Coda

And so we now have a single political party in a position to form a majority government. Between our single-chamber Parliament and the historically very tight party discipline on Labour MPs, the new government will be able to do whatever they like over the next three years. And where significant things are not done, it will be entirely down to them: their choice.

Of course, they didn’t promise much, so most don’t seem to expect much. But the issues, challenges, and problems don’t go away just a party or government chooses to ignore them. House prices for example – where the Prime Minister has consistently refused to suggest she might act in ways designed to markedly lower the price of urban land/houses.

Or, and the economic issue that mostly drove the creation of this blog, New Zealand’s dismal long-term economic performance. In short, productivity growth (and the lack of it), and our continued decline relative to other advanced economies.

The outlook wasn’t good before Covid – the last government was doing nothing, and Labour was promising nothing, that would have prevented those well-established and dismal trends continuing. But now there is Covid to confront too.

One view of the outlook was contained in the International Monetary Fund’s World Economic Outlook forecasts published last week. The IMF doesn’t have a particularly good track record as a forecaster, but its forecasts do have two particular values at present: first, they are compiled consistently for a wide range of countries, and second, they forecast/project five years ahead, which on most readings is currently far enough out that one could think of things by then being back to some sort of new normal. For what it is worth, the IMF also has no particular partisan interest in New Zealand, but has also, over the years, tended to run relatively upbeat stories about New Zealand when it does comment.

Unfortunately, the IMF does not publish productivity (eg real GDP per hour worked, or MFP) forecasts. But here is a chart showing their forecasts for growth in real GDP per capita for their “advanced country” grouping over the period from 2019 (pre Covid) to 2025).

IMF WEO 0ct 20

Third worst of all the advanced countries over this period, at least on the IMF’s telling. And do note that the countries a few to either side of us all have materially higher levels of labour productivity than New Zealand does, while the countries to the far left of the chart – best-performers – are mostly the countries (I’ve previously highlighted here) that started way behind and are now matching, and move to roar ahead of, New Zealand. On these projections, our relative decline – underway now for 70 years – keeps on keeping on.

Are there any silver linings? I couldn’t find any when I dug a bit deeper:

  • as I noted, since these numbers are for 2019 to 2025 they shouldn’t be affected by either measurement challenges, or real differences in economic structure, that contribute to quite different GDP outcomes for some quarters this year,
  • the difference also can’t be down to differences in how quickly unemployment drops back to normal (itself a thing amenable to policy, especially in a country with its own exchange rate): in most countries by 2025 the IMF thinks that unemployment rates will have got back to pretty close to 2019 levels (NZ’s is about 5 per cent, so not quite there, but it won’t explain anything like the differences in the real GDP chart).  For what they are worth, the IMF also publishes output gap estimates for G7 countries, and they are also back near zero by 2025. 
  • I didn’t look deeply into what border assumptions the IMF is making, but I did check their population growth projections, and they continue to forecast high rates of population growth over 2019 to 2025 (hardly lower than the rate for the previous six years, and third fastest in this group of countries), which again suggests they must think something like a new-normal re-establishes before too long.
  • the IMF seems to think that investment as a share of GDP will also be more or less back to pre-Covid rates by 2025 (unfortunately in New Zealand business investment in the last decade was very subdued, especially once one took account of the needs of a rapidly-rising population).

Sadly, the only realistic interpretation one can take is that the IMF thinks that over 2019 to 2025, on current government policies, New Zealand’s productivity growth performance –  labour productivity and MFP – will be simply shocking.  Most probably negative –  the only way to square falls in real GDP per capita, unemployment returning towards normal, and a reasonable level of investment – and almost certainly far worse than in almost all other advanced economies, and especially far worse than the performance in the countries that were aiming to close gaps with the OECD leaders.

It is a really dismal outlook.

Of course, it is only one set of forecasts.  The IMF may be completely wrong, even specifically about New Zealand’s relative performance.  But it isn’t clear what about policy or the economic environment should be expected to generate decent productivity growth over 2019 to 2025, especially after the fairly dismal performance in the pre-Covid years.

One would like to suppose it was the sort of issue the Minister of Finance would be intensely focused on.  One would like to think that The Treasury’s post-election briefing would have extensive analysis on the issue and possible remedies, and indeed how political party promises may even worsen the outlook.  But such is the malaise around New Zealand economic policy and performance that it seems unlikely.

Changing tack, for some months I’ve been writing much less here than I’d really intended or hoped to. I’ve made occasional references to my indifferent health. I’ve had bugs occasionally in the past that have hung around for a couple of months, never amenable to medical diagnosis, and then eventually gone away and I kept expecting this would be the same. But despite some moderately good weeks at times – this week wasn’t one of them – it hasn’t, and my doctor now reckons that I have some – perhaps fairly moderate – version of chronic fatigue syndrome. And while it still seems most likely that it will eventually go away again, there is no immediate timeframe for that. It seems a rather pathetic thing to have, but I can’t really ignore, say, the three daytime naps I needed on Tuesday.

