Economic failure: the reluctance to recognise the implications of extreme remoteness

As regular readers know, I tend not to be particular upbeat about the New Zealand economic story.  For anyone new, there should be a hint in the very title of the blog.  If, by chance, you are still attracted to an upbeat take, only last week in a post here I critiqued a recent book chapter taking that sort of view.

And so I was a bit surprised when, more than a year ago now, I was asked to write a chapter for a forthcoming book on aspects of policymaking, and associated outcomes, in a small state (this one).  In principle, the book sounded potentially interesting, and they were approaching a bunch of pretty serious and senior people to contribute.  But it wasn’t clear there was much in it for me, and since the plan was for the introduction or foreword to have been written by the head of the Department of Prime Minister and Cabinet, it seemed likely that the thrust the organisers were looking for was a positive take on the New Zealand story.   So as not to mess people about, I declined the invitation, only to have my arm twisted, with assurances that there was no such agenda.  In the end I agreed to write something, and although the organisers/editors still seem keen on a more positive spin, by the time I discovered that I was committed.

The latest draft of my chapter, attempting to be positive where I can, is here.

An underperforming economy; the insufficiently recognised implications of distance (draft chapter)

I’ve had useful comments from various people on an earlier draft (none of them bear any responsibility for the current version though), but if any readers have comments you’d like to add to the mix, you can earlier leave them as comments to this post or email me directly (address in the “About Michael Reddell’s blog” tab).

The potential market for the book, as I understand it, is people like students of public policy, perhaps in parts of Asia.  Many of these potential readers, I’m given to understand, see New Zealand as a sucesss story.   Within the (severe) limitations of length, I’ve set out to provide a more balanced take on the economic story.  In a way, I guess, New Zealand is a sort of success story.  200 years ago on these islands there was not much more than a subsistence economy, and only recently had overseas trade resumed after the inhabitants had been isolated for several hundred years.  From that to one of the richest countries in the world in a hundred years was remarkable.  And even now, after a century of relative decline,  there is only a handful of countries in east Asia and the southwest Pacific with material living standards matching or exceeding our own (Australia, Japan, Singapore, Taiwan, with South Korea coming close).   And from a macroeconomic policy perspective, we’ve now had low and stable inflation again for 25 years, have had low and stable public debt, and a considerable measure of financial stability.  That isn’t nothing by any means.

But it doesn’t exactly mark us out.  What does mark us out is that century of relative decline: of course, we are much richer than we were 100 years or so ago, but then we were among the top three countries in the world (GDP per capita), and now we languish a long way down the advanced country rankings (especially on productivity measures).    With productivity levels not quite 60 per cent of those in the leading bunch of advanced economies, we are getting closer to the point where New Zealand could really only be described as an upper middle income country.

My story, as a regular readers know, is that our physical remoteness –  in an era where, internet notwithstanding, distance appears to be not much less of a constraint than ever in many respects – is the key issue in our underperformance.  It isn’t that –  as some models and sets of estimated equations suggest –  distant countries are inevitably poorer, but that distant countries seem to thrive (to the extent they do) mostly on natural resources, and industries building directly on those resources.  And with a limited stock of natural resources, there are limits to the number of people that such places can support top tier incomes for (a very different proposition than for economies –  eg those of northwest Europe – where most of the most productive economies are found) where natural resources are simply no longer that important, and where the advantages of proximity can be realised more readily.    The story is much the same for Australia as for New Zealand –  and Australia has also been in (less severe) relative decline over the last 100 years – with the difference that Australia found itself able to utilise whole new sets of natural resources, either unknown or uneconomic previously.  New Zealand has had nothing – that material – similar, and no big asymmetric technology shocks in our favour for a long time either.   Against that backdrop, using policy to drive population growth (rapid by advanced country standards) simply did not make sense –  putting more people in a fairly unpropitious location, albeit one with some reasonable economic institutions (rule of law etc).  It didn’t make sense decades ago –  before people fully appreciated the nature of New Zealand’s relative economic decline –  and it doesn’t now.   There was a valuable signal, that policymakers and their advisers simply chose to ignore, when New Zealanders –  who know New Zealand best –  starting leaving in numbers that (while cyclical variable) are really large by international or historical standards (absent a civil war or the like).

