Productivity by the numbers

That is the title of a new paper, intended (it appears) to inaugurate an annual series, from the Productivity Commission.   It is full of interesting tables and charts, and usefully drives home the point –  made repeatedly on this blog, and elsewhere –  that (a) longer-term productivity growth in New Zealand has been poor, and (b) that productivity growth matters for all sorts of other things New Zealanders individually or collectively care about.

Productivity growth in New Zealand has lagged since at least the 1950s.  On the data we have, the worst decade (falling further behind) was the 1970s, but the Productivity Commission usefully highlights that we have on slipping even in the last couple of decades.  This is one of their charts, showing the level of labour productivity in 1996 (about when the full OECD data series starts) and growth in productivity since then.

NZPC prod

Broadly speaking, the cross-country story has been one convergence: countries with lower initial productivity catching up (top left quadrant) and those with higher initial productivity growing more slowly (bottom right quadrant).   There is only one country in the top right quadrant (Ireland), but that is substantially a measurement issue stemming from the corporate tax rules.

But, as the Commission highlights, New Zealand is in the bottom left quadrant: countries that had only modest productivity levels in 1996, and still managed to grow slowly in the subsequent decades.  The real basket-case is, of course, Mexico, but we find ourselves grouped with Portugal and Greece, and Israel and Japan  (as I’ve noted here previously, it is well past time people in New Zealand stopped talking of Israel as some sort of high-growth exemplar).

I like the chart, and I’ve highlighted here previously the contrast between the productivity growth performance of the central and eastern European OECD member countries (top left) and New Zealand, including noting that several of them now have productivity levels very similar to those in New Zealand and are still growing fast.   I dug out the data for a similar chart going back to 1970 (when the OECD database begins, but for a smaller sample of countries).   Over that full period, we stand out as the underperformer.

But the Productivity Commission does rather tend to pull its punches (they are a government-funded agency, and depend wholly on (a) the resources the government allocates to them, (b) the quality of the Commissioners governments appoint, and (c) the character of the issues governments invite them to investigate).  (On (b) it seems somewhat overdue for the government to announced a replacement for now-departed former Secretary to the Treasury, and highly-regarded economist, Graham Scott, who has served as a Commissioner since the Productivity Commission was founded).

Pull its punches?  Reading “Productivity by the Numbers” you would have no idea how absolutely poor our labour productivity performance had been over the last few years.

Tsy productivity GDP phw

And there is, therefore, no sense of what light this experience might shed on possible explanations for our continued long-term underperformance.

They are also a bit self-promoting, suggesting that reversing the productivity underperformance “has been a central theme of the Productivity Commission’s work since 2011”.  If anything, the opposite has been true.  The Commission research team (when led by the now-departed Paul Conway) has at times produced some interesting papers on the issue, but the Commission’s core work is the inquiries successive governments have asked them to undertake, and not one of those inquiries has had as its focus economywide productivity failures and challenges.  Some of the inquiries have led the Commission down pathways which can, at best, be described as limiting the (economic) damage –  eg the low emissions inquiry.  On the other hand, the Commission has done a (mostly) positive job in helping to develop a more widely shared recognition that land use regulatory restrictions (and associated infrastructure financing perhaps) are at the heart of the housing disaster successive central and local governments have presided over for the best part of three decades.

“Productivity by the numbers” is mostly descriptive – tables, charts, and comments thereon – but the authors do weigh in a little on possible explanations.  They include this table, taken from another recent article

NZPC prod 2

A couple of the items in the left-hand column are clearly intended as a nod in the direction of my ideas (referenced in the article the table is drawn from), and I welcome that.  But it isn’t clear that the Commission –  let alone the government’s official departmental advisers – is even close to a current integrated and persuasive narrative of what has gone wrong and how, if at all, things might be fixed.    As is perhaps inevitable in a summary table, many of the items are at best stylised facts (some probably not even facts).

The report goes on

This work has highlighted that New Zealand’s poor productivity performance has been a persistent problem over decades and turning this around will require consistent and focussed effort over many fronts and for many years. There is no simple quick fix.

It is a convenient line –  especially as there is no political appetite for change anyway –  but I don’t believe it is true.  Sure, we aren’t going to close the productivity gaps overnight, and sure there are (always) lots of useful reforms that could make a difference in a small way.  But here we aren’t dealing with the small differences between, say, productivity in the Netherlands and that in Belgium.  For an underperformance as large and as sustained as New Zealand’s – in what is substantially a market economy with passable institutions (rule of law etc) – it is highly likely that there are (at most) a handful of really important policy failures (things done or not done) where most of the mileage from reform would be likely to arise.  And there the Commission just does not engage.   Instead it tries to move on to a more upbeat story, and to shift the “blame” onto the private sector.

Indeed, work is already taking place in many areas, including in competition policy, infrastructure, science and innovation, and education and the labour market. There is growing interest in the need to improve Kiwi firms’ management practices and ability to learn (absorptive capacity), which shape their ability to innovate and improve their productivity (Harris & Le, 2018).

To me, much of this seems like dreamland stuff, deliberately choosing to avoid hard questions, while flattering the egos of ministers and officials in Treasury or MBIE.   Whatever the Productivity Commission thinks is good among those topics in the first sentence (and I struggle to think of anything much), it isn’t credible to suppose that the things they like about current policy even begin to make the sort of difference required to reverse the productivity failures.  And much as officials and academics like to suggest there is something wrong with New Zealand businesses (convenient that), there is no evidence that New Zealand firms and employees (managers and others) would be any less able to identify and respond to opportunities if government roadblocks and obstacles, including distorted relative prices, were fixed.

In the report, the Productivity Commission highlights how much we will miss out on if productivity growth continues to underperform the (somewhat arbitrary) 1.5 per cent per annum growth assumption in Treasury’s medium-term fiscal model.  The point is that small differences compound in ways that make for big differences in material living standards and opportunities.  And on that count I totally agree with them.    I made a similar point the other way round in a post on productivity last year.

