economic policy choice.  It has had consequences, and there seems a reasonable prima facie case, which the New Zealand Initiative has not attempted to seriously rebut, that that government-controlled influx has not been economically beneficial to New Zealanders as a whole.

This post has already got rather long, so just two final thoughts.

First, it is striking how little attention the Initiative gives to the large sustained outflow of New Zealanders over recent decades.  That outflow is certainly at a low ebb at the moment, but there seems little reason to assume that the exodus has come to any sort of permanent end –  as even the Initiative recognises, our productivity performance languishes.   Whatever one thinks of immigration policy in the abstract, surely it is a somewhat relevant consideration to look at what New Zealanders themselves are doing –  people best placed to assess opportunities and prospects here?   There is, among some policymakers, a weird approach to this issue, in which immigration policy is substantially about replacing those who leave.  I don’t think the Initiative subscribes to that silliness, but neither does it call it out.  When individuals are making rational choices to move – to leave New Zealand –  the burden of proof should really be on those who want the government to try to second-guess those judgements and choices.  When people left Ireland, Italy, Sweden or wherever for the US in the 19th century, it benefited those who left and those who stayed.  It would have daft for the authorities in those places to have responded “woe is me, we need to find some poorer people from other places to bring in to replace those who’ve left”.  A quite different approach would be to respect and respond to the market signals – movements of their own people –  and try to fix up their own economies in ways that might make it no longer attractive for  their own people to leave.  It would have been a much better lesson for the New Zealand authorities to take.  Residents of Taihape and Invercargill should be grateful governments didn’t/couldn’t respond to outflows of people from those towns by suggesting a presssing need to get other people from elsewhere in the world to move to Taihape and Invercargill, even though the economic opportunities had moved on from those places.

And second, in the IMF paper that the Initiative cite there are references to a new paper by various Harvard researchers on the economic effects of diversity (so recent that the references have been added since the version of the IMF piece that I commented on last year).  The authors note that typically in studies to date “the negative effects of diversity seem to dominate empirically”.  In this paper, they find more positive results, but they also look at what sort of diversity might produce benefits (p 26)

 we extend our index of birthplace diversity and account for cultural and economic distance between immigrants and natives. The productive effects of birthplace diversity appear to be largest for immigrants originating from richer countries and from countries at intermediate levels of cultural proximity.

and

This suggests that a combination of culturally closer immigrants and richer origins (potentially a proxy for higher skills) can be particularly valuable.

If this model is robust, then it is perhaps unfortunate for the economic case for the immigration programme that very little of New Zealand’s immigration is from countries richer than our own, and most of it isn’t from countries with close or intermediate levels of “cultural proximity”.  By contrast –  and uncomfortable as it is to point it out again –  all New Zealand’s immigration in the mid 19th century was from countries richer than us.  As such, there is little doubt that if lifted economic performance and productivity for all New Zealanders.    Whether the results are robust is something for others to look at, but it is the sort of specific results, that recognise that some immigration can be beneficial, but not all needs to be –  it depends on various things, including time, place, and people –  that the New Zealand Initiative should be engaging with rather than merrily asserting, with no New Zealand specific evidence –  that the gains to natives are there simply because people have come among us from another country, any country.

Total factor productivity growth: how have we been doing?

The Conference Board’s Total Economy Database is my favourite source for cross-country comparisons of productivity growth.  I’m not close enough to the respective methodologies to know whether and where to prefer their methodology to that of the OECD, but the Conference Board has data for a lot more countries, and typically  has estimates that go back a bit further in history.

Yesterday, I dug out their estimates of total factor productivity (TFP) growth.  They’ve recently revised their methodology, although for the time being that means they only currently go back 20 years.  I was curious to see how New Zealand had performed, on this metric, relative to other advanced countries.

Some readers will recall this IMF chart which I’ve run a few times previously.

imf-hours-and-mfp

It uses an earlier vintage of Conference Board estimates, and on that basis, New Zealand had had the lowest TFP growth of any of these OECD countries for the full period 1970 to 2007.

How about the more recent period, since 1994?   Here I’ve used a larger group of countries –  all the OECD countries, all the EU countries, plus Singapore, Hong Kong, and Taiwan –  very similar to the set of countries I used for a range of posts back in 2015 about New Zealand’s relative performance.

