Switzerland as our example – again

A month or two back, the New Zealand Initiative arranged a study tour (Go Swiss) for members (and a friendly journalist), “to learn more about their success story”.

I’ve written about this a few times, mostly because I’m genuinely perplexed that the smart people who run the Initiative really seem to think that Switzerland is much of an example for us, or even these days that much of a “success story”.

Sure, Switzerland is richer and more productive than we are.  Most advanced countries are.  But productivity levels in Switzerland now lag behind those of the leading OECD countries.  And over the last 45 years or so, Switzerland has had the lowest rate of productivity growth of any of the OECD countries for which there is a full run of data.  Just a little worse even than New Zealand.

switz 70 to 15

If I were sponsoring a study tour to places that had put in really strong performances in recent times, the Czech Republic, Slovenia or Slovakia look like they might be rather stronger contenders.     They’ve been catching up quite rapidly, not drifting back in the pack.       The Slovakia picture looks particularly impressive.  Here is the Conference Board data on real GDP per hour worked for each of New Zealand, Switzerland and Slovakia, relative to the average for France, Germany, Netherlands, and the United States (four of the higher productivity large OECD countries).

slovakia

Of course, New Zealand Initiative members are free to take their holidays wherever they like.   But it becomes of somewhat wider interest when they return trying to proselytise.

A few weeks ago the Herald’s Fran O’Sullivan provided a vehicle for some of that, relaying some rather questionable stories about the Swiss labour market (which does, among other things, feature a low youth unemployment rate), while ignoring such potentially relevant features as the absence of a generalised minimum wage in Switzerland.   Somewhat surprisingly, from a bunch of leading business people, Switzerland’s much lower company tax rate also wasn’t mentioned.  Then again, neither was its poor long-term productivity growth performance.

Sometimes the Initiative has been directly purveying the material.  Their chairman, Roger Partridge, had a piece in the Initiative’s newsletter recently extolling the contrasts between Italy and the Ticino, the Italian region of Switzerland.  “The secret to Swiss success”, so we are told, is down to “can solve”, reputedly the approach adopted by Swiss officials and politicians.    Now doing better than Italy isn’t such a great boast these days, but actually as the chart above shows, over the last 45 years Switzerland has done worse than Italy –  at least on productivity.  And then there are some of the summary indicators: on the World Bank’s ease of doing business index (not, of course, a perfect indicator of the state of regulation), Switzerland beats Italy by a substantial margin.  But Switzerland comes in at number 31.  New Zealand is number 1.

But what prompted this post was the editorial in the business section of this week’s Sunday Star-Times.   It doesn’t appear to be on the Stuff website, but if you go to this link to one of Initiative director Oliver Hartwich’s tweets, you can read an image of the whole piece.

Do you fancy living your lives more like the Swiss?…..It means entering into a radical experiment which could turn this country into another Switzerland.  A country with a high wage economy that manufactures and exports quality products, welcomes thousands of immigrants without any problems and has a fast and efficient public transport system

And, once again, we are told that

the ‘big picture” answer, according to the NZI, is in Switzerland’s decentralisation, where more than 2000 local councils have their own tax-raising powers.  Their argument is that it leads to greater pro-activity in devising strategies to attract business investment and power growth.

So, again, that would be the OECD country with the worst long-term productivity growth record?

And the other strand of the answer is, it is claimed, the education system.

Education is a dual system, which sees 80 per cent of young people enter vocational training, with only the remainder going to university.  But there is no stigma in that,

Then again, this is the OECD country with the worst productivity growth record over the last 45 years.  And, as OECD data I highlighted in the earlier post showed, actually a larger proportion of Swss 25-34 year olds have completed tertiary qualifications than in (a) most OECD countries, and (b) New Zealand.

One business leader is quoting waxing lyrical

As Fraser Whineray, boss of Mercury, said:  “an aluminium welder can be earning $150000 a year and living in a village like Queenstown”

I had no idea how much aluminium welders earn here, but this website suggests about $22.75 an hour.  That’s a bit under $50000 a year and given that Swiss GDP per capita is not even double New Zealand’s you’d have to be a little sceptical about that $150000 number (and this site offers some Swiss numbers).

But, picturesque as Switzerland is, what about the housing situation?

According to the New Zealand Initiative, as channelled by the Sunday Star-Times

Swiss house prices haven’t changed for three decades (inflation included) –  houses are still affordable compared to salaries.

The first part of that sentence is quite correct.    Real house prices (having had various ups and downs) haven’t changed much in 30 years.    But they were eye-wateringly expensive 30 years ago, and they still are today.   At the level of anecdote, I recall doing a course at the Swiss National Bank in 1990 and being told by our guides that prices in the capital Berne were so high that only senior managers at the central bank owned their own houses.

Good statistical data appears to be harder to come by: Switzerland is not, for example, in Demographia’s annual collection of house prices to median income data.   I stumbled across one website that offers data (of what quality I”m not sure) on rents and house prices in all sorts of cities.   Here is what they suggested for price to income ratios in various Swiss cities.

Zurich                                         9.5

Basle                                            9.2

Geneva                                       10.5

Lucerne                                      9.0

Berne                                        12.3

Whole country                       10.4

From what I could see, actual house prices don’t look any more “affordable” than those here (although, of course, interest rates are lower).  And, consistent with that, residential mortgage debt as a share of GDP is materially higher than that in New Zealand, in fact one of the highest ratios anywhere.

Oh, and how about home ownership rates?  Ours have been slipping, something that makes a lot of people uncomfortable (except a few –  economists mostly? –  who seem to have a vision that we’d be somehow better off if even more of us rented).  This chart is a subset of a table I found.  I’m sure not all the numbers are strictly comparable, and they are all for slightly different years, but I think most people will take New Zealand’s poor outcome over Switzerland’s any day.

home ownership

And, of course, none of this New Zealand Initiative material ever mentions the rather considerable advantages of location Switzerland enjoys –  at the heart of one of the wealthiest and most productive regions on earth, in an age when proximity and location seem to matter more than ever.    Or that, when international agencies look at Switzerland, one of the things they highlight most is the need for reforms to lift productivity growth.  The latest OECD report on Switzerland highlighted how relatively poor Switzerland’s productivity growth had been.  The press release for that report was headed “Focus on lifting productivity to guarantee future prosperity”, and part of the text read

The main objective has to be raising productivity, which will remain the key to boosting growth and maintaining a high quality of life and well-being.  The Survey suggests that Switzerland launch a new reform agenda to boost productivity, including renewed efforts to add flexibility to labour and product markets, improve public-sector efficiency, education and the business environment, and boost competition.  Increasing competition in the telecoms and energy sectors, including the privatisation of Swisscom, will be critical.

As I’ve said repeatedly, in many respects it would be nice to enjoy the material living standards the Swiss do, but……they are slipping backwards, and there is little sign that there is anything very systematic about how Switzerland does things that offers positive lessons for us, whether in beginning to reverse our dreadful productivity performance, or reverse our housing market disaster.

The mystery is why the New Zealand Initiative thinks otherwise.

But on a lighter note, I did find something from Switzerland that New Zealand could emulate.    I know Eric Crampton was one of those a bit upset about the loss of the rugby sevens tournament from Wellington.  Well, how about replacing it with office chair racing?  We spotted this on the BBC news the other night, and there is video footage here.  As the New Zealand capital of office workers, what better place than Wellington for a New Zealand leg of this sport.   Bowen Street looks as though it would offer a nice gradient, ending right in front of Parliament perhaps.  Think of the promotional opportunities.   It probably wouldn’t even take $5m of public money to get it going.

 

Immigration and New Zealand’s economic performance

That was the subject of last night’s Law and Economics Association seminar.    Eric Crampton (from the New Zealand Initiative) and I each spoke, and a good discussion followed.    The LEANZ flyer captured the essence of our own different approaches

Our speakers have differing views on the subject:

According to Michael Reddell, for most of the last 70 years successive governments have promoted large scale inflows of non-New Zealand citizens. Through various channels, this helps explain why New Zealand has been the worst performing advanced country economy in the world over that time – before and after the 1980s economic reforms. Located on remote islands, in an age when personal connections are more important than ever, that performance is unlikely to improve much, whatever else we do, until the government gets out of the business of trying to drive up our population, against the revealed preferences and insights of New Zealanders. We can provide top-notch incomes here – as we did in the decades up to World War Two – but probably only for a modest number of people.

