Reviewing immigration policy

The Productivity Commission has been charged by the government with reviewing immigration policy with a view to identifying “what working-age immigration policy settings would best facilitate New Zealand’s long-term economic growth”, with a specific emphasis on productivity.

The draft report came out in early November, and I wrote a couple of sceptical/critical posts on it (here and here). The Commission invited submissions on the draft report (submissions close on Friday) and I’ve just lodged my submission. The full text is here:

Submission to the Productivity Commission inquiry on NZ immigration policy Dec 21

Most of the material in my submission will be familiar to regular readers, so I’m not going to quote extensively from it here. My overview was as follows:

There are plenty of individually interesting bits of material in the report (and supporting working papers) but overall, I’m left with the impression that the Commission has not yet done adequately what was asked of it. Specifically, in the Terms of Reference for the inquiry, you are invited to “explore what working-age immigration policy settings would best facilitate New Zealand’s long-term economic growth and promote the wellbeing of New Zealanders”, and in the next paragraph the connection to improving productivity is explicitly highlighted. Your draft report seems to touch on many of the more-detailed points listed in the Terms of Reference, but does not sufficiently stand back to evaluate the way in which immigration policy has (or has not) been contributing to productivity growth and material
living standards of New Zealanders.

Doing so well would require at least a pretty comprehensive review of New Zealand’s experience with large-scale non-citizen immigration over recent decades (arguably informed by the earlier post-war large scale immigration experiences that ended in the 1970s), including recognising that our approach to immigration policy has been something of an outlier among advanced countries, occurring against the (also unusual) backdrop of a very large net outflow of our own citizens. Without something of that sort, informed too by relevant overseas experiences and by a detailed engagement with the stylised facts of New Zealand’s dismal productivity record (recognising that the scale of New Zealand’s
immigration policy structural “intervention” has been huge), it is difficult to see how you can reach a view on what future immigration policy would be most suited to maximising, all else equal, New Zealand’s specific economywide productivity prospects. Moreover, nothing at all in the report seriously engages with the literature on economic geography, surely a startling omission when New Zealand immigration policy involves inviting large numbers of people to relocate to the most remote outpost in the advanced economy world, with the policymakers responsible claiming to have had explicit economic motivations for the policy.

Consistent with these omissions, two of the three highlighted Preliminary Recommendations are primarily process oriented, and the third is really a second-tier issue around absorption capacity. Other suggestions, some sensible, some questionable, play around the edges of the issue, perhaps focused simply on refining something like the last decade’s status quo. None gets to the heart of the issue: what sort of immigration policy should New Zealand run in future, if governments were interested in maximising the productivity and income prospects of New Zealanders?

The rest is there for anyone interested.

I had a quick look earlier in the week through the submissions the Commission had already received. The one that most caught my eye was a second submission by someone called Mike Lear (he’d already made a submission prior to the draft report). I don’t know who Lear is, although I deduce from his submission and this footnote that has had some past exposure to economic analysis and economic policy issues.

34 When I started work in the Department of Industries and Commerce in 1972 (in the newly formed
Productivity Centre!) I was told by the most senior person in the department responsible for overall industry policy that New Zealand should aim to be the Switzerland of the Pacific region for machine tools.

It is a very well-written submission, almost certainly easier to read than my own. Much of it represents a fairly trenchant championing of the “Reddell hypothesis” (the idea that our large-scale non-citizen immigration policy has detracted from New Zealand’s productivity performance) and point by point pushback on various points made (or ignored when they should have been made) by the Commission in the draft report. I don’t agree with every line of his submission, even where he is writing about my ideas, but it is a particularly clear and useful articulation of the arguments and identifies numerous issues that the Commission really needs to grapple with before publishing a final report next year.

Here is his Introduction

lear 1

lear 2

It will be interesting to see what the Commission comes up with in the final report. There is an opportunity to do a really valuable report standing back and asking how best this major structural policy intervention can contribute to improving our dismal economic fortunes. Or the Commission can keep to where the draft report got to, and focus mostly on process issues and tweaks (some sensible, some not) to the (pre-Covid) status quo. The former seemed to be what the government invited the Commission to do when it set out the Terms of Reference for the inquiry.

Productivity Commission at sea

Were I writing yesterday’s post now I would word some things differently. Yesterday afternoon the Productivity Commission drew my attention to their supplementary paper called “The wider wellbeing effects of immigration” which – despite the title – turns out to be mainly about core economic dimensions of the issue, including a substantive discussion of some of the macroeconomic arguments I have been making. Strangely, there had been no cross-referencing to this document in the parts of the body of the main report where, as discussed yesterday, these issues were briefly discussed. I had seen an earlier draft of the macroeconomic bit of this supplementary paper and had provided some comments on it to the Commission.

Awareness of that supplementary paper does not change my main concern about the overall draft report. There is still little or no compelling analysis or insight on any of wider economic issues, no arguments or evidence or reasoning that anyone serious (on either side of the debate or in the middle) is likely to look back to in future and suggest that they saw things a bit differently as a result. There is quite a lot of description but not much in the way of serious evaluation or critique. And this for one of the largest economic policy interventions the New Zealand government undertakes.

But it now flows into a bigger concern that the Commission – despite months of work – really does not know what it thinks, and thus was reduced to highlighting a bunch of second or third order issues. Recall their own summary of their recommendations

I had thought the Commission was largely endorsing the pre-Covid high (non-citizen) immigration status. I reread the main report last night in the light of the “Wider Wellbeing” paper, and I still reckon that is where their heart is. And that is hardly surprising when the chairman of the Commission had been on record as a vocal champion of using policy to create an ever-bigger New Zealand, and had for years run a story in which monetary policy was the main culprit in any sustained economic underperformance. And thus, as I noted yesterday, in one of their supplementary papers they rely on some modelling done back in 2009 by the chairman’s firm (BERL) which has been touted by some (including ministers in the previous government) as demonstrating the wider economic gains from New Zealand immigration – even though the modelling both assumes away some of the questions required to be answered (the response of business investment), is structured to impose on the model no productivity gains (or losses), and where any gains that do flow (in aggregate) flow entirely to the migrants themselves.

But then in the “wider wellbeing paper” at the end of the macroeconomics chapter we find these “findings”

I wouldn’t frame things quite that way myself, but it is interesting that the Commission chooses to do so. You wouldn’t know of anything like this if you just read the Summary (as probably most politicians will only do) or even get much of a hint of it in the main draft report itself. There is no attempt to reconcile it with other material or arguments they cite (including that 2009 paper by the chairman). They might be right or they might be wrong, but the answer should matter materially. Just prior to these “findings” we find this

So, continuing with high immigration has a potentially costly regret whereas (whether the Reddell hypothesis is correct or not), it has no offsetting large benefit. Cutting back on migration will cause short-term disruption to some businesses and loss of small benefits but no large regret even if the Reddell hypothesis is incorrect. In the latter case, a small benefit would be discovering that Reddell’s hypothesis does not hold the answer to New Zealand’s productivity problems. As Fry concludes:
…least regrets suggests that at some point, there may be value in risking the seemingly small benefits from existing immigration targets in order to determine whether larger benefits may be obtained via reduced interest and exchange rates following the adoption of a lower immigration target. (Fry, 2014, p. 26)

That first sentence is quite strong language. It would be news to at least some champions of the policy pursued here over the last few decades. But again it is hardly hinted at in the main report, let alone those higher profile summary documents.

As for the “Reddell hypothesis” itself , the Commission says

At this stage of its inquiry, the Commission is not taking a definite view on the Reddell story

Which, I suppose, is a legitimate stance for them to take, but there is nothing much in the report even indicating where their key uncertainties are, let alone a provisional overall interpretation that submitters could scrutinise and review. I don’t suppose that will seem very satisfactory to anyone, from any side of the debate, considering making a submission. It speaks of a Commission that just has not exercised the intellectual grunt to critically analyse, assess, research and review conflicting arguments and interpretations.

And when they have made the odd tilt in that direction, they seem to end up confused. Again, rereading the papers last night – and recalling some of the discussions I’ve had with them – it is clear that they are quite exercised by problems/delays in building “public infrastructure” and housing. And there are probably – well almost certainly – reasonable points to be made there, even if most of those issues could be addressed directly and thus do not necessarily have connections to immigration policy (although perhaps in a second or third best sense they might).

But they seem to have conflated those issues with the real resource pressure arguments I have been making, even though the two arguments have quite different implications.

Why do I say that? Well, straight after that line above about the “Reddell story” follows this sentence

For example, it notes that policies to improve housing and infrastructure supply and to invest in them prior
to migrants arriving, could do much to avoid the problems of ongoing excess demand in those areas.

(There is something of a similar, unjustified, flow in the main report too).

And I’m just shaking my head and going “no, no, no” to that. I’m all for freeing up land use (especially on the outskirts of our existing urban areas), properly corporatising water services, building promptly roads etc (that pass credible cost-benefit tests) but – all else equal, and on the Commission’s own arguments – these reforms would boost investment spending. But at the heart of the bit of my story which they seem to take most seriously is the simple proposition – from Stage 2 macro really – that real interest rates in an economy are largely determined by the adjustments required to reconcile ex ante desired investment and desired saving. Getting more houses built might well ease house price pressures – itself generally a good thing – but there is no reason to suppose it will do anything positive about lifting New Zealand private business investment, expanding the tradables sector, or lifting economywide productivity. If anything, the risk is that the effect would run a little in the other direction.

Perhaps there will be more analysis in the final report, including looking at the insights we might gain from a careful comparison of our experiences with those of other countries (including the handful of other high-immigration advanced economies). What, for example, does the Commission make of the cross-country evidence that rapid population growth over decades – and ours is mostly now the result of immigration policy – is associated with a larger share of GDP being devoted to housebuilding (naturally and as one would expect) but not with any commensurate lift in the share of GDP devoted to the business investment required to support ongoing growth in productivity and incomes? And so on. But shouldn’t we have been able to have expected a more developed, and robust, story by the time the Commission was publishing several hundred pages of draft reports, not just when the final report lands on the desks of ministers?