Perhaps the new bit to my story in this draft chapter – which was prompted by the way the initial specification was framed –  was to think about why the stark economic underperformance has been allowed to go on, not just by our politicians and political parties, but with no compelling remedies offered by our major economic policy advisory institutions (The Treasury in particular) or by international agencies that offer advice (notably the OECD).  I suggest a story in which it is simply difficult to identify that right comparator countries when thinking about economywide productivity and economic performance issues.  For many areas of policy –  monetary policy is an example, but it is probably true of health and education and welfare –  pretty much any advanced market economies can offer useful benchmarking, but if remoteness really does matter (not just to, say, defence, but) to the viable options and business opportunities available here, then the experiences of –  say –  Belgium or Denmark just aren’t likely to be that useful, even if Denmark has a similar population and was once the major competitor for UK dairy markets.

We may be able to learn something from reflecting on the differences, but it is typically much more compelling if one can point to another similar country (or 2 or 10 of them) and learn from them.   And thus I note an important difference between New Zealand and many of the (now fast) emerging advanced economies of central and eastern Europe.  Not only are they physically proximate to various highly productive economies (easy and cheap to meet fellow policymakers and analysts regularly, including in EU fora), but have a lot of similarities across each other (similar location, similar communist past, and so on).     I don’t claim to know Hungary, Slovenia, the Czech Republic or Slovakia in great detail, but if I were a policymaker in any of them, I’d be (almost obsessively) benchmarking my economic policies against those of the others, and of nearby rich and productive countries (eg Austria and Switzerland).  There are never exact parallels, but in New Zealand’s case it is hard to find good parallels at all. I suggest that Israel might be in some respects the best for New Zealand –  but it is little studied here (and its productivity performance is about as bad as ours –  partly, I’ve suggested, for similar reasons).

The lack of easy examples to benchmark ourselves against isn’t really an acceptable excuse, but I suspect it is part of the explanation.  It is long been a problem for the OECD in their advice to New Zealand: they’ve repeatedly brought a northern European mindset to a remote corner of the world, after early on investing quite a lot in the idea that the New Zealand reforms were exemplary, and almost sure to reverse our underperformance.  Places like the OECD work a lot on illustrating cross-country comparisons, but they simply never found the right ones for New Zealand (on these economywide issues) and have not shown much sign of trying.  It is particularly problematic because the OECD are full-on committed to high immigration, regardless of the experience of an individual country (see my post about the then OECD Chief Economist extraordinary performance when she launched their 2017 New Zealand report – there is a new report due out in a few weeks, and I’m not holding my breath).

Of course, New Zealand politicians no longer seem to have any appetite for trying to reverse the staggering decline in New Zealand’s relative performance.    But just possibly they might if their advisers were offering a compelling diagnosis and set of prescriptions.  As it, The Treasury seems to have no more idea than the OECD, and seems to have abandoned much interest in the productivity issue, in favour of the feel-goodism and smorgasbord of random indicators that makes up the Living Standards Framework, supporting the “wellbeing Budget”.  I was exchanging notes the other day with someone about the mystery as to who the next Secretary to the Treasury will be (there is a vacancy a month from now, and applications closed three months ago).  It is hard to be optimistic that it will make much difference who gets the job –  given the hoops they will have to have jumped through to get it –  but sadly it is a story of a low-level equilibrium: no political demand for answers and options to reverse our decades of relative decline. and no bureaucratic supply of such answers or the supporting analysis either.

Anyway, for anyone interested here are the concluding paragraphs.

Conclusion

After the bold reforming period of the 1980s and early 1990s, official and political economic policymaking in New Zealand appears to have been at sea, without a tiller or compass, for at least a couple of decades.   Much that was positive was done during the reform era, and various good institutional reforms were put in place.  Much needed to be done, and in some respects it was to the credit of a small country that so much – initially attracting considerable international admiration –  could have been put in place so quickly.    Seared by the experience of the quasi-crisis of 1984, and rapid escalation of official debt in the previous decade, New Zealand has since enjoyed an enviable degree of macroeconomic stability: low and stable public debt, low and stable inflation, and domestic financial stability (even amid severe policy-induced upward pressures on house prices and household debt).  Unemployment rates that are fairly low on average are another successful element.   In those areas of policy, meaningful international benchmarks have provided a routine check of policy, and the external advice sometimes provided has typically been drawn from countries (small floating exchange rate countries), where the comparisons are apt and insightful.