I’ve banged on here about how dismal productivity growth in New Zealand has been in the last five years in particular. The best-performing OECD countries over the most recent five years were averaging more than 2 per cent productivity growth per annum – and all of them were countries catching up with the most productive economies, just as we once aspired to do. If we’d managed 2 per cent productivity growth per annum in the last five years, per capita GDP would be around $5000 per head higher (per man, woman, and child) today.

Catching up to the top tier will, in a phrase from Nietzche, take a “long obedience in the same direction” – setting a course and sticking to it. But here is a scenario in which the top tier countries achieve 1 per cent average annual productivity growth, and we manage 2.5 per cent average annual productivity growth. Here’s what that scenario looks like:

nzpc prod 3

I’ve marked the point, 15 years or so hence, where the gap would have closed by half.

I don’t usually quote Nietzsche, but here is the full quote

“The essential thing ‘in heaven and earth’ is… that there should be a long obedience in the same direction; there thereby results, and has always resulted in the long run, something which has made life worth living.”

What matters in an economy like New Zealand now isn’t finding 100 or 300 things to reform – sensible as many of them might be –  but finding the one (or two or three) things that might make a real difference, adjusting policy accordingly, and then persevering long enough to start seeing real and substantial results.     There is no reason why New Zealand should not again manage something close to top tier OECD average labour productivity, but –  on the demonstrated –  there is no reason to suppose that (a) anything like the current policy mix will deliver it, or (b) that tiny changes at the margin will deliver very substantially different results.    Welcome as the Productivity Commission’s statistical compilation is, those are the messages that need to be heard more loudly.

Sadly, of course, not a single political party seems to have any appetite for reversing our decades of economic decline.  But, just possibly, a compelling narrative from an authoritative body like the Productivity Commission might one day begin to change that.  At present, instead, the Commission seems in some unsatisfactory place where they don’t have the answers, and to the extent they sense some elements of an answer, they don’t want to upset anyone.




The Productivity Commission’s zeal for net-zero

Among those holding the reins of power –  and their supporters –  there appears to be an almost passionate commitment to a goal of eliminating (net) all greenhouse gas emissions by 2050.  So passionate as, it seems, to care very little about the consequences for New Zealanders.  And since some of the easiest and least costly (probably actually net beneficial) ways to make big inroads on New Zealand greenhouse gas emissions run head-on into other passionately-held ideological commitments, those options simply get ignored as well.  None of this seems based on any robust analysis, either of the specific issues facing New Zealand, nor of the way in which the substantial costs of adjustment would be likely to fall most heavily on the poorest in our society.  Some, who should know better, seem to want to pretend that a major coerced reorientation of our economy would actually be net beneficial (in economic terms) to New Zealanders.

We’ve had another display of this sort of attitude today, with the release of the Productivity Commission’s final report into making a transition to a low emissions economy.   There is more than 600 pages of it.    In its evangelical tone –  not much detached analysis here – much of it could have been written by the Green Party.

There is, for example, no sign of any recognition that New Zealand may well benefit from global warming (consistent with previous OECD modelling and IPCC analysis). And yet, according to the the chair of the Commission in his Foreword.

We make that effort as a member of a global community with a shared interest in overcoming this challenge to our collective well-being. We cannot expect to influence others of the need to change if we cannot ourselves demonstrate the willingness and ability to play our part, to offer our assistance and to share the benefits of our experience.

It seems laughable to suppose that the world will be looking to a lead from New Zealand on these issues (if only because the pattern of our gases is so much different).  But even if they were, why would we sacrifice ourselves –  and our own lower income people –  on the altar of some issue which may well pose significant risks in other countries, but if anything is likely to make New Zealand a more pleasant, and productive, climate in which to live?  Mr Sherwin gives us no clues on the answer to that.

The report itself open with this claim on the first page of the Overview.

It is difficult to estimate accurately the economic costs of climate change, due to many uncertainties. Even so, broad estimates of the economic costs of escalating climate risks are daunting. Even at 2°C of warming, the Intergovernmental Panel on Climate Change (IPCC) estimates the annual economic cost at between 0.2% to 2% of global GDP, even if strong measures are taken to adapt to such change.

Deep in the body of the report, the Commission  –  which seems to have commissioned no modelling of the GDP impact of emissions reductions targets itself –  downplays the NZIER modelling results published in the recent official consultative document on a net zero target, which suggested GDP losses for New Zealand of 10-22 per cent if we pursue a proper net-zero by 2050 target.  But even half the potential losses NZIER estimated would be a lot larger than 0.2- 2.0 per cent (benefits) –  and recall the OECD modelling suggesting that the economic costs of climate change itself are concentrated in already warmer countries, not in temperate places like New Zealand.

The zeal to lead the world continues a page or two later

Further, by achieving a successful transition to a low-emissions economy, New Zealand has an opportunity to influence others in pursuing a low emissions economy. That influence can help reduce the risk of other countries failing to pursue mitigation pathways because they either do not know how to, or do not think it can be done while continuing to grow incomes and wellbeing. Such influence is likely to be particularly relevant in areas where New Zealand has expertise and experience (eg, techniques for pastoral GHG mitigation) and by implementing innovative policy solutions (eg, to reduce biogenic methane (CH4)).   New Zealand’s capacity to influence will be the greater if it can point to its own credible and substantial mitigation progress.

So, even though climate change won’t particularly adversely affect New Zealand, we should take a gigantic gamble –  that others might be hesitating about taking –  on the off chance that we can influence the world.   And all premised on the spurious benchmark that a net-zero target can be achieved “while continuing to grow incomes and wellbeing”.  The people who run the Commission really should know better than that: the benchmark shouldn’t be whether people in 2050 are better off economically than we are, but what difference the proposed policy initiatives will make to the outcomes we would have had otherwise.  Anything like a 10 to 22 per cent loss of GDP (relative to baseline) is enormous, and appears to be a risk the Productivity Commission has little interest in engaging with, such is their emotional commitment to the net-zero aspiration (or their political commitment to keeping onside with a new government).