Mightn’t we, for example, have hoped to see compare and contrast of the view (with which I largely agree) that high levels of immigration don’t make wage-earners worse off relative to others in society (in fact, the excess demand pressures I’ve highlighted seem to have boosted NZ wages relative to growth in nominal GDP per hour worked), and the view – that the Commission seems at times sympathetic to – that high immigration to New Zealand may nonetheless have damaged economywide productivity growth, and thus held back the improvements in living standards that all of us might have aspired to. They aren’t at all inconsistent (and similarly if the optimists are right high immigration could be boosting economiywide productivity growth, and yet in such a world we might still see wage-earners getting a slightly small share of a much larger GDP per capita).

As it stands at present, the Productivity Commission’s work on immigration just really isn’t fit for purpose. No wonder what they presented us with highlighted those third order or bureaucratic process points rather than offering something offering genuine New Zealand specific insight on how this major tool of public policy has, or has not, worked for the economic wellbeing of New Zealanders.

The Beehive will have been happy, I suppose

[Note significant UPDATE at the end of this post.]

The only good case for having an entity like the Productivity Commission is if it delivers serious in-depth research and analysis – insight – on significant public policy issues, and does so without fear or favour. In principle, there might have been a decent argument for such an institution (I used to be persuaded) given the weaknesses of academe (at least on New Zealand policy issues), the relative absence of think-tanks, and the deterioration in our core public service advisory agencies. But it is hard to fix just one small part of organisational mix, and even more so when those (a) holding the purse strings,and (b) making key appointments demonstrate no appetite for, or interest in, serious research and analysis. And thus, 10 years into its existence, we have the diminished Productivity Commission.

It was never likely to be easy to create and sustain a good entity of that sort, with no critical mass (unlike the much larger Australian equivalent which initially inspired the creation of the New Zealand one), and just up the street from key ministries (the Australian equivalent is an Melbourne, so an attractive option for people who do not want to live in Canberra). But this government seems to have basically given up trying. But then they’ve consistently indicated little or no interest in reversing the decades of relative productivity decline, even though fixing this failure would provide the best long-term support for fixing many of the things they often claim to have gone into politics for.

That was all exemplified with the appointment a year ago of their mate Ganesh Nana as the new chair of the Commission. Doubts that I and others expressed at the time have been more than vindicated since (be it speeches, interviews, or other public statements).

But if there was still any doubt, the diminished state of the Commission was fully on display with the release yesterday of the draft report on the immigration policy inquiry. Immigration (of non-citizens) is a huge government intervention lever, deployed in New Zealand on a scale far larger than in almost any other countries, with (potentially) significant economic, social, and cultural implications. In New Zealand, champions of the large-scale non-citizen immigration policies – run for much of the last 150 years – repeatedly claim that there are significant economic benefits to New Zealanders from such policies, even as for decades now our position in the global economic league tables has kept on dropping away. Perhaps the advocates are right, perhaps they are not. But you might suppose it was a topic warranting some serious and in-depth research and analysis, New Zealand specific but engaged with diverse cross-country experiences, that really engaged with the issues and experiences and offered compelling insights on what might work best, for what end, and how.

But if that was the sort of report anyone was hoping for, it bore no resemblance to what the Commission has delivered. I’m sure there may even be a first-rate case that could be made for how New Zealand’s immigration policies of recent decades have made (or will soon make) most or all of us economically better off – that is, after all, the thrust of the rhetoric from successive governments, and ministries like MBIE (that used to tout New Zealand immigration policy as being a “critical economic enabler”). It would be fascinating to read – and engage with – such a document. But even though it largely champions something like the (pre-Covid) status quo, the Productivity Commission’s piece offers nothing serious to engage with. I wasn’t a great fan of the New Zealand Initiative’s report on immigration policy/experience a few years ago (and offered extensive commentary in a series of posts collated here), but it was a worthier effort – on fewer resources – than the Productivity Commission’s.

The essential vapidity of the report – most especially on anything relevant to productivity and economic performance – seemed well-captured in this extract from the final page of the Commission’s four page summary of the report.

prod comm summary

So the very first recommendation – one of three in that shaded box – is that ultimate Wellington-insider type of recommendation: more jobs for bureaucrats writing policy statements for the governments. Nothing about the substance, all about process. It isn’t necessarily a stupid idea, but surely as about item 25 on a list of second-tier recommendations?

I suppose every Wellington bureaucrat these days feels obliged to invoke (or conjure up) Treaty of Waitangi dimensions, and so the Commission also has it in its top-3. But the focus of the Commission is – or was supposed to be – primarily economic in nature (there is something of a clue in the name) and all the commissioners – and probably all the professional staff – are economists so one if left wondering what they have to add on Treaty issues, at least beyond their personal politics (quite far left in the case of the chair). Same goes for that weird suggestion that learning Maori might be made a factor in granting residence – I suppose some might think it a good idea, but you might have thought there would be at least some attempt to highlight potential trade-offs (in which, for example, some of the more potentially valuable migrants might find learning a niche language – or least jumping through hoops appearing to do so – something of a deterrent).

I don’t have any particular problem with something along the lines of a couple of the recommendations. Providing more flexibility for those of time-limited work visas to change employer makes some sense (although would make more sense as part of my scheme whereby employers would pay a significant fee to hire short-term migrant workers), and the suggesting about limiting the rights of return of permanent residents who leave seems sensible (if niche), as might a provision to allow only citizens to vote (a more normal practice overseas). But relative to the scale of the intervention immigration policy represents these are second or third order issues at best.

And all that is left, which might have some substance (for good or ill), is the second of those highlighted recommendations, but even there is less to it than meets the eye. Net migration flows (in, out, New Zealander, other) are volatile, but that isn’t mostly because New Zealand policy is volatile. Instead, most of the volatility arises because when the Australian labour market is strong the net outflow of New Zealanders to (higher-paying) Australia increases, and when the Australian labour market is less strong the net outflow diminishes (often quite sharply). There isn’t anything much New Zealand governments can do about that – other than (which would be grossly against the interests of New Zealanders) begging the Australian government to limit our escape option. It is disconcerting that in the draft report the Commission still seems to be hankering to attempt to smooth the net flow (without changing the average rate of immigration over time) and says it will be thinking more about options before presenting their final report. I suspect that if there is one thing the champions of high immigration and the sceptics (like me) agree on is that attempting to use policy to fine-tune flows is a daft, and probably unworkable, idea (it always used to be MBIE’s line to me when I was still an official – and not championing such fine-tuning – and I was at a meeting at the Commission within the last couple of months at which a strongly pro-immigration economist and I (united on almost nothing else in that discussion) strongly urged them not to try. If the Commission thinks they, or MBIE, can forecast the Australian labour market that well, that far in advance – and then adjust policy and movement that quickly – then the macro authorities in Australia probably have jobs on offer for them. And if the government does want to encourage large average migration inflows – to an underperforming remote economy – changing the rules frequently (with forecasts and mis-forecasts of the economic cycle) simply isn’t a sensible way to be attractive to the few really able people likely to be seriously interested in settling here.

The draft report (at 68 pages) is much shorter than many of the Commission’s reports over the last decade. Unfortunately, with the greater brevity has come an absence of much serious analysis or engagement, or even a framing of the issues. The report is accompanied by a series of special topic papers, and I turned, hopefully, to the one headed “Impacts of immigration on the labour market and productivity”. That alone is 98 pages, but (a) the text runs out after 48 pages (the rest is mostly just charts) and (b) most of the rest is boilerplate description of the data, offering no insight to anyone who knows the New Zealand story. And when we finally get to a few pages on productivity – and you will recall that over the years the Productivity Commission has consistently highlighted New Zealand’s long-running poor outcomes – the Commission’s treatment involves no serious engagement with the New Zealand data or experience, no fresh analysis or research (commissioned or in-house) but rather (a) on the global picture a description of one academic paper, and (b) on New Zealand specifically, a single paper done for the old Department of Labour by the Commission’s chair some years ago, in which sure enough gains to per capita income show up, but solely by construction (it is a CGE model) and in which any possibility of productivity gains (or losses) is assumed away by construction. Nana has long been on record as a champion of large scale immigration, and juicing the population of our cities (he was my interlocutor in this RNZ discussion) but his paper sheds no light (and really can’t do so by the technique used).

Overall, the report is the sort of thing an average MBIE policy team could have churned out. It offers little or no insight, no fresh analysis or research, but offers a few tweaks (some sensible, some not) which a government that likes mass migration (and Labour has for several decades now) can nod sagely at and perhaps make the odd change (and of course some red meat to the Labour Maori caucus).

Now regular readers might be wondering how the Commission has treated the arguments I have been making over the last decade or so about New Zealand’s immigration policy and our disappointing economic performance.

I noticed that a recent speech was shown in the list of references so I searched the document to find out where they had referred to it. The solitary reference was here

This raises the question of whether overall resident approval numbers (the “planning range”) should be reduced or linked to
other factors, such as outflows of New Zealanders or the state of the economy. If other changes are not made to ease restrictions on housing construction and to boost investment, a “least regrets” approach implies setting the planning range at lower levels
than has been the case in recent years. Some commentators and submitters argued for setting the planning range at much lower levels (Reddell, 2021).

Which is, to say the least, a bit naughty, as neither in that speech nor in anything I’ve written in recent years, have I suggested tailoring the residence approvals numbers to housing construction, the cyclical state of the economy, the outflow of New Zealanders, and the “least regrets” framing is one that I have not used (I think it originates with the economist Julie Fry).  But, however they describe it, the Commission simply presents the idea of lower numbers of residence approvals, makes no comment and moves on.

A few pages earlier, the Commission does devote half a page to a discussion of “arguments from a macroeconomic perspective suggesting that fast population growth may have suppressed New Zealand’s productivity growth”.   I recognise some aspects of some of my arguments and analysis in what follows, and I suppose it is welcome that –  without further analysis or testing – they comment that 

Aspects of New Zealand’s economic performance over the past 30 years are consistent with these arguments, including a persistent high real exchange rate (despite poor relative productivity growth which would tend to push the exchange rate down), a flat or falling share of exports to GDP, slow rates of productivity growth, and high real interest rates compared with other developed countries. Immigration is unlikely to be the sole cause of these trends, but the symptoms are consistent with it being at least a contributor.

