Australia’s foreign trade

In the wake of the upset Australian election result on Saturday, I thought it might be a good day for a quick post on some Australia/New Zealand economic comparisons.

I often bang on about New Zealand’s atrociously poor longer-term economic performance, but if Australia’s longer-term performance is less bad by comparison, we are about the only country that makes them look less bad.

At present, for example, average real GDP per hour worked in Australia is about 15th in the OECD, with quite a gap to 14th.   To New Zealand readers that probably doesn’t sound too bad, said quickly, but in 1970 –  when the OECD series starts – Australia ranked 8th.   A hundred years or so ago, on the eve of World War One, Australia’s real GDP per capita –  the only measure for which there are long-run historical estimates –  was 1st equal among the countries that now make up the OECD (with New Zealand and the United States).

But my particular focus this morning is exports, as a share of GDP.   There is an old mercantilist sort of view –  which at times seems to be held by Donald Trump –  that somehow exports are a superior form of economic activity, and that whereas exports are in some sense good, imports are bad.  That isn’t my story at all.   Exports and imports are both good –  gains from trade and all that.  In many respects, at least at a national level, one doesn’t go too far wrong in saying that we export so that we can import.  Of course, firms export not countries, but over time and in the aggregate, our appetite for cars, jet aircraft, overseas holidays or Hollywood movies is only able to be met if we find other products and services we (firms based here, employing us etc) can successfully sell to the rest of the world.  And since, especially for small countries, there is a lot bigger market in the whole world (even just the whole advanced world) than at home, export success often tends to go hand in hand with wider economic success: it isn’t that the exports, per se, make you prosperous, but that you’ve been able to generate (or even dig up) products and services that other people will pay for: you’ve passed the (demanding) market test.   Empirically, countries that have sustainably caught up –  in GDP per capita or GDP per hour worked terms –  almost without exception have had strongly performing export sectors.

But what about New Zealand and Australia?

Here is the (nominal) share of exports in GDP for the two countries for the period since our quarterly data starts in 1987 (as the paeans to Bob Hawke last week remind us, at the time both countries were doing fairly far-reaching economic reforms).   This is simply the nominal value of exports over nominal GDP.

aus exports

That gap has closed, a lot, over the decades, perhaps especially over the last 15 years or so.

It is worth remembering two stylised facts:

  • remote countries tend to trade less internationally than do countries close to lots of other countries/markets (distance really does reduce economic opportunitites), and
  • small countries tend to trade internationally more (share of GDP) than large ones.

In economic terms, New Zealand and Australia are almost equally remote (arguably they a bit more so than we, since Australia is big relative to New Zealand).  So, all else equal, one wouldn’t really expect a country five times the (population) size of the other to be exporting a similar share of their GDP –  New Zealand should be well ahead.

There is another possible exports/GDP measure. This chart uses deflated (“real”) series for both exports and imports.  Statisticians tend to frown on it –  and I mostly don’t use it –  but it does strip out the direct effects of terms of trade fluctuations, which (for Australia in particular) can be large.

aus real exports

In New Zealand, there has been no increase in the volume of exports as a share of GDP this century.  In Australia, by contrast (and after a flat period) there has been a substantial increase this decade, primarily as the newly-exploited mineral resource projects have come on stream.   In both countries, the real volume of exports has increased – in New Zealand’s case by about 50 per cent since 2002 –  but in New Zealand trade with the rest of the world is a smaller share of GDP now, and in Australia it is larger.

Of course, even this story has its complexities.  Much of the mineral sector operating in Australia is foreign-owned, so that a chunk (but by no means all) of the benefit of the export surge is accruing to foreign shareholders rather than to Australians.  But without the surge in mineral exports –  a windfall to a considerable extent (although with a policy framework that allowed developments to proceed) –  it is hard not to look at Australia and conclude that on the present suite of economic policies –  much the same as prevail in New Zealand –  their relative productivity and income performance would have deteriorated even further over the years.

Perhaps the gaps between New Zealand and Australia would have narrowed a bit, but from the wrong direction.  Much better would be if both countries were doing something that credibly might move them back up the advanced country rankings.   If the re-elected Coalition is less likely to further damage Australia’s economic prospects than Labor, no party on either side of the Tasman really seems to have serious analysis or ideas –  or to particularly care – about reversing decades of relative decline.

 

Perhaps the politicians are content with this record

I’m on deadline trying to finish a chapter for a forthcoming book, but was checking some numbers and noticed that the OECD now has 2018 labour productivity estimates for most countries.

This is the company we keep these days (comparable levels of real GDP per capita, in PPP terms).

e europe.png

(For the two countries with asterisks the numbers are for 2017).