And, of course, the Commission has a great deal of confidence in the ability and willingness of governments and public servants (people like them), to “get things right”, never once engaging with the generations –  centuries –  of records of government failure, or the limitations of human knowledge.  Thus we are earnestly told that one of the “problems” is

Discounting climate change pushes responses to it into the future. There is a tendency to punt policy choices into the future because of near-term costs and a belief that some disincentives will reduce in the future (eg, cheaper technology or increased cost of inaction). Yet as the future approaches (when action was due to occur), the salience of the short-term costs returns, creating a vicious cycle.

And yet in a country that has almost certainly benefited, probably modestly, from  global warming to date, it is almost certainly beneficial for us not to have taken action generations ago, when the technologies were not there to support such adjustment.

They more or less recognise some of this just a little later, in a rather incoherent paragraph

So, an important theme in this inquiry is that the long-term perspective must be introduced into politics and policymaking, domestically and internationally. Added to the long horizon is deep uncertainty about many aspects of the future. The combination of these two features requires political commitments and durability that spans many generations. Without durable and ambitious policies now, the signals for firms and households to move their production and consumption towards less emissions-intensive options will be weak, at best. The challenge is therefore how best to design the political and governance architecture in a way that effectively signals future policy intentions and provides a commitment to such intentions.

Long horizons and “deep uncertainty about many aspects of the future” in combination are not simply a good recipe for getting (good) “durable and ambitious policies”, or the sort of aspiration the Commission seems to have to make such issues –  with huge economic and social implications –  something bipartisan or even transcending politics.  But politics is about the sphere in which hard choices should be debated.

Ultimately though, laws and institutions will not endure unless underpinned by political consensus. Support across political parties is therefore vital; climate change is the ultimate intergenerational issue, and governments change. So, substantial cross-party support for the core elements of statutory and institutional arrangements will help provide policy permanence regardless of the make-up of the Government.

Even though, on the government’s own modelling, the adjustment costs are very large (and probably uncertain), the distributional consequences are severe, what other countries are doing in largely unknown and subject to change –  oh, and New Zealand itself isn’t particularly adversely affected by climate change.

A big part of the Productivity Commission’s vision of the path forward is afforestation on a huge scale.  At least they recognise –  unlike the NZIER modelling, which assumes the new forests are effective all a net gain –  that if this were to happen it would mostly displace existing uses of land for sheep and beef (although the Commission barely touches on the transitional economic implications of that –  there is, for example, no mention of the exchange rate in the entire report).  And even the Commission knows that this approach has its limits

Expanding forestry can achieve large reductions in net emissions up to 2050. Yet heavy reliance on forestry will create challenges in the longer term because it is not possible to expand without limit the land area under forest. With continued emissions reductions required after 2050 to achieve and maintain net-zero or negative emissions, New Zealand will need to find mitigation options for hard-to-reduce emissions sources.

Which might leave you wondering why we should massively reorient the economy now –  at likely considerable real economic cost –  to achieve an artificial goal of no specific relevance to New Zealand, net-zero by 2050.  The feel-good dimension might be fine for the Green and Labour parties, but we should expect more from the Productivity Commission.

Towards the end of their Overview, the Commission verges on the dishonest. There is a section headed, in big  bold letters

Many benefits from the transition
Investment and job opportunities

They note

An important framing point is to think about the potential cost of transitioning to a low carbon economy as an investment, rather than as a net-cost on the economy and taxpayers. With all nations playing their part, the return in the form of avoiding damaging climate damage is substantial.

Except that (a) the numbers don’t back this up (say a 2% of GDP global loss from climate change and a 10-22 per cent loss of GDP in New Zealand to get to net zero by 2050 (again, on the government’s own numbers)), and (b) thinking of something as an “investment” doesn’t make it a good call.  There was plenty of stuff the national accountants called “investment” during the Think Big era in the 1980s –  and actually late in any boom –  that was simply wasted resources.

They prattle about much of the investment being undertaken by the private sector, as if again somehow this was a good thing, or a sign of it being well-justified.  Regulation and taxes often force businesses to undertake investment spending that has little or no societal economic benefit.  Skewing the economy to achieve a net-zero target is not obviously different.

As for jobs

A low-emissions economy has the potential to be a major source of jobs growth in the future, with many jobs yet to be defined. The International Labour Organisation (ILO), for example, says that taking action in the energy sector alone to limit global warming to 2°C by the end of century can create around 24 million new jobs by 2030, more than offsetting losses in traditional industries.

But we already have something close to full employment.  We had something closer to full employment in the dark days when New Zealand protected every industry under the sun.  Market economies will generate jobs, and technological change mostly isn’t a threat to overall employment levels (any more than in the Industrial Revolution). The issue is what those jobs pay, and that is largely determined by productivity.  The Commission is curiously, conveniently, silent about the likely overall productivity losses –  those GDP losses NZIER identified will mostly be lost productivity.

I could go on quoting the politicised blather, but here is just one last quote from the Overview

New Zealand can achieve a successful low emissions economy, but there will be tough challenges. Delaying action will compound the transition challenge, making it more costly and disruptive, and limiting viable and cost-effective mitigation options in the future. If New Zealand fails to act, it risks being locked into a high emissions economy and missing potential future economic opportunities.

