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.

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

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

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

The Initiative seems keen to take the other view

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

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

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

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

How does the Initiative respond to this point?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And this was my comment last year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

and

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

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