And here is total growth in labour productivity over the period 2012 to 2018 for each of those countries.

e europe 2

(On my reading of SNZ data, the OECD’s New Zealand numbers looks a little low: probably something between 0 and 1 per cent looks to be a better estimate).

It wasn’t that 2012 was particularly exceptional in New Zealand –  so that we were coming off an artificially high base –  just that since then productivity growth has vanished.

GDP phw may 19

I do hope our political leaders –  both main parties –  and their business and media cheerleaders are happy.

Citizens shouldn’t be.

Advanced countries with flat/falling populations seem to do just fine

In my post on Monday I was critical of various aspects of Liam Dann’s Herald pieces in praise of New Zealand’s high rates of immigration.  Part of his story was that we simply had to keep on with high rates of immigration or our population would stop growing and……well, there lies dragons, or at very least “economic stagnation” and some existential threat to “New Zealand’s economic and social wellbeing”.

A casual reader might have supposed that there were no examples of countries with flat or falling populations, no straws in the wind we could look at and see how likely it was that a stable or even modestly falling population would represent a serious threat to the living standards (material and otherwise) of New Zealanders.

There was a new wave of Conference Board Total Economy Database data out a couple of weeks ago.  It has wider coverage than the OECD databases and the economic estimates are a bit more timely too.  I’ve used Conference Board data in numerous posts over the years, with a particular focus on the 40 or so advanced countries (OECD members, EU members, plus Singapore and Taiwan).

Over the last 20 years, 10 of those countries have experienced a fall in the total population, and another two have had almost no population growth.

population falls.png

If one takes a more recent period –  just the current decade –  all the countries with falling populations are still falling, and they’ve been joined by Portugal. Spain’s population is also now flat.

Of course, the economic performance of one of these countries –  Greece –  has been truly atrocious.  Real GDP per capita is still about 20 per cent below 2007 levels, and even the average level of labour productivity has fallen.  But no one supposes that Greece’s economic woes are because the population is flat or falling: if anything plummeting living standards and high unemployment have prompted Greeks to look for better opportunities elsewhere.

Here is the productivity growth (real GDP per hour worked) performance of those countries with flat or falling populations, again over the 20 years to 2018.

population 2.png

A flat or falling population is, of course, no guarantee of economic success (Greece and Portugal are what they are), but it certainly doesn’t seem to have been a major roadblock in the way of strong economic performance over the last 20 years.   Even Japan –  already rich 20 years ago, and often a poster-child for the alleged economic problems of a falling population – has had productivity growth outstripping that of the median advanced country.

Where would  New Zealand fit in that picture?  New Zealand –  with rapid population growth – managed 24 per cent productivity growth over 20 years, better than Greece and Portugal, but well below the median, let alone the median of the flat/falling population countries.

20 years ago falling populations really were a new phenomenon.  And 20 years ago, many of those countries really were rather poor, just a few years out of Soviet domination.  Perhaps one needs to look at more recent periods to really see the (alleged) crippling effects of a flat or falling population?  So I had a look at the period from 2007 to 2018 (choosing 2007 so as not to start my comparison in the middle of a severe recession), and over that period the median country with a flat or falling population also did materially better than the median advanced country (or the median of the countries with fast population growth).    New Zealand, once again, underperformed each of those medians.

But the focus of Liam Dann’s article had been on the population/immigration surge New Zealand has experienced since 2012.    I’m very reluctant to put much weight on short-term comparisons (even across a pool of other countries there can be other cyclical factors that muddy the water), but….what the heck, here it is.

You’ll recall my chart showing an estimate of labour productivity growth in New Zealand.

GDP phw may 19

That was basically no productivity growth over the last five years, and perhaps 1 per cent total productivity growth over the period since 2012.

There are various ways of getting an estimate of labour productivity. Mine (in the chart above) averages the two measures of GDP (production and expenditure) and the two hours measures (HLFS and QES).  I’m not sure quite what the Conference Board uses, but their numbers aren’t inconsistent (if perhaps a touch lower) than what is in my chart.

Here is productivity growth for the countries with flat and falling populations from 2012 to 2018, with numbers for New Zealand, all advanced countries, and the median of the flat/falling population countries also shown.

popn 3

Using slightly different estimates, we might have done better than Portugal but that is as far up the ranking as you can get New Zealand over this period, one when we have –  on the Dann telling –  been blessed by such a beneficient immigration policy (and associated rapid population growth).  Of these countries, Japan and Slovakia already have higher average labour productivity than New Zealand does, while many of the countries are now also close.   The convergence story in defence of New Zealand (others are just catching up) has long since lost most of its salience: we were supposed to be one of the countries catching up, but we just haven’t been.