But that is it. Which is strange, because the story has implications. If it is right (in whole or in part), it argues for much less trend immigration (at least to the extent economic outcomes matter a lot), and if it is wrong, well it should be exposed and demonstrated as wrong. Instead, we get “symptoms are consistent with it being at least a contributor” and then they move on to the next topic. It does not create much confidence that they have thought hard or engaged much. Instead, as they move to the next paragraph, they seem to confuse and conflate these arguments with quite different issues and arguments (that I’m certainly not making) about housebuilding and construction of public infrastructure.

When people refer back to this report in years to come – as no doubt some will – no doubt the champions of large scale non-citizen immigration will find support. But no one – pro or con – will find illumination. But with nothing challenging, nothing troubling, no doubt the Beehive will have been happy, and the powers that be at the Commission will have rewarded the trust ministers showed in appointing their mates.

I have tried to look at the report not just through the lens of my own views on a sensible immigration policy for New Zealand. If one is evaluating the quality of a report, what matters isn’t just (or even mainly) if the authors end up agreeing with you, but how. I can’t believe that any serious champion of large scale immigration to New Zealand (and there are some, not just among the self-interested) would regard this report as a serious and useful contribution to a better understanding of the issue in New Zealand. If those were my views – and of course they aren’t – I’d be a bit embarrassed that this was the best the government’s Productivity Commission had managed to come up with.

As it happens, I am very curious as to how the Commission ended up where it did. I chose not to make a submission, on some combination of lack of confidence in the Commission, health, and a sense that staff and at least some commissioners were well aware of my arguments, which had been documented extensively over the years. But about three months ago I had an approach from a senior staff member asking if I would write a paper for them, which they would have reviewed and would then publish, articulating the “Reddell hypothesis” and reviewing the experiences here and abroad that might help shed light on the issues etc.

I declined almost immediately, and after some further engagement not only declined but suggested that such a paper would not necessarily be in their best interests even if the Commission was to be sympathetic to my story (they’d have been much better off getting someone not precommitted to review the arguments and evidence). But I have since had a couple of sessions with staff and commissioners on the issues and arguments, and while I’m not going to go into detail on the substance of those discussions, suffice it to say that it was something of a surprise to read the report, and the lack of serious engagement with the issues and experiences.

It is, of course, up to the Commission what issues and arguments and experiences it addresses. But for anyone interested in exploring mine further

this was the speech the Commission (somewhat misleadingly) linked to

and these were notes for a recent lecture at Victoria University

and this is a longer version of a recent book chapter in which I explore New Zealand’s longer-term economic underperformance, distance, and the inconsistency between our immigration policies and producing first world living standards at this distance from the world.

UPDATE:

Silly me. I assumed that any substantive discussion of effects of immigration policy on productivity might appear either in the main report or in the supplementary paper I linked to earlier “Impacts of immigration on the labour market and productivity”. However, the Commission has just pointed me to another supplementary paper which – because it was under the heading “The wider wellbeing effects of immigration” and I am mainly interested in economics and productivity – I had not read. It turns out that “the wider wellbeing effects” is mostly about economic effects, and that there is a whole chapter (pp12-19) on macroeconomic issues and arguments, including a sub-chapter on the “Reddell hypothesis”. I had seen an earlier draft of that chapter and had provided some comments on it.

It is a little strange to have (a) published this core economic material in a chapter under such a heading and then (b) not to cross-reference it in the main report, but for what it is worth the chapter includes this specific official “finding”.

Reddell hypothesis

Inconsistent with the scale of the challenge

A few weeks ago I received an invitation from the OECD to this (Zoom) event

Going for Growth is one of the OECD’s flagship economics publications in which, among other things, they identify for each member country what their indicators and models suggest should be structural reform priorities. As the title suggests, the focus is – or at least used to be – productivity, labour market utilisation and the like. The latest New Zealand note, released in May, is here. There is often a fuller treatment in the OECD’s Economic Survey for each country, which they are working on now, having done the rounds (by Zoom) of New Zealand officials and other people (me included) a couple of months back.

Yesterday’s event had potential. The Director of the OECD’s Economics Department spoke, as did one Productivity Commissioner for each of New Zealand and Australia, and then three non-government economists (two from Australia, one from New Zealand), followed by questions from the audience. I wasn’t able to stay to the end, but heard all but one of the presentations (and the one I missed was by an Australian bank economist, presumably focused on Australia). They said that a recording of the event will be posted on the OECD website but as of this morning it didn’t yet appear to be there.

First up was Luiz de Mello from the OECD. With the New Zealand note having opened highlighting how far behind productivity lags in New Zealand one might have hoped for far-reaching policy suggestions. Instead, we got a boringly familiar list, most of which make sense but – realistically – none (individually or collectively) offer the prospect of dramatic macroeconomic change. De Mello was speaking about both New Zealand and Australia, and given how far behind Australia New Zealand average productivity lags that probably further limited the value. Anyway, his list was as follows:

  • he highlighted a component of the OECD’s Product Market Regulation (PMR) indices, suggesting that for both New Zealand and Australia licences and permits (presumably cost or timeliness) were much more of an obstacle than in the top 5 OECD countries (Australia worse than New Zealand),
  • he highlighted the bad scores both countries get on the OECD FDI restrictiveness index (New Zealand worse than Australia)
  • he highlighted the variance in PISA scores, which is higher in New Zealand and Australia than in most small advanced countries and the UK (having, somewhat to my surprise given our slide down the PISA rankings, noted in the report itself that New Zealand “educational achievement is high on average”.
  • he highlighted how high housing expenditures are relative to the OECD for the bottom quintile, and
  • he highlighted the OECD’s view that too much of greenhouse gas emissions in both Australia and New Zealand were “underpriced”.

Beyond that, they seemed keen on a large social safety net –  addressing “child poverty” directly, and smoothing the income of the unemployed.

Most commentators in New Zealand probably think the government has done little useful structural reform –  with a growth/productivity focus –  but the OECD begs to differ, talking in their final paragraph of the “significant actions” taken in recent years in key priority areas.  Weird housing tax measures, for example, seem to win favour from an organisation that used to favour neutrality in the tax system.

So the session wasn’t off to a great start at this point.  Whatever your view on pricing emissions, increasing those prices is not going to boost incomes and productivity, and the other four items – while each no doubt pointing towards useful possible reforms –  are simply not likely to be game-changers.

The next speaker was one of the New Zealand Productivity Commission members, Gail Pacheco.  She too started with a bow to history, highlighting our decades of languishing productivity performance.  She chose to pick up some points from a couple of the Commission’s recent reports.  From the Future of Work she noted, reasonably enough, that New Zealand probably did not have enough technology and that a successful New Zealand economy would see more technology adaptation and diffusion, but she offered no thoughts on what changes in the economic policy environment might create conditions in which firms would find such investment worthwhile.  She seemed more interested in the Commission’s social insurance idea –  now being picked up by the government –  which would pay more to people unemployed at least in their first few months of unemployment.     There might be a case for such a policy – I’m pretty ambivalent –  but in a country where it is not that hard to close business and lay off staff, it has never been obvious (and Pacheco made no effort to elaborate yesterday) how this had anything to contribute to creating a climate supporting higher business investment and stronger productivity growth.

She then moved on to the recent Frontier Firms report and briefly ran through a list of things she thought would help, including

  • significant (government?) investment in a handful of chosen focus areas/sectors,
  • coordinated effort across government
  • everyone working together across the wider community,
  • transparent and adaptive implementation,

all of which, she claimed, would lead to (the current government’s mantra) a “more sustainable, inclusive and productive” economy.

Now, in fairness, each speaker did not have a great deal of time, but there was nothing in Pacheco’s speech that suggested that she had got anywhere near the heart of the issue, had any real sense of the market and private sector, or saw the answers as anything more than well-intentioned (we hope) ministers and Wellington officials trying more (seemingly) smart interventions, preferably without pesky disagreement or robust accountability (she talked of long-term predictable policies).

Pacheco was followed by one of the Australian Productivity Commissioners, Jonathan Coppel, who seemed to have a rather more robust grasp of the economy.    Interestingly –  to me anyway, it wasn’t his point –  he opened with a chart using new historical estimates suggesting that New Zealand’s decline (relative to both Australia and the US) can be dated earlier than Pacheco suggested or than the previous Maddison estimates suggested.  His point was that Australia has made no real progress in closing their (smaller) productivity gaps to the US –  US 30 per cent ahead of Austraia – repeating a line often heard out of Australian recently that the 2010s were the worst decade for Australia –  growth of GNI per capita –  for six decades.  He seemed keen to stress the importance of building on the reforms of the 80s and 90s, rather than discarding them, but it wasn’t that obvious how his suggestions – reduced reliance on income taxes, good regulatory practice, and a focus in post-school education/training on competition and lifelong learning –  were likely to be equal to the task.   He did stress the idea that economists needed to do more communicating with, and persuading the public, re the case for change, not leaving everything to the politicians. 

The next speaker was an Australian private sector economist, Melinda Cilento who –  she spoke very fast –  had a long list of things she wanted in Australia, almost all of which seemed peripheral re longer-term productivity, and several of which were simply out and out redistribution (for which there may or may not be a good case in Australia).

The final speaker I heard was Paul Conway, formerly of the Productivity Commission and now chief economist of the BNZ.  HIs was perhaps the most promising of all the presentations, even if he seemed implausibly optimistic when he talked of the “once in a lifetime opportunity” to fix the New Zealand economy, end its “muddling along” performance, and (the government mantra again) deliver a more “sustainable, productive and inclusive economy”.  He didn’t point to a single sign that either the government or their Opposition were interested in anything serious along those lines.

But he did highlight the need to think carefully about policies that “fit us here” including taking explicit account of our remoteness. He called for a much deeper understanding of the problem, for a priority on good economic research, for the development of credible narratives that explain our underperformance and ground sold recommendations for policy changes. Much of this reflected Paul’s efforts at the Commission, including the narrative he drove (and wrote) –  which I wrote about here.   In some of his work, Paul has expressed sympathy for aspects of my story around immigration policy, and noted that he welcome the current Productivity Commission inquiry.