TFP growth 94 ot 15 TEDOver this period on this measure, we weren’t the worst, but we weren’t far off the worst.  A lot of the former eastern-bloc countries, now given the opportunity to catch-up with the West, are bunched towards the left of the chart.

And here are New Zealand and Australia shown relative to the median of these advanced countries.

TFP NZ and AUsAnd New Zealand relative to the median of the G7 countries, and to the median of the former eastern-bloc countries. Recall, after all, that the narrative of economic reform in New Zealand had also been to allow us to catch up again with the richer advanced countries.

TFP NZ g7 east europeNot an altogether pretty picture.

Of course, observant readers have probably noticed that there doesn’t seem to have been much TFP growth anywhere for the last decade or so, and that while New Zealand doesn’t look to have done particularly well during that period, we also don’t look much worse than usual.  But here is how we have done relative to various other countries/sub-groups over that period.

TFP 05 to 15

Plenty of countries did worse than us, but among those that were quite similar to New Zealand and Australia over this period were Italy, Spain and Portugal (Greece was materially worse).

For these purposes, I’m mostly interested in how New Zealand has done relative to other countries.  There is a reasonable question as to how the level of TFP can have fallen so badly in 20 years (almost 15 per cent in New Zealand if one believes this measure).  TFP growth is a residual, after decomposing GDP growth into growth in the capital and labour stocks and –  done properly –  measuring both of those isn’t straightforward (eg it is one thing to measure total hours worked, another to get a good measure of the quality of the labour, or thus total human capital applied to production, especially in an era when tertiary education has become a lot more common).  Different methodologies will produce different estimates, but so long as similar methodologies are applied for all countries we can still use the datasets for cross-country comparative purposes

All of which is a lead in to a perhaps slightly less discouraging picture for New Zealand.  The OECD also produces TFP growth estimates, but for a much smaller range of countries  –  only 20 of their 34 member states, including none of the east European convergence economies.   And there aren’t yet estimates for all the countries for 2015.

But here is the comparison for 1994 to 2014 between New Zealand and this sample of the really advanced OECD countries.

TFP oecd oecd sampleThe gap between New Zealand’s cumulative TFP growth and that of the other advanced economies isn’t as large as that shown on the Conference Board data (second chart above).  Then again, since the OECD data doesn’t include the catching-up eastern Europeans that shouldn’t be a surprise.   But what is more striking is that until 2003 we were more or less matching the other OECD countries in this sample.

Here, for comparison, is the Conference Board data for New Zealand and the OECD’s sample of (20) countries.

TFP OECD TED sampleIn the end, perhaps the pictures aren’t really that dissimilar after all.  We’ve done badly relative to other traditional advanced countries and, if anything, on this measure too, the last decade or so is looking relatively worse.  In other words, if there was some convergence of growth rates, it looks to have been mostly only because TFP growth in the east European countries (in the TED sample but not in the OECD’s) slowed up so very markedly (as you can see in the third chart above).   That might be unfortunate for them –  and some combination of policy limitations, and substantial convergence already having occurred in some countries –  but doesn’t put New Zealand’s underperformance in any better light.

It is the sort of underperformance that should be leading to hard questions about the overall direction of economic policy in New Zealand.   After all, if TFP growth isn’t everything about economic performance and sustained prospects for prosperity, it is typically seen as quite a large part of the picture.  And we’ve just kept on doing badly.

Not Treasury at its best

On 25 June last year, I wrote to The Treasury requesting

copies of any material prepared by The Treasury this year on regional economic performance, particularly in New Zealand. I am particularly interested in any analysis or advice –  whether supplied to the Minister or his office, or for use internally –  on the economic performance of Auckland relative to the rest of the country (whether cyclically or structurally).

It wasn’t simply a request out of the blue, but was prompted by a speech given a few days previously by the Secretary to the Treasury, Gabs Makhlouf, The Importance of Being Auckland: Strengths, Challenges, and the Impact on New ZealandIn my post on that speech, I’d been quite critical of Makhlouf.

He’d begun his discussion this way

Why do I find this exciting? It’s because high levels of diversity provide dividends including through increases in innovation and productivity.