For what it is worth, over this particular recent six year window, New Zealand’s productivity growth was not just second lowest on this chart, but second lowest among all the advanced economies.

My main interest is in New Zealand, an incredibly remote set of islands. Over decades now there has been no sign that rapid policy-driven population growth has been helpful to our medium-term economic performance.  But there is no necessary reason why issues that might be relevant to our economic underperformance should also be relevant for countries much closer to major markets, supply chains, networks and opportunities.

On the other hand, there is no sign that countries with flat or falling populations are doing particularly poorly.  In fact, in economic terms, most seem to have been doing just fine.

Simple cross-country correlations can always only take one so far.  After all, the countries with flat or falling populations will include those where people are fleeing underperformance (Greece say) and countries with rising populations will include some of those where people are attracted to economic success (Singapore say): in neither case is it likely that the main direction of causation runs from population growth to economic success.

But, for what they are worth, here is a scatter plot showing population growth and productivity growth across those 40 or so advanced countries over 1998 to 2018 (one dot per country, New Zealand is red).

popn 4

It isn’t a tight relationship, but it is there (and was there is the economics literature decades ago) and isn’t obviously skewed by a single outlier country.  And New Zealand isn’t an outlier either – our productivity growth over 20 years was only a bit less than one might have expected from this crude relationship.

For the much shorter more-recent period (2012 to 2018), the negative relationship is still there but, as one would expect (with other stuff going on), is weaker.    But New Zealand more starkly underperforms.    Perhaps that underperformance –  little or no productivity growth for years –  will eventually be revised away.  Perhaps.

I’m not one of those with any generalised aversion to population growth.  Most population alarmism, at least at the macro level, is misplaced.  Technology, ideas etc keep on allowing for rising material living standards for more people.  But equally, there is little evidence that rising populations –  beyond some critical low thresholds –   themselves work to boost material living standards, and some signs that advanced countries with rapid population growth do less well (in material terms) than countries with less rapid population growth (even with all the sometimes conflicting chains of causation at work).

But across advanced countries as a whole even if all that was simply false, we’d still be left with a picture of New Zealand where policy has fuelled rapid population growth for most of the last 70 years, even as our relative economic performance has kept on declining.   Whatever the situation in Japan or Slovakia, there is decent prima facie reason to be intensely sceptical of the alleged economic gains to New Zealanders from continued high policy-induced immigration to this extremely remote corner of the world.

And few/no signs that countries with flat or even falling populations need to worry about economic underperformance stemming from such population changes.

Immigration is inherently a political issue

In the few days after the Christchurch shootings, a few of the more rabid on the left appeared to want to rule out of court any discussion – ever –  about immigration policy.  Immigration was good –  was their prior –  and more immigration better, and no correspondence could be entered into.  Decent people don’t discuss such issues, except perhaps to celebrate.

The other day we had a similar sort of voice from another point on the political compass, this time in a column from Kirk Hope, the head of the leading lobby group advocating for the interests of businesses, BusinessNZ.   Despite counting myself pretty strongly pro-market (not at all the same as pro-business) I don’t often agree with Hope (I just googled his name and the name of this blog to remind myself of some of his more-egregious previous claims).  But Stuff seems to think him worth publishing, and he does head a pretty big advocacy group.

Hope’s key assertion?

One of the challenges we must face is for our politicians to stop treating the topic of immigration and immigrants as politics.

What a breathtaking proposition.   One of the most substantial instruments of government economic and social policy and Kirk Hope thinks that it shouldn’t be debated by politicians (let alone, presumably, the rest of us). Politics isn’t a bad thing –  as Hope seems to imply –  but something pretty fundamental, a big part of how we decide (and refine that view) what sort of country this will be.

As it happens, Kirk Hope never actually says how he thinks immigration policy should be decided, if not by politicians, weighed competing interests and claims.  Perhaps by BusinessNZ?   He never even tells us what his own preferred policy is.  Perhaps is he just some open-borders absolutist who thinks the very idea of an “immigration policy” is abhorent?   Probably not (there aren’t really very many advocates anywhere for such a policy).  My guess is that he’d like to keep on with something like our current immigration policy (probably the most aggressive anywhere in the advanced world), and just a bit more.   He doesn’t tell us, just urges that “politics” be removed from the process, all while advancing a mix of threadbare and/or flawed arguments for high rates of non-citizen immigration.

So how does Hope make his case?

First, there is the tired rhetorical trope about “a nation of immigrants”

It is a truth that New Zealanders are immigrants or the descendants of immigrants, and we are ethnically diverse.