Eric Crampton on the other hand says: It’s easy to scapegoat immigrants for all of the world’s problems – and many do. Proving immigrants do any harm at all is substantially more difficult. The New Zealand Initiative’s 2017 report on immigration looked to the data on immigration and found it difficult to reconcile popular fears about immigration with the data. As best we are able to tell, immigrants have lower crime rates than native-born New Zealanders; the children of immigrants are more likely than Kiwis to pursue higher education; and, immigrants integrate remarkably well into New Zealand society. Arguments that immigrants are to blame for slow productivity growth in New Zealand are inconsistent with either the international evidence of the effects of immigration on wages, and with what New Zealand evidence exists. And where the benefits of agglomeration seem to be increasing, restricting immigration against the revealed preferences of migrants, of those selling or renting them houses, and of those employing them, is likely to do rather more harm than good.

Eric’s presentation (here) was largely based around the Initiative’s advocacy piece on immigration published earlier in the year, which I responded to in a series of posts (collected here).    The text that I spoke from was under the title Distance still matters hugely: an economist’s case for much-reduced non-citizen immigration to New Zealand.  We engage pretty amicably, and I’m still grateful for Eric’s post about this blog in its early days, in which he noted

Michael believes that too high[a rate] of immigration has been substantially detrimental for New Zealand, where I’m rather pro-immigration. But his is the anti-immigration case worth taking seriously.

But in many respects, we were probably talking about different aspects of the issues.   When he focused on New Zealand, the points Eric made mostly weren’t ones I disagreed with.  We have been relatively successful in integrating large numbers of migrants, and migrants to New Zealand have been more skilled than those to most other advanced OECD countries.  Migrants don’t commit crimes at higher rates than natives: if anything, given the prior screening, probably at lower rates.   We both agree that housing supply and land use laws need fixing – although I’m more pessimistic than he is, because I’ve not been able to find a single example of a place that has successfully unwound such a regulatory morass.  But much of his story seemed to be on the one hand an acknowledgement that there isn’t much specific New Zealand research on the economic impact of our immigration, and on the other an empassioned call for us therefore to simply follow the “international consensus” and international evidence on the issue, because he could see no reason why our situation would be different than that of other advanced countries.

By contrast, my presentation was really devoted to making the case –  grounded in New Zealand’s economic history and experience – that New Zealand’s situation (and Australia’s for that matter) really is different than that of most advanced countries.    Along the way, I suggested that the overseas evidence is less persuasive than it is often made out to be.   After discussing the 19th century migration experiences, where the economic literature is pretty clear that migration contributed to “factor price equalisation”  –  lowering wage growth in the land-rich settlement countries, and raising it in the European countries the migrants left –  I turned to the literature on the more recent experience.

There are two broad classes of empirical literature on the more-recent experience (in addition to the model-based papers in which the models in practice generate the results researchers calibrate them to produce):

  • Studies of how wages behave in different places within a country depending on the differing migration experiences of those places, and
  • Studies that attempt to estimate real GDP per capita (or productivity) effects from a multi-country sample.

There are lots of studies in the first category, and not many in the second.   And almost all are bedevilled by problems including the difficulty of attempting to identify genuinely independent changes in immigration (if a region is booming and that attracts lots of migrants, higher wages may be associated with higher immigration without being caused by it, and vice versa).

I’ve never found the wage studies very useful for the sorts of overall economic performance questions I’m mainly interested in.  Precisely because they are focused on different regions within a country, they take as given wider economic conditions in that country (including its interest rates and real exchange rates).  They can’t shed any very direct light on what happens at the level of an entire country – the level at which immigration policy is typically set –  at least if a country has its own interest rates.  I’ve argued, in a New Zealand context, that repeated large migration inflows tend to drive up real interest rates and exchange rates, crowding out business investment especially that in tradables sectors.    In the short-term, it is quite plausible that immigration will boost wages –  the short-term demand effects (building etc) exceed the supply effects –  but in the longer-term that same immigration may well hold back the overall rate of productivity growth for the country as a whole.

There really aren’t many cross-country empirical studies looking at the effects on real GDP per capita (let alone attempting to break out the effects on natives vs those on the immigrants themselves, or looking at superior measures such as NNI per capita).   Those that exist tend to produce what look like large positive effects.  So large in fact that they simply aren’t very plausible, at least if you come from a country that has actually experienced large scale migration.   In one recent IMF paper, discussed in their flagship World Economic Outlook last year, an increase in the migrant share of the population of around 1 percentage point appeared to boost per capita GDP by around 2 percentage points.   As I noted, if that were so it suggested that if 10 per cent of the French and British populations swapped countries – in which case the migrant share in each country would still be lower than those in NZ and Australia –  both countries could expect a huge lift in per capita GDP (perhaps 20 per cent).   Nordic countries could catch up with Norway in GDP per capita simply by swapping populations between, say, Denmark and Sweden.

And countries that were seeking to reverse decades of relative economic decline could reverse that performance by bringing in lots of migrants.  Except, of course, that that more or less described New Zealand.  Over the last 25 years we’ve had lots of policy-induced non-citizen immigration (and many of the migrants aren’t that lowly-skilled by international standards).  And we’ve made no progress catching up with the other advanced countries; in fact we’ve gone on having some of the lowest productivity growth anywhere.  As it happens, Israel –  with more migrants again than we had –  had similarly dismal productivity growth.

I could go on.  For example, a country like Ireland certainly experienced a huge surge in productivity, but it was half a decade before the real surge in immigration started.    And, the way the model is specified, the per capita GDP gains are sustained only if the migrant share of the population remains permanently high –  if the migrant share dropped back so would the level of GDP per capita.  None of it rings true.  It speaks of models that, with the best will in the world, are simply mis-specified, and haven’t at all captured the role of exogenous policy choices around immigration.

But the thrust of my story was that New Zealand (and Australia) were different because their prosperity has, since first settlement, rested substantially on the ability of smart people, with good institutions, to make the most of fixed natural resources.   And our prosperity still rests on those fixed natural resources –  whereas that is no longer the case in most advanced economies – because it seems to still be very hard for many successful international businesses to develop and mature based in New Zealand (or Australia) when based on other than location-specific natural resources.  Our services exports, for example, are still lower as a share of GDP than they were 15 years ago, and represent a small share of GDP by advanced country standards (even with subsidies to the film industry (direct) or the export education industry (indirect)).

Of course, really energetic and smart people –  NZers and immigrants –  will start businesses here that seek to tap global markets (often going straight to the world, not starting with the domestic market).  But experience suggests that for all those talents and ideas, it is (a) harder to base and build such businesses here than in many other places, and (b) even among those that succeed, in time most will be even more valuable and more successful based somewhere nearer the markets, supplier, knowledge networks etc.   Mostly, it looks as though remote places will successfully specialise in production of things that are location-specific.   Gold or oil are where they are.  They aren’t in London or San Francisco.  Or Auckland.   Much the same could no doubt be said for hydro power, or good dairy or sheep land.

Heavy reliance on fixed factors (land and associated resources) doesn’t doom a country to underperformance.  But it does mean that if your country’s population is going to grow faster than that in other countries that are much less reliant on fixed natural resources, one needs a faster rate of underlying productivity growth just to keep up with the income growth in other countries.  Either that, or new mineral discoveries (always there but not previously recognised).   We’ve managed neither.

Against this backdrop, I concluded

Specifically, now we need deep sustained cuts in our immigration programme.  I’ve argued for 10000 to 15000 residence approvals a year.  Doing that wouldn’t be terribly radical – we’d actually be putting ourselves more in the mainstream of international experience with immigration policy.  Doing so would allow a rebalancing of our economy, and help us to meet pressing environmental challenges,  in ways that would offer a credible promise of materially higher living standards for, say, 4.5 million New Zealanders.     After 25 years –  perhaps even 70  –  when things have just gotten worse for New Zealanders relative to their peers in other advanced countries,  it is past time to abandon the failed experiment  –  and radical experiment, not mainstream orthodoxy, it is –  of large scale non-citizen immigration.     A population growing as fast as ours is, driven up by government fiat when private choices are mostly running the other way (birth rates below replacements, net outflows of New Zealanders), in a location so remote, just doesn’t make a lot of sense.

In the discussion that followed, there was quite a lot of what seemed to me like wishful thinking, and a reluctance to accept the apparent limitations of our location.  I can understand that reluctance.  In the past I’ve been there myself – I’ve just this morning re-read the text I wrote some years ago for the 2025 Taskforce’s report on why distance was overstated as a constraint.   I think Eric and I both accept that, if anything, personal connections are becoming ever more important (certainly than say 100 years ago, and perhaps even than 30 years ago).  Perhaps one day, technology really will markedly ease those constraints  –  eg the possibilities that might arise from mooted six hour flights to San Francisco instead of twelve.   As I responded to a questioner, if those ideas about the death of distance were being articulated in 1990, when New Zealand was just opening up, I’d probably have found them plausible.  But we’ve seen no evidence of it being enough –  no acceleration in (relative) productivity growth, no surge in city-based exports, really no nothing.