Mostly this is just rhetoric.  If we face difficult adjustments, including around animal emissions for which there are as yet few decent technological options –  beyond getting rid of the animals (and shifting production to other countries –  might it not make a lot more sense to delay adjustment, take advantage of economic new technologies as they arise, and so on.  After all, despite the rhetoric, neither Donald Trump, Xi Jinping, nor anyone else is looking to us to commit some sort of economic suttee, on the off chance of rising phoenix-like from the ashes.  The Commission, for example, is dead keen on electric cars, but presumably technology in that area will continue to improve, perhaps rapidly, and we might mostly be better off not leaping now, but waiting until the prices come further down.  Individual firms will make their own choices about long-term global market opportunities, and officials at the Productivity Commission are unlikely to be able to give them any useful guidance, about balancing costs and risks, opportunities and threats.

Longstanding readers will know that I had complained that the Commission’s draft report had entirely ignored the role that immigration policy had played in driving up New Zealand’s total GHG emissions in recent decades, and –  in particular – the way in which current immigration policy, if persisted with, will compound the economic difficulty of meeting any sort of low emissions target, let alone net-zero by 2050.  Population growth was treated as an exogenous constant in the draft report.   I made a submission on the draft report, again highlighting the issue and the fairly strong cross-country relationship between population growth and emissions growth (not only in total, not only in transport, but even in agriculture).

The final version of the report represents a very modest improvement.  There is no still no reference to immigration policy, past or present, in the entire document.  There is some more discussion of the contribution of population growth, and a single piece of sensitivity analysis that makes the rather obvious point that a lower population growth rate would lower the carbon price required to meet a net-zero target, but no recognition that in New Zealand – unlike many countries –  trend population growth is very directly influenced by specific policy choices around immigration.       As even the Commission notes, achieving a net zero target by 2050 will be “challenging”. Against that backdrop it seems remiss –  and highly political –  not to even put on the table the question of whether the target rates of non-citizen immigration should be revised down.  If the government and the Commission were serious about mitigating the costs of meeting such a target –  rather than pretending that there are real net economic gains –  they’d be taking a hard look at all the things that compound those costs, without providing much benefit to New Zealanders as a whole.  High rates of immigration –  to a country more remote than almost any other, with no demonstrated productivity gains over decades, and about to be put through the wringer of large structural changes undermining the competitiveness of much of the tradables sector –  look like a clear example.    But touching on such issues would challenge the priors of the elite, and we can’t have that it seems.

Productivity Commission documents come with this statement

The Productivity Commission aims to provide insightful, well-informed and
accessible advice that leads to the best possible improvement in the wellbeing
of New Zealanders.

Perhaps they think they aim to.  It doesn’t look as though they’ve done so with this report.  On the government’s own numbers –  ignored by the Commission –  the wellbeing of New Zealanders will be jeoparised.  But quite probably their advice will have improved the standing of the Commission with the new government.  Which is not at all the same thing.

This was the chart, from the government’s own modelling, that I included in a recent post

Six times the adverse impact on the bottom quintile as on the top quintile.  Breathtaking…..


Productivity Commission and the path of least resistance

The Productivity Commission’s draft report on making a transition to a low-emissions economy is out this morning.   It is a 503 page document and so, of course, I haven’t read very much of it.  But electronic search is a wonderful tool.

As I noted yesterday, despite having had a fairly large (by international standards) fall in emissions per unit of GDP since 1990, New Zealand has had one of the larger increases in total gross emissions of any OECD country.  What reconciles those two observations isn’t some incredible surge in New Zealand’s productivity and GDP per capita – as is generally recognised, we haven’t done well on those scores –  but a large increase in the population.  And most of that increase in population is due to the planned immigration of non-citizens to New Zealand.  In other words, it is more or less a direct result of the policy adopted by successive governments (including the current one).

For any given set of technologies and relative prices, more people means more emissions both directly (more transport, more power) and indirectly –  people need to earn a living and so emissions associated with, for example, manufacturing or agriculture also rise.   As a rough first approximation, if we’d stayed with the rate of non-citizen immigration New Zealand had in the late 1970s and much of the 1980s, total gross emissions in New Zealand now would be at least 20 per cent lower.  For governments that want to materially reduce emissions that should be something to ponder (especially as New Zealand average units of GDP are themselves quite carbon-intensive)  It is, of course, water under the bridge now.  But the same high non-citizen immigration targets are still in place and, all else equal, will continue to drive up emissions in future.    Given those immigration policy pressures, more of a (costly) burden of adjustment has to be imposed on the economy through other instruments.   As marginal abatement costs here are widely accepted to be higher than those in most other advanced countries, the likely adverse economic effects on New Zealanders are large.

But you don’t get much of a sense of any of this from the Productivity Commission’s report.  There are quite a few references to the role of population in the growth of emissions.  It even makes one of their formal findings

Finding 2.7     Economic and population growth have been important underlying factors in New Zealand’s rising emissions. Over the last 25 years, New Zealand’s emissions per person and emissions per unit of output have decreased, but the increase in population and output has caused overall emissions to increase.

Flowing from this short discussion.

Strong population growth and economic growth have been key underlying drivers of New Zealand’s rising emissions since 1990. Between 1990 and 2015, New Zealand’s real GDP nearly doubled. During the same period, population growth was higher than most other developed countries (Figure 2.10). More people means greater consumption of goods and services that contain emissions (eg, more vehicle use, and greater demand for electricity). Economic growth (and, indirectly, population growth) means more emissions-intensive goods and services are produced, leading to higher emissions.

And there is the odd passing observation, such as that

Future population growth will provide a challenge in bringing down transport emissions.

although no apparent recognition of the connections to agricultural emissions.

But the Commission has chosen to treat population growth (past and future) as some sort of exogenous given.  For example, they report some results of some commissioned modelling exercises, and in each of the scenarios exactly the same future population growth is assumed.  That might make sense in a country where population changes were almost entirely the result of developments in natural increase (or even of the emigration choices of nationals), neither of which should be any sort of policy lever.  It makes no sense at all in a country where most of the population growth (last quarter century and next) is directly the result of policy choices.