Which is pretty meaningless, offensive, and acts to diminish people’s sense of identity with New Zealand.  If all human beings are ultimately descended from people emerging from, say, the Rift Valley, at very least everyone other than perhaps Kenyans and Tanzanians is descended from immigrants.  But what of it?  Closer to home, the ancestors of the Maori population came many hundreds of years ago.  They have no other home.  I’m have no idea of Hope’s ancestry, but I’m one of those (of European descent) with no other home but New Zealand –  I’ve never known an ancestor who wasn’t born in New Zealand.  But again, so what?  It is simply irrelevant to the question of how many people we should import now, on what terms, with what skills or backgrounds.   Like many who run the line, Hope makes no effort to draw out any logical implications from his factual statement –  presumably because there aren’t any.

Then we get another factual statement with few/no implications

It is also true that the demographics for New Zealanders born in New Zealand tell a story of aging and regional depopulation.

And?   People leave regions when the opportunities in those regions aren’t particularly attractive.   There is no obvious role for central planners (like Mr Hope) to argue for policy initiatives to repopulate areas they happen to think aren’t growing fast enough.  I suspect that Hope is also hoping to skate over the evidence that New Zealanders have been leaving the region of Auckland for most of the last 20+ years.   And if great opportunities do exist in particular regions, wage adjustments are likely to act as an effective signal (higher wages never seem to be part of how business lobby groups think markets should deal with incipient “labour shortages”).

Then we get a grab bag of statements inviting a “so what?”

We will soon have more people aged over 65 than under 15 years of age. Auckland and New Zealand will be dependent on immigration for skills. Two out of every five New Zealanders will live in Auckland, nearly a third of them Asian.

Isn’t it great –  something to celebrate –  that life expectancy is improving so much that there is an increasing share of the population aged (well) over 65?  Apparently not to Mr Hope.     Or was his (central planning again?) concern that New Zealand couples aren’t having enough babies?

And what of that strange claim about skills?  Is Mr Hope deliberately avoiding the OECD skills data showing not only that New Zealand workers had among the very highest skill levels in the OECD, but that immigrant workers on average had lower skills than natives (that gap is smaller in New Zealand than most, but still there)?  Let alone the official SNZ data that confirmed again last month how poorly the Auckland economy does (GDP per capita) relative to, say, big cities in many other (overall more successful, typically with less immigration) OECD countries.   Inconvenient I suppose.

Then claims start getting more far-fetched

The labour market needs to grow by 1.5 per cent to support moderate economic growth of 2.5 per cent, but actual labour market growth tends to be under 1 per cent. Workforce exits are increasing, while workforce entry levels are modest and declining.   Our people shortage is getting worse.

This is just nonsense stuff.  Sure, all else equal, if your population growth rate is faster so will the rate of growth of GDP.  But – unless you are raising an army –  total GDP doesn’t much matter to anyone.  What matters, more closely, is real GDP per capita and the real GDP per hour worked that undermines that per capita growth.   If, say, the population were static –  as it now is in many OECD countries – 1.5 per cent annual GDP growth would be a quite reasonable outcome.    As Mr Hope surely knows, we’ve had almost no productivity growth recently (despite, because of, or just coinciding with very strong immigration).

A central planner apparently to the core –  did he tell the (generally pro-market) people at BusinessNZ this when he was hired? –  Mr Hope is alarmed about “people shortages”.   This just incoherent stuff, and he shows no sign that he has looked, even cursorily, at how countries are managing where the population is flat or even falling a bit?  As a hint –  but he could check the data himself –  most are achieving faster growth in per capita income and productivity than New Zealand is.

He offers some strange arguments about how we need immigrants to “replace” New Zealanders who are retiring and yet a little later on even he acknowledges that  immigrants themselves get old.  If there are fiscal problems associated with increasing life expectancies –  and there are – why wouldn’t you tackle those directly (eg raising the NZS eligibility age)?

We are then get back to some other claims

Immigration contributes to population and economic growth, provides an expanded talent pool, helps us understand overseas markets, and contributes to the diversity and vitality of New Zealand communities.

I’d be impressed –  though still not thinking that immigration policy should be taken out of the realm of politics –  if he’d claimed (and offered New Zealand evidence for) that rapid New Zealand immigration had boosted productivity growth.  We never know the counterfactual, of course, but in our decades of high non-citizen immigration, we’ve made no progress at all in closing the productivity gaps, and have actually fallen further behind.  Oh, and “understand overseas markets”…..well, perhaps, except that New Zealand has one of the very worst exports (as a share of GDP) performances of any OECD country –  levels and changes –  despite all that immigration.

Not content with the evidence-free-zone so far, Hope ups his rhetoric

Our people shortage is critical now because of the opportunities that are opening for New Zealand business.