As a result, I’ve decided for the time being to stop attempting to maintain any sort of regular blog output. As I’ve said to various people who’ve asked, I’m probably only able to operate at 50 or 60 per cent of normal, and while I’m fortunate in not having to try to hold down a fulltime job, I have other fixed commitments (household and other) that demand almost all that energy. Since there are good days, and even a few relatively good weeks, and there many issues (even if I don’t have the concentration to dig into all of them as I’d like), I expect I will probably post here from time to time. But I won’t be trying to meet any schedule. For anyone who wants to not miss out on those posts, feel free to subscribe to get posts by email, and I also use Twitter (@MHReddell) to, among other things, provide links to any posts here.

And now it is time for a lie down…..

And so another term passes and nothing changes for the better

A couple of years ago I had my arm twisted and agreed to write a chapter for a new book on New Zealand public policy being edited by a couple of Victoria University academics. My chapter was to be on the economy, and although the general tone of the book was to be rather upbeat, about the public policy and governance frontiers New Zealand had marked out, there wasn’t very much to be upbeat about in the longer-term New Zealand economic story. And so I wasn’t.

The published book finally turned up in the mail last week and I’ve started reading it (there might be a post later about some of the other chapters). In my chapter (a slightly longer version of which is here) I’d highlighted the continuing relative decline in New Zealand’s economic performance. I’d forgotten that I’d ended the chapter this way (emphasis added)

Looking ahead, if New Zealanders are once again to enjoy incomes and material living standards matching the best in the OECD, policy and academic analysts will have to focus afresh on the implications, and limitations, of New Zealand’s extreme remoteness and how best policy should be shaped in light the unchangeable nature of that constraint (at least on current technologies). Past experience – 1890s, 1930s, and 1980s – shows that policies can change quickly and markedly in New Zealand. But with no reason to expect any sort of dramatic crisis – macro-economic conditions are stable, unlike the situation in the early 1980s – it is difficult to see what might now break policy out of the 21st century torpor or, indeed, whether the economics institutions would have the capacity to respond effectively if there was to be renewed political appetite for change.

That must have been written 18 months ago and finalised later last year. We were a couple of years into yet another government that, while perhaps perfectly competent at overseeing some macroeconomic stability, was quite uninterested in – and had no serious ideas about – reversing the continuing decades of relative economic decline. And that was even though the better of them surely knew that productivity was the best, and only reliable, long-run path to widely-shared prosperity. Another government and, of course, another Opposition. To which one could add, a Treasury – self-described premier economic advisers to the government – that had little to offer and seemingly little interest in the issue, and a Productivity Commission that now seemed less-equipped to offer much of value either.

Since then, of course, we have had a rather dramatic crisis – not economic in origin, but with major and ongoing economic ramifications. Best forecasts – in this case, Treasury’s PREFU numbers such as they are, and no one really knows – suggest it will be years before even the cyclical losses are behind us, and that the economy (ours and others) may just settle on a lower path of real income and productivity. We’ll be poorer than we previously thought, and even if others are too, we would still be lagging a very long way behind the advanced world’s leaders. That means real lost opportunities – whether consumer fripperies, or the health and education preferences that get so much attention.

Faced with a backdrop like that perhaps one might have hoped for an election campaign in which a major theme involved confronting the decades of economic underperformance. Note that I’m not suggesting that it should be the only issue of importance – of course not, there is the government-made housing disaster, and the handling of Covid itself (where to from here) as just two other examples.

But what is striking, sobering, and sad is that – even amid a serious economic downturn, with no end in sight – the decades of economic policy failure seems to command no attention at all. I think it was Matthew Hooton who in a column a few weeks ago suggested that focus groups and polling suggested that the public wanted to hear that parties had “a plan”, but there is little sign any of the parties is offering us one. They use the word often enough, but there seems to be little or no substance behind any of it – even the immediate Covid stuff, let alone the economic failure.

One listens in vain to the debates among political party leaders, and there is no hint of any serious interest in addressing the structural issues at all, no suggestion (of course) that they’d done the hard work and settled on a compelling narrative of what had gone wrong, and what they’d offer that might make a real difference.

In the Herald’s election supplement this morning there was a double-page “Policies at a glance” feature, with a line for economic policy.

Labour seemed to have no clue, and no interest. There were policies for the short-term. They might create jobs in the short-term or even limit immediate jobs losses. I don’t have any particular argument with that – although monetary policy is better and cheaper. But then there were the longer-term policies which – whatever their merits on other grounds might be – are all likely to make us a bit poorer not richer (higher top tax rate, higher minimum wage, higher sick leave). But that is par for the course: even at the last election where Ardern occasionally mentioned productivity, there was never any energy or compelling ideas behind it.