Auckland’s diversity is particularly critical for our international connections. There’s much more to international connections than trade. It’s the other international flows – flows of capital and people, and the accompanying flow of ideas – which are the key to reinventing trade, and which will lay the foundation for a more prosperous New Zealand in the long-run.

The high number of overseas-born Aucklanders can bring new skills, new ideas and a diversity of perspectives and experiences that help to make our businesses more innovative and productive. And perhaps most importantly, they often retain strong personal and cultural connections to other parts of the world, which opens up, and helps us to pursue, new business opportunities.

Auckland is truly New Zealand’s gateway to the world. It’s not just that there is a big number of companies here doing business internationally. It’s the port and airport linking the country to global markets; and tertiary institutions, researchers and innovators linking us to global knowledge.

To which my response was

Which might all sound fine,  until one starts to look for the evidence.  And there simply isn’t any.  Perhaps 25 years ago it was a plausible hypothesis for how things might work out if only we adopted the sort of policies that have been pursued. But after 25 years surely the Secretary to the Treasury can’t get away with simply repeating the rhetoric, offering no evidence, confronting no contrary indicators, all simply with the caveat that in “the long run” things will be fine and prosperous.  How many more generations does Makhouf think we should wait to see his preferred policies producing this “more prosperous New Zealand in the long run”?

If the Secretary to the Treasury was going to address the economic issues around Auckland, one might have hoped there would be at least passing reference to:

He might also have linked to the recent presentation by Jacques Poot (in a Treasury guest lecture), in which Poot was keen not to sound very optimistic about just how large those economic benefits of diversity really are, or to the work of Bart Frijns – an (immigrant) professor in Auckland (see last sentence of the extract above) –  whose recent work suggests that on some measures, in some contexts, there may be net costs, not benefits at all.

Of course, one can’t say everything in a single speech, but when a credible case could be made that the Auckland-centred model is in serious trouble, it is bordering on the seriously unprofessional to not even allude to any of these sorts of points, even if only to explain why the Secretary interprets then differently than, say, I might.

So I was curious about what background analysis Treasury had been doing, or what advice it might have been providing to the Secretary or the Minister, in support of Makhlouf’s “cheerleading” for the Auckland story.

It turned out that there was none –  or none recent anyway.  But it took some considerable time and effort to extract even that information.

Their initial response was fairly prompt.  It came on 12 July.  Treasury told me that they were “currently updating their analysis and advice on regional economic performance, including Auckland performance” and expected to include this analysis and advice in future strategic documents, including the next Long-Term Fiscal Statement.  Accordingly, they declined to release any material, citing as grounds under the Official Information Act the need to “maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials”.

I lodged a complaint with the Ombudsman.  Perhaps some “advice” did need to be kept confidential for the time being, but it was hard to believe that the underlying “analysis” could legitimately be withheld.  And then I didn’t think much more about the matter –  the wheels of the Ombudsman’s office often grind exceedingly slowly.

But last week, somewhat out of the blue, I got a letter from Treasury, to advise that

“following the release of our Long-Term Fiscal Statement…… I have revisited my decision and am now able to release the relevant material to you”.

Doing so eight months after the original request, and three months after the release of the LTFS itself, was no doubt just enough to avoid having the Ombudsman rule against them.

And what had all this been to protect?  Well, almost nothing.   It turned out that there was one internal discussion document (and a set of slides covering the same material) prepared for some discussion forum Treasury staff and management were participating in.   There was no advice to the Minister, or to the Minister’s office, at all, so it is a little hard to see how they can have legitimately invoked, as grounds for withholding this material last year, constitutional conventions protecting the advice tendered by ministers and officials.  Perhaps the fact that there was almost nothing was what they wanted to protect, but that isn’t good grounds under the Official Information Act.

For anyone interested here is the document they released (Treasury usually put OIA releases on their website, but this one doesn’t seem to be there yet).

official-information-act-response-auckland-regional-performance-michael-reddell-20160227-2

The document seemed mainly focused on trying to get ahead of potential political pushes for further specific interventions in poorer regions and local authority areas in New Zealand, and there is some interesting material there.   On Auckland, there was little beyond conventional pre-conceptions (these extracts are from various places in the document).