Some of his specifics I’m less convinced of, and he noted that his own views have a lot of overlap with the OECD’s Going for Growth proposals (see above for how limited they are) –  while noting that he had been involved in the very first Going for Growth, back in 2005 when he worked at the OECD, and the ideas mentioned for New Zealand then were much the same as those now.

Conway ended with a call for specifics, for work with policy people and lawyers, and for a lot more emphasis on communications and doing the “hard sell” to our “lawmakers”, claiming that as he had got older he was increasingly convinced that the task was mainly marketing good ideas –  “we know what needs to be done” – and building consensus, rather than devising new ideas.

And at that point I had to leave.  Perhaps the follow-up questions generated some startling insights, but probably not (and I have no idea how many New Zealand focused people were even in attendance).  My biggest criticism is for the OECD –  which, after all, put the event on and their ideas on the table –  who seem simply inadequate for the task pf offering serious, analytically and historically grounded, advice to New Zealand authorities (or others here who might want to champion actually doing something about decades of failure) on making a dramatic difference to economywide productivity outcomes here.  It must be more than a decade now since I attended a workship in Paris where OECD staff presented modelling suggesting that on their standard prescriptions New Zealand should be much much richer and more productive, which suggested that there was something quite seriously wrong with their model, at least as applied to (really remote) New Zealand (I’ve long held the view that –  unsurprisingly – the OECD has model and mentality that probably primarily adds value in small European countries (a lot of those in the OECD).   One might argue that it doesn’t matter, since no politician here is serious about change (at least for the better, the current government is pursuing paths likely to worsen things) but that isn’t really the point of the exercise.   As various speakers noted yesterday socialising ideas, persuading people, showing what might be possible are all a significant part of a prelude to action (just possibly one day).   I disagree with Paul Conway that there is consensus about what needs to be done: there clearly isn’t, and may never be, but we might expect an entity with the resources and expertise of the OECD to be offering a lot more insight, a lot more recommendations commensurate with the scale of the failure, than we are actually getting.

As for the New Zealand Productivity Commission, they seem to be on a downhill path, more interested in cutting pies differently than growing them, too confident in politicians and officials, and more inclined to wishful thinking than serious analysis indicating what might really lift our productivity levels back towards the top tiers of the OECD.    I guess there is cause and effect at work, but it is no wonder politicians aren’t serious about change when the advice they get from high-powered official and international agencies is so thin.  It is a lot easier to just cut the pie differently and dream up more announceables, but reversing the relative productivity decline is really what matters for our future material wellbeing –  those at the top and those at the bottom –  ours, our children, our grandchildren.  If we don’t fix it, exit will remain an increasingly attractive option for many.

No idea apparently, probably not much interest

Over the three and half years that Jacinda Ardern has been Prime Minister and Grant Robertson Minister of Finance it has become increasingly obvious that not only do they have no serious ideas for turning around decades of productivity growth underperformance, and no intention of doing much on that score, but they have no real interest either.

Appointments are among the things that help reveal priorities. A couple of years ago they had the opportunity to look for a new Secretary to the Treasury who might revitalise the agency and start generating serious credible advice on fixing that economic failure – with all its ramifications for opportunities in other areas of life. They chose to pass up that opportunity.

More recently – and the focus of this post – there has been the Productivity Commission, set up a decade ago with some vision that it might offer medium-term analysis, research, and advice focused on reversing that economic failure. It hasn’t done a great job at that over the years, partly because the Commission is heavily constrained to work on specific inquiry topics that the government of the day determines. Neither government has really been interested in tackling the decades-long failure.

Late last year the government had the chance to appoint a new chair of the Commission – the key position in this (small) organisation. They could have found someone serious: someone with wide credibility on these issues, and preferably not seen as a partisan figure. As it was, they appointed Ganesh Nana. I wrote a bit about the appointment at the time.

Nana took office on 1 February. There was always the hope that reality wouldn’t be as bad as I (and others) had feared. Unfortunately, this week we’ve had two public contributions from Nana – an introductory statement, and a first on-the-record speech – that suggest reality is at least as bad as feared.

Take first his introductory statement, posted on the Commission’s website the other day. I described it elsewhere as just another marker in the sad decline of the Productivity Commission. In 1000 words there was not one hint of any insight on New Zealand’s productivity challenges just – in the style of the modern public sector – lots of Maori words, together with straw men (as if any government – or person – ever has cared only about GDP). It wasn’t much more than, as one other observer put it, a “word salad”. Perhaps it warmed the hearts of parts of the Labour Party and places further left, but it was almost entirely substance-free. He just doesn’t seem that interested in the medium-term performance of the economy – for which productivity is a key marker.

Perhaps more disconcerting was his speech yesterday at a Waikato University event called the 2021 New Zealand Economics Forum (which continues this morning), an event focused on the longer-term economic challenges New Zealand faces, especially in the wake of Covid. The organisers seem to have attracted a reasonably impressive array of speakers. After a welcome and introduction from the Waikato Vice-Chancellor, Nana – newly inducted head of the Productivity Commission – was the first speaker. It would seem like a forum and topic tailor-made for a powerful and insightful speech from the Chairman.

You can watch the whole thing yourself – about 45 minutes into the recording of yesterday’s event here. It was quite remarkable for how little there was there (and in fact how low-energy it all was). His title was “Challenges and opportunities for inproving productivity in a post-Covid world” but I heard not a single serious idea and hardly any supporting analysis. He did acknowledge that New Zealand’s productivity performance for the last two decades “and probably longer” (as if there is any serious doubt on the matter) had been “sobering”, and that productivity growth had been slowing. But that was about it. And if one of his messages was intended to be “you can’t keep on doing the same thing over and over again and expect different results” well, I’d agree. But that was really it. And when he suggested -in the body of his talk – that perhaps tourism shouldn’t come back to the way it was pre-Covid, it was supported by precisely no analysis at all, nor any suggestion as to where – if his idle prognostication or wish came true – the earnings and employment that tourism has generated might be replaced from. Perhaps someone might ask the Minister of Finance, the Minister of Tourism, or the PM what they think of their new Chairman’s perspective.

To be clear, I do not regard international tourism as the sort of industry likely to lead us back to first world economywide productivity performance – there is no country I’m aware of that it plays such a role – but them I’m not the only idly, but publicly, as head of a significant government agency, suggesting that the industry might usefully shrink. There seemed to be no mental model behind the comments, no research, and no policy prescriptions. And, of course, no cross-country comparative analysis or perspectives, and no sense of how far behind the productivity leaders we now are. It was as if he really wasn’t that interested.

There was quite a bit – none insightful – about the “Four capitals” Treasury likes to go on about. And just to reinforce the doubts that Nana has little or nothing useful to say about productivity, and not even much interest, in the question time we got a comment about how while the Commission would continue to publish its annual statistical report on productivity, he didn’t really like to pay too much attention to productivity. There was a fair point – but one that no one disputes – that productivity is really a medium-term thing and that he doesn’t pay much attention to a couple of quarters (to which I’d add, among other things data revisions reinforce that point). He described it as akin to a “profit and loss” measure, while he preferred to look at the “balance sheet” – those four capitals again, which might perhaps sound good to some but (a) for economic assets, the value is in the returns they generate (or credibly could generate, but (b) by comparison with labour productivity for which there is a good time series data, and reasonable cross-country comparisons, most of the “lets value the capitals” approaches offer neither. If, of course, there is a well-understood, long accepted, point that simply raping and pillaging the environment is, all else equal, a less valuable form of economic growth than income that does not do so, it doesn’t help in the slightest address the issues of New Zealand’s economic failure.

But perhaps that is the point. Robertson and Ardern have no interest in doing so – simply in cutting a small pie a bit differently – and so why bother appointing a chair of the Productivity Commission who might lead some hard thinking on the issues and offer options that might improve productivity – and wider “wellbeing” that stems from productivity possibilities. Easier simply to handwave and feel good.

Shame about the prospects for our country.

Productivity, Productivity Commission, and all that

I’ve written various pieces over the years on the Productivity Commission, both on specific papers and reports they have published, and on the Commission itself. I was quite keen on the idea of the Commission when it was first being mooted a decade or so ago. There was, after all, a serious productivity failure in New Zealand and across the Tasman the Australian Productivity Commission had become a fairly highly-regarded institution. But even from the early days I recall suggesting that it was hard to be too optimistic about the long-term prospects of the Commission, noting (among other things) the passing into history of the early Monetary and Economic Council, which had in its day (60s and early 70s) produced some worthwhile reports. In a small, no longer rich, country, maintaining critical mass was also always going to be a challenge, and agencies like The Treasury might be expected to have their beady eye on any budgetary resources allocated to the Commission, and on any good staff the Commission might attract or develop (a shift to another office block at bit further along The Terrace was unlikely to be much of a hurdle).

What I probably didn’t put enough weight on in those early days was the point that if governments weren’t at all interested in doing anything serious about New Zealand’s decades-long productivity failure, there really wasn’t much substantive point to a Productivity Commission at all, unless perhaps as something to distract the sceptics with (“see, we have a Productivity Commission”).

Ten years on, it isn’t obvious what the Commission has accomplished. There have been a few interesting research papers, some reports that may have clarified the understanding of a few policy points. But what difference have they made? Little, at least that I can see. Is the housing market disaster being substantively addressed? Is the state sector better managed? Is economywide productivity back on some sort of convergence path? Not as far as I can tell. Mostly that isn’t the Commission’s fault, although my impression is that the quality of the reports has deteriorated somewhat in recent years. But if politicians don’t care about fixing what ails this economy, why keep the Commission? It might be no more pointless than quite a few other government agencies and even ministries, but they all cost scarce real resources.