Eric also suggested that reliance on natural resources was a dangerous strategy, because of the potential over future decades for things like meat-substitutes to develop.  They may well.  And perhaps Ukraine (say) will get its act together, and a remote agricultural producer will be at even more of a disadvantage.  I don’t have any expertise in those areas, but even if they are a possibility that we may have to face, so what?  If the advantages/industries that have made New Zealand relatively prosperous were to go into further decline, it would be even more worrisome (for future living standards) if our policymakers had gone out on a limb and imported even more people.    Because there is simply no evidence, despite all the hopes, and all the high-flown bureaucratic words, that an Auckland-based alternative economic future is coming to anything very promising.  Auckland’s GDP per capita isn’t much above the New Zealand average –  unlike the situation in places (think London or New York) where service-based international industries now predominate –  and that margin has been shrinking further.   When the economic opportunities in places go into relative decline people rationally leave those places.  It is the way things work within countries.  There is no particular reason for it to be any different between countries (see for example, the huge outflow of New Zealanders to Australia in the last 40 years or so).

I have sought to advance a narrative to explain as many as possible of the stylised facts of New Zealand’s underperformance, including

·        There is still no sign of any labour productivity convergence (if anything, on average, real GDP per hour worked is falling slowly further behind),

·        Total factor productivity is hard to measure, but on the measure there are we’ve kept on doing very badly there too,

·        We’ve had 25 years of the highest average real interest rates in the OECD  (which could be a good thing if we had lots of productivity growth, but we haven’t)

·        Not unrelatedly, even though our productivity has slipped behind over decades, our real exchange rate hasn’t adjusted downwards in the way that standard theory would teach,

·        We’ve had weak business investment (bottom quartile of OECD countries, even though population growth has been in the top quartile), even though we started with low levels of capital, and

·        We are still experiencing weak growth in exports (unlike most countries, we’ve seen no growth in exports/GDP for 25 years or more) and weak growth in the tradables sector of the economy (in per capita terms, no growth at all this century.

·        Among those exports, there is little sign of any sustained move beyond reliance on natural resource based exports.

·        Oh, and our one half-decent sized city, Auckland, has experienced declining GDP per capita, relative to the national average, over the 16 years for which we have the data.

Eric’s response last night was that there were many alternative narratives to explain our dismal long-term productivity performance.  But, in fact, whether in their full report earlier in the year, or in discussion last night, the Initiative hasn’t really sought to outline a credible alternative story.   In practice, any alternative seems to amount to “well, it would, or could well have been, worse without the large-scale immigration”.  Perhaps it could have been. but surely it would be helpful to offer a story about the channels through which those worse outcomes could have come about, and how those channels are consistent with the indicators we’ve actually seen?

I ended the text I spoke from with an appendix setting out the key elements of how I’d change our immigration policy.  Much of it will be more or less familiar to regular readers, but for the record here is the list.

Appendix

Some specifics of how I would overhaul New Zealand’s immigration policy:

  1. Cut the residence approvals planning range to an annual 10000 to 15000, perhaps phased in over two or three years
  2. Discontinue the various Pacific access categories that provide preferential access to residence approvals to people who would not otherwise qualify.
  3. Allow residence approvals for parents only where the New Zealand citizen children have purchased an insurance policy from a robust insurance company that will cover future superannuation, health and rest home costs.
  4. Amend the points system to:
    • Remove the additional points offered for jobs outside Auckland
    • Remove the additional points allowed for New Zealand academic qualifications
  5. Remove the existing rights of foreign students to work in New Zealand while studying here. An exception might be made for Masters or PhD students doing tutoring.
  6. Institute work visa provisions that are:
    • Capped in length of time (a single maximum term of three years, with at least a year overseas before any return on a subsequent work visa).
    • Subject to a fee, of perhaps $20000 per annum or 20 per cent of the employee’s annual income (whichever is greater).

I argue that this sort of approach would take more seriously the constraints of location, and offer much better prospects for lifting the productivity and living standards of something like the existing population of New Zealanders.  Much of modern economics doesn’t pay much attention to fixed natural resources, and economics of location (at least in a cross-country sense).  That is understandable –  they aren’t the big issues for most other advanced countries (UK, USA, Belgium, Switzerland and so on).  What is less readily pardonable is the willingness of our own political leaders, and supporting bureaucrats, to give so little attention to those factors and what they mean for our prospects.  Firms, families, and societies all manage within constraints.  Our governments do so when it comes to managing their own financial accounts.  But otherwise, they seem free to just pretend that we are in a different situation than we are actually are, to persist with a modern Think Big that, decades on, still shows no sign of working out well for New Zealanders as a whole.   Quite why New Zealanders allow ourselves to be carried along, when the evidence is against it, is something of a mystery.

Answers from Switzerland?

A month or so ago, prompted by a Herald news article talking up a New Zealand Initiative study tour to Switzerland to learn “the secrets of their success”,  I pointed out that Switzerland wasn’t such an obvious place to look for lessons on lifting New Zealand’s continuing disappointing economic performance.  After all, since 1970 they were the only OECD country to have had slower productivity growth than New Zealand

switz 70 to 15

and although the average productivity level in Switzerland is still much higher than that in New Zealand, it is no longer among the very best in the OECD.   Denmark, Belgium, and the United States are among the countries doing much better than Switzerland, and even they don’t top the rankings.

A few days later it turned out that the author of the article, veteran journalist Fran O’Sullivan, was actually participating in the study tour, not just talking it up.  At the time, I noted that it would be interesting to hear, in due course, what she learned from Switzerland, while being a little sceptical as to how detached from a New Zealand Initiative perspective she would prove able to be.

In Saturday’s Herald, O’Sullivan devoted a substantial article to reporting back on what was learned on the tour (this time with all the appropriate disclosures, including her partial sponsorship from one of the Initiative’s member companies).   Much of the article is quotes from New Zealand Initiative people.  And the answer it seems, at least on O’Sullivan’s summary take, is in the headline: Education key to Swiss success.

Near the start she observes of her own past trips to Switzerland

Other times I have been to Switzerland, it has been straight to Geneva to the World Trade Organisation’s HQ for trade discussions, or to observe the World Economic Forum in Davos. Not to look at what underpins Switzerland’s own resounding economic success.

I’m still quite genuinely puzzled at where she –  or the Initiative –  get this idea of “resounding economic success”.  I’m sure there are many things to like about  Switzerland but –  despite a very strong starting point a few decades ago –  it just isn’t one of the great economic success stories of modern times.  Productivity growth has been underwhelming –  to say the least –  and although GDP per capita in Switzerland is higher than in, say, France or Germany, it is so mostly because the Swiss put in a lot of hours.  Average productivity is higher in France and Germany, while Switzerland is like New Zealand in that total bours worked per capita are very high in both countries.

I quite like the sound of the Swiss political system –  highly decentralised, lots of quite small, and competitive local authorities.  It is the antithesis of something like the Auckland “supercity” put in place a few years ago by our government.     But one has to wonder quite what economic gains it might have produced.    The New Zealand Initiative seems dead keen on the highly decentralised system

“Private and central bankers, economists and journalists, federal and local politicians alike – in fact everyone we talked to – agreed that this was the most crucial component to the Swiss success formula,” says NZ Initiative executive director Oliver Hartwich.

But when your country has had the weakest productivity growth in the OECD over 45 years, you have to wonder whether the alleged contribution to “economic success” is not mostly one of those myths that all countries have, that don’t necessarily line up that well with the evidence.  I’m sure the decentralised system is cherished, but in modern times it has seen (although not necessarily caused) Switzerland drifting backwards.

But the political system isn’t the thrust of O’Sullivan’s article.  Rather, the education and vocational training systems seem to be.  In fact, even Hartwich seems to agree

Concludes Hartwich: “The most important insight was the fact that a solid vocational apprenticeship is just as respected as a university degree (and sometimes leads to better salaries, too). New Zealand businesses should not only co-operate with institutions but lead the debate on the required reforms.”

And a couple of quotes to give you the flavour of the rest

It may seem ruthless to stream students at an early level into academic and vocational education training (VET) streams. But Switzerland does just that.

About 20 per cent go into the university stream and the rest into the upper secondary school vocational education training stream, where students combine school learning with skills developed in the workplace.

This system serves 70 to 80 per cent of Swiss young people, preparing them for careers ranging from high-tech jobs to health sector roles and traditional trades. Both white collar and blue collar roles are appreciated. There are about 230 vocational categories.

and

The upshot is that Switzerland enjoys virtually full employment, the youth unemployment rate is among the lowest in developed countries and the Swiss enjoy a very high standard of living. Those doing the VET stream are not locked out from university education, which they can do at a later stage.

….