As agglomeration and clustering theory predicts, our more urban services-based regional economies (Auckland and Wellington and to a lesser extent Christchurch) are relatively more productive and generate higher incomes than our more resourve-based regional economies.

Our Treasury preference is usually to encourage or permit the continued concentration of economic activity in key centres (forces of agglomeration) where returns are expected to be greatest.  Resources and activities should be allowed to flow betwen regions over time.  Agglomeration suggests productivity benefits from large diverse cities and clusterng suggests some businesses benefit from being in smaller but specialised cities. This means higher economic performance but spatial differences.

This view was reinforced by the 2010 economic geopgraphy debate, which emphasised the importance of agglomeration (and Auckland especially), and implicitly downplayed the economic significance of “non-agglomerating” areas.

Not a mention of how the gap between Auckland levels of income and those of the rest of the country are small compared to those typically seen between largest cities and the rest of the country in other advanced countries.  And not a mention of how those gaps have been closing rather than widening.  In other words, little attempt to grapple with the specifics of the New Zealand experience at all.

We should expect better from our premier economic advisory agency, both in terms of the quality of the analysis and advice they are presenting, and in complying with both the letter and spirit of the Official Information Act.

And in the meantime, the grand Auckland Think Big experiment rolls on, cheered on by the Secretary to the Treasury.  After 25 years we might reasonably expect our officials and ministers to be able to point to evidence of the success of the strategy.  If it is there, they haven’t found it yet.  More likely, it just isn’t there, and decades of bringing more and more non-New Zealanders to Auckland (even as New Zealanders, net, leave Auckland in modest numbers), looks like a strategy that has unbalanced the economy, and produced few real gains, whether for Aucklanders or the rest us.

 

 

 

 

 

 

Getting the small things right

Readers may be getting bored with a full week of posts on nothing other than Reserve Bank topics.  In truth, so am I.    But here is one last post in the sequence.

Saturday’s Herald featured, as the front page of the business section, an interview with outgoing Reserve Bank Governor Graeme Wheeler.    This seems to have become a bit of a pattern –  the Herald gets access to the Governor the day after the MPS, to provide a bit of a platform for whatever the Governor wants to say.  The interviews are notable for being about as searching and rigorous as, say, the recent Women’s Weekly profile of Bill and Mary English.

The interview allowed the outgoing Governor to “launch the campaign” to become Governor for his deputy (and former Government Statistician), Geoff Bascand.    That shouldn’t surprise anyone.  Then again, it has now been 35 years since an internal candidate was appointed Governor.  Successful organisations – the Reserve Bank of Australia is one example –  are often seen promoting from within.

But my interest in the interview mostly centred on the Governor’s claim that “the economy is in very good shape”, and that we really should be grateful to the Reserve Bank for being a “big part of that outcome”.    I had to read it several times to be sure I wasn’t missing something.   Here was the full excerpt:

Broadly, if you look at where New Zealand is now “in terms of growth, inflation, unemployment rate, current account as a share of GDP, labour force participation and compare all that with a 20 or 30 year average, then the economy is a very good shape”, he says.

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

In the initial version I read online on Saturday, and in the hard copy newspaper, that “compare all that with a 20 or 30 year average” read “compare all that with a 2009 year average”.    Quite which of them the Governor actually said, or intended to say, isn’t clear.  But either way, it isn’t very convincing.  2009 was the depth of the recession: economies tend to recover from recessions.  Pretty much every economy in the world –  perhaps with the exception of Greece –  has done so to a greater or lesser extent.  It is no great achievement to cut interest rates a lot in a recession.

But lets grant that the Governor meant to refer to comparisons with a 20 to 30 year average (I’ve seen him make such comparisons previously).  How then do his claims stack up?  He lists several indicators to focus on. Of them

