Who did Iain Rennie consult?

I’ve written a couple of times about the review former State Services Commissioner Iain Rennie has been conducting, at the request of the Minister of Finance, into two aspects of the governance of the Reserve Bank:

  • whether something like the existing internal committee in which the Governor makes his OCR decisions should be formalised in legislation, and
  • whether the Reserve Bank should remain the “owner” of the various pieces of legislation (RB Act, as well as the insurance and non-bank legislation) it operates under.

An earlier OIA request from a journalist saw The Treasury refuse to release the terms of reference for the report, but they did release the terms of engagement.  I wrote about that here.    We learned from that release that the report had been delivered to Treasury in mid-April.    We also learned that

In completing the work, the author will engage with an agreed set of domestic and international experts.


The key deliverable is a report, which will be peer reviewed by a panel of international experts.

I was interested to know who these experts were, and lodged an OIA request with Treasury.  No doubt, they could readily have responded in a day or so, but after four weeks they did finally respond yesterday.

Anyway, this was the list of “agreed domestic and international experts”.


and this was the list of reviewers


It is a curious list in many ways.    Setting aside the SSC people, of whom I know nothing but who are presumably knowledgeable on issues of governance of New Zealand public sector institutions, not a single one of the central bank experts (first list) has any experience of, or exposure to New Zealand (let alone actually being a New Zealander).

And Rennie, with Treasury’s agreement, appears to have consulted only current serving central bankers.   No doubt several will have had useful perspectives to offer on their own central banks’ experiences.  But the world of central bankers is a fairly clubby (or collegial) one, and you would have to think it unlikely that Rennie would have heard anything from these people that would cast doubt on how the arrangements their New Zealand peers operated under were working.   And among those current central bankers only one (Poloz, the Canadian Governor) has any stature in his own right; the others appear to be “corporate bureaucrats”, able no doubt to pass on information about how things work in their own central banks, but not self-evidently qualifying as “international experts” on central bank governance etc.

One might have supposed that any number of other people (even from abroad) could have provided valuable perspectives and insights.  For example, retired Governors and former members of decisionmaking committees, who are freer to speak their mind.   Lars Svensson, the leading academic and former monetary policy board member, wrote a review of our Reserve Bank in 2001 for our then-government.   Having had extensive experience as an insider since then, and retaining an interest in New Zealand, he would have seemed like a natural person for Rennie to have consulted.    In fact, there is not one academic on the list.   Not, for example, Alan Blinder, former vice-chair of the Fed and author of academic work on decisionmaking by committee.   There are no private economists on the list.  Not, for example, Willem Buiter now chief economist of Citibank and a former academic and member of the Bank of England’s Monetary Policy Committee.  And no one from abroad with, say, a Treasury perspective, or the perspective of a Minister.  Bernie Fraser, for example, had been both Governor of the Reserve Bank of Australia, and Secretary to the (Australian) Treasury.

And not a single person from New Zealand made the expert list?  Not Arthur Grimes, who was heavily involved in the design of the current system and later chair of the Reserve Bank Board.  Not Don Brash, who was Governor under the current system for 12 years.  Not thoughtful former Board members such as (for example) Hugh Fletcher.  Not people who had been involved from a Treasury perspective (especially in the years since Rennie himself left Treasury).  And, of course, no one who has written on the issues domestically.

You might, incidentally, be wondering why people from the Bank of Canada and the Bank of Israel top the list of experts.  That is likely to be because Canada is the only other advanced country central bank with the Governor as (formally) single decisionmaker (Canada has quite old central banking legislation, and the Bank of Canada has much narrower responsibilities than our Reserve Bank).  And until relatively recently, Israel also had the Governor as a single decisionmaker, before the legislation was overhauled and a mixed committee (internals and externals) took over the monetary policy decisionmaking role.  The Israeli experience should be interesting, but again you have to wonder why Rennie didn’t consult Stan Fischer, former Governor of the Bank of Israel, and now vice-chair of the Federal Reserve.

What of the international peer reviewers?  There were three, and each will have been likely to have added something in commenting on Rennie’s draft.    But, again, there is a distinctly “let’s keep this inside the club” feel to it all.   Goodhart, for example, is a respected academic economist, and former staff member and Monetary Policy Committee member at the Bank of England.    But he is now rather elderly, and has had a very strong relationship with the Reserve Bank of New Zealand over the years –   including as guest speaker at the (rather extravagant) 50th anniversary celebrations of the Bank, and then someone used as an expert witness  by the Bank at the parliamentary select committee when the current Reserve Bank Act –  governance and all – was being legislated (rather controversially) in 1989.