The successful completion of the giant Pacific trade deal CPTPP and the likely completion of an European-New Zealand trade deal mean 46 more markets will soon be open to enhanced trade with New Zealand businesses.

So, while our markets are expanding our working population is reducing.

So despite having probably the largest (per capita) non-citizen programme in the OECD, it just isn’t enough.    He calls for even more.

Even serious defenders of the New Zealand immigration programme will be embarrassed by this particular line.  After all, no serious analyst claims that CPTPP will be worth more than perhaps a 1 per cent boost to GDP –  and serious analysts would claim those gains would come through terms and trade and higher productivity, not conditioned on even more people.  As for the EU, I know Hope is a big advocate of that possible deal, but as I pointed out in debunking an earlier article containing his over-egged claims (that the EU deal might finally be what transformed our –  already –  “rockstar economy”), the best sober estimate of the GDP gains from Canada’s “free trade” agreement with the EU was about 0.5 per cent.

And wasn’t there the small point that, despite all the various trade deals New Zealand has signed up over recent decades – including those with Australia and the PRC –  and the reduction in global agricultural protectionism, exports and imports have been falling as a share of New Zealand GDP.  Perhaps another million migrants will make all the difference?  But perhaps not.

Hope ends by getting out the violins

We need to ensure that our political thinking more clearly acknowledges that we are an immigrant nation at our core, that we truly value diversity, that we are inclusive and will celebrate and support new New Zealanders as we all grow our economy and standard of living, contributing to our communities and our future.

I could –  and would- reframe this as something along these lines

We need to ensure that our political thinking more clearly acknowledges that after one of the largest-scale immigration programmes undertaken anywhere in recent decades, there is little or no evidence of economic gains for New Zealanders, and at least the possibility that such rapid rates of immigration, to a location so remote, have made us poorer rather than richer.  Responsibility for that rests not with the migrants themselves –  almost all of them as simply pursuing the best for themselves and their families –  but with our own political and business leaders, who have championed an ideological cause (with both globalist and bigger-New Zealand strands) even as the economic evidence in support of their claims has failed to arrive.  Notwithstanding a wider range of ethnic restaurants (and associated consumption diversity), there has simply been no compelling evidence –  as there is none globally –  that “diversity and inclusion” (as distinct from the ongoing contest of ideas) has produced any economic gains whatever.    If anything, New Zealanders at the bottom of the socio-economic heaps have been paying an increasing price for this obeisance to an “elite” ideology.

I’m still left rather gobsmacked that a supposedly serious public figure can, apparently seriously, suggest that immigration is other than a natural and appropriate subject for intensive political debate.   What is more fundamental to a country than the people who make it up, and yet that is what immigration policy influences very heavily, at least when done on the huge scale our politicians have chosen in New Zealand.  Even at a narrowly-economic level, it represents a significant change in the overall resource mix and productive structure of the economy (especially in a country as natural resource dependent as New Zealand or Australia).

Immigration policy doesn’t make that much difference in any particular year, but we’ve been running something like current immigration policy now since the early 1990s.  In 1992, New Zealand’s population was about 3.5 million. In the years from 1992/93, we’ve granted residence status to more than 1.1 million non-citizens.  That is a huge number.   Some, perhaps many, will think it is a “good thing” –  for various possible reasons –  and others will think it a disastrously bad choice (that’s my view, even if more apparent in hindsight than it could have been in 1992).  Even among those who think it a bad choice, some (me) will emphasise overall economic performance arguments.  Others might emphasise real world second-bests around housing, or traffice congestion, or just a preference for being small.  Others again might emphasise environmental pressures.  Others might raise concerns about precisely the sort of “diversity” Kirk Hope and the cheerleaders celebrate, highlighting issues around cohesion, trust, mutual support etc. And others too might be uneasy about large-scale immigration does to the relative place of Maori in New Zealand.  Some might just think that the ideological etc make-up of future New Zealand should be determined by the individual choices of New Zealanders, not by politicians skewing the future population one way or another.  But all those disputes are naturally and appropriately the stuff of politics.   Given our relative economic underperformance, notwithstanding decades of large scale immigration, all these angles should be debated more vigorously, not less.

Most of my own arguments around New Zealand’s immigration policy have been economic in nature.  On its own, the economic track record should have been more than enough basis for a rethink, were it not for the ideological priors of the champions.  Perhaps the most accessible version of my economic story is here, in a speech I did 18 months or so ago.

I have occasionally commented on various social and cultural dimensions, including in two posts sparked by the 2017 New Zealand Initiative report on immigration policy (here and here) and in some remarks on diversity, and its limits in a stable democracy, here.