Asked if they could import one feature of Switzerland to New Zealand, the consensus of the visiting business leaders was that it would be the vocational training system.

ASB chief executive Chapman says any growing economy relies on a pipeline of skilled and motivated workers for momentum, and “in that context I think there is a lot to learn from the Swiss”.

“The Swiss have an enviable record of high youth employment.

I don’t know anything specific about the Swiss vocational training programmes, so there may well be some specific aspects that New Zealand firms, or New Zealand governments, could learn from.     But as I reflected on O’Sullivan’s article, the story about education etc didn’t seem terribly convincing as an explanation of Swiss “economic success”.

Overall employment rates in New Zealand and Switzerland are very similar (on OECD data 66.2 per cent in both countries last year).  But on youth employment, Switzerland does appear to have had a consistently higher employment rate.  Among those aged 15 to 24,  62 per cent of Swiss were employed last year, and 54 per cent of New Zealanders.

Employment among young people is a bit of an ambiguous indicator.  After all, if young people are in full-time study (school or tertiary) they often won’t be in employment at all.  Youth employment rates were probably higher in both countries 100 years ago.

But what about youth unemployment: people who want a job, are looking for a job, but can’t find a job?   Here, Switzerland seems unambiguously to do better than New Zealand.

U rates Switz and NZ

And what are some of the things that affects the ability of young people to get into work?  Minimum wage laws are likely to be one of them.  I recall the New Zealand Initiative’s Eric Crampton, when he was at Canterbury University, making some very useful contributions  (eg here) to the debate about the impact of the much more stringent minimum wage provisions, especially as they affect young people, that were put in place here about 10 years ago.

Readers may recall that, relatively low as New Zealand wages are, our minimum wage relative to median wages –  the sort of metric relevant when thinking about whether minimum wage provisions exclude some people from employment –  are very high by OECD standards (fourth highest in fact).

And what about Switzerland?   Well, in Switzerland there is no minimum wage law at all.   And not that long ago, Swiss voters overwhelmingly rejected an attempt to establish one.     Perhaps in the course of the Initiative’s study tour no one thought to ask the question about minimum wages.  But whatever the reason, it looks as though it could be a rather important omission.  It isn’t the really skilled young people who typically have difficulty getting jobs, but the less skilled and more troubled ones.  Our systems works against them getting established in the labour force, while the Swiss one seems not to.   As the ASB chief executive put it:

“You can’t underestimate the power this has on the optimism and confidence of their youth as they look to their own future.”

But I was also a little puzzled about the story that seemed to downplay the role of universities in Switzerland.  I’m as willing as next person (including New Zealand Initiative members) to think that perhaps New Zealand went through a phase where too many people went to university.   And a good builder or plumber will certainly earn more than many of the occupations our more-marginal university students end up in.

But what did the data show?  As it happens, the OECD Economic Survey on New Zealand came out on Thursday, and they had a whole chapter on the labour market, skills etc.   So I flicked through it looking for relevant charts.  Like this one.

skills young

Switzerland is “CHE”.   Relative to New Zealand –  and to the OECD as a whole –  Swiss young workers (25 to 34 year olds) now have a far higher rate of completed tertiary qualifications than New Zealand ones do.

And there was also this chart

skills swiss

Whether for younger people or older ones, Switzerland is ahead of New Zealand, particularly in the proportions with masters or doctorates.

And yet

Tertiary Education Commissioner Sir Christopher Mace says, “to be highly qualified technically rather than academically was totally acceptable in Switzerland.”

No doubt that is true –  or rather I have no reason to doubt it.  But a huge proportion of Swiss young people are getting strong academic qualifications.

Oh, and the OECD also makes much in their reports of the adult skills data I’ve written about here previously. Switzerland didn’t participate in that survey, but New Zealand workers came up with some of the very highest skills (notably problem-solving skills) of any of the many countries that did participate.

Still flicking through the OECD chapter, I found another interesting chart on employment.  Ideally it would be a chart of all sole parents, not just mothers, but it was part of another chart focused on maternal employment.

Swiss sole parents

Switzerland is at the far right end of the chart.

Which is by way of leading into another difference between Switzerland and New Zealand –  the overall size of government is a bit smaller there.  Here is the OECD data on current government receipts (mostly taxes) as a per cent of GDP.

govt size nz and swiss

The Swiss tax take is smaller than ours, as a share of GDP, but (a) the gap seems to have been closing, and (b) at least as much of that is coming from the Swiss raising average taxes as from us lowering them.   Again, if one is concerned about productivity, it isn’t obvious that the Swiss experience has a great deal that is positive to teach us, even if the reasons for their weak productivity growth might well be different from the reasons for our own.

The Swiss track record with weak productivity growth isn’t something new that no one had noticed before  –  the OECD, for example, has been offering thoughts on it for some time (eg here).  So it is still a bit of a mystery why the New Zealand Initiative is touting Switzerland as a success story to emulate, or why a senior journalist is channelling those lines.   Perhaps it would have offended New Zealand business leaders’ sense of amour propre to have gone further east, but if there are many lesssons to be learned for us in Europe about lifting overall economic performance, it seems more likely they might be found in countries like Slovakia or Slovenia, Estonia or Latvia (all now fellow members of the OECD) where productivity is fast catching up (in some cases already has) average levels in New Zealand –  and that in countries that for the whole of modern New Zealand history (ie since say 1840) have been much much poorer and less productive than New Zealand.

Travel generally broadens the mind, and almost any country can probably offers some experiences (good and bad) that visitors could learn from.  I’ve no doubt Switzerland does too (eg about minimum wages and company tax rates perhaps) .    But Switzerland’s overall economic growth performance has been poor for decades, and that even with the advantages that come from being a relatively-small government place in the heart of one of the most prosperous places on the planet (northern Europe).  It seems unlikely there is very much to learn from them, at least in a positive sense, about how to markedly lift the performance of another struggling country almost as far from anywhere (and from suppliers, markets, clusters of knowledge)  as it is possible to be.

One could wonder whether this group of leading business people, (having gone off to learn from Switzerland, where they would have found a system with no minimum wages and much lower company tax rates, but nonetheless want to tell a story about training and education as the secrets of what they see as Swiss success) are not perhaps preparing against the chance of a change of government later in the year.   All that talk in the article would, no doubt, have seemed like music to Grant Robertson’s ears.  Perhaps not, but I’m struggling to formulate a better hypothesis.   Because the data don’t really seem to fit their story.

 

 

 

Budgets, journalists, Switzerland and all that

Last week I wrote about the New Zealand Initiative’s study tour to Switzerland, where (so we were told) a large and high-powered group of CEOs and chairs were seeking to learn from Switzerland’s success.  As I noted, it seemed odd to look for inspiration from the one OECD country that has managed to achieve less productivity growth than New Zealand since 1970.   Even since 1990, Swiss productivity growth has underperformed New Zealand’s own poor record.

I learned about this tour in an article in the Herald, written by veteran journalist (and apparently “Head of Business at NZME”) Fran O’Sullivan.  It was presented as a straight news story, with no suggestion of any Herald involvement with the trip.

But in today’s Herald O’Sullivan devotes her column to Five elements of a good first Budget.  I’ll come back to the substance of the column in a moment.  But in the middle of the column was this

From a distance (in Switzerland travelling with the NZ Initiative to look at how New Zealand can once again become a “rich country”) it is easy to overlook that for some nations – like the Swiss – posting surpluses is mandatory.

So a leading journalist writes about a business lobby-group’s study tour to Switzerland without disclosing that she herself is participating in the tour?   One presumes NZME is paying for her to undertake the tour, but even so.   Wouldn’t it normally be elementary to let readers know of your involvement when you write up the story?  Isn’t it just possible that, in what looked like a straight news story, the fact that the author herself was participating in the tour might colour the angles put on trip, and reports of what it might reasonably hope to achieve?      It will be interesting to hear, in due course, what O’Sullivan makes of the Swiss experience, but how likely is that we will get a balanced and rigorous account when she has gone in with the New Zealand Initiative to do this trip, running their advance lines about “lessons to be learned” etc  (and presumably NZI organised everything, arranged the programme of meetings etc)?      Presumably at a distance, she still hadn’t noticed that while Switzerland is pretty rich, its productivity performance has been shocking, and it has slowly but steadily been dropping down the league tables.

That quote come from item 2 in O’Sullivan’s list of five elements she wants to see in Steven Joyce’s Budget tomorrow.     And yes, the Swiss have changed their constitutional rules to require budget surpluses, but as the chart in my post this morning showed, on net government debt (as a share of GDP), they are virtually identical to New Zealand, and both of us have a bit more debt than Australia.     Perhaps a formal binding surplus rule might make some sense –  although when you don’t have a formal constitution it would be hard – but the case doesn’t seem that compelling in a country that successfully maintains low public debt itself, and yet is exposed to very nasty (and very costly) natural disasters.