No analytical sense that is.  But perhaps it makes sense if you are a government agency feeling your way with a new government that is strongly committed to the “big New Zealand” mentality and to current immigration policy, and where much of that government seems more interested in having New Zealanders don hair shirts and feel the pain (or alternatively conjure up imaginary futures in which a forced adjustment to net-zero emissions won’t come at aggregate economic cost to New Zealanders).  The path of least resistance politically presumably led the Commission to conclude that it was better (“safer”) not to mention immigration (policy) at all.

And so they didn’t.   In the entire 503 pages there is a single reference to immigration.

But that is just part of the (reproduced in full) Terms of Reference for the inquiry, set out by the previous government.

New Zealand’s response also needs to reflect such features as its high level of emissions from agriculture, its abundant forestry resources, and its largely decarbonised electricity sector, as well as any future demographic changes (including immigration).

It feels a lot like abdication, and not at all like the sort of free and frank analysis and advice that a body like the Productivity Commission should be providing if it is to be any long-term use.  The Commission seems to have been so scared of upsetting its liberal readers –  political and other –  that it isn’t even willing to address the issue.

It would be one thing if they’d devoted some substantive discussion to the issue and concluded, whether on the basis of reasoned analysis or modelling, that the economic benefits to New Zealanders from the immigration policy were sufficiently large, and the marginal abatement costs of other approaches in a portfolio of measures to reduce emissions were sufficiently small, that winding back non-citizen immigration targets should not be part of a preferred response strategy.  Reasonable people could debate that sort of proposition and the evidence advanced for it.  But the Productivity Commission chose to totally ignore the issue.   Since as an institution they don’t seem to be gung-ho enthusiasts for the economic benefits of New Zealand’s immigration policy (see my discussion of their narrative of New Zealand’s economic underperformance) it looks a lot like playing politics, going along with a Labour/Greens (and their acolytes) narrative.  In the short run that might make it more likely they get a hearing from the government. In the long run, that sort of approach to issues won’t stand them  –  or the cause of good policymaking and analysis in New Zealand, already enfeebled enough – in good stead.

(It was also noticeable that amid all the happy talk in the document, there was no sign of any attempt to estimate, or model, the likely real economic costs of the sorts of carbon reduction policies the Commission is dealing with.   There is an entire chapter reporting initial modelling results, but –  as far as I could see –  no reference to the implications for GDP per capita (or any of the cognate national accounts measures).  No doubt, the average New Zealander in 2050 will be wealthier than we are today, but the relevant issue for policy isn’t that baseline, but the deviations from it.  In particular, they should have focused much more attention on what the economic implications of various possible policy levers –  perhaps including immigration policy –  might be, and how best to minimise the economic costs to New Zealanders of making the adjustment the government is planning to target.     And it is fine for enthusiasts for aggressive policies to talk of unpriced externalities etc, but even with those unpriced externalities our economic performance over decades has been startlingly poor, and it isn’t obvious why removing them won’t further worsen economic outcomes.  That might be an acceptable trade-off, but there doesn’t seem to be anything much in this report suggesting just how large those costs and benefits might be.)


Emissions, population growth, and the Productivity Commission

Early tomorrow morning the Productivity Commission will be releasing its draft report on how New Zealand can transition to a low emissions economy.   The report was commissioned by the previous government, but this will be the first real test for the Commission in dealing with the new government –  for whom this is an issue dear to the heart.   The Commission has been trailing the report, with links to a recent presentation.   Like most Commission reports it will, presumably, be long, and full of lists of findings and recommendations.   My main interest is whether they again –  as they did in their earlier issues paper – manage to entirely avoid the elephant in the room:  the role that deliberate (immigration) policy has played (and continues to play) in driving up the population, and driving up emissions, in a country that is pretty widely-recognised as having some of the highest marginal abatement costs anywhere.

On that latter point, don’t just take my word for it.  Here was the Ministry for the Environment –  official advisers on these things –  in their report last year.


(not, it appeared, that MfE had done any more thinking about it than that)

Bear in mind too that Statistics New Zealand project that New Zealand’s population will increase by another 25 per cent by 2050 –  the date by when the current government aims to have net carbon emissions to zero – and all (net) that projected population increase is due to immigration policy.

One key indicator around emissions is total emissions per unit of GDP.  On that measure, New Zealand has the second highest emissions of any OECD country, just behind Estonia.

nz and estonia

But we seem to be heading for number 1.   That our emissions per unit of GDP are high isn’t that surprising, given the large role that pastoral farming plays in our economy.  It may even be that New Zealand –  temperate climate and all – is a relatively efficient place for such farming emissions to occur.

As the chart shows, emissions per unit of GDP have been falling in New Zealand.  Even if that first chart might suggest a modest fall, in fact it only illustrates how energy-inefficient much of the former Soviet bloc actually was.   Here is a chart showing the reduction in total emissions per unit of GDP from 1990 to 2015 (the latest OECD data) for all the OECD countries for which there is complete data.  There are four countries missing, but looking at their incomplete data, it doesn’t as though including them would change the picture.

emissions 2

On that metric –  the change in intensity – New Zealand hasn’t done badly at all.  Of the countries to the right of us on the chart, six were former Soviet-bloc countries (formerly highly resource –  including energy –  inefficient).   And the Irish numbers are badly distorted by the way in which GDP  in the last 20 years has been increasingly artificially boosted by aspects of their corporate tax regime, counting as GDP stuff that doesn’t actually happen –  or generate emissions –  in Ireland (details here).  Relative to most of the old OECD, New Zealand emissions per unit of GDP have fallen more than most –  which is all the more striking because our productivity performance has been so poor.