I was also reading yesterday an  interesting article from the latest issue of The Atlantic by David Frum on US immigration, experience and policy.  Frum is a pretty determined never-Trumper, and yet he concludes his article this way

Reducing immigration, and selecting immigrants more carefully, will enable the country to more quickly and successfully absorb the people who come here, and to ensure equality of opportunity to both the newly arrived and the long-settled—to restore to Americans the feeling of belonging to one united nation, responsible for the care and flourishing of all its people.

Every country is different, but it is worth recalling that US immigration policy –  under all recent presidents – has targeted non-citizens inflow about one third those of New Zealand (in per capita terms).  I don’t agree with everything in his article, and some of the issues are different for New Zealand than for the US –  there is a more plausible argument in the US context that immigration is roughly a wash (in economic terms) for natives than there is here – but I thought it was a piece worth reading and reflecting on.  I wonder what Mr Hope would make of it?

 

A woefully weak tradables sector

The GDP numbers came out last week.   The media commentary, such as it was, seemed quite relaxed about the numbers (politicians’ attention was elsewhere) with a “not too bad” sense.  But here is a chart of the annual average percentage growth in real per capita GDP.

RGDP aapc

It has now been more than 18 months since the annual average growth rate was above 1 per cent.  That is the worst run of per capita GDP growth, outside recession periods, we’ve had in the three decades for which we have data.    It is the Labour/New Zealand First watch now, but the slowdown was well underway towards the end of the previous government’s term (0.8 per cent annual growth for the year to September 2017).

It has, it seems, been quite a few quarters since I last updated my chart showing an (indicative) split between the tradables and non-tradables sectors of the economy.  Here it is, in real per capita terms.

T and NT to Dec 18

Per capita growth in the tradables sector isn’t doing too badly at all (although even there, the growth rates are a bit lower than they were in the mid-90 to mid 00s period).   But what of the tradables sector indicator (recall that this is agriculture, forestry, fishing, mining, manufacturing, together with exports of services)?    The latest observation is 7 per cent lower than the peak, itself reached more than 14 years ago.     Growth in the GDP contribution of these sectors has been about 1 per cent, in total, in the 18 years from the end of 2000.

It is an astonishingly bad performance –  well, it would be “astonishing” if we hadn’t become so used to New Zealand’s underperformance, and ministers (in successive governments) hadn’t got so used to glossing over failure.  Successful economies –  and most especially small successful economies –  tend to succeed when firms that can take on the world markets and successfully compete find it profitable to develop, locate, expand and remain in the country in question.   That simply hasn’t been the New Zealand story (and consistent with that, our foreign trade shares of GDP –  exports and imports –  are little changed over almost 40 years; quite out of step with the experience of successful advanced and emerging economies).

More than a few economists don’t really like the way this chart combines components of the GDP production and expenditure measures, in ways that (while probably sound enough for illustrative purposes) aren’t quite kosher.   So here are components individually, again in real per capita terms.

components mar 19

In per capita terms, mining is smaller than it was in 1991 (despite that huge oil-related surge in 2007).  Agriculture etc and manufacturing are still a bit smaller than they were in 1997 –  and less than 10 per cent higher (in per capita terms) than they were in 1991.

Services exports were, once, a good story, recording very rapid growth –  in per capita terms – over the 1990s and until around 2002.  But that was then, almost a generation ago when our current Prime Minister had barely come of age.  The current level of services exports (per capita) is only about 4 per cent higher than it was in 2002.     And all that despite the export subsidies –  for that is what film industry grants and bundling immigration and work rights with study here really are.    Others might note that emissions from international air travel aren’t even captured in the commitments successive governments have made, let alone internalised.

Here is another way of looking at exports of services: in nominal terms as a share of GDP.

services X to dec 18

The current share (8.5 per cent of GDP) was first reached in 1995.

When the Minister of Finance, the Secretary to the Treasury (and even the Governor of the Reserve Bank) go on about a more “productive economy”, these are the sorts of underperformances they need to start openly engaging and grappling with.

That, in turn, might involve taking the real exchange rate more seriously

rel ULC RER

A 20 per cent plus sustained appreciation in the real exchange rate, unsupported by (say) independently-sourced acceleration in productivity growth, is rarely very positive for the economic health of a country’s tradables sector.  But none of our political parties seem interested.  A high exchange rate means consumption remains cheap, and domestic-focused firms (who now dominate most of the business bodies and lobby groups) do well.  But it simply isn’t a sustainable long-term foundation for New Zealanders’ material prosperity.    High real exchange rates are a good outcome when they stem from an economy with strong underlying productivity growth, catching up with the rest of the world. But our policymakers and advisers almost seem to act as if they think they can put the cart before the horse, as if having a high exchange rate is itself some mark of success.