What are the five items O’Sullivan looks for?

First –  for G*d’s sake, be bold

Second: Post a surplus?

Third: Budget is the plan

Fourth:  Get economic growth up on a per capita income level

Fifth:  Strip out the smoke and mirrors

Item 1 is the sort of item that helps reinforce conservatives in their conservatism.  Being bold might sound good, but her lead proposal is simultaneously bold and daft.

A bold Budget would unveil a significant long-term investment in the country’s infrastructure. For example, a high-speed railway network to service Auckland from elsewhere in the Golden Triangle (Hamilton, Whangarei, Tauranga).

This generation’s Think Big, if I hadn’t already applied that label to our immigration policy.

The British government is envisaging spending 55 billion pounds –  stop and take in the number –  on their HS2 high speed rail route.   There is plenty of scepticism about that proposal –  and this is country with many many more people, at either end of the proposed routes, than anything we are ever (or even just in our lifetimes) likely to have in northern New Zealand.    If the costs in New Zealand were similar, that would be $100 billion (or around 40 per cent of current GDP).     We do lots of government capital spending badly in this country –  check out the Transmission Gully project –  but an HS2 equivalent would surely take the cake?

Urging boldness on politicians is fine, if there is a strong and well-grounded agreement on what they should be bold about.  Otherwise, it feels a lot like random action because “something must be done” and anything is something.

She poses a question mark around the second item –  post a surplus.  This seems to be because she is tantalised by the idea of using surpluses to fund “major infrastructure to support growth”.  As I noted this morning, government infrastructure may involve ongoing maintenance and depreciation costs, but straight government capital expenditure doesn’t show up in the operating balance.

What of the third item –  the plan.

Does the Government have a plan? New Zealand is at a choke point. There needs to be a credible five-year plan to capitalise on the major influx of immigrants. Ensure New Zealanders can be housed; clean up our waterways … the list goes on.

Joyce has had a lengthy eight-year period as English’s understudy.

That’s more than enough time to come up with a plan.

Hard to disagree that a credible plan would be nice.  After eight years it doesn’t seem likely that one will suddenly be granted us.   And, given the Minister’s penchant for interventions all over the place (universities, student visas, tech schemes etc), it isn’t likely that any such plan now would offer us a credible way forward.  He was, after all, the Minister primarily responsible for the exports target.    Over recent years, we’ve been moving away from that target rather than towards it.

The fourth item –  lifting per capita growth –  is really the same as the third.  It would be nice –  rather more than that actually.    But there isn’t much sign of doing differently things that have given us such weak per capita GDP and productivity growth for the last eight years.

On the fifth item –  smoke and mirrors –  one can only agree.

Joyce – like previous Finance Ministers – will be a fail on this score. He is unlikely to strip out the “smoke and mirrors” which politicians use to overstate government expenditure; particularly on social programmes such as housing.

He’s already been caught out by Labour’s Grant Robertson when it comes to massaging the numbers on an $11 billion investment in infrastructure.

Robertson labelled the $11b figure as “just playing with numbers”.

“When you peel it all back, what you have is National only promising to spend an extra $300 million a year from the promise made in the half-year Budget update.”

Finance Ministers really shouldn’t play this game and Treasury should issue tables which keep a running track of “re-announcements” of spending promises.

It is the sort of reason why Treasury forecasts and fiscal reporting are supposed to be done at arms-length from the Minister of Finance.  Each time ministers do this stuff it erodes, just a little further, what remaining confidence the public might have in our elected leaders.  A cheap (brief) win, and a long-term cost.

In the end, it is a pretty bleak column.  Plenty of stuff to wish for –  much of it quite sensible, provided you forget about the high speed train –  and little prospect of any of it happening.

But I still can’t help thinking that we deserve a lot better from a leading journalist in the country’s largest circulation newspaper than a story writing up and promoting the activities of a lobby group, only to find out 10 days later that the journalist in question is herself a participant in that same (apparently rather misguided) study tour.

 

 

 

If NZ was like Switzerland…productivity growth might be even slower

Reading the Herald over lunch, I was interested to learn that the New Zealand Initiative is leading a study tour (of 40 chief executives and chairs) to Switzerland to see what we have to learn from them.  According to the Herald’s account,

At the heart of a one-week study tour organised by leading think tank the New Zealand Initiative is a quest to examine the role “localism” plays in the Swiss economic success story.

The online version of the story even had a graphic,

Switzerland

Many of those items seem quite attractive.   Nonetheless, when the story was framed around Switzerland’s economic success, I couldn’t help wondering if the Initiative’s members might not be heading to the wrong place.

Once upon a time, Switzerland had either the highest or second highest measured productivity (real GDP per hour worked) in the advanced world.  The Conference Board has estimates back to 1950 – when Switzerland was just behind Luxembourg.  But in this post, I’ll use OECD data, which goes back to 1970.

As recently as 1970, Switzerland still held that sort of rank (as it did for nominal GDP per hour worked –  in some ways a superior measure, but good timely estimates for the current situation aren’t available).    These are the OECD countries for which there is 1970 data.

switz 1970

We weren’t doing too badly either –  just slightly below the median for example, and in the middle of the big European countries (Spain, UK, France, Germany and Italy).

But here is the cumulative growth in this measure of labour productivity for the full period 1970 to 2015.

switz 70 to 15

Beaten even by New Zealand.  It is a pretty woeful Swiss productivity performance.    Even over the last 25 years when both countries have done a little better relatively (we beat six of the OECD countries), Switzerland still came in behind New Zealand.        Over the decades, they don’t even have the excuse of agricultural protectionism, or being remote in an age when personal connections have become more important.

And what about the present?  Here are the levels of real GDP per hour worked in 2015, for the now much larger OECD.

switz 2015

Switzerland is, of course, still a productive and prosperous economy.  But over the last 45 years, it has slipped a long way down the league tables.    As for us, of the countries on the first chart who had lower productivity than New Zealand in 1970, only Turkey, Portugal and Korea still do.    (I hadn’t really noticed previously that if they don’t shoot themselves in the foot, even Turkey will soon go past us if these numbers are to be believed.)

I’m sure there are many good things about Switzerland.  It is a much richer, and in many ways more successful, country than New Zealand.  But I’m not sure I’d be looking to them, or their governance models (fascinating as they are in many respects), for lessons on what New Zealand should do to lift its relative economic and productivity performance.

The New Zealand Initiative’s manifesto

I mentioned yesterday that the New Zealand Initiative had released its Manifesto 2017: What the next New Zealand government should do.   When I sat down and read it I came away with mixed feelings.   There are quite of lot of specifics I agree with, which shouldn’t be a surprise: the Initiative is variously described as pro-business, neo-liberal (both, for different reasons, unhelpful descriptions –  they are generally pro-market rather than pro-business) or just plain “right wing”.  And I was summed up a few weeks ago by one journalist as being on the ‘dryish right of the spectrum’, which sounded roughly correct.   We have our (large) differences over New Zealand immigration policy, and I’m a conservative while they often tend towards a libertarian view of the world, but there is often a lot of overlap in the sorts of policies we would favour.   In fact in some areas I think they are far too trusting of central and local government.

I said I had mixed feelings.  That is mostly because of the elephant in the room which in the Manifesto they almost entirely ignore –  our long-term economic underperformance.  The author  –  Initiative director Oliver Hartwich –  is a recent migrant, clearly enraptured by New Zealand.   That’s nice, but it rather ignores the things – the underperformance –  that has led to such a large exodus of New Zealanders over the last 40 years or so.   The relentlessly upbeat tone often comes across as almost delusional –  which isn’t a good start to what he claims is “more than a collection of randomly assembled policies –  it is an intellectual guide for imminent challenges”.

But what do they propose –  drawing on many of the studies they have put out over their first five years of operation?   As another (interesting – left wing) commentary on the Manifesto noted it is all “divided handily into six different sections and 28 different proposals”.

The first set are about housing

• abolish all rural-urban boundaries;
• abolish all height and density controls;
• strengthen property rights by introducing a presumption in
favour of development into the Resource Management Act;
• incentivise councils for development by letting them capture
the GST component of new buildings; and
• introduce MUDs but ideally give them a more appealing name
(maybe Community Development Districts).