Donald Kohn is pretty highly-respected in international central banking circles.  So much so that Treasury omit to note in their description that, having retired from a career at the Federal Reserve, he is now a member of the Bank of England Financial Policy Committee, so still entirely within the central banking club.  He has visited the Reserve Bank and, from memory, wrote up his experiences pretty positively.

The final reviewer is David Archer, former Assistant Governor and Head of Economics at the Reserve Bank (and sometimes mentioned on lists of potential future Governors). He now holds a senior position at the Bank for International Settlements, a body owned by central banks (including ours) which describes itself thus

The mission of the BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

I worked with David closely over a long period, and he was usually pretty willing to speak his mind.  He certainly knew the Reserve Bank well –  at least in the days before financial regulation became so important, and before the Reserve Bank moved more back into the mainstream of central government as a major regulatory institution –  but you have to wonder quite how free he will have felt to offer views the Reserve Bank might be uncomfortable with – the Governor visits the BIS pretty frequently –  especially as those views will themselves presumably be discoverable in time.

So the offshore people consulted, or used as reviewers, seem as though they will have been a rather partial perspective on the issues at hand. No doubt, all provided some useful information and perspectives, but you can’t help thinking there could have been a lot more there if Rennie had sought it.  Then again, as State Services Commissioner his reputation was hardly that of someone keen on open government.  What is perhaps more troubling is that The Treasury was okay with all this.

Despite this published list, you have to wonder who else Rennie in fact consulted.  Why I do suppose there was anyone else?  Because, somewhat by chance, I also yesterday got a response from the Reserve Bank to an Official Information Act request for minutes of the Reserve Bank Board.

In the minutes of the Board meeting held on 30 March this appears

Rennie board

There follows almost three pages recording the details of the Board’s discussion with Rennie (and his supporting Treasury staff). every single word withheld (on somewhat questionable grounds).    Nothing else ever gets three pages of text in the Board minutes –  in fact, the process for appointing a new Governor is still not being minuted at all, even in this latest set of releases.

I don’t have any particular problem with Rennie consulting with the Bank’s Board.  They are likely to have some useful experiential perspectives to offer, but if the discussion covered almost three pages of minutes and –  according to Treasury –  no one else in New Zealand with any familiarity with central banking issues was consulted, it does all have the feel of an insiders’ job.  Perhaps that is what Steven Joyce wanted.  It isn’t what the situation requires.    Meanwhile, one can only hope that the report itself, along with the terms of reference, will be released before too long.

New Zealand isn’t the only country looking at these issues.  The Norwegian government just this week released an independent report they had commissioned looking at the future governance and mandate of their own central bank.  The summary report is very easy to read, and includes specific draft amendments to the law to give effect to the report’s recommendations.  Among those recommendations is a streamlined system of governance, with proposals for a monetary policy committee (40 per cent of whose members would be externals appointed by the government), and for a separate Board to which the Governor would be responsible in his role as chief executive of the Bank.    We can only hope that the completed Rennie report will be as clear and crisp.



Natural resources: Norway and the UK

How natural resources contribute to the prosperity of nations is much-debated.   There is little doubt that a) natural resources can be wasted, mismanaged etc, such that a country well-provided for by nature still ends up pretty poor (Zambia is my favourite example, partly because I worked there), and b) that it is perfectly feasible for some countries to do very well indeed with little in the way of natural resources (one could think of Singapore or Japan, but also Belgium or Switzerland).    The quality of the human capital of the people in a place, and the “institutions” that are put in place or sustained, make a huge difference.   Location looks as though it might matter too.

But equally, it is easy to think of countries where it is pretty clear that natural resources have made a great deal of difference indeed in lifting the economic prosperity of the nation.  One could think of Saudi Arabia, Kuwait, Brunei, Equatorial Guinea and so on.  It isn’t natural resources in isolation that makes them rich –  Iraq and Iran still manage to mess themselves up –  but in combination with some basic level of property rights, institutional quality, and human capital (native or imported) the natural resources have lifted living standards in such countries above levels that could otherwise readily be explained.