For the last 18 months I’ve been looking to appointment of the new chair of the Commission, replacing Murray Sherwin who has had the job for 10 years, as perhaps one last pointer to the seriousness – or otherwise – of Labour about productivity issues. There wasn’t much sign the Minister of Finance or Prime Minister cared much at all – or perhaps even understood the scale of our failure – but just possibly they might choose to appoint a new chair of the Productivity Commission who might lead really in-depth renewed intellectual efforts to address the failure, perhaps even in ways that might, by the force of their analysis and presentation, make it increasingly awkward for governments (Labour or National) to simply keep doing nothing. I wasn’t optimistic, partly because I’d watched Robertson and Ardern do nothing for several years, but also because – to be frank – it really wasn’t clear where they might find such an exceptional candidate even had they wanted one.

But then they removed all doubt last week when they announced the appointment of Ganesh Nana as the new chair. There is a strong sense that he is too close to the Labour Party. If that wasn’t ideal, it might not bother me much – especially given the thin pickings to choose a chair from among – if it were matched with a high and widespread regard among the economics and policy community for his rigour and intellectual leadership, including on productivity issues. Or even perhaps if he knew government and governent processes inside out (Sherwin, after all, was a senior public servant rather than himself being an intellectual leader). I don’t suppose the Nana commission is simply likely to parrot lines the Beehive would prefer – and can imagine some of Nana’s preferences being uncomfortable for them from the left – but this is someone who has spent 20+ years in the public economics debate in New Zealand, from his perch at BERL, and yet as far as I can tell his main two views of potential relevance are that (a) inflation targeting (of the sort adopted in most advanced economies) is a significant source of New Zealand’s economic underperformance, and (b) that a much larger population might make a big difference (notwithstanding use of that strategy for, just on this wave, the last 25 years or so.

Then there was this bumpf from the Minister’s press statement announcing the appointment

Ganesh Nana said he is excited to take up the position and looks forward to working with other Commission members and staff to focus on a broad perspective on productivity.

“Contributing to a transformation of the economic model and narrative towards one that values people and prioritises our role as kaitiaki o taonga is my kaupapa.  This perspective sees the delivery of wellbeing across several dimensions as critical measures of success of any economic model.

“Stepping into the Productivity Commission after more than 20 years at BERL will be a wrench for me and a move to outside my comfort zone.  However, this opportunity was not one I could ignore as the challenges facing 21st century Aotearoa become ever more intense.

“The role and nature of the work of the Commission is set to change in light of these pressing challenges.  I am committed to ensure the Commission will increasingly contribute to the wider strategic and policy kōrero,” Dr Nana said.

Whatever that means – and quite a bit isn’t at all clear to me – it doesn’t suggest any sort of laser-like focus on lifting, for example, economywide GDP per hour worked, in ways that might lift material living standards for New Zealanders as a whole.

(And then there was the unfortunate disclosure in the final part of the Minister’s press statement that the government has agreed that while functioning as a senior economic official, paid by the taxpayer, Nana is to be allowed to retain his almost half-share in his active economic consulting firm BERL. There is the small consolation that the Commission itself will not contract any business with BERL, but that should not be sufficient to reassure anyone concerned about what is left of the substance or appearance of good governance in New Zealand.)

A couple of weeks ago the Productivity Commission released a draft report on its “Frontier Firms” inquiry. The Commission does not control the inquiries it does – they are chosen by the government – and this one also seemed a bit daft to say the least, since “frontier firms” always seem much likely to arise from an overall economic policy environment that has been got right, rather than being something policymakers should be focusing on directly. But the Commission might still have made something useful, trying to craft something a bit more akin to a silk purse from the sow’s ear of a terms of reference.

I had thought of devoting a whole post to the draft report, and perhaps even making a formal submission on it, but since the report will be finalised under the Nana commission that mostly seems as though it would be a waste of time. And there is the odd useful point in the report, including the reminder that our productivity growth performance has remained dreadful by the standards of other modestly-productive advanced economies, and that we have relied on more hours worked, and the good fortune of the terms of trade, to avoid overall material living standards slipping much recently relative to other advanced economies. Productivity growth – much faster than we’ve achieved – remains central to any chance of sustainably lifting those material living standards and opening up other lifestyle etc choices.

But mostly the report is a bit of a dog’s breakfast. Just before the draft report was released the Commission released a short paper on immigration issues that they had commissioned. I wrote about that note, somewhat sceptically, at the time – sceptical even though the gist of the author’s case might not be thought totally out of line with some of my own ideas. It turned out that the Fry and Wilson work was the basis for the Commission’s own discussion of immigration in the draft report, a discussion that neither seems terribly robust nor at all well-connected to the “frontier firms” theme of the report. Perhaps the RSE scheme has problems, perhaps some low-skilled work visas are issued too readily, but…..apple orchards and vineyards didn’t really seem to be the sort of “frontier firms” the Commission had in mind in the rest of the report.

Perhaps my bigger concern was about their attempts to draw lessons from other countries. They, reasonably enough, suggest that there might be lessons from other small open advanced economies, perhaps especially relatively remote ones. But then they seem to end up mostly interested in places like Sweden, Finland, Denmark and the Netherlands – all of which are in common economic area that is the EU (two even with the euro currency, most with no disadvantages of remoteness). I don’t think there was a single reference to Iceland, Malta, or Cyprus. Or to Israel – that country with all the high-tech firms and a productivity performance almost as bad as ours. And – though it might not be small, it has many similar characteristics to New Zealand – no mention at all of Australia. Remote Chile, Argentina and Uruguay get no mention – even though two of those three have had strong productivity growth in recent times – and neither, perhaps more surprisingly, do any of the (mostly small) OECD/EU countries in central and eastern Europe, many of which are now passing New Zealand levels of average labour productivity.

There wasn’t any systematic cross-country economic historical analysis or a rigorous attempt to assess which examples might hold what lessons for New Zealand. Instead, there a mix of things that might be music to the ears of a government that wants to be more active, and perhaps to punt our money again on the emergence of some mega NZ excellent firm(s) – without any demonstrated evidence that it (or its officials) can do so wisely or usefully – plus the odd thing that must have appealed to someone (eg the material on immigration – a subject that might still usefully warrant a full inquiry of its own, if the government would allow it, and when better than when we are in any case in something of a hiatus).

This will probably be the last post for this year, so I thought I’d leave you with a couple of charts to ponder.

The first is a reminder of just how little we know about what is going on with productivity – or probably most other aggregate economic measures – right now. As regular readers will know, I have updated every so often an economywide measure of labour productivity growth that averages the two different real GDP series (production and expenditure) and indexes of the two measures of hours (HLFS hours worked, QES hours paid).

mix of econ data

First, there is the huge difference in the two GDP measures. Whichever one one uses – but especially the expenditure measure – suggests a reasonable lift in average labour productivity this year (on one combination as much as 5 per cent). In the period to June there was an argument about low productivity workers losing their jobs, averaging up productivity for the remainder, but how plausible is that when hours are now estimated to be down only 1% or so on where they were at the end of last year (much less than, say, the fall in the last recession)? And thus how plausible is the notion of an acceleration in productivity growth given all the roadblocks the virus, and responses to it, have put in place this year. And although SNZ’s official population estimates have the population up 1.5 per cent this year (to September), if we take the natural increase data and the total net arrivals across the border data, they suggest a very slight drop this year in the number of people actually in New Zealand. I’m not sure, then, which of the economic data we can have any confidence in, although I’ll take a punt that the single least plausible of these numbers is the expenditure GDP one, and any resulting implication of any sort of real lift in productivity this year. SNZ has an unenviable job trying to get this year’s data straight.

But, of course, the real productivity challenge for New Zealand was there before Covid was heard of, and most likely be there still when Covid is but a memory. As we all know, New Zealand languishes miles behind the OECD productivity leaders (a bunch of northern European countries and the US), but in this chart I’ve shown how we’ve done over the full economic cycle from 2007 to 2019 relative not to the OECD leaders but to the countries that in 2007 either had low labour productivity than we did, or were not more than 10 per cent ahead of us then. For New Zealand I’ve shown both the number in the OECD database, and my average measure (which has the advantage of being updated for last week’s GDP release).

productivity 07 to 19

Whichever of the two NZ measures one uses, we’ve done better only than Greece and Mexico. Over decades Mexico has done so badly that the OECD suggests labour productivity in 2019 was less than 5 per cent higher than it had been in 1990. Even Greece has done less badly than that.

(As a quick cross-check, I also looked at the growth rates for this group of countries for this century to date. We’ve still done third-worst, beating the same two countries, over that period.)

It is a dismal performance. And there isn’t slightest sign that our government cares, or is at all interested in getting to the bottom of the problem, let alone reversing the decades of failure. Talking blithely about alternative measures of wellbeing etc shouldn’t be allowed to disguise that failure, which blights the living standards of this generation and the prospects of the next.

(And, sadly, there is no sign any political opposition party is really any better.)

Small economies

The Productivity Commission last week released a report done for them by David Skilling on “frontier firms”.  That is the topic of the Commission’s latest inquiry, handed to them by the Minister of Finance.  Personally, I reckon the topic is mis-specified and will tend to drive people to focus on symptoms more than causes, but I’ll come back to that in more detail at some point.

Skilling was formerly Executive Director of the former (somewhat centre-left) New Zealand Institute and these days runs a consultancy, based in the Netherlands, with a focus on small advanced economies.  I’m a bit under the weather today so in this post, I wanted to touch on only two points from his report.

The first was to draw attention to footnote 10

10 The one policy foundation setting that I identify as having had a meaningful impact on New Zealand’s productivity performance and the development of frontier firms is with respect to immigration (or more precisely, the absence of a strategic migration policy).  The substantial net migration inflows that New Zealand has received over the past 25 years has been a strong source of support for headline GDP growth, but has created a series of distortions and pressures in the New Zealand economy: infrastructure and cost pressures, greater residential real estate demand (with implications for allocation of investment capital), downward wage pressure that deters business investment, as well as upward exchange rate pressure.  An explicit immigration policy that was focused on quality and filling skills gaps, with lower gross inflows, would create a more supportive environment for higher levels of international engagement by New Zealand firms (although the transmission mechanism to outcomes is more indirect than those discussed in the body of this paper).