And yet, for the OECD as a whole gross emissions increased by only 2 per cent from 1990 to 2015, while in New Zealand they increased by 24 per cent.  The big difference isn’t that somehow New Zealand has become relative more carbon-inefficient –  we haven’t (see previous chart) – but simply that we have a whole lot more people.  And the overwhelming bulk of that population growth is due to New Zealand’s immigration policy (natural increase – itself boosted by immigration – offset by the net outflow of New Zealand citizens would have given us a population increase of only around 250000 from 1990 to 2015).

There seems to be a real squeamishness about confronting this, pretty straightforward, series of facts:

  • production here is more carbon-intensive than elsewhere among advanced economies,
  • marginal abatement costs here are higher than those in most other parts of the advanced world,
  • more people drive up total emissions, all else equal, and
  • in New Zealand trend population growth –  over the last 25 years, and in the projections to 2050 –  is mostly due to active non-citizen immigration policy.

(In fact, you might have supposed that emissions/climate issues might have featured in the Fry/Wilson book on a multi-dimensional approach to thinking about immigration policy, but no.)

And here a few of the cross-country charts of the relations between population growth and gross emissions.  This one is for all energy sectors (including transport).

emissons 3

New Zealand is very close to the line (and the line remains upward sloping even if one excludes rapidly industrialising Chile, Turkey, and Korea –  the three dots at the top of the chart).

The relationship shouldn’t be a surprise: more people means, all else equal, more requirement for power, more need for transport, and so on.  Over time, production processes tend to become more efficient, but for any given production technologies, more people will tend to mean more emissions.

Much the same relationships is present (again unsurprisingly) for total gross emissions.

total emissions

and even, more to my initial surprise, for agricultural emissions

ag emissions

In fact, as I noted in an earlier post

Somewhat to my surprise there is actually even a (weak) positive relationship between population growth and per capita emissions and emissions per unit of GDP.  I’m not quite sure why that would be, although in New Zealand (and Australia’s) case, the migrants are moving to some of the OECD countries with, already, the highest emissions per capita and per unit of GDP.

The apparent relationship between agricultural emissions and population growth (even across advanced economies) is both interesting, and particularly germane to New Zealand.  As I’ve argued elsewhere, it is plausible that if New Zealand had had much lower immigration (and thus lower population growth) and, thus, a lower real exchange rate (according to the Reddell model), the political constraints on tightening water-quality standards (especially affecting dairy industry competitiveness) and on introducing agriculture to something like the ETS would have been less intense.  The lower exchange rate would have provided a competitiveness offset.  So it is likely that, all else equal, our immigration policy has even driven up our agricultural emissions.

None of which might matter much if

(a) there was compelling evidence that very high rates of non-citizen immigration had been boosting domestic productivity, or

(b) if the marginal abatement costs for emissions in New Zealand were low.

But neither appears to be so.   And thus, if one cares at all about minimising the cost to New Zealanders of a forced policy adjustment towards a net zero carbon emissions world –  as distinct from simply forcing us all to don a hair shirt and feel the pain –  rethinking our immigration policy really should be high on the list of options for responding to the carbon goals the new government (and, less ambitiously, its predecessor) have set for themselves.  I hope  –  but am not optimistic, based on the “part preview” I linked to above  –  that the Productivity Commission, who are supposed to be politically neutral analysts, have recognised this in their report.  But perhaps I’ll be pleasantly surprised.  We’ll see tomorrow.

It isn’t as if the issues haven’t been raised with them.   Here is the link to my brief submission to their inquiry.

More on population and per capita GDP

My quick post on Saturday, in response to someone’s comment, was designed simply to illustrate what should have been quite an obvious point: looking across countries in any particular year, countries with large populations don’t tend to be richer (per capita GDP) than countries with small populations.  Just among the very big countries, the United States is towards the top of the GDP per capita rankings (beaten by a bunch of small countries), and China, India, Indonesia, Pakistan, and Brazil are not.   Since both the physical sizes of countries, and their populations, are the outcomes of all sorts of historical factors, it wasn’t an observation about immigration policy or (wince) “population policy”.    And, of course, GDP per capita isn’t everything: moderately well-off large countries are typically more powerful (defence or offence) than small rich ones.

But, continuing to play with the same data download from the IMF WEO database (190 or so countries and territories) for the period since 1995, is there any obvious relationship betweeen population growth rates, and growth in real per capita GDP?

Here is the chart

population 9 Aug 1 all countries

Actually, I’ve left out three extreme outliers –  all oil producers.  Equatorial Guinea had growth in real GDP per capita of about 2500 per cent over the period, and UAE and Qatar had population growth of 300-400 per cent (in one case, with falling real GDP per capita, and in the other with a moderate increase).

There is basically no relationship between the two series –  again, each dot is a country.  The simple linear regression line is downward-sloping but that probably wouldn’t be a statistically significant relationship.  Bear in mind though that simply charting population growth and per capita GDP growth for the same period could have shown an upward-sloping relationship even if there was no causal link from faster population growth to faster per capita economic growth: countries with rapid growth in real GDP per capita might be expected to attract more people (immigrants flow towards opportunity) and perhaps even induce higher birth rates.   But there is no sign of even that sort of relationship, across all countries, and over this period of 20 years or so (this sort of reverse causality is a big problem looking at annual data, but much less so looking at long periods).

The full sample of countries includes a huge range of types of countries –  from war-torn poverty stricken basket cases (Syria, Somalia, Afghanistan) to tiny remote islands (Tuvalu), as well as places with strong institutions, good connections, and an established record of economic performance.   How do this simple bivariate relationships look if we focus just on these latter countries?

In various posts over the years, I’ve used a sample of about 40 fairly advanced countries, encompassing the members of the OECD and the EU, as well as Taiwan and Singapore.   There is still a lot of difference among these countries: places that were non-market communist economies only 30 years ago, the odd place (eg Mexico) that is more like an honorary member of the group of advanced countries, as well as the places with very high productivity (France, Germany, United States, Ireland, Norway).  And there are countries as small as Malta or Luxembourg, and as large as the United States.  This group leaves out countries that appear to be rich only because of oil.