The quantity of natural resources in each country is fixed.    That doesn’t mean that what can be done with those resources is fixed –  able people and smart technologies find more efficient ways of extracting the resources or utilising them.  We’ve seen that in New Zealand with the growth of agricultural sector productivity over 150 years or more.  But the fact that the endowment is fixed means that each additional person added to the country reduces the average per capita value of that endowment.  If the natural resource stock is small to start with, it isn’t a point worth bothering about (and so a lot of economic models largely ignore fixed factors).    But if it is a large part of what an economy produces, and exports, it can matter rather a lot.  It is why I’m unconvinced that rapid immigration policy driven population increase makes a lot of sense in New Zealand or Australia, where the overwhelming bulk of what we sell abroad is natural resource dependent.   The point is more immediately pressing in New Zealand –  where we haven’t uncovered major new natural resources for a long time –  than in Australia, but is no less conceptually relevant there.

In this post, I wanted to illustrate the point by looking at the experience of Norway and Britain with North Sea oil and gas.  The oil and gas were always there, but weren’t known about for most of history –  and even if they had been known about, it wasn’t until offshore drilling and processing technology got to a certain point that the resources had much value.  By the 1970s, Britain and Norway were beginning to get into oil and gas production.

Britain and Norway were both advanced economies in 1970, drawing on the skills and talents of their people and growth-friendly institutions and cultures.  Natural resources probably matter a bit more in Norway, but oil and gas weren’t then among those resources.  And in 1970, OECD data indicate that GDP per hour worked in the two countries (converted at PPP exchange rates) were about the same.  As it happens, GDP per hour worked in New Zealand then was around the same level.

norway uk nom gdp phwThese days, by contrast, GDP per hour worked in Norway is around 60 per cent higher than that in the UK  (which is in turn quite a bit higher than New Zealand’s).  Norway has among the very highest material living standards of OECD countries, and the UK is still in the middle of the pack.

Here are the charts for total oil and gas production in the two countries since 1970, using data taken from the BP Statistical Review of World Energy.

First oil

oil prodn

And then gas

gas prodn

Over the 40 years to 2015, the two countries each produced roughly the same amount of oil and the same amount of gas.

There are all sorts of differences between the two countries. I’ll come back to some of those, but the first I wanted to emphasise was population.  Norway now has around five million people, and the UK currently has around 65 million.

Here is per capita oil and gas production for the two countries.

oil pc

gas pc

That “windfall” –  the discovery of large recoverable oil and gas resources –  made a big per capita difference in lightly populated Norway, and not much of one in heavily-populated Britain.

Determined sceptics might argue that it is all a mirage and that somehow Norway would have got to its current living standards anyway.  If I was focusing on GDP per capita they could, for example, point out that in Norway a materially larger share of population is employed than in the UK.  But, as it happened, I was focusing here on GDP per hour worked (and if anything, employing a higher share of the population should probably lower, at least a bit, average output per hour, if the less productive people are the last to be draw into the workforce).  As it happens too, the employment/population gap between Britain and Norway is narrower than it was in 1970.

Perhaps too people might set out looking for areas in which Norwegian policy is superior to that in the United Kingdom.    But there isn’t much to find.   As a share of GDP, for example, government spending in Norway has typically been larger than it is in the UK.

gen govt spending uk and norway

And I went through the structural policy indicators released last week as part of the OECD’s Going for Growth.   Norway isn’t badly run by any means, but on a majority of the indicators Norway scores less well than the UK.

Location probably favours the UK as well –  the south of England is very close, and accessible to, the high productivity populous countries of France, Belgium, Netherlands, Germany.  Norway isn’t remote –  certainly not by New Zealand standards –  but it isn’t quite as advantageously located for prosperity as the UK is.

In sum,  don’t think any dispassionate observer would doubt that oil/gas –  combined with the responsible management of the revenue –  is what explains Norway’s rise over the last few decades to the top of the OECD league tables.  And if, by some historical chance, there had been 65 million people living there, rather than the five million who actually were, it just wouldn’t have made very much difference.  For the UK, the oil and gas were a “nice to have”.  For lightly-populated Norway they made a great deal of difference.

For New Zealand, for whom extreme remoteness is a given, and where fixed natural resources make up so much of our export earnings, it is something to think about.   There is a reasonable alternative story to tell under which the average New Zealander would have been better off –  given the current state of global and local technology etc –  if there were three million of us not 4.7 million.  Perhaps that would have been the case, if we hadn’t restarted large scale immigration after World War Two.