  • Per capita growth –  the only sort of growth that really matters –  has been pretty weak this cycle compared to that in previous recoveries and growth phases,real-gdp-pc-aapc
  • Inflation is (of course) low, but then it is supposed to be higher.  The target is centred on 2 per cent –  a rate we haven’t seen for several years –  and was previously centred on 1 per cent, and then 1.5 per cent.  Trend inflation outcomes are the responsibility of the Reserve Bank, but those outcomes have been away from target for some time.
  • The unemployment rate is below a 20 or 30 year average –  although well above the average prior to the mid 1980s –  but then all estimates (including the Bank’s) are that the NAIRU has been falling over that time, and no one claims that that has been because of monetary policy (any more than previous increases were).
  • The current account deficit is certainly smaller than it has been.  But that is mostly because interest rates have been so much lower than had been expected (s0 that the servicing costs of the large stock of external debt have been surprisingly low).  Much of the time, the Governor is more inclined to lament, than to celebrate, just how low interest rates have been, here and abroad.
  • Labour force participation is higher than the historical average, but it isn’t clear why this is unambiguously a good thing.    Work is a cost to individuals as well, at times, a source of satisfaction, but mostly people work to live.  In a subsistence economy, pretty much 100 per cent of adults work.  When New Zealand had the highest per capita incomes in the world, participation rates were lower.

But, of course, even then the Governor has cherrypicked his data.    There isn’t even any mention in this list of disastrously high house prices, or of the household debt stock, let alone of the real exchange rate, or the productivity growth performance, or the weak performance of the tradables sector, or of the large gaps between New Zealand incomes/productivity and those in most other advanced countries.

You might think that those are simply “Reddell hobbyhorse” indicators.   But we know the Governor cares a lot about house prices and household debt, and about the real exchange rate.  And it isn’t that long –  before he became embattled, and seemed to feel the need to become something of an apologist for New Zealand’s economic performance –  since he was talking about exactly the same sort of stuff.

Just a few weeks after he became Governor, he gave a speech in Auckland on Central banking in a post-crisis world . In the opening paragraphs of that speech he counselled

With these assets we should be capable of stronger economic growth. Internationally, and particularly in smaller economies, economic growth is driven by the private sector and its ability to compete on global markets. We need to reverse the slowdown in multifactor productivity growth since 2005 and the decline in value added in our tradables sector. And we need to reverse the shift of resources into the public sector and other non-traded activities.

Productivity growth hasn’t improved –  if anything the reverse – since then, exports as a share of GDP have been slipping, and there has been no sustained rebalancing towards the tradables sector.

t-and-nt-gdp-feb-17

They were the Governor’s words, not mine.

Another couple of months into his term, he gave another interesting speech, this time Improving New Zealand’s Economic Growth.   Back then he seemed concerned about productivity (and the lack of it)

Since 1990 we’ve outperformed many OECD countries on inflation and unemployment. Our inflation rate has been one and a quarter percent below the OECD median and our unemployment rate half a percent lower. But our per capita income has lagged behind and we’ve run large current account deficits. Real per capita GDP growth has been one and a quarter percent, about half a percent below the median and our current account deficit has averaged five percent of GDP – about the 6th largest relative to GDP in the OECD region.

There are two main ways in which our prosperity can improve over the longer run. The first is if the world is willing to pay more for what we produce. The second is by raising our labour productivity – that is by increasing the level of output per working hour. In the short term, we can generate higher income if we increase labour force participation or work longer hours. But we already have a higher proportion of our population in the labour force than nearly all other OECD economies and we work longer hours than most people in the OECD.

and

This is striking given the high international rankings for the quality of our institutions, control of corruption, ease of doing business, and according to the World Bank, the highest per capita endowment of renewable resources in the world.

Chart 2: Labour productivity growth in selected OECD economies, 1990-2011

(Average annual rate)

5124340_files/gw-improving-new-zealand-s-economic-growth-cecc-february-201301.jpg

Source: OECD

So why is our per capita income so far below the OECD median? Partly it’s due to our geographic location and small economic size. Distance and economic size matter a lot even in a more globalised world of trade, capital and knowledge flows, and increasing interdependence. This also partly explains why our export range is concentrated over relatively few products – with food and beverages accounting for almost half our exports. The OECD and IMF believe size and distance, which limit economies of scale and market opportunities, account for around three quarters of the gap in our per capita income compared to the OECD average.

But this is not the whole story. Despite our high international rankings in key areas, the latest World Economic Forum’s Global Competitiveness Report ranks New Zealand’s overall competitiveness at 25th out of 142 countries. Besides market size, we perform poorly on our macroeconomic environment, and especially on our budget deficit and low national savings. But regulatory and performance-related factors also diminish our growth potential. Many of the remedies to substantially improve our ranking lie in our own hands, and groups such as the 2025 task force, the Savings Working Group, and the Productivity Commission, emphasised reforms that can raise our living standards.