Here is the simplest plot: of the levels of population and GDP per capita in 2016.

popn advanced 1

This time, the simple regression line is very slightly upward sloping.  Remove the US and it changes sign.  Remove all the countries with more than 50 million population and it is still downward sloping.

But what about growth rates?  For quite a few of these countries, GDP per capita is pretty shaky before about 1995 (communist-era and immediate post-communist transition).  That’s why I’ve done all these charts for just the last 20 years or so.  But that also happens to be a period when there has been a lot more population movement between advanced countries (especially in Europe).

popn advanced 2

Recall that even if there was no causal relationship running from population growth to growth in real GDP per capita, there was a possibility that we might have seen an upward-sloping relationship simply from any link between successful economies drawing in more people (as happened in Ireland most obviously –  net immigration rising well after the boom in per capita GDP and productivity).  But, in fact, across these 40 or so advanced countries, any relationship is downward sloping.  Across these countries in this period, faster population growth has been associated with slower real per capita GDP growth. (For the eagle-eyed among you, New Zealand is the red dot.)

And in this final chart, I’ve broken the period in two.  I’ve charted, for each country, population growth in the first 10 years of the period (1995 to 2005) against real GDP per capita in the second half of the period (2005 to 2016).  In other words, none of the population growth variable is directly caused by the growth in the real per capita GDP variable.

popn advanced 3

The downward-sloping relationships is weaker this time –  less of the variance in GDP growth is explained simply by prior population growth –  but again it is downward-sloping, and not the upward-sloping line many of the immigration-policy boosters in New Zealand would like us to believe.   I forgot to mark New Zealand on this chart –  we are one of the dots a bit below the line with 12 per cent population growth –  but there is nothing unusual about New Zealand’s place on either chart.

If one wants to get more sophisticated, one could look at growth in labour productivity or total factor productivity, rather than just real GDP per capita.  Especially for TFP, one becomes dependent on the model used in estimating TFP and the available sample of countries drops away,  As for labour productivity, in earlier posts I’ve illustrated the lack of a positive relationship between population growth and productivity growth (and recall that New Zealand has managed better real per capita GDP growth than productivity growth, by working longer hours), and that –  for example –  if anything business investment as a share of GDP has been negatively correlated with population growth across advanced countries.  That is the opposite of what might been expected if population growth –  and immigration –  was typically boosting the productivity and per capita income prospects of recipient countries.

It is past time we started backing our own people, not looking to replace or augment them with a mythical group from across the water.  Part of that involves the government getting serious about facing up to the disappointing economic outcomes of our long-running Think Big economic and social experiment with large scale immigration.  As part of that, in turn, a serious review of immigration policy by the Productivity Commission –  there have been two in Australia in the last 15 years –  would be a good place to start.


Immigration policy and emissions targets

I’ve written a few posts in recent months about the connections between our immigration policy – materially boosting our population growth rate – and New Zealand greenhouse gas emissions (eg here and here).  New Zealand is unusual because, as the Ministry for the Environment (MfE) has highlighted:

• we have a fairly high rate of trend population growth,
• a large chunk of our emissions are from animals, and
• much of our power has long been generated from renewable sources.

I’ve also written here about Official Information Act requests to MfE (responsible for climate change policy advice) and MBIE (responsible for immigration policy advice). It turned out that neither ministry had given any thought at all, or done any work on, possible connections between immigration policy and the economic challenges of emissions reductions target (the MfE response is discussed here).  Perhaps one wouldn’t really expect MBIE to have thought so much about emissions issues, but in MfE the omission looks less excusable, and probably deliberate.

A few months ago, the government asked the Productivity Commission to hold an inquiry into making the transition to a low-emissions economy. In August the Commission published an issues paper, trying to frame the inquiry. That document was notable for almost completely ignoring the possible population/immigration dimension. But they were inviting submissions, and so this morning I lodged mine.

Rather than attempt to excerpt, or summarise, the relatively short submission I’ve reproduced the whole thing below. It does have the feel of the sort of issue where there should be some common ground discoverable between New Zealand First (with concerns about immigration) and Labour and the Greens (proposing more ambitious emissions targets). But, equally, for the National Party it should also be something they take seriously. After all, as I note in the submission, in pursuing an emissions reduction target the goal should not be to don a hair-shirt and deliberately “feel the pain”, but to make the adjustment in a way that has as little cost to the future material living standards of New Zealanders as possible.

Submission to the Productivity Commission inquiry on a possible transition to a low emissions economy

Michael Reddell

29 September 2017 

1.      This submission is in response to the Commission’s issues paper on a possible transition to a low emissions economy, released on 9 August 2017.  

2.      My concern is that the issues paper does not touch on at all the role that immigration policy has played in driving up total emissions in New Zealand nor, relatedly, on the role that potential changes in immigration policy could play in offering a lower cost (to New Zealanders, the appropriate standard against which to measure these things) transition to the proposed low emissions economy. 

3.      As the Ministry for the Environment has noted in its most recent annual document on New Zealand’s Greenhouse Gas Inventory, a growing population represents a significant challenge for New Zealand in meeting the emissions targets the government has set (let alone those proposed in the recent election campaign by other political parties).  In fact, the Ministry included population as the first in its list of challenges. 

4.      New Zealand’s population growth has been well above that of the typical advanced country, even though for some decades now our birth rate has been below replacement level, and even though for some decades the net emigration outflow of New Zealanders (at around 0.5 per cent of the population per annum on average) has been very high by international standards.  The difference is accounted for by immigration policy.   Because of our distance from other countries we have near-complete control over who comes to New Zealand and stays.   And we have chosen to bring in numbers of non-citizens each year that, as a proportion of the existing population, are far in excess of what happens in typical advanced economies. 