Immigration and the macroeconomy

Eric Crampton, the strongly pro-immigration head of research at the strongly pro-immigration New Zealand Initiative drew attention to a nice summary (on a high profile portal for the wider dissemination of economic research) of a new empirical paper by a couple of researchers at the Norwegian central bank looking at the macroeconomic implications of immigration in Norway.    It looks as though a draft of the paper may have been presented in New Zealand, and at very least the authors thank a couple of Reserve Bank researchers for comments, and cite a couple of  Reserve Bank research papers.

Unlike most European countries (apparently) but like New Zealand, Norway has good quarterly immigration data.  Historically, Norway had quite low rates of immigration, but over the last 15 years or so there has been a substantial increase, mostly stemming from the liberalisation of migration flows within the EU (and closely associated countries, including Norway).  By New Zealand standards, the net inflows are still modest, and annual population growth peaked at around 1.3 per cent, compared with a 2.1 per cent peak recent annual increase in New Zealand.

Figure 1 Annual change in Norway’s population (%)furlanettofig1

One of the challenges in assessing the economic impact of immigration is assessing which bits are a response to domestic economic developments, and which are more genuinely exogenous.  There aren’t easy or foolproof ways of doing that (after all, even when there are discrete policy changes –  as with the recent change in New Zealand’s target level of residence approvals –  those changes aren’t made in a vacuum, and may be influenced by the actual or perceived state of the economy).

The latest paper uses a particular empirical “identification strategy” to try to distinguish endogenous from exogenous changes in the immigration  flows.  It looks a plausible enough approach, but it is hardly the last word on the subject.   There are two other features of the paper to note, both of which should make it more likely that the authors will find positive results.

The first is that the authors look only at immigration from “western countries” (EU/EFTA, North America, Australasia and Eastern Europe).   As they note, in Norway “immigrants from non-western countries exhibited an employment rate substantially lower than natives, and migrated to Norway mainly because of family reunification or as asylum seekers”.  The second is that the analysis uses “mainland GDP” –  which excludes oil production and associated transport.  Doing so is common in short-term macroeconomic analysis in Norway, but tends to skew the results towards finding positive results from immigration –  since the oil resource is a fixed factor, and a major contributor to Norway’s overall economic prosperity.  Every increase in the population spreads that particular fixed resource across more people, lowering the average per capita output from that sector per person.

So what do the authors’ find as a result of their modelling?  Using quarterly data, they examine the response of a number of variables over periods up to 36 quarters (9 years) after the initial immigration shock.  Here is their chart.

Figure 2 Responses to an exogenous increase in immigration


When the grey shaded area encompasses the red (zero) line, there is no statistically significant effect found.

The results largely rang true to me, and are consistent with the longstanding approach of New Zealand economists to the short to medium term impact of immigration.    Unsurprisingly, an immigration shock boosts GDP –  to a statistically significant extent –  over the first year or so.  The new migrants (particularly these western migrants) are both workers and consumers, and generate a need to additional private and public infrastructure.  But interestingly, the effect doesn’t last.  On this modelling, there is no permanent increase in GDP –  let alone GDP per capita.

And consistent with the New Zealand stylised facts –  over decades, but including Reserve Bank research in the last few years –  a positive shock to immigration typically lowers the unemployment rate in the short-term (in this case two to three years), and in the long-term immigration makes no difference to the unemployment rate. That all makes sense –  typically the demand effects of additional immigration exceed the supply effects in the short-term –  after all, new arrivals need to eat (and do all or most of the normal consumption spending natives do), but they also create a demand for new houses –  which might last 100 years –  and other public and private additions to the capital stock.   In the longer-term, of course, the basic institutions of the labour market (regulations, unemployment benefits etc) determine the unemployment rate.

What about the fiscal impact?  On this modelling, it was found that additional immigration –  and recall that this study focused on western work-oriented migrants, not refugees or people coming on family reunification –  made no difference to public finances in the long-run.  There was a “slightly positive” effect in the short-term, which again shouldn’t be surprising, since –  as we saw earlier-   demand effects tend to exceed supply effects in the short-term, and strong demand tends to boost government finances.