Agricultural sector productivity growth

In the last few weeks, presumably simply by coincidence, I’ve had various comments and emails about productivity growth in the agricultural sector.    The most recent one finally prompted me to dig out the official data and check that my impressions were still supported by the data.  They were.    Agricultural sector productivity growth was very strong, but has been much more subdued for some time now.

There are two main measures of agricultural sector productivity: labour productivity (in effect, output per hour of labour input) and multi-factor productivity (in effect, the residual after what can be attributed to growth in labour and capital inputs has been deducted). In principle, MFP is superior.  In practice, estimates rely more heavily on the assumptions used in the calculation (although –  diverting briefly –  to the various readers who have sent me a recent piece by GMO on TFP/MFP, I reckon there is less to that critique than the authors claim).

Agriculture is one of the sectors for which we have consistent productivity data back to year ending March 1978.  By New Zealand standards, that is a long run of data.  Note that there is quite a bit of natural volatility from year to year because of fluctuations in the climate (droughts and all that).

Here are the charts showing growth in labour productivity and in multi-factor productivity (both expressed in log terms, so that the slope of the line indicates the growth rate).

agric LP

Really rapid growth in the first 20 years or so (up 150 per cent in 20 years), but much slower growth since then.  It isn’t disastrous growth by any means –  averaging just under 1.5 per cent per annum from 2005 to now –  but nothing startling either.

And MFP.

agric MFP

Once again, really strong productivity growth for the first 20 years, and much less since then (none at all in the last decade).  If one had confidence in the data, that might be more concerning.

Perhaps –  and it is an obvious question to ask – you are wondering if the slowdown in agricultural productivity growth is just part of the general slowdown in labour productivity growth in New Zealand (seen mostly starkly in the overall economy figures, where there has been very little growth at all in the last five years or so).

So here are the same two charts –  labour productivity and MFP –  but this time showing agriculture relative to the overall “former measured sector” (the series SNZ publishes that also goes back to 1978, covering the 70 per cent or so of the economy where productivity is relatively less hard to measure).  All series are indexed to a common base in 1978 (so none of this is about productivity levels, it is all about cumulative growth rates).

Labour productivity first.

agric LP and FMS

and MFP

mfp agr

There is clearly something in the story.   Growth in the “former measured sector” productivity itself has slowed –  labour productivity growth averaged 2.4 per cent from 1978 to 1998 and 1.6 per cent for the 20 years since 1998.  But whereas agricultural sector productivity growth was (far) outstripping that in the rest of the “former measured sector” in the earlier years –  the upward-sloping bits of the last two charts –  in the last 20 years (and even more so in the last 10) productivity growth in the agricultural sector has been a little slower than in the rest of the “former measured sector”.

I don’t have a policy point to make here.  Sector-level productivity isn’t my area.  Relative optimists might look at the data and suggest liberalisation played a big part in the earlier productivity surge, and that liberalisation wasn’t ever going to be repeated.  Perhaps, but bear in mind that our agricultural sector was always the part of the economy most heavily exposed to international markets  (by contrast, a sector like “Transport, postal, and warehousing” –  with similar total labour productivity growth over 40 years –  was almost certainly much more sheltered).   Pessimists might focus on the role of unpriced externalities (particularly around water pollution, but also methane emissions) and wonder how agricultural sector productivity might respond as regulation bears more heavily there (although it is possible we could see higher average productivity and lower total output).   Others might reasonably wonder about these productivity measures for agriculture in particular: in most sectors labour and capital are the critical inputs, but land is a huge input in agriculture and it isn’t directly accounted for (something which matters –  much –  more in looking at levels estimates).   [UPDATE: A SNZ person got in touch and pointed out that they do take account of land in their capital services estimates.]

As for me, my only motivation was to update my impressions.  Sadly, the latest data confirmed them.

 

Looking at the regional GDP numbers

Under this government money from the Provincial Growth Fund has been being flung round like confetti (this was last week’s example), with very little sign of any rigorous evaluation.  It isn’t clear to me whether things are worse under this government than they were before (recall the 13 bridges Simon Bridges was promising in Northland as Minister of Transport, to try to win a by-election) or whether this lot are just “better”
at the branding.   “Regional development” –  with no disciplined sense of what actually shapes economic performance – has certainly been a cause dear to the heart of all recent governments (and their MBIE bureaucrats).

SNZ yesterday released the annual regional GDP numbers.   As ever, these  numbers aren’t perfect –  nominal not real, and prone to revisions for several years –  but they are lot better than nothing, which is what we had until almost 20 years ago.