But if stability has been successfully regained and maintained, on the wider counts of economic performance only a “fail” mark could possibly be assigned.  Among the failures, policymakers managed to preside over reforms that have created artificial scarcity of urban land and sky-high housing prices, in common with many of their Anglo peers.  But the productivity failure is more stark, because it is more specific to New Zealand.   Despite numerous (de)regulatory steps taken to open the economy to international competition –  and a considerable increase in the real volume of exports and imports –  foreign trade as a share of GDP has shrunk and with it the relative size of the tradables sector.  The export sector itself remains heavily dominated by industries reliant on domestic natural resources (a fixed asset) – services exports have been shrinking as a share of GDP – and, despite rapid population growth, business investment has been modest at best.

To an outsider, perhaps the surprising feature of such an underperforming advanced economy is that population growth has nonetheless been quite rapid. Birth rates have been below long-term replacement rates for several decades now. But defying the revealed preferences of New Zealanders, who have left the country in huge (but cyclically variable) numbers over the last 50 years for 25 years now policy has been set to bring in one of the largest migrant flows (per capita) of any advanced country.   Regularly presented as a skills-focused approach, it has remained difficult to attract many really talented people to a small remote country with lagging incomes and productivity[1] and there have been few (apparent or realised) outward-oriented economic opportunities in New Zealand for either natives or migrants.

Advocates and defenders of New Zealand immigration policy often attempt to invoke arguments and indicative evidence from other countries.  Even then, the value of insights appears more limited than the champions believe: not one of the high immigration advanced economies (Canada, Australia, New Zealand, Israel – or the United States) has been at the forefront of productivity growth over the last 50 years, and only the US is now near the frontier in levels terms.  But even if those arguments might have some validity in some other countries, there has been too little serious engagement with the specifics of the New Zealand situation: remoteness, lack of newly-exploitable natural resources,  and the actual experience (lack of demonstrable gains for New Zealanders) following 25 years with a high level of (notionally) skills-based immigration.    As by far the most remote of any advanced country, it is perhaps the last place one might naturally expect to see policy actively working (encouraged by local officials and international agencies) to support rapid population growth.

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies)   Past experience –  1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand.  But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s –  it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

[1] OECD (2016) adult skills data suggest that although the gap between skills of natives and migrants is small, migrants to New Zealand are, on average, less skilled than natives.

There won’t be any posts for a few days as we are heading off this morning to attend the funeral for my wife’s (extremely aged) grandmother.  Back blogging on Tuesday.

(Un)successful public policy

Yesterday afternoon I saw this in my Twitter feed

My first thought was along the lines of “well, I guess there is nothing about New Zealand economic policy”, (a) so poor has our long-term performance been, and (b) because surely outcomes matter?.   But I’m a policy geek sort of person, ANZSOG is chaired by our very own State Services Commissioner, and ANU is the top-ranked university in Australasia, so I clicked the link to see what examples of successful policymaking in New Zealand they’d found. To my surprise I found this

New Zealand’s economic turnaround: How public policy innovation catalysed economic growth (PDF, 0.2MB)Michael Mintrom and Madeline Thomas

(Downloads of all the individual chapters appear to be free, and there are pieces on ACC, early childhood education, Kiwisaver, nuclear-free New Zealand, and so on, some of which may interest some readers.)

But I was a bit flummoxed even by the title of this economic chapter.  I recognised the “public policy innovation” –  thirty years on I still support most of it –  but the idea of an “economic turnaround” or “catalysed economic growth” seemed, to say the least, at odds with the data.

Mintrom is a public policy academic, now at Monash University in Melbourne. He worked for The Treasury for a few years in the late 1980s before heading off to do his PhD.  But, from the look of his publications, he seems to know a lot about public policy processes, but not necessarily a great deal about economic growth or overall economic performance.  Thomas is his research assistant, with a psychology degree and some experience working on social policy with local governments.

When I got into the chapter itself it turned out the authors were focusing on a handful of specific initiatives undertaken in the late 1980s and early 1990s:

  • reduction of market interventions (controls, subsidies, import restrictions etc),
  • creation of SOEs and subsequent privatisations,
  • simplification of the tax system and introduction of GST, and
  • passing responsibility for monetary policy to an independent Reserve Bank.

And they lay out early on how they define success.  Their first criterion is endurance, and thus they argue that “these policy innovations have now remained in place for decades. Thus, judged by endurance, they have been highly successful.”