I’m sympathetic to the broad direction of what they propose, but

  • I don’t agree with abolishing all height and density controls on existing urban land (as distinct from newly developed land).    Were it not for council rules, private landowners would in many cases have negotiated such restrictions themselves (as we see in the covenants in many new subdivisions) –  waiving or trading them as and when mutually beneficial opportunities arose.   My preference would be to devolve  most existing restrictions to groups of existing landowners, and allow them to transact among themselves to permit (or not) greater height and density.
  • I’m very sceptical of the Initiative’s support for disbursing GST revenue to local authorities.  It seems like an opportunistic response to current pressures, which would quite dramatically overturn the sort of fiscal arrangements we’ve had since 1876 (and the end of provincial governments).    Local authorites have their own revenue base –  one generally favoured by economists as, in principle, less distortionary than most –  and I’m not aware of provisions preventing differential rates.

The second set of recommendations is around education

• create an attractive career structure for teachers;
• provide tailored professional development for teachers;
• monitor teacher performance and introduce performance based
appraisals;
• evaluate systematically the impact of interventions on
school performance; and
• expand school clusters as a means of sharing best practice.

I haven’t read all their material on education, so perhaps I’ve missed something.   The general direction seems fine, but this is one of those areas where they seem to be too ready to trust governments to get things right.    I imagine that in the Business Roundtable days there would have been a lot more talk about genuine school choice –  not just a few charter schools for targeted groups at the bottom, but much more genuine choice (public vs private, religious vs secular, non-profit vs for-profit etc) of provider for all parents, including greater choice about what is taught  I probably shouldn’t be surprised, but as I’ve listened to my children over the years I’ve been surprised at just how much ‘indoctrination’ –  of conventional left-wing/’progressive’ causes –  goes on in our state schools; some of it conscious, much of it no doubt unconscious.   The Initiative seems more focused on making the state behemoth work better –  not necessarily a poor goal in its own limited way –  rather than backing what I’d have thought would be a belief in markets, civil society etc.

Then they move on to foreign direct investment (where Bryce Wilkinson did some really useful work over several reports).  Here they recommend

• Abolish the Overseas Investment Act. There should be no
FDI regime.
• Subject all investors, domestic and foreign, to the same rules.
• Protect New Zealanders’ property rights, including the
freedom to sell to whoever they wish. In cases of public
interest, appropriate compensation must be made.

I’d mostly agree with them, with four caveats:

  • having gone to great lengths over the years to put in place good governance arrangements for our own SOEs, and in many cases to privatise them, I’m much less relaxed than the Initiative seems to be about allowing foreign SOEs –  particular those from countries with, shall we say, weak governance traditions –  to take on substantial roles in New Zealand.  We might not suffer the poor returns to capital, but we still face potential efficiency losses.  I have a strong prior that genuine private sector entities investing here will, on average, be mutually beneficial.  One can’t extend the same presumption to organs of foreign states.
  • in certain extreme circumstances – but they are extreme and rare – I’d be uneasy about allowing concentrated foreign ownership of New Zealand land.  Had the Soviet Union during the Cold War wanted to buy up, say, most of Northland, it would have been dangerous and reckless to agree.  It is fine to counter with “but the land is still New Zealand, subject to New Zealand law”.  But one has to have the capacity to enforce that law.  Geopolitical threats are, at times, real.   My own halfway house would be to abolish controls on any investments from OECD member countries, and add to that list on a case-by-case basis.
  • while I largely agree with the Initiative on FDI, I suspect it is a less important issue (in terms of potential economic gains) than they do.  Why?  Because the restrictions seem to bear most heavily on land purchases (not the sort of high-tech industries often touted as the way of the future –  or even banks or oil explorers), and we already put so many other restrictions on land use (eg restrictions on GE products) that I’m sceptical that there is currently much in the economic case for liberalising foreign land purchases.
  • I’m not totally averse to restrictions on non-resident foreigners purchasing residential properties in New Zealand –  at least as some sort of third best, if governments can’t/won’t fix up land supply issues or the (aggravating) population pressures.

The next section is about better regulation (or better law).  They propose

• No new law or regulation shall be introduced without a
cost-benefit assessment that demonstrates real gains for the
public and costs fairly shared.
• Regulatory reform cannot be delegated to a junior minister
but needs real commitment from the prime minister down.
• The regulatory culture should shift from one of ticking
boxes and managing risk to encouraging greater flexibility
and innovation.

and they repeat a line from a previous report

Over-reliance on primary legislation: New Zealand’s overreliance
on primary legislation is unusual by international
standards. Other countries use more secondary and
tertiary legislation to amend outdated rules. Most
regulatory changes in New Zealand require amendments
only Parliament can make.

In general, I’m sympathetic to the direction they propose, but

  • I’m all for good cost-benefit assessments, but am less convinced of the argument that it should have to be demonstrated that “costs are fairly shared”.  After all, it is rare legislation (primary or otherwise) that affects most people equally, and part of politics is differences in views of what is “fair”,
  • Is anyone in favour of “tick boxes” approaches?  I doubt it, although actual regulation often drifts towards that sort of outcome.  Flexibility and innovation are laudable goals, but so is predictability and certainty when citizens are dealing with the state,
  • I strongly disagree with them when they want to reduce reliance on primary legislation. For too much law-making power is already delegated by Parliament to ministers and official agencies.  It is a technocrat’s dream, but a citizen’s nightmare.

They then move on to social policy

• Social policy is not a silo and should be regarded as a whole-of-
government task.
• Fixing New Zealand’s housing affordability crisis is crucial
to addressing both income-related poverty measures and
inequality concerns.
• To provide all New Zealanders with good life opportunities,
special attention needs to be paid to education. More
targeted support for students from lower deciles should take
precedence over untargeted programmes such as interest-free
student loans.
• Taxes and regulations should not choke off employers’
incentive to create jobs for the available skills or deprive
those with those skills of the incentive to work.
• The government’s plan to trial new ways of delivering social
services such as social bonds is laudable.

My thoughts?

  • I’m rather sceptical –  but open to persuasion –  on the merits of “social bonds”.
  • I’m more than sceptical of the big-government first bullet.   The logic sounds compelling at first blush –  and if fiscal savings were the only focus it might be persuasive –  but it is a path that undermines privacy and autonomy, delivering more and more information to an overweening state.
  • It is striking how the Initiative –  like the government, and no doubt the Opposition –  are reluctant to ever go near the role public policies have played in corroding cultures and giving rise to the welfare-dependency and other social problems joined-up government is now supposed to be trusted to deal with.

And then they turn to local government

• Local communities should share the benefits that accrue
to central government from extractive industries and
growth. Local government should receive financial benefits
for creating economic growth (and suffer a loss when it
does not).
• Central and local government need to better define their
responsibilities to preclude cost-shifting and blame games,
and enhance accountability.
• Special economic zones would increase flexibility and
regional variability of economic policy.

Here I largely disagree with them (and probably side more with the former Business Roundtable, which favoured restricting more tightly the activities of local government).

  • the second bullet is vacuous.  It is what politics is.
  • I documented my scepticism about their special economic zones idea in a post in 2015.
  • For all their talk of how many local authorities France or Germany have, it is worth remembering that this country has a total population not much different from that of a typical US state.  Do we really think we have the policy capability for dozens of different economic policies?  And what do we make of the demonstrated capability of local bodies?  I know the Wellington City Council is one of the members of the Initiative, so perhaps they have to be polite, but it is a local body that hankers after uneconomic runway extensions, expensive convention centres and film museums, extraordinarily expensive town hall refurbishments, all while then going to cap in hand to government to sort out the water supply risks in an earthquake (a fairly basic function I’d have thought) I simply don’t understand why the Initiative wants to give more scope to local bodies.  Perhaps it worked in Germany, but there is little sign it does here.
  • I was also a bit flabbergasted when the Initiative seemed to lament local council reliance of property taxes.  Local body rates aren’t a pure land tax, but they are probably further towards the non-distortionary end of the spectrum than most other possible taxes.

Their final section is about economic growth.  There is plenty to agree with them on there.

Imagine if we could achieve an annual productivity
growth of 2% per year from now until 2060 instead of, say,
1.5%. Half a percent may not sound much. But through the
power of compound growth, it makes a substantial difference
to economic output.

By 2060, GDP per capita would be 22% higher (or about
$22,000 per person in today’s dollars) if we achieved 2%
productivity growth instead of 1.5%.    ……

Creating a dynamic, growing economy is essential if we do
not want to end up like some European countries that have not
generated enough growth over the past decades, and are now
paying a heavy social and economic price for it.

All good stuff, but…….there is not a single policy recommendation in this section of the Manifesto. Not one.

I suppose their defence will be that the earlier report they were drawing from was about making the case for economic growth, as against those who doubt it is something worth focusing on.   But this is a policy manifesto, you are an (economics-based) think tank, and you have nothing specific to offer on diagnosing the causes of New Zealand’s disappointing long-term economic performance, and nothing on remedying it.    It seems quite a large gap in the manifesto.    No doubt, the Initiative would argue –  and fairly –  that some of their other proposals would lift productivity and per capita GDP, but I doubt any serious observer would think that list –  even if all the items on it were adopted –  would be more than modestly helpful in reversing our decline.  After all, we did much more ambitious reforms –  in the same general spirit –  in the 1980s and early 1990s and they didn’t.  (And for those about to comment  “so what would you do”, I dealt with a list of things I’d favour in a post last year.)