The Provincial Growth Fund seems to have been particularly concentrating its confetti in Northland, Gisborne, and the West Coast.  The Northland and Gisborne regions are estimated to have the lowest average GDP per capita in New Zealand (at about 70 per cent of the national figure).  As it happens, the West Coast doesn’t do too badly, with average GDP per capita 84 per cent of the national average in the year to March 2018.  Manawatu-Wanganui and Hawke’s Bay round out the bottom five regions (with average GDP per capita less than that on the West Coast).

The regional GDP data have been available since the year to March 2000.  Over the period since then, three of those five regions have had faster growth in per capita GDP than the national average (and by very substantial margins in Northland and the West Coast).  All five have recorded faster growth than Auckland and Wellington.  And if one goes back to 2000, one of the poorest five regions then was the Bay of Plenty, but it has recorded such fast (per capita) growth since 2000 that it has overtaken not just Hawke’s Bay but also Tasman-Nelson.

The picture is a bit less positive if one takes just the last decade, but even over that period growth in per capita incomes is estimated to have been stronger in Hawke’s Bay and Gisborne than in the country as a whole.

As a matter of interest, I also had a look at the unemployment data.  The regional data from the HLFS arem’t reported for the same groupings as the regional GDP data, but here is one chart I constructed.

regional U rates

Even at its worst this decade, the gap between the two lines wasn’t as large as it was 20 years ago.  Last year, it was almost as low as it has ever been.  Involuntary unemployment is a blight on lives wherever it is found, but these particular regions don’t seem to have been doing too badly.

Meanwhile, any guesses as to which regions had the slowest growth in average GDP per capita over the entire period from 2000 to 2018?

Wellington was worst, followed by Auckland as second-worst.

akld wgtn shares

The two regions combined have recorded a material increase in their share of national population, and yet their share of total GDP is unchanged (actually down very marginally).

What about Auckland alone?  If the picture is less dramatic than for Wellington, Auckland matters much more, due to sheer size (and population growth, actual and projected) Here is the latest version of a chart I’ve shown in previous years.

akld gdp pc to 18

It certainly isn’t monotonic.  There are reasonably good phases (which look to coincide with building booms in Auckland) and really bad ones, but there is no sign of the longer-term trend reversing.   An even-greater share of the population is in Auckland, and average output per person in Auckland is growing more slowly than in most of the rest of the country.  In high-performing economies –  at least those relying on something other than really abundant mineral resources –  the picture is typically the other way round.  Big city GDP per capita is typically much higher than in the rest of the country, and in most cases that margin is widening.  But not in Auckland.

Any why is Auckland’s population growing so rapidly when its economic performance has been unimpressive (to say the least).  That’s down to immigration policy.  That isn’t really a debateable point: the data show that (net) New Zealanders have been moving away from Auckland.  This chart was taken from a Treasury working paper I wrote about last year.

tsy akld popn

Our large-scale non-citizen immigration policy –  with targets not exceeded in per capita terms in any other OECD country –  is a practical centrepiece of the economic strategy of successive New Zealand governments.   You don’t hear the phrase now, but it is only a few years ago that MBIE openly talked of the policy as a “critical economic enabler“.  With the best will in the world no doubt, “critical economic disabler” would be a fairer description of the role immigration has played for decades (probably going back all the way to the post World War Two period).  It isn’t the fault of the immigrants –  simply looking for the best for themselves and their families –  but of successive governments and their officials.  They are particularly culpable as the evidence has mounted that their strategy simply is not producing the desired economic results.

The story in Wellington is different of course, but probably no less telling.  Here, local government likes to talk up the idea of a city built on high tech industries.   Central government likes that talk, and also throws (lots of) money at the film industry.    The information in the regional GDP tables doesn’t give a full picture, but there is a line for the component of GDP labelled “Information, media and telecommunications and other services”.  Here is the share of that sector in Wellington’s GDP.

wgtn ICT

Even in Auckland, the share of that sector has been falling –  so there may be something structural around, say, the falling real price of telecommunications going on  –  but nothing like as steep as that fall in Wellington.

New Zealand does macro policy reasonably well –  fiscal policy and (for all my various criticisms at the margin) monetary policy – but our structural policies are set for failure, and in delivering continued underperformance, are doing just that.    The immigration policies pursued by successive governments simply take no account of either our experience (70 years of ongoing relative decline) or our most unpropitious location.   If –  as I noted yesterday –  this is a bad place for basing outward-oriented business (and revealed preference suggests that is so), it is a bad place for governments to engage in “population planning”, importing large numbers of people.  One of the fastest population growth rates in the OECD combined with one of the poorest economic performances should be telling anyone with ears to hear (not our politicians) something important.  The specific relative failure of Auckland just makes that message more stark.