There, it would appear, speaks someone more interested in processes than outcomes.  After all, the broad range of policies the 1980s and 90s reforms replaced –  exchange controls, heavy import protection, monetary policy set by ministers – also lasted for decades, and were generally not accounted a success.   The Soviet Union managed 70 years.

But the authors offer three other perspectives from which to view the success of the policy programme.  There was something called the “programmatic perspective”, which seems to be encapsulated in these two sentences:

A highly coherent theory of change guided the development of these policy innovations.  After a relatively short time, it was clear the changes were producing beneficial outcomes.

Then there is the “process perspective”, where they claim (and I mostly wouldn’t disagree) that “the policy innovations were well designed and generally well managed”.

And, thirdly, there is the political perspective, which they describe as “more complicated”.  That, presumably, does duty not only for the deep divisions that opened up in the Labour Party, Jim Anderton’s breakaway, and the divisions that opened up in National, culminating in the founding of New Zealand First, to all of which one could add the public sense that politicians hadn’t been straight with them (many readers will be too young to recall that in 1987 Labour published its manifesto the week after the election) and the replacement of FPP by MMP (you may think that change good, but it simply wouldn’t have happened without the ructions of the previous few years).

Remarkably, in a chapter focused on economic policy and –  at least according to the title –  economic growth, the authors take as their “starting point” several very positive assessments of the reforms written from 1994 to 1996.    Some of those articles are valuable, but each was written with the benefit of almost no distance or perspective, and were written a quarter of a century ago.  I found it remarkable that in a chapter about New Zealand’s economic growth, there were no references at all to the literature over at least the last decade about New Zealand’s disappointing productivity performance (sometimes, but quite wrongly, characterised as the New Zealand “productivity paradox”).    Those concerns, from extremely orthodox sources, have been around much longer than that: I happened to be dipping into the OECD’s 2000 report on New Zealand yesterday and found explicit concerns there about the failure of the New Zealand economy to converge, highlighting in particular the disappointing productivity growth.

The first part of the chapter is devoted to rehearsing some of the political and economic context for the reforms –  with which I mostly have only relatively minor quibbles – before they move on to focus on the four areas of reform (listed above).  Again, as pure description, it isn’t too bad –  with the odd annoying mistake (eg the exchange rate was not pegged to the US dollar in 1984, the price freeze had been lifted before the 1984 election), but whenever there is any sort of evaluative tone it is almost always very upbeat.  And perhaps only a young Treasury official from those days could describe, with a straight face, the Treasury’s approach to other departments as “Treasury analysts showed a great desire to….seek insight from colleagues in other departments”.

There is a variety of odd claims.  Thus,

The move to a more independent Reserve Bank came after several years of a floating New Zealand dollar, which was also viewed as a key element of market liberalisation; it was therefore uncontroversial.

Where did they get that from?  The Reserve Bank Act was intensely controversial at the time, with considerable opposition (wrongheadly in my view, but it was there nonetheless) from most prominent academic economists in New Zealand and some vocal business lobby groups.  The authors talk up the legislation passing Parliament unanimously (perhaps so if Jim Anderton was away that day), but if they’d done even the slightest refreshing of memories, they’d have been aware that the legislation divided both major party caucuses.  National – in Opposition – voted for the legislation, but Ruth Richardson’s former economic adviser recorded later that the vote in favour at caucus secured a majority of only one: Sir Robert Muldoon (opposed) was away seriously ill, and Winston Peters (opposed) for some reason skipped the meeting.   And I’ve perhaps mentioned before that in every subsequent election –  down to and including 2017 – one or other political party was campaigning on a platform of changing the Policy Targets Agreement or the Reserve Bank Act.

There are other odd claims.   The authors are mildly circumspect about aspects of the privatisation programme (“some sales were poorly managed”), but then cite as evidence of the “policy success” of the Labour government’s privatisation programme, that the succeeding National government did more privatisations.

The authors begin their Analysis and Conclusions section suggesting that in the early 80s New Zealand was heading towards “economic collapse”, but that is simply overblown political rhetoric for a process of stagnation, fairly high and variable inflation, and rising debt.  The broad direction of policy was still towards liberalisation, but it was a halting, half-hearted, and inconsistent process.  A crisis it wasn’t –  even if forced devaluations make good headlines.  Thus, the authors note that “unemployment grew” and yet the historical backdating of the HLFS suggests that the unemployment rate in June 1984 was 4.4 per cent, almost identical to the current rate.