These Norges Bank authors seemed to have started from a position of being relaxed about the economic impact of immigration to Norway.  They focus on the widely-heard arguments that increased immigration will raise unemployment and put additional strain on the public finances, and note that

Our research did not find any support for the macroeconomic arguments that have recently been used against immigration. In our model, immigrants do not limit job opportunities for native workers, and an increase in immigration has no negative effects on the fiscal balance (if anything, we find a small positive effect). It is important to stress, however, that our results refer only to immigration from western countries, and so largely capture job-related immigration.

However, reassuring (and unsurprising) as those results might be, the authors did find some more concerning results.  Specifically, GDP per capita (even just the mainland measure) appears to fall as a result of positive immigration shocks –  recall that in the long-term GDP didn’t rise and the population did –  and GDP per hour  worked also fell.   In their results, this arises from

This decline in productivity was mainly driven by a strong drop in capital intensity reflecting the adoption of less capital-intensive and more unskilled efficient technologies

As they note, laconically, in concluding their note

This may be a worry for long-term growth.

I wouldn’t want to make too much of these results. It is just one paper, and there are plenty of other papers with different research strategies and modelling techniques, that claim to find more positive results for other countries.    I’m not even sure this is the best approach to trying to sort out the long-term effects.  Then again, by focusing on only western immigration, and by looking only at mainland GDP (ignoring the fixed quantity of oil/gas), this paper gave itself the best possible shot at finding economic gains from immigration and –  at least on this methodology –  didn’t.  And these are results for a small country that – while not exactly located as favourably as Belgium or the Netherlands –  suffers nothing like the penalties of distance New Zealand does.

But there is a tendency in the New Zealand debate to (a) wipe from the memory banks all record of the longstanding scepticism of New Zealand economists about the value –  in gains in GDP per capita to New Zealanders –  of large immigration flows in the post-war decades (I wrote about one leading, and early, example of such scepticism here), and (b) discount any scepticism about the economic value of immigration to New Zealand as flying in the face of all serious literature.

The modelling approach in the Norwegian paper doesn’t really allow the authors to offer much insight on why mainland real GDP per capita, and real GDP per hour worked, in Norway might be being adversely affected by immigration, even though –  as in New Zealand –  the short-term effects on GDP and unemployment are typically positive.

As a reminder, while I am somewhat sceptical of the likelihood of large benefits to natives from immigration pretty much anywhere in the world –  unless people from a clearly more productive economic culture/set of institutions move to, and largely swamp the people of, a less successful place (the uncomfortable, but not seriously inaccurate summary of the 19th European migration to New Zealand).  Generally, I suspect immigration doesn’t make that much (economic) difference to natives.  But in some cases, it is likely to be materially harmful.  Give Wales, Nebraska, Tasmania or Southland control of their own immigration policies, and it is very unlikely that large scale immigration would leave the people of those places better off.  I suspect that New Zealand as a whole –  remote islands with control of its own immigration policy –  is also such an example.

I suspect there are two main channels through which this effect occurs here:

  • the first mechanism is the pressure that persistent large immigration inflows put on real interest rates and the real exchange rate.  The economy is skewed towards meeting the physical needs and demands that arise from a rapidly growing population, and away from outward-oriented business investment.
  • the second mechanism is through the dilution of natural resource endowment.  New Zealand’s exports remain overwhelmingly natural resource oriented (be it dairy, or coal, or wine or tourism), and there has been little sign of any dramatic transformation of that picture.  There are individual firms that succeed here simply on the quality of their people and ideas, not tied to any particular location-specific resources, but there simply aren’t many of them.   The persistent pressures on the real exchange rate make it less attractive than otherwise to develop them here, but in any case, New Zealand just doesn’t look like a natural location for lots of such businesses.  If so, we will remain very reliant on the fixed natural resources –  and ever more people, induced by immigration policy –  just makes it ever harder to keep up with, let alone catch up to, incomes and productivity in other more economically fortuiutously located countries.

It is a narrative that fits a lot of the stylised facts about New Zealand.  Of course, it doesn’t fit the prevailing “ideology” or mindset of our economic and political establishment – past and present Prime Ministers, key economic government departments, or (heavily non-tradables oriented) think tanks like the New Zealand Initiative.  But decades on there is still no evidence that their approach –  favouring lots of immigration to New Zealand, as some sort of “critical economic enabler” –  is producing economic gains for New Zealanders, and making New Zealand a more productive place.