National also has its shorter-term policies (the temporary income tax cut, grants, and depreciation provisions), but the longer-term ones seem to come down to not much more than new roads. Of their claim that they would save $1 billion per annum in Auckland congestion costs I wrote

I guess $1 billion per annum is supposed to sound like a big number.  In fact, it is about 1 per cent of Auckland’s GDP.   Fixing the problems is probably worth doing, but 1 per cent of GDP is tiny in the context of either Auckland’s gaping economic underperformance, let alone that of New Zealand as a whole (recall that the productivity leaders are more than 60 per cent ahead of us).

Perhaps welcome. Certainly not transformative.

And yes, we heard a bit about the technology sector, but the numbers were so modest that no one supposes it was going to be transformative either. But Opposition parties have to have a little bait to throw towards the fish.

Of the other parties, and with productivity in mind, I guess ACT seemed to lean in the right direction in places, while the Greens mostly offer measures that would make us poorer and less productive (then again, no one votes Green for productivity etc concerns). To my surprise, NZ First seemed to a have a few sensible lines – offset by wanting to “ramp up” the PGF – but who cares any more?

But, at best they are all just playing, suggesting doing stuff at the margin and offering no real leadership.

It isn’t just the politicians. Somewhat surprisingly, twice in the last few days I’ve seen media invite several economists to offer their thoughts on what should be done about economic policy. Saturday’s Herald’s contribution was under the headline “What’s the next big idea” in which “Liam Dann asks independent experts what tough policy changes are needed for a fairer, more productive economy”. The six economists they consulted seemed to cover the spectrum from Ganesh Nana (BERL) on the left to Prof Robert MacCulloch (who co-authors papers with Roger Douglas).

Their ideas?

Ganesh Nana: a) tax reform (“taxing income and goods and services, but not property/wealth – is not working and is not fair”), and b) a rent freeze and the government as last resort buyer of houses.

Robert MacCulloch: Saving. (“NZ should introduce mandatory savings accounts for all workers which cover health, retirement, housing and risk (like unemployment)”

Cameron Bagrie: “an unflinching commitment to microeconomic reform…..the little things”. More funding for the Commerce Commission and RMA and Overseas Investment Act reform.

Oliver Hartwich largely agrees with Bagrie, adding in a desire to see “a return to a more rigorous approach to cost-benefit analysis”, and a renewed focus on education (the NZ Initiative has a new report on education failings out shortly).

Christina Leung (NZIER) emphasises equality of opportunity with a particular emphasis on education.

Brad Olsen (Infometrics) wants tax reform “to ensure that investment is directed into productive areas”, and also wants a National Skills Plan and a Digital Business Investment Fund “to accelerate the movement of New Zealand businesses into the digital age.

I happen to agree with some of those points – generally the Bagrie/Hartwich line – but even if some of those proposals would be steps in the right direction almost inevitably they would mostly be pretty small beer (others would mostly likely represent small steps backwards). Some of these economists – notably MacCulloch – really do seem exercised, in other writing, about the shockingly bad economic performance. But none seems to have a model in mind for how the ideas they are proposing would make the scale of difference that the productivity failure – material living standards failure – calls for. One can’t hold people too much to account over a few quotes in a newspaper article, but I’m not aware that in other writings most of these economists have even tried to tell such a story.

That was one lot of economists. Then the latest issue of the new Listener turned up this morning offering the views of nine “leading economists on the way forward”. Leung and Bagrie were in both groups, and the Listener added the bank chief economists, Shamubeel Eaqub and David Skilling.

Mostly the bank economists are focused on short-term data flow and perhaps inevitably their focus was on relatively short-term stuff, about traversing the difficulties the virus poses for the next few years, so I’m not going to focus on them, but Westpac chief economic Dominick Stephens had a comment that caught my eye.

Covid-19 will eventually pass and we will still be a country with solid economic institutions, a highly-educated workforce and First World infrastructure. It won’t be east, but our economy is flexible enough to adapt to the challenges and opportunities. 

Sadly, to the extent that those descriptions are accurate they have been so for 25+ years, and yet we’ve still been drifting slowly further behind, even as other poorer OECD countries have begun to converge quite rapidly.

Of the remaining two economists, Eaqub rightly observes that New Zealanders seem to care about “housing affordability, inequality, climate change, health, education and justice”, noting that many of them are areas in which New Zealand is getting worse, but does not hint at what big things he thinks might be done differently to lift our economic performance. David Skilling has thought a lot about economic performance issues – and I’ve written about some of them including here – and on this occasion emphasises his view that the government should focus on spending on R&D, training and enterprise policy (I think this last relates to his idea of promoting – and picking – a few big companies). There is material worth debating in what Skilling writes, but it is still difficult to see a credible model, or narrative, for catching up again.