Various omissions from the Manifesto struck me.  Having just launched a major report on immigration, it was surprising to see almost nothing on that topic, not even on ways to improve the current system.  Writing about the Manifesto at Spinoff, Simon Wilson noted

Still, I’ll give them this: they don’t believe cutting taxes is the cure for all ills and they don’t bang that old privatisation drum much either. For neoliberals, both those things are revolutionary. Credit where it’s due.

In fact, as far I could see there was nothing about lowering taxes at all, even though our company tax rate is towards the upper end of those in OECD countries.  I guess the Initiative hasn’t done a report about the tax system –  perhaps it will be a topic if there is a change of government, given that the Opposition parties propose a tax working group.  Perhaps too there are no votes in arguing for lower company tax rates –  in an overheated climate of angst about multinationals and tax –  but, as the Initiative note, the role of a think tank shouldn’t be to be popular.

And now to revert to my earlier comments about the tone of the scene-setting introductory chapter.  It is relentlessly upbeat.  Apparently

New Zealand is not just doing well but doing spectacularly well on many measures.

And

Instead of taking this performance for granted, we need to celebrate it.

Ending on tones that could have been taken from Land of Hope and Glory

Land of Hope and Glory, Mother of the Free,
How shall we extol thee, who are born of thee?
Wider still and wider shall thy bounds be set;
God, who made thee mighty, make thee mightier yet,
God, who made thee mighty, make thee mightier yet.

Or, as the Initiative puts it

the Initiative takes great pride and satisfaction in helping make our great country greater still.

Of course there is a lot to like about New Zealand.  Most countries in the world have far lower material living standards, however one wants to assess them.

But what the Initiative seems to want its readers to forget – and perhaps it is just because many of their staff are so new to New Zealand that that history hasn’t yet made much impression –  is that not long ago,  New Zealand wasn’t just better than most countries, it was a better place to live than almost all of them.  Norway was somewhere well down the scale, as were France and Germany, let alone Singapore and Japan.  One can’t put too much weight on single estimates for single years, but 100 years ago we vied only with the US, Australia and perhaps the UK and Switzerland for top ranking.  My grandparents were just starting out in the workforce then.  Even in early 1950s –  when my parents were starting out –  we were still in the top handful, helped a bit by escaping the direct ravages of war.      And now?     Now, whether you look at GDP per capita or GDP per hour worked, or dig down and look at NNI (net national income) measures, we don’t score well.  Of the OECD countries, we are perhaps 23rd, and showing no signs of improving.  In the league tables, and depending on your precise measure, we vie with places like Slovenia and Slovakia (still regions of communist countries when we were doing our liberalising reforms in the 1980s) and Greece, Israel, Korea and Spain.   In our European history, New Zealand has never before been as poor and relatively unproductive as these countries.   And as the Initiative rightly stresses, economic growth –  and surely even they mean it in per capita terms –  matters.    We haven’t delivered it, and there is no point pretending otherwise.

Is GDP everything? No, of course not.   But if you want a balanced assessment of New Zealand –  and such hardheaded asssessments are the only sensible starting point for good diagnosis and prescription –  one could also point to things like:

  • a homicide rate that is around the middle of OECD countries,
  • an incarceration rate (a “fiscal and moral failure” as the Prime Minister put it) far higher than most,
  • shocking domestic violence rates,
  • wide disparities between Maori and Maori economic and life outcomes,
  • as well as more mundane, but ubiquitous, scandals like the housing market.

Oliver Hartwich is glad to have come to New Zealand.  He’s found a good niche here and I wish him all the best.  Life is comfortable for upper income people in central Wellington.     But what have New Zealanders been doing?

Here is the chart, since 1950, of the cumulative net immigration flow of New Zealand citizens.

net plt flow of nz citizens

In the 50 years to 2016 that was a net outflow of 963000 New Zealanders.   The average population over that 50 years was about 3.7 million.  Roughly a quarter of all New Zealanders have left (net) and not come back.  It is a staggering symptom of failure and underperformance here, that so many people –  in a relatively rich country –  saw what they regarded as  better opportunities abroad and went after them.      Well-performing countries just don’t experience that sort of exodus.  Most of us don’t want a repeat, or a resumption of larger scale outflows once the Australian labour market picks up.  But to read the New Zealand Initiative’s report, one wouldn’t even know it was an issue.

Nearing the end of his rhapsodic introduction Hartwich observes

For policy experts such as my colleagues at the Initiative, New Zealand does not provide the same challenges one faces in solving the Greek debt crisis, organising Brexit, or fighting home-grown extremism.

It should.  After all, that sort of outflow of our own people, that sort of sustained economic underperformance, is unknown in reasonably well-governed countries in modern times.  If I can end on my own modestly upbeat note, we aren’t Argentina, Venezuela or Cuba……and yet we’ve experienced the staggering slippage that shows no sign of reversing itself.    There are plenty of challenges for the next manifesto, if they interested in actually engaging with the specifics of New Zealand’s experience.

New Zealand Initiative on immigration: Part 10 Recommendations and Conclusion

At last we get to the end of the New Zealand Initiative’s report on New Zealand’s immigration policy.

I don’t want to spend much time on the Conclusion page or so.  Even in a short section, there is lots I could challenge or disagree with, but much of it is ground already covered.  But I did want to highlight briefly the tone they adopt.  It is not one that, say, respects the very wide differences in immigration polices found across time and across the countries of the world (even just among the relatively advanced countries).    Or one that recognises that in some area men and women of goodwill and decency might have different preferences as to how best to organise or govern societies.  It isn’t even one open to the possibility that not all state-facilitated immigration –  to any place, at any time –  will necessarily benefit the natives of the place.  Rather, the only things that can possibly lead to different conclusions than the Initiative are fear, confusion, racism and so on.

This is what I mean.

Such is the intensity of the fear and confusion among the public that many opposition parties have seized on this narrative, some naively and some opportunistically. The pro-immigration Key government too has tightened policy settings to appease the public.

No one, presumably, has engaged in a thoughtful or considered reassessment?

Radical changes to policy settings simply to appease populist fears is misguided and even harmful.

The only reason anyone might apparently consider change is “to appease populist fears”.

Which is all a bit odd because a couple of paragraphs on they come to the economic aspects of immigration –  economics being the core expertise of Initiative people.  And there, writing about New Zealand, they say (emphases added)

Economic worries about immigration are overblown. There is no compelling reason to believe migrants are causing major detrimental impacts to the labour market. Although the empirical evidence is less than conclusive, there are good reasons to believe, as most economists do, immigration can make a positive contribution to economic growth.

Note how weak the actual claims are.  It isn’t exactly a ringing endorsement of the contribution of New Zealand’s immigration policy to the economic wellbeing of New Zealanders.  After all, I’m happy to sign up to the proposition that immigration “can” make a positive contribution to per capita economic growth, productivity, NNI per capita or whatever. Pretty clearly it did in New Zealand in the 19th century.   It is just that the Initiative, at the end of a major report, can point to no evidence that it actually has done so in recent decades, or is doing so now, in New Zealand.

But what of their specific policy recommendations?  For practical purposes, they endorse roughly the current scale and structure of our immigration policy (with no attempt to assess whether New Zealanders would be better off if, say, the programme were 50 per cent larger, or smaller, than it is).  There are, broadly, four areas of reform they suggest.  As they argue –  noting again the loaded language

Most of the low-hanging fruit have been picked, but policy can still be improved. And there are less harmful ways to placate those who demand an exclusionist policy.

The first is “giving business more of a say”.  In some areas, I agree with them.  For example

Rather than let government decide what types of skills the market needs, let the market reveal it through the price system. A market-driven approach could be to adjust the points system to assign points to the salary ranges of job offers rather than the specific industries migrants are qualified in.

I would favour something similar for our short-term work visa rules.  Set age-related salary thresholds, and set them quite high, and use that as the main tool to decide whether or not to approve a work visa.  I’d have no real problem in offering work visas fairly freely for any position (genuinely) paying, say, $100,000 per annum or more, subject to a limit of, say, three years.   After all, in the Initiative’s words –  and ones I could have written myself

Skills ‘shortages’ can be rectified through higher pay rather than lobbying
government to add the skill requirement to the list.

Where I depart from the Initiative is when they fall back on comparing people with pineapples.

The free market is a much better decision-maker on how many imported pineapples or cars New Zealand needs. Likewise, the number and types of skilled workers New
Zealand requires is for businesses to decide without the strong hand of government.