There isn’t much about policy that I agree with Skilling on  –  and find it strange that in a 30 page report with an emphasis on the tradables sector, this is the only mention of the exchange rate –  but, as you can imagine, I agree with much of that.

And the second was about this chart

Forbes 2000

of which he observes

This seems to be the case in small advanced economies also.  One of the striking characteristics of successful small advanced economies is their reliance on large firms, with a disproportionate representation of small economy MNCs in measures such as the Forbes Global 2000 (Exhibit 6).

I wasn’t particularly familiar with this listing, so went and had a look.  But I also had a look at a wider range of countries.  For his paper, Skilling uses the IMF classification of advanced economies, focusing on those with a population under 20 million.   However, that grouping leaves out the central and eastern European countries (the Baltics, Hungary, Czech Republic, Slovakia, Slovenia) that are both OECD and EU members, and which are either catching or already overtaking New Zealand in terms of labour productivity (all but Hungary have had faster productivity growth than New Zealand since, say, 2007 – just prior to the last recession).

I’m not really going to dispute what I take to be one of Skilling’s propositions, that a successful New Zealand would probably see more large and internationally successful firms.   Nonetheless, it is perhaps worth noting a few things:

  • the Forbes listing is of public companies.  That’s fine; it is what it is.  But the implied market capitalisation of Fonterra makes it large enough that were it be tomorrow transformed fully into a listed company, it would almost certainly make the list (five Greek banks, with a combined market cap less than Fonterra make the list).  If anything, Skilling is too kind about Fonterra –  which has woefully underperformed the marketing pitches of 20 years ago –  but big and international it still is,
  • while we are the only advanced country in Skilling’s chart not to have a company in the list, none of the Baltics nor Slovenia nor Slovakia has an entrant either.   The Czech Republic and Hungary (both about twice our population) have one and two  respectively, in the Czech case a power company that appears to have a market capitalisation not much larger than that of Meridien,
  • Iceland and Luxembourg are both small successful advanced countries; the former has no entrants on the Forbes list, and the latter quite a few (more per million than any of the countries shown).
  • Portugal and Greece are not that successful small advanced countries, and both have several entrants on the list.

I guess A2 and Xero are increasingly not New Zealand companies, but appear large enough that they could well have shown up on a listing like this.

There are always going to be pitfalls in any illustrative indicator –  this one simply happened to catch my eye –  but if I agree with Skilling that it makes sense to pay attention to other small advanced economies in trying to make sense of the New Zealand story (and of our constraints and policy options), starting from where we are now, it is probably at least as useful to think about the central and eastern European countries –  and Israel, which does quite well on various of Skilling’s indicators but has productivity very similar to ours –  as the more traditional western European ones.

queen 4

.

Not in narrow seas

That’s the title of a new book, published this month, by veteran economist and commentator Brian Easton.   The title is borrowed from a collection of poems, published in 1939, by New Zealand poet Allen Curnow,  but presumably also keys off the author’s previous book published in 1997, In Stormy Seas: The Post-War New Zealand Economy.

The full title of the new book, published by Victoria University Press, is Not in Narrow Seas: The Economic History of Aotearoa New Zealand.      It is a curious title in a number of respects.  First, there is that reference to the place –  so beloved of public servants and the Wellington liberals –  that is no place: New Zealand is the name of the modern country, and there was – so far as we know –  no collective name for what went before.   Then there is the definite article “the” – not “a” –  suggesting a definitive treatment that just isn’t on offer, even in this big (655 pages of text) book.   And then there is the suggestion that it is an “economic history”.

When I saw the title of the finished volume last month I was reminded of hearing Brian telling people –  the book has been many years in the making –  that it wasn’t going to be a conventional “economic history”, but something different, more of a “history of New Zealand from an economic perspective”.   And it is somewhat reassuring that, however the publisher has chosen to present the finished book, the author still seems true to  his earlier vision –  he begins his final chapter thus “This is a history of Aotearoa New Zealand, centred on the economy”.     Six years ago, seeking a new funding grant, he told interested parties

Not in Narrow Seas, as its title, suggests is an ambitious history of New Zealand . It is written from an economic perspective.

In fact, an extract from that document, written when the book was two-thirds done, probably gives you a good flavour of what is covered

As such it covers many issues which are often neglected by most general histories. These include:

– the interactions between the environment and the economy (and society generally); the book starts 600 million years ago at the geological foundation of New Zealand;

– the offshore origins of New Zealand’s peoples and the baggage they brought with them;

– there are seven chapters on the Maori plus further material in numerous other chapters;

– there is a whole chapter on the development of the  Pacific Islands (after the proto-Maori left)  in preparation for the account of the Pasifika coming to New Zealand;

– there are specific chapters on the non-market (household) economy in preparation for an account of mothers entering the earning labour force (one of the radical changes in the 1970s);

– there are five chapters on the evolution of the welfare state;

– the book pays attention to external events and globalisation;

– it could be argued this is the first ‘MMP history’ of New Zealand because it looks at how people voted as well as electoral seats won. (If this seems odd, it is rarely mentioned that when Coates lost power to Ward in 1928 his party won far more votes but fewer seats);

– this is not yet another history of the ‘long pink cloud’. It takes a critical view of the more extreme versions from this perspective, in part because it puts a lot more weight on the farm sector as a progressive force (albeit with its own kind of progressiveness);

– it synthesises the rise of Rogernomics with the events before, showing both the continuities and the disruptions;

– while not a cultural history, it integrates culture and intellectual activity into the narrative.

And, of course, there is a fair amount of more-conventional “economic” material as well.

Easton was economics columnist for the late lamented Listener for decades (I think I saw a reference to 37 years, a remarkable run) and you don’t hold down a slot like that without being able to write in a clear and accessible way, and make comprehensible what sometimes some economists almost seek to make imcomprehensible.    That carries over to this book.  If one were looking for straight economic history you might expect lots of tables and charts, but there is only a handful of either (by contrast, around 100 tables and charts in the much shorter In Stormy Seas).   And breaking the text into 60 chapters means bite-sized chunks.    For a serious work of non-fiction it is a relatively straightforward read (and, for better or worse, there are no footnotes).    For those who don’t know much about how the story of New Zealand fits together, especially with an economic tinge, it is a useful introduction –  especially when one recalls that the last comprehensive economic history of New Zealand, that by Gary Hawke, was published in 1985 (and had gone off to the publisher before any of the reforms of 1984 and beyond were even initiated).

But talking of “tinges” note that line in the extract above “this is not yet another history of the ‘long pink cloud’ “. He notes

Much of our history has indeed been written from a leftish perspective. However, the pink cloud obscures the total story of New Zealand’s development.

And he has some useful correctives to perspectives offered by other “leftish” authors, but make no mistake this is a book from the liberal-left as well.   If he occasionally has positive things to say about National governments, for example, it is largely when they initiated things – ACC as an example –  that were radical for their time.  His is a “progressive” vision in which, to a first approximation, things have only got better and better as they’ve approached today’s state of affairs –  even while there is still some way to go to get to the desired “progressive” end.

I always find it interesting to read the Acknowledgements sections, perhaps especially of New Zealand books.  Easton has well over 100 names listed, some of people long dead (such as Bill Sutch). I recognised only half or two-thirds of them but the great bulk were people of the liberal-left (plus Winston Peters).  That isn’t a criticism; just an observation about where the author’s central Wellington milieu is.   In some respects, the book may be best seen as a distillation of Easton’s decades of thinking and debating about New Zealand (not just its economy).

I’m not going to attempt a full review of the book –  I’d say that I’d leave that to the New Zealand Review of Books, except that that publication too has now passed into history –  but I wanted to highlight just a few scattered points that struck me as I read.

First, in his earlier history of the post-war economy (mostly up to 1990) there was much to like.  One of the key areas I disagreed with him on  – I’ve dug out a published review I wrote at the time  – was around macroeconomic policy since 1984.   He reckoned the conduct of monetary policy, and in particular the handling of the nominal exchange rate, played a big part in explaining New Zealand economic underperformance.  Here were my 1998 comments.

easton 1998

In the new book, although less space is devoted to it, this continues to be Easton’s view.   I continue to think his case isn’t compellingly made, but then this is one of those issues where I’m closer to the New Zealand conventional wisdom than on most (I reckon macro management –  fiscal and monetary policy – has been among the better bits of New Zealand economic policy in recent decades).

Having said that, one line in the new book that got a big tick next to it was his observation that the real exchange rate was probably the most important relative price in New Zealand (arguably the terms of trade).   In that regard, I was a little surprised that with the benefit of another 20-25 years, there was nothing in the new book about the extent to which New Zealand’s real exchange rate had –  over decades now – moved (risen, stayed high) in ways inconsistent with the productivity performance of the New Zealand economy, even adjusted for the improvement in the terms of trade, and the associated decline in the relative significance of the tradables/exportables sector of the economy.    It is the same curious de-emphasis we now see from our officials and ministers faced with a really major adverse economic shock and apparently unbothered that a key stabilising relative price –  the real exchange rate –  has barely moved at all.   Since one of the key elements in Easton’s economic history of New Zealand is the collapse in the wool price in 1966 –  at the time wool was a third of our exports –  it is all the more surprising.

Relatedly, I was quite surprised by how little mention there is in the book of the continuing relative decline in New Zealand’s productivity and material living standards over many decades, to today.  Brian is well-known for asking hard questions about just what official statistics are actually measuring, so perhaps he doesn’t think we’ve continued to drift far behind –  but I doubt that is the explanation (he explicitly highlights data for the late 30s that suggests that at that time our material living standards were still among the highest in the world).  On the one hand, he seems to work with a model in which government policy doesn’t really make much difference –  unless it is messing up “Rogernomics” and associated macro policy – but even if that is his model, he doesn’t make clear what he thinks is driving our relative decline (let alone –  and perhaps one can’t ask for this in a history – what might make a difference). I wonder too if there isn’t an element of the point I’ve suggested over the years, that the powers that be in Wellington (political, bureaucratic, and other) finding our structural economic performance too hard to explain prefer no longer to talk about it much?