5.      As is also widely recognised, the marginal abatement costs for reducing emissions are generally quite high in New Zealand.  First, unlike most advanced countries, animal emissions make up almost half our total emissions and, as yet and as I understand it, science does not offer methods to reduce substantially the emissions while keeping the animals (which, in turn, generate much of the export earnings of New Zealand).  In addition, as I understand it, other countries do not yet include agricultural emissions in their regimes to charge for or tax emissions.  And, secondly, much of our power generation already uses renewable (mostly hydro) sources.  

6.      An increasing population has resulted in additional emissions, all else equal, through at least two channels: 

a.      The direct effects of more people needing more transport, more heating, more energy in their workplaces etc, and

b.      The indirect effects, in which a rapidly growing population and a generally lagging export sector has accentuated pressures for increased intensification in agriculture, with associated pushback against attempts to internalise the effects of environmental externalities (whether water pollution or methane emissions).  With fewer people, it seems quite plausible that we’d have had fewer cows. 

7.      Because the marginal abatement costs of conventional approaches are generally accepted to be particularly high in New Zealand, it is even more important that in undertaking its inquiry, the Commission should be willing to examine the role of immigration policy.  As Official Information Act requests to MfE (responsible for climate change policy advice) MBIE (responsible for immigration policy advice) have shown, core government departments appear to have done nothing at all to look at the possible connections.  There may have been ministerial political constraints on the freedom of either ministry to do so.   Those sensitivities should not hold back the Commission –  a more independent agency – from seriously considering the connection. (In that light, I found it disconcerting that there was no material reference to the topic in your issues paper). 

8.       The argument for using immigration policy as a potential instrument in meeting emissions reduction objectives would not be strong if there were clear and material economic benefits to New Zealanders from the high target rate of non-citizen immigration (the centrepiece of which is the 45000 per annum residence approvals “target”).    But those possible gains –  most notably perhaps a lift in labour or multi-factor productivity – cannot simply be taken for granted in New Zealand.     Despite claims from various lobby groups that the economic gains (to natives) of immigration are clear in the economics literature, little empirical research specific to New Zealand has been undertaken, and there is good reason –  notably our remoteness –  to leave open the possibility that any gains from immigration may be much smaller here than they might be in, say, a country closer to the global centres of economic activity, whether in Europe, Asia, or North America.    Even many of those who are broadly supportive of New Zealand’s past approach to immigration policy will now acknowledge (a) that the New Zealand specific literature is quite limited, and (b) that any gains to New Zealanders may be quite small.  Your staff are, I know, well aware of my alternative approach which interprets modern New Zealand economic history as suggesting that high rates of non-citizen immigration have held back our productivity performance (i.e. come at a net economic cost to New Zealanders).  I would be happy to discuss those issues with you further. 

9.      The overlay of an official emissions reduction target –  a new factor –  adds a new dimension to how best to think about immigration policy.  Even if immigration policy, on its own, was slightly beneficial, in economic terms, to New Zealanders, those assessments need to be redone in the light of the constraints posed by the emissions reduction targets.  In an economy with low marginal abatement costs through conventional price/tax instruments, the effect of any such reconsideration might be small. But in New Zealand, where all informed observers recognise that the marginal abatement costs are large through conventional means, it might well be that a lower immigration target would represent one of the most cost-effective ways to reduce total New Zealand emissions.  And as our emissions reduction target is quite similar to those of a number of other countries that have much lower population growth rates, there would be no serious basis for others to suggest that pulling back our immigration targets, to something more conventional among advanced countries, was in some sense free-riding or engaging in a “beggar thy neighbour” approach to the emissions issue.  New Zealand simply isn’t a cost-effective location to reduce emissions, but having taken on the commitment to a reduction, it doesn’t make much sense to create a rod for our own back by continuing to use policy to drive up the population, thus forcing reliance on even more costly alternative abatement instruments.   

10.   All else equal, lowering expected annual population growth rates by, say, half a percentage point (by, for example, lowering the residence approvals target from 45000 to around 15000 per annum –  in per capita terms, still about as liberal as the current US approach) would make a material difference to the projected path of greenhouse gas emissions.  Over 20 years, all else equal, the population would be 10.5 per cent lower than otherwise.  Direct emissions would, accordingly be considerably lower than otherwise projected, and the inevitable pressures to do little or nothing about agricultural emissions would be eased.   The national benefit/cost ratios look likely to be considerable higher if a lower immigration target was added into the mix of instrument used to meet the commitments the government has made.  At very least, I would urge you to think hard about, and undertake modelling as appropriate, to evaluate that possibility.  Doing so might not be easy.  There probably won’t be off-the-shelf modelling exercises from other countries you can simply look to. But in a sense that is the point of this submission.  The issues facing New Zealand in meeting emissions reduction objectives are different from those facing many other countries and we need analysis that takes specific accounts of the issues, options, and constraints that New Zealand itself faces. 

11.   In conclusion, I would urge the Commission to take much more seriously (than was evident in the issues paper) the role that rapid immigration policy led population growth has played in explaining the growth in New Zealand emissions since 1990, and the possible role that modifications to our immigration policy could play in facilitating a reduction in emissions, consistent with current or possible alternative official targets.   No doubt technological advances will offer options for relatively painlessly reducing emissions to some extent.  But those options will be available to all countries.  As official agencies already recognise, New Zealand faces some specific challenges that are quite different to those other advanced countries will be dealing with.  We make it much harder for ourselves to meet the emissions targets our governments have committed to if we persist with such an unusually large non-citizen immigration programme.    The aim of a successful adjustment to a low-emissions economy is not to don a hair shirt and “feel the pain”.  The aim should be to make the adjustment with as small a net economic cost to New Zealanders – as small a drain on our future material living standards – as possible.  Lowering the immigration target looks like an instrument that needs to be seriously considered if that goal is to be successfully pursued.