What else struck me?  There was the claim –  about the 80s period –  that “through listening and working with others – even those who might have strong objections to a proposals –  it is possible for advocates of change to improve policy design and build a strong colation to support change”.  No doubt that is true generally, but it bears very resemblance to anyone else’s impressions of 1980s/90s reform period –  it was. after all, Roger Douglas, who championed the approach of “crash through or crash”.

Our authors carry this lesson forward:

“subsequent New Zealand governments have achieved important reforms while moving more slowly and working to ensure implementation is well managed. For example, the National Party-led coalition of 2009-17 [wasn’t a coalition, and it was 2008-17, but I guess those are details] established a new program of privatisation of government assets. Important work was done that drew on lessons from hre past and met considerable success.”

You might –  as I did –  have supported those more recent partial privatisations, but lets remember how small they were.  One of the companies involved was already market-listed (Air New Zealand) and all are still majority state-owned.    And the list of “important reforms” undertaken by that more recent government was limited, to say the very least.

The very final (short) paragraph begins this way.

In sum,we judge New Zealand’s economic turnaround to have been a major public policy success. Innovative public policy changes catalysed economic growth.

And yet, remarkably, in the entire chapter there is not a single number or chart or even a discussion of the specifics of economic growth. Not one.  And despite (rightly) lauding the removal of protection and subsidies, no mention of the fact that foreign trade as a share of GDP is no higher now than it was in 1984.   Absent evidence of this “catalysed economic growth”, perhaps we are just supposed to imagine it, and somehow feel better for the thought?   But I hope this isn’t how ANZSOG helps train our public servants.

My own take on the reform and stabilisation effort of the 1980s/90s is roughly as follows:

  • stabilisation was a major success.  We have low and stable inflation, low and fairly stable government debt.  We also have a considerable measure of financial stability.  For all that, we should be truly grateful.  But we should also recognise that (a) low and stable became a pretty global phenomenon (especially in the advanced world) around that time, and (b) that various other well-managed countries (eg Australia, Canada, Sweden, Switzerland) have much the same sort of fiscal record we do.  That leaves me sceptical of stories which put too much emphasis on specific New Zealand events, circumstances, law, individuals, or policy processes.    Moreover –  and I don’t think this appears in the chapter at all – we have greatly benefited from a big increase in the terms of trade (reversing the couple of decade decline that policymakers from the late 60s to mid 80s had to cope with),
  • many of the specific reforms (including those Mintrom and Thomas deal with) served us well.   Lower import protection, a well-designed GST, injecting much greater efficiency into state trading operations and a bunch of others benefited most New Zealanders.
  • but that isn’t true of all the reforms.  One might focus in on the RMA and associated provisions which have given us among the most unaffordable house and urban land prices in the developed world, or one might look at the tax treatment of savings.  And then there are the immigration policy reforms.
  • and, as honest observers have known for 20 years, there has simply not been the productivity turnaround that champions of the reforms hoped for at the time (and there is also no reason to suppose that problem is just that we didn’t engage in radical enough reform.)

Here is a table I was working on the other day, comparing average productivity in New Zealand with that of a leading bunch of OECD countries.

prod 1

The book was an ANZSOG project.  Here is labour productivity for New Zealand relative to Australia, indexed to when the New Zealand domestic data start in 1989.

prod 2.png

I reckon there is a plausible argument that the whole reform programme taken together slowed the rate of decline in New Zealand’s relative fortunes (although even that isn’t clear-cut: the rate of decline slowed, but I’ve not seen any careful attempt to assess how much of that was policy and how much about, say, improvements in the terms of trade).

But that isn’t the case Mintrom and Thomas attempt to make.  Judged by economic growth outcomes –  the sort of criterion their title asks us to use –  the programme just cannot be judged a great success. Perhaps the processes were good in some respects, and there was certainly a lot of intellectual rigour behind some of the reforms. It remains a fascinating case study in concentrated far-reaching reform.  But the productivity results really suggest that the episode belongs in another book, about the disappointing results despite the very best of intentions.  Those are salutary lessons policy advisers need to be trained in too.

How we –  certainly anyone who supported, voted for, worked on the reforms –  wish the outcomes had been different –  much better.   But they weren’t.  That is a failure –   uncomfortable as it is, there is no other word for it –  politicians and policy advisers have to grapple with honestly.

 

 

 

 

 

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.