In passing –  which is more or less how he treats it here –  it may be worth noting that Easton here (as in the previous book) seems less than persuaded by the notion that large scale immigration to New Zealand since World War Two has done anything beneficial for the productivity or material living standards of New Zealanders.  Here, as I’ve noted before, he stands in continuity with earlier authors on New Zealand economic history.

And two final points.

The first relates to the Productivity Commission.  Commenting on developments this century, he notes of the Clark government

Curiously the government often reappointed or promoted those closely associated with Rogernomics, and they did little to create institutions to provide alternatives to neo-liberalism. By contrast, the National-ACT Government established the Productivity Commission, one of whose members was not only a “Rogernome” but had stood as an ACT candidate [former Treasury secretary Graham Scott].

and moving a decade on, he notes

…the Key-English Government, nudged by the ACT Party, established a Productivity Commission to help pursue its economic objectives. This agency remained in existence under the Ardern-Peters government.  More generally, the Ardern-Peters Government had followed its predecessor’s habit of assuming a milder version of the neoliberal framework.  Like the previous Labour Government it gave important jobs to former neoliberal enthusiasts.

I imagine one of the people Easton has in mind here is the current chair of the Productivity Commission, Murray Sherwin, who was head of the International Department of the Reserve Bank back in the days of the float of the exchange rate –  an issue Easton has long written about and strenuously challenged how things were done –  and, of course, a key figure at the Bank in the years when price stability was becoming established.  I guess he must be almost the last of the people who held reasonably significant positions in those reforming days to still be in public office.  But his term expires early next year, and it will be interesting who the government (I’m assuming Labour leads the next government too) chooses to replace him, and telling about the interest (if any) the government has in addressing longstanding economic failures, and how.  [UPDATE: Brian tells me he didn’t have Sherwin in mind.]

But, to be blunt, if the Productivity Commission is the institution for the propagation of continued “neo-liberal excess” (my words, not Easton’s), those on the left wouldn’t seem to have that much to worry about.  In addition, of course, to the fact that the “Key-English Government” seemed to have no serious structural “economic objectives” –  do you recall them fixing the urban land market, addressing productivity underperformance etc? –  the Commission itself has increasingly tended to reflect the same sort of “smart active government”, technocratic wing of the European social democratic movement, that we see in –  notably –  the OECD.   Since governments appoint the Commissioners, the Commission will over time tend to reflect the preferences of governments of the day –  and we’ve seen that already in the rather different tinge of appointments under this government.  The Commission is certainly nearer in inclination –  if better-resourced –  to the old New Zealand Institute (former executive director, David Skilling) than to, say, the Business Roundtable or the New Zealand Initiative.  To survive –  as always a peripheral player, and rather small –  I guess they have to meet the market one way or another.

Economists are renowned –  sometimes fairly, sometimes not –  for acting as if they believe that economics is some sort of universal discipline without which almost everything and everyone is poorer.  But one rarely sees it quite so breathtakingly expressed as on page 75 of the book, discussing 19th century New Zealand, when Easton observes

Perhaps most of the settlers did not have well-formed opinions –  economics was then a new discipline, even among the well-educated.

In summary, almost everyone reading the book will learn something, and perhaps on a few points be challenged to think a bit differently.  It is fairly easy to read, but it isn’t “the economic history” of New Zealand.   Then again, it doesn’t really aim to be.  I noticed that back in 2014 Easton talked of wanting to have these appendices available on the publisher’s website (I presume the numbers refer to word count)

APPENDICES

I. The Course of Population                            3850

II. The Course of Prices                                  4200

III. Measuring Economic Activity                  2100

IV. The Course of Output: 1860-1939           3250

V. The Course of Output: 1932-1955 2700

VI. The Course of Output: 1955-                   3400

VII. The Structure of the Economy                4050

VIII. The Course of Productivity                   1450

IX. Patterns of Government Spending           4850

X. Transfers                                                    5650

XI. Debt and Deficits                                     3300

VUP doesn’t seem to have been receptive to that. I hope that in time Easton might be able to make this material available on his own website, and past such notes (including appendices in the 1997 book) were useful and interesting to the geekier of his readers.

 

 

 

The Productivity Commission

Writing, somewhat critically, the other day about the latest Productivity Commission paper got me thinking a little more about the Commission itself.

I welcomed the decision to set up the Commission, partly in the backwash to the then-government ignoring and thens disbanding the under-resourced one-off exercise in focusing on New Zealand’s productivity failures, the 2025 Taskforce. But I’ve long been fairly ambivalent about what it has become, and unsure what the future might hold.

It certainly isn’t anything personal.  The longserving chair of the Commission, Murray Sherwin, was an old boss of mine and until recently we shared the misfortune of being trustees of the Reserve Bank staff superannuation scheme (he got off, I still serve penance).  They’ve run numerous interesting seminars over the years.  The people I’ve known there are smart and happy to engage.  In fact, I was just on their website and clicked on a piece I thought sounded interesting only to find that it was a link to one of my posts.

The Minister of Finance must also have had some doubts.  Papers just (pro-actively, but very belatedly) released show that shortly after the Minister took office he asked Treasury to conduct a review of the Commission, and they in turn commissioned David Skilling (independent consultant, now based in Singapore, and former head of the centre-left New Zealand Institute think-tank) to write a report.   Remarkably, the Commission itself was not invited to provide input –  and perhaps was not even aware the review was going on, since were it aware it would surely have provided input pro-actively.    The Commission seems only to have been invited to comment on the final Skilling report, completed in June 2018.   That seems a strange way to treat an agency that wasn’t evidently dysfunctional, was headed by a respected former senior public service chief executive and which at the time had a respected former Secretary to the Treasury as another of its longserving commissioners.   Even if Graham Scott had once stood for Parliament on the ACT list, no one has seriously accused the Commission of being partisan (and if anything their inclinations often seem to lean in the direction of “smart active government”, of the sort centre-left parties have often favoured, with too little emphasis on “government failure”).

None of which is to criticise the Skilling report. I found it clarifying in a number of places and was pleasantly surprised to find myself agreeing with the bulk of his recommendations.  He draws extensively on some recent OECD work reviewing institutions in various countries trying to do things somewhat similar to the Productivity Commission, with a focus –  consistent with the emphasis of his consultancy firm – on small advanced economies.

As Skilling notes, the explicit model for our Productivity Commission was the Australian Productivity Commission, at the time a very highly-regarded body.  But Australia is a much bigger economy than New Zealand’s (big economies tend to have relatively smaller export sectors), and although still some considerable way from global productivity frontiers, has nothing like the economywide challenges facing New Zealand.  And there is the not-insignificant issue of resourcing: there aren’t that many economies of scale in policy analysis and associated research (policy issues are just as complex in fairly large as in fairly small countries) and yet our Productivity Commission has perhaps 20 staff, while the Australian Productivity Commission has about 170.   That allows for a much greater depth and specialisation than is possible at the NZPC, no matter how able the individuals here might be.

Skilling usefully highlights that the Productivity Commission is not really focused on economywide productivity at all (“bluntly, it is a misnomer”).  Rather, and rather like the Australian counterpart, it is really a detached (from day to day political pressures, or even just the immediacy of the urgent) policy advisory group on specific topics that take the fancy of ministers from time to time.  Sometimes those are really important issues, other times they have the feel of topics it is good to be seen having someone doing, or even (the current “future of work” inquiry, which there are signs the Commission has struggled with) just as –   in effect –  a research resource for a political party’s next election manifesto.  To be clear, topics are chosen by ministers, not by the Commission.

This “chip away at bite-sized topics” approach seems to have been deliberate.  After all, the previous government (which set up the Commission) had no interest in serious reform on the sort of scale that made have made a really significant difference.  2.5 years in, neither does the current government.

It is an approach that probably makes a lot of sense in a country that was already at or near the global productivity frontiers.   Whatever challenges you face in Belgium, Netherlands, Sweden, Denmark (let alone Norway) –  and there are always areas where specific policies could be improved –  you know that your overall economy (productivity) is already about as good as it gets anywhere.  That simply isn’t the New Zealand situation: you’ll recall I’ve highlighted previously that it would take a 60 per cent lift in average labour productivity in New Zealand to match that leading bunch of countries.

Here, the approach taken to the Productivity Commission ends up serving as a distraction.  There is a pretence of an institution devoted to the issue, to taking the whole thing seriously, but not the substance.  If the Commission is to be kept as it now operates it might better be renamed, more prosaically as something like the Medium-term Microeconomic Advisory Group.  But even then there is a real problem, in that because there is no sign that the Commission has a shared narrative, or model, of the bigger picture economic underperformance, causes and broad remedies, it is often hard to have much confidence in the specific recommendations they throw out, and whether they should be priority areas for a government interested in change.  It also means they have no consistent framework underpinning their public communications.  (There was a narrative document published a few years back –  which I wrote about here –  but it was still exploratory in nature, and although it was owned at the time by the Commission, it seems to have been more the thinking of the author, who has now left the Commission.)

This issue has become more stark over the years.  When the Commission was set up there were two separate allocations of funding by Parliament: 90 per cent of the total funding was for specific inquiries initiated by Ministers, and the remaining 10 per cent was for the Commission’s self-directed research programme and related activities.  That formal split, in parliamentary appropriations, has been discontinued, but in the context of a flat overall level of funding (the total level of funding is unchanged over 9 years –  a period in which there has been not-insignificant total inflation), it is likely to be the discretionary activities that get squeezed.

As the Commission’s last Annual Report noted

The 2018-19 year ended with an operating deficit of $98 000, our second successive year with a deficit. The Board has been acutely aware that with rising costs, especially from remuneration costs, and an appropriation unchanged since the Commission commenced operations in 2011, we would eventually reach a point where spending would run ahead of our appropriation. In early years, our budgets provided for surpluses in order to build a small buffer of reserves. But we clearly face a decision about reducing costs and outputs should our business case for additional funding be unsuccessful. Decisions on funding will take place within the context of the review of our operations.

and

Given resource constraints we were no longer in a position to facilitate the Productivity Hub nor provide support to the Government Economics Network.

and

It has also been suggested that the Commission should have greater capacity to undertake wider ranging productivity-relevant research, exploring the nature, sources and characteristics of New Zealand’s poor productivity performance.   Our capacity for such research remains limited. ….our capacity to pull resource away from our inquiry teams is quite limited. To provide more research output requires either an increase in funding or a reduction in inquiry outputs.