He thought then there were three areas governments should focus on

Three areas seem particularly important. The first, is to raise our level of saving and investment, and improve the quality and productivity of our investment.

The other two were to close fiscal deficits, and to lift human capital. On the latter he observed

The bottom income deciles are populated by those with lesser skills, and those who experience prolonged and recurrent spells of unemployment. Addressing these groups would both promote productivity and reduce inequality.

Very little has changed since the Governor gave those speeches early in his term.  The fiscal deficit has been closed, and no doubt the Governor would welcome that.  But in late 2012 and 2013, there was just no sign that he thought the economy was in “very good shape” –  rather it had key pretty deeply embedded structural challenges – and few of the key indicators he cited have changed for the better since then.

Now, to be clear, (and as central bank governors have pointed out for decades) very little of this is down to the Reserve Bank.  Central banks aren’t responsible for  –  and don’t have much influence on trends in –  house prices, current account deficits, productivity growth (labour or multi-factor), the health of the tradables sector, savings rates, participation rates or NAIRUs, let alone human capital and inequality.  So the fact that the economy isn’t in particularly “good shape” –  even if it isn’t doing that badly on some purely cyclical measures – isn’t the Governor’s fault, or that of the Reserve Bank.  What the G0vernor can do is keep inflation close to target, and help safeguard the soundness of the financial system.

Which makes that line of the Governor’s, from Saturday interview, so puzzling

“It is puzzling to me why some of the commentators been so critical when the Reserve Bank is a big part of that outcome. We aren’t the whole story by any means, but our monetary policy configurations do have a major impact on the economy.”

After all, since 2009, the Reserve Bank has twice started tightening monetary policy only to have to reverse itself.  I’m not today getting into the question of how much of that was a foreseeable problem.  Even if none of it was, the fact remained that the Bank twice (out of two times) had to reverse itself.    Neither episode –  tightening and then reversal –  had the sort of major positive impact on the economy that the Governor talks of.  At best, they probably did little damage.  And those episodes aside, the Reserve Bank just hasn’t done much on monetary policy for years.   People –  like me –  have been critical of the Reserve Bank’s monetary policy management because of (a) those reversals, (b) the refusal to even acknowledge mistakes, (c) more recently, almost laughable attempts to rewrite history to suggest they were easing when in fact they were tightening.  And, of course, the persistent deviation of inflation from target, and the concomitant extent to which the unemployment rate has been kept unnecessarily higher than required, or than the Bank’s own estimate would have suggested.  Those outcomes suggested that, on average, monetary policy has been a bit too tight, as well as unnecessarily variable.

Is the aggregate cyclical position of the economy terribly bad?  No, it isn’t.  But it isn’t great either, and the longer-term metrics give even less reason for an upbeat story.  The Graeme Wheeler who took up the job of Governor in late 2012 was better than this.  Back then, he was willing to highlight what he saw as some of the structural problems.  Perhaps it wasn’t his job –  central bank governors don’t need to get into that territory, but he chose to.   If he ventures into such territory, what we should expect is a Governor who calls things straight –  for whom black doesn’t become white just because the Governor himself has himself had a rough few years.  If he no longer feels he can name the serious economic challenges New Zealand still faces, perhaps he’d have been better to keep quiet rather than further undermine his good name with the sort of propaganda that we shouldn’t hope for, but might nonetheless expect, from a political party or lobby group.

Why do I bother, you might wonder?  I was reading this morning a brief piece written to mark the anniversary of the death of  US Supreme Court justice Antonin Scalia, by one of his former law clerks.   The author wrote about “five lessons for living well” that he had seen in the judge’s life.  One of them was

“Be honest in the small things, even if it makes life more difficult”

If our democracy and institutions are to be strong, it is what we should expect from people in powerful public office.    It is too easy to put out “propaganda” and for it to slide past, and for people to nod in acquiescence when they read stuff they don’t know a lot about.  At one level, Graeme Wheeler’s interview doesn’t matter much –  and he’ll be off to pastures new shortly –  but we deserve better, from our journalists and (in particular) from those who seek out and voluntarily assume high public office.