What is being decided, in our medium-term immigration programme, is how many people, of what sort, will be able to come and join the polity that is New Zealand.  Pineapples don’t vote, pineapples don’t come with cultures.  People do.    The Initiative seems largely indifferent to any notion of the state as agent of the collective preferences of its citizens, but most voters probably see it differently.   I’d put their sentence the other way round:

“It is for the government, on behalf of the public, to make choices as to how many, and what type of, people to invite from abroad to become New Zealanders.    Firms and employers will choose optimal production structures, remuneration patterns etc, in light of all the resources and constraints they face.”

The Initiative also explores the option of imposing a levy, “to limit the effects of migration on infrastructure costs”.    One of the authors, Rachel Hodder, followed up this idea in an article on interest.co.nz.    As she puts it

Our recommendation then also stands as a challenge to political parties that have been using infrastructure burden as justification for cutting immigration. If that is the genuine reason you believe immigration policy needs to be adjusted, then why not explore this option first?

It is an interesting idea, and I don’t think I’d have any objection in principle.  It would increase the chances –  although certainly not ensure – that large scale immigration would actually be benefiting New Zealanders in aggregate, although on its own it would do nothing to allay the distributional concerns (that relatively unskilled New Zealanders are losing out).

The Initiative proposes the idea of a levy without, as far as I can see, giving any sense of the possible size.    One angle might be to look at the public sector capital stock, which presumably needs to be augmented, in much the same per capita amounts, for each addition to the population.   As at last March, Statistics New Zealand estimated that the current value of the general government sector’s capital stock was around $41500 per person.  But that is a depreciated value.  Assume that all the capital was halfway through its life, and one could easily be looking at a per capita cost of putting in place the new public sector capital that new migrants require of $80000.    Some of the public sector capital is already financed by user-fees, but most of it isn’t.   I wonder if anyone is seriously willing to propose an $80000 levy for successful applicants for a residence visa in New Zealand  – even if, say, it could be paid as an income tax surcharge over the following 10 years?  In principle, it should raise the average skill level of the successful applicants to some extent.  It would certainly deter migrants with children.

I don’t have a huge problem in principle with such a scheme but, rightly or wrongly, I suspect most people would judge that it was almost a “repugnant transaction” –  they would prefer not to sell the right to become one of us.  Is it different in character from inviting migrants in on the hypothesis that doing so will enrich us all (the current philosophy)?  Perhaps not –  and definitely not to the economist in me –  but I can’t see it finding a great deal of public favour, among supporters or sceptics of the immigration programme.

The Initiative also seems to endorse proposals for New Zealand to sign reciprocal free movement agreements with any willing coountries, citing favourably ACT leader David Seymour’s suggestion to promote such agreements with Canada and the United Kingdom, complementing the arrangements we currently have with Australia.

Doing so with the UK in particular would, of course, restore the system that operated for more than a century after New Zealand was first settled.  It was only in the 1960s and 70s that free movement between the UK and New Zealand was no longer legally permitted.  At a political level, I find the idea quite appealing (but politicians in the two countries are unlikely to).  At an economic one, I don’t.  This simply harks back to my longstanding argument that the most important issue for New Zealand is the sheer number of immigrants we’ve been taking, not primarily what shills they’ve had or where they’ve come from.  Most of our migrants in the early post-war decades came from the United Kingdom.  At the time, material living standards here were better than those in the UK.  But even now, decades on, no one has been able to produce studies –  whether econometric ones or analytical narratives – demonstrating the productivity gains to New Zealanders from that large scale immigration.  Economists at the time was pretty sceptical.  Those now just seem uninterested in New Zealand economic and economic policy history, and the possible lessons it should offer.

These days, of course, New Zealand is poorer than the UK, but the UK is so much the larger country that even a small outflow from the UK to NZ  (as a share of the UK population) would be materially disruptive to New Zealand, and would further set back the chances of lifting productivity and living standards here back to those in, say, the top half of the OECD.  There is, additionally, the adverse selection problem, that the people most willing to migrate from a rich hub to a poorer, but perhaps more relaxed and spacious, country are hardly likely, on average, to be those with the greatest desire to succeed, and the strongest likelihood of offering the vaunted productivity spillovers.

The Initiative’s final suggestion for policy improvement is in the area of sponsorship for migrants.

A separate visa category could allow committed people to sponsor and support migrants in adverse circumstances, provided adequate checks and balances are in place. Canada allows community groups to sponsor refugees above the quota if they agree to be responsible for the basic care and support of the refugees, and New Zealand is laudably trialling this system for refugees here.

In principle, I’d have no particular problem with this suggestion.   As they note

Requiring bonds from sponsors could ensure the sponsors are held to their commitment.

But I think it is an approach mostly best operated on a relatively small scale.  Immigration policy is a collective decision about the number, and sort, of people we welcome to become future New Zealanders. I’m not sure we want motivated minorities  –  whether libertarians, evangelical Christians, Wahhabi Muslims or whatever –  trying to skew the population balance over time by fundraising to bring in lots more of their own.  Each group is, of course, welcome to evangelise and persuade, and perhaps if the libertarians ever persuaded enough of us we’d have open borders after all.  But make it a contest of ideas, not of the power to buy more imported supporters.

In the end, it is a pretty modest list of suggested reforms.  Much as they seem driven by a vision of open borders, in the end the Initiative is worried that New Zealanders might be getting uncomfortable with the grand Think Big experiment of New Zealand existing immigration policy over the last 25 or so years.  It has delivered us a large increase in the population, and a lot more ethnic restaurants and higher house prices (to take the most obvious gains and downsides), but with little or no evidence that it has done anything to lift our overall economic performance.  As the OECD noted again only the other day, for the last quarter century our productivity –  already low –  has just drifted a little further behind other advanced countries.  Perhaps it is past time to rethink this key dimension of economic policy.

My own preferrred model would probably have these elements:

  1.  Reducing the residence approvals target from around the current 45000 per annum to, say, 10000 to 15000 per annum.  In per capita terms, that would be about the rate of legal immigration the US has, and would be similar to the rate we had in the 1980s.  Not exactly closing the door, but certainly pulling it over to some extent.
  2. Within that reduced target I would look to focus much more strongly on demonstrably highly skilled people (who offer the best chance of fiscal and productivity gains) and thus would
    • revisit, reduce and potentially eliminate the current Pacific access categories,
    • permanently eliminate parent visas, except (and even then capped) where there is an enforceable, insured, commitment to full financial support from the parent, or their New Zealand citizen child.
    • leave the refugee quota as it is
    • eliminate the additional points provided for job offers in regional areas (a measure that is tending to lower the average quality of the accepted migrants)
    • eliminate additional points for New Zealand specific qualifications,
    • eliminate additional points for jobs in areas of “future growth” or “absolute skill shortage”
    • more strongly differentiate points in favour of higher level qualifications,
    • perhaps establish a category akin to the US visa for those with extraordinary ability
  3. Eliminate the provision allowing foreign students studying here to work 20 hours a week.  If New Zealand tertiary institutions really have a product worth buying –  and some probably do –  they should stand on their own feet, as other exporters are required to.
  4. Reshape the work visa system with a view to (a) reduce the scope for lobbying and influence peddling, (b) reducing the total number of people here on work visas at any one time, and (c) provide much greater flexibility for employers to utilise work visa people for short specific periods in highly-skilled and well-remunerated roles.    Since there would be many fewer residence approvals place open (see above) this path would in any case be much less popular with prospective migrants.   Specific features might include:
    • no one could have a work visa for more than two three year stints
    • use an age-based matrix in which in normal circumstances no work visas might be issued to anyone under 30 for a role paying less than, say, (an inflation-indexed) $75000 per annum, increasing by (say) $25000 in each five year age window up to a cap so that for a person over 50 to get a work visas they would need to be in a role paying $200000 per annum or more.
    • no doubt there would need to be some exceptions to this, and it would not apply to say approvals for roles of less than perhaps three months, but the point is to get the focus not on official judgements of “skill shortages” but on attracting people, if we do, who are capable of commanding high salaries (loose proxy for skill) on market.

Is it a perfect scheme?  No, of course not.  That isn’t a meaningful test for any human institution.  Is it a scheme for other countries.  No.  Some might find it useful, but for others –  where there might be clear evidence of gains to natives from large scale immigration –  it might be quite inappropriate.   But for the specifics of where New Zealand finds itself now, it would be a huge step in the right direction.   For a very remote place, in an age when personal connections seem to matter more than ever, it would give us a much better chance of finally beginning to close the income and productivity gaps, and offer New Zealanders –  the inevitably fewer number of future New Zealanders than under current policy – the chance of achieving world class productivity and living standard here in their own place.