Of course, one challenge is that a generalist policy analysis function (essentially what the bulk of the Commission is doing) and something seriously focused on getting to the bottom of New Zealand’s longrunning economic underperformance might not sit that naturally together in the same small semi-detached organisation.

As all prudent government agencies must these days, if they want to impress ministers, they wave the flag for “wellbeing” (this from the front of the Annual Report)

NZPC wellbeing

Perhaps they will secure some more funding in this year’s Budget (though more policy advice might not be an election year priority).

Skilling’s report had four recommendations:

  •  a greater focus in inquiry topics on the external facing tradables sector of the economy (noting the centrality of outward-facing sectors to successful small economies)
  • a more structured inquiry selection process, with more emphasis on criteria relating to economywide productivity,
  • more flexibility in inquiry formats,
  • more public reporting and analysis on overall productivity performance issues, including international benchmarking.

I generally agree (and will take the opportunity to note one of his suggestions for a specific area that would repay further work from the Commission:  “important domestic issues, such as the impact of migration (and population) on New Zealand’s productivity performance”

But you can’t help thinking that there are severe limits on the value of any such agency (or any long-term thinking in major economic ministries such as The Treasury) unless and until some political leadership rises up that really wants to deliver something different for New Zealand, that takes seriously dealing with our economic failure.  Of course, in an ideal world if/when that time ever comes those political leaders would find a rich and deep literature –  from the Commission, from academics, from government agencies, from other researchers and commentators –  on the issues and options for change.  But why would politicians who are themselves indifferent want to spend much money on things they would do nothing with?

Part of my long-term pessimism about the Commission –  quite independent of any individuals involved –  involved reflecting on the fate of past New Zealand efforts and agencies.  There was the Monetary and Economic Council, and then there was not.  They produced some interesting reports in their time, but didn’t last much more than a decade.  Same goes for the Planning Council, some of whose papers are still worth reading.  What will make the Productivity Commission different?  One difference is that it has its own act of Parliament, but that just means that it could be left to wither on the vine, funding gradually squeezed, good people no longer wanting to work for it, before one day someone tidies thing up and abolishes it.   It does not have critical mass, it does not have specialist expertise (those generalist economic policy analysts instead)…..and there isn’t really much evident political appetite for excellent policy or the supporting analysis (even on the occasions –  not always –  when the Commission has delivered such).  And if there were such an appetite, a revitalised Treasury would have the institutional incentives to seek to become the key provider (and in a small public sector, their arguments wouldn’t all be wrong).

There will be an interesting test just a little way down the track.  Murray Sherwin’s second term as Commission chair ends next January and the government will need to find a replacement.  The sort of person the government chooses (whoever is in government by then) could be quite revealing about the sort of future and role they see for the Commission.  Sherwin is a very smooth and effective bureaucratic operator and effective manager –  well-equipped for the sort of role the Commission has largely come to occupy – but if any government were serious about a greater focus on whole economy underperformance they’d probably have to be looking to a different sort of person to either Sherwin or to the other existing commissioners (able as they each no doubt are).  I’m not holding my breath.

The Productivity Commission again

The Productivity Commission looks into topics the government of the day asks them to.  The current government asked for a report on issues around the “future of work” (a favoured topic of the current Minister of Finance when he was in Opposition) and the final report is due out next month.

The Commission has released a series of five draft reports looking at various aspects of the issue.  Late last year I wrote quite critically about one of those reports in which the Commission championed the case for a larger and more active welfare state, claiming that by adopting such policies New Zealand’s productivity performance might be improved.  As I noted

What it boils down to, amid various reasonable insights, is a push for a much bigger welfare state, allegedly in the cause of lifting average New Zealand productivity (and sustainable wages), without a shred of evidence or careful considered analysis connecting one to the other.    It is the sort of thing you might expect a political party to come out with –  the Labour Party conference, for example, is meeting shortly –  but not so much independent bureaucrats supposedly focused on productivity.

It was one of the less impressive pieces I’ve seen from the Productivity Commission.

Just recently I noticed the Commission announcing the release of the last of its draft reports.  I was a little surprised that they were allowing only just over two weeks for submissions (they close next Monday if anyone is interested).  When I finally read the latest draft, “Technology adoption by firms”,  I was less surprised: there was very little of substance there (including only about 20 pages of core text).  There was, of course, a summary recapitulation of the argument that people who lose their jobs should get from the state.

Beyond that, and as often with the Commission, there were some interesting perspectives and charts.   They have apparently had some new research done (as yet unpublished) on the implications of land-use restrictions for worker mobility, and there are a couple of charts from that forthcoming paper but (a) it is hard to know what to make of them without seeing the underlying paper, and (b) there is no sign they done anything cross-country thinking on the issue (bad as land use restrictions often are, it seems unlikely that they explain much about New Zealand –  or Auckland –  economic performance relative to Sydney, London, San Francisco, Hong Kong or wherever.  It is a hobbyhorse cause of the Commission’s – and one I mostly agree with them on –  but the case for a strong connection to New Zealand aggregate productivity performance is poor (and our labour market functions pretty well as it is).

Of course, since the focus of the paper is on firms (mostly private entities) and the question seems to be why those firms operating in New Zealand don’t invest more heavily in technology (or, I suppose, why there aren’t more such firms), the answer surely has to be (when all boiled down) “because the risk-adjusted returns to doing so don’t seem sufficiently attractive”.    And yet I don’t think that line appeared at all.  Nor, therefore, is there any sense that we should assume firms, and their owners, are already doing what is in their own economic best interests.    If so, the focus should be less on individual firms – although perhaps case studies can sometimes enlighten –  and much more on the wider economic policy settings (and any exogenous constraints- remoteness possibly being one of them).

Some regard for history might be helpful too. The Commission suggests on a couple of occasions that policy stability can be important, which is no doubt true in the abstract, but might offer less than they suggest in a country where economic policy has been pretty stable for most of the last 25 years, but that particular stable policy regime has not been accompanied by good economic performance.  Materially different and better outcomes are likely to require some quite different policy approaches.

Instead, what they have to offer is really not much more than a grab-bag, not supported by much.  Perhaps it was telling that of the two case studies mentioned in boxes in the draft report, the one on Weta never mentioned the massive taxpayer subsidies to the industry/firm, and the other Zespri never seemed to mention that export monopoly Zespri has, even though the Commission has often pointed to the importance of competition and easy entry and exit.

At the policy level, it was notable that three whole-economy variables/tools did not get a mention at all.  There was no mention of the real exchange rate, even though ours have unfolded this century in ways quite out of step with productivity growth differentials.  There was, as far I could see, no mention of company tax rates, even though ours are now quite high by international standards, particularly as they affect overseas investors.  And despite the scale of New Zealand migration, there was no mention –  good or ill –  of how the system might be affecting firm incentives to invest.    Foreign investment doesn’t even get much of a mention, other than to note the way the recent foreign buyer restrictions might be limited new housebuilding.

And of what was there was fragmentary at best.   Thus, we are told that “increasing emissions prices” “would encourage technology adoption by firms”.   Quite possibly so, but with no way of knowing whether the resulting technology adoption would be good for the economy or otherwise (one of the Commission’s messages is that we should embrace technology to lift material living standards).  Higher minimum wages can also encourage “technology adoption”, as firms try to substitute away from the now artificially more expensive input.  All sort of regulations can require investment in new technology, but that isn’t –  simply by assumption –  a good thing from a living standards/productivity perspective.

We are also told that strengthening something called the “national innovation system” would help, but  –  as was the case when the government brought back R&D subsidies –  no serious attempt to analyse why the returns to private firms to invest more heavily seem to be not-overly-attractive (when there are other countries, without subsidies, that see high private R&D spending).

We are told that targeted government intervention can have a role.  At times you get a sense that here they are pandering to the government, citing the “industry transformation plans” that are currently in the works (actually, I hope they are pandering there). But they go on to attempt to spell out examples of “successful targeted interventions” in New Zealand’s history.  Their first item is “industry training” –  it is no more specific than that, so I can’t quite tell what they mean.  And the second is this

encouraging technology development, diffusion and adoption in New Zealand’s agricultural industries (eg, the establishment of experimental farms, a “farm extension service” to spread good practice, and research institutions such as Lincoln Agricultural College, Massey University and the Department of Scientific and Industrial Research)

Even if you thought these were all success stories –  I don’t claim the specific knowledge to know –  they date from 100 years ago (DSIR founded in 1926) or even 150 (Lincoln founded in 1878).   It isn’t exactly a compelling narrative of modern “targeted interventions”.

Much of the rest is similarly scattergun in nature.  I’d happily see some regulatory reform around genetic modification, perhaps there is a case for competition policy changes (but the Commission doesn’t really claim to know –  “competition laws have not been fundamentally reviewed to assess their suitability for the digital age”).  Perhaps legislation around “consumer data rights” has a place, but they don’t seriously attempt to link this to obstacles to business investment.  And so on.

It isn’t that I think most of the specific policy suggestions are wrong –  some may be, most probably aren’t, some I’d support quite strongly –  but that they are little more than grab-bag of favoured measures, not well-grounded in any compelling narrative about New Zealand’s economic underperformance, and the obstacles to matching our strong labour market performance with a highly productive overall economy.  The Productivity Commission has been around for almost 10 years now, and we really should have been able to hope for more.   But I guess some of the issues get awkward (for Commissioners and their masters) and politically uncomfortable, so it is easier to play at the margins.  Amid the championing of personal political/policy preferences, there will probably be the odd bit of interesting analysis, perhaps some useful peripheral reforms, but the core challenges will be no closer to being addressed.

But then it isn’t as if the Prime Minister and Minister of Finance want anything much different –  unless some magic fairy dust somehow conjured up better outcomes –  and there was that sadly telling quote the other day from the man who would be Minister of Finance.

How will doing more of what we’ve done for the past three decades finally make us wealthy? I asked. Goldsmith offered no explanation.