A dynamic and diversified export sector or “alternative facts”?

The Prime Minister went to Auckland yesterday, accompanied by his Deputy and his Minister of Finance, to deliver what is popularly billed as a “state of nation” address at the Auckland Rotary Club.   I’m staggered that the Prime Minister could give such an address in Auckland and not once mention that house price debacle that his government, and the previous Labour government, have presided over, and done little to address.

But the bit of the speech that caught my eye was this

I’m proud that on the other side of the globe from the European capitals I visited a few weeks ago, New Zealanders have built a cohesive and globally competitive country that can provide valuable lessons to the rest of the world.

In recent years, New Zealand has dealt with the biggest financial crisis since the Great Depression, we’ve dealt with devastating earthquakes and we’ve made significant progress on deep-seated social and Treaty issues.

We now have a dynamic and diversified export sector,

In particular the suggestion that we have “built a globally competitive country” and as a result we “now have a dynamic and diversified export sector”.  (I wasn’t too sure about the “valuable lessons” we can apparently offer to the rest of the world, but I’ll leave that aside for now.)

Statistics New Zealand typically advise that the best way to look at longer-term trends in components of the national accounts is to use ratios of the various nominal series.    Doing so avoids deflator problems, and also recognises that prices –  earned and paid –  matter.   Here is the chart showing exports –  and imports –  as a share of GDP.

exports-and-imports-over-gdp

Exports as a share of GDP are now below where they were when the Prime Minister was Minister of Finance/Treasurer in the last days of the Shipley government in the 1990s (and lower than at any time since then, under Labour or National governments).

In a thriving, globally competitive, economy one would more normally expect to see both exports and imports trending upwards as a share of GDP.  For small countries that is even more important than large countries.

Out of curiosity I did dig out the data on export and import volumes and how they’ve grown relative to GDP.  Here is the chart for the last decade.

x-and-m-volumes

Export volumes have certainly increased a little faster than real GDP has, and import volumes more so.  But if the value of what we sell to the world (and then buy from it) hasn’t increased as a share of GDP, it doesn’t look like a particularly impressive story.

And finally, here is the chart I run every so often, showing an estimate of GDP broken down between the tradables sector (primary plus manufacturing plus export of services) and the non-tradable sector (the rest).  And I’ve presented both series in real per capita terms.  It isn’t a perfect proxy by any means, but it tries to get at the idea that domestic production for domestic consumption –  especially in the manufacturing sector – is often exposed to global competition too.

t-and-nt-gdp-feb-17

In real per capita terms, this estimate of tradables sector GDP hasn’t grown in more than 15 years.  The current estimated level is lower than the average for the 2000 to 2007 pre-recession period.

The evidence for this economy being globally competitive is slim at best.  There are no doubt plenty of individual firms doing well, but it doesn’t add up to much, especially as the starting point –  the initial share of exports (or export value-added) in our economy –  was already so low for a country our size.

In part, firms seeking to export –  or produce locally in competition with imports –  have been battling uphill.  The TWI measure of the exchange rate is around 79 this morning –  on the Reserve Bank’s real exchange rate measure only around 5 per cent off the post-float peak.    High real exchange rates can be a welcome thing, when they result from rapid productivity growth and the growing success of New Zealand firms in international markets. The high exchange rate rate then helps share the gains around.  But that simply isn’t –  and hasn’t for a long time –  been the New Zealand story.

I’m not entirely sure why politicians come out and say this sort of stuff (“globally competitive”, “dynamic and diversified export sector”).  It is particularly sad coming from the Prime Minister, who in his early years as Minister of Finance used to make exactly the sorts of points I’ve made in this post in speeches up and down the country: he was particularly fond of a version of the tradables/non-tradables chart.  And the government has long had as one of its targets a material increase in the share of exports in GDP, suggesting that they knew there was something not quite right about New Zealand’s economic performance.

But now, almost nine years in, they seem reduced to simply making up lines like these, that perhaps might feel or sound good, so long as no one actually looks into them.  Doing so discredits the speaker, and perhaps as importantly it further cheapens and debases political dialogue and debate.  Bill English should be better than that.