Now perhaps – it is just barely possible – that The Treasury has been beavering away from months and is about to deliver to the incoming government some really persuasive analysis and advice on the importance of the productivity failure, and what should be done about it. But it isn’t at all likely. Not only has their capability been degraded, but most of their energy will have been going into short-term Covid stuff. And, realistically, they know that neither party – but notably including their current minister, almost certain to be reappointed – has any appetite whatsoever. On economics they are conservative to the core – in a few good ways, but mostly in dreadful ways, simply preferring not to rock the boat, whatever the long-term cost.

I find it all pretty deeply depressing – even if, and yes I can be a detached observer too – not overly surprising, given the torpor into which policymaking and thinking in and around government has fallen (not just in New Zealand of course, but our long-term economic failure is much more serious, and idiosyncratic, than the situation in most other advanced countries). Of course, the cynics approach would be to observe that the public seem to care much, and that a definition of leadership is finding out what the followers want and getting in front of them. But real leadership – courageous, even costly, leadership is something quite different. It is about the perceptions to recognise real problems, and the drive and energy to find and promote solutions, championing answers, making the case and seeking to take the public with you. That sort of thing seems deeply out of fashion in today’s New Zealand- where holding office seems more important than what you want to do with that power. And such is our economic plight – once affordable housing, once the highest material living standards anywhere, but no longer – that is inexcusable and really rather shameful.

As for me, when I write posts like this I always get asked what my answers are. I don’t like to champion them too often, as writing frequently here I probably can come across as a bit of a stuck record. My “big idea” is, of course, a permanent and substantial cut in the rate of non-citizen immigration, so that public policy is not worsening the disadvantages of being in the most remote corner of the earth. But I’ve articulated other strands of story of response in, for example, this speech, this Covid-contextual paper from early in the year, and in this post from a couple of years ago with a fairly long list of things I’d do (some to boost productivity or fix housing directly, some to free up fiscal resources for better-focused and aligned policies, and some to help support some cohesion and legitimacy for our political process through what would, inevitably, be a difficult and contentious transition.

It is easy for things to drift. One year is (mostly) much like another, but before you know it am electoral term, decade, a generation, or even a lifetime has passed, and nothing has been done to fix, and reverse, the decades of relative decline. Our so-called leaders – whether political or official – really are without excuse now. And yet….nothing.

Productivity, and politicians who no longer care

I was reminded again the other day both how (absolutely) poor even advanced countries were not that long ago, but also how (relatively) rich New Zealand was. I was reading a fascinating book on Ireland’s (rather shameful) history in World War Two and stumbled across a snippet suggesting that “there were nearly 170000 licensed radio sets in Ireland on outbreak of war”, in a country of almost three million people. On digging around a bit, I found that in New Zealand, then with 1.6 million people, we’d had 317509 licensed radio sets in 1939 (then, apparently, third highest in the world per capita). The licence fees in the two countries appear to have been very similar.

The standard compilation of historical estimates of per capita GDP – that of Angus Maddison – is consistent with my radio anecdote. In 1938/39 GDP per capita in New Zealand was more than twice that in Ireland, with New Zealand in the very top grouping (New Zealand, UK, USA, and Switzerland).

How times change. As even Irish official statisticians acknowledge the idiosyncracies of Ireland’s corporate tax system substantially distort Irish national accounts statistics, but doing whatever adjustments are possible (eg the Irish modified GNI measure) or looking at consumption statistics it is clear that these days Ireland is producing considerably better material living standards than New Zealand is. In terms of standard productivity measures – the OECD’s real GDP per hour worked data – they probably went past us in the mid-1980s.

The OECD productivity data go back as far as 1970. By then, we’d already had a couple of decades of relative decline – even though for most countries, including New Zealand, the 1950s and 1960s had seen really impressive absolute growth rates. Of the 23 countries for which the OECD has 1970 data – not all of them (including New Zealand) then part of the OECD – real GDP per hour worked here was just over 95 per cent of that in the median OECD country. We were a touch behind France and a touch of the UK. These days – pre-Covid – real GDP per hour worked is about two-thirds of the median for that same group of 23 countries.

By far our worst decade since these data start was the 1970s. In that decade we had, by some considerable margin, the slowest growth in labour productivity of any of the countries the OECD has data far. Unfortunately, since then there has never been any sustained period when we have regained ground relative to the OECD pack, and if anything the gaps have widened further.

Relative optimists might look at the New Zealand experience this century and observe that there hasn’t been any material slippage relative to the leading bunch of OECD countries.

But that shouldn’t really be any consolation when:

  • the absolute rate of productivity growth has been so poor (our average annual rate of productivity growth for the nine years to 2019 has been a bit worse than our dismal performance in the 1970s –  see above),
  • we’ve managed no catch-up relative to the leading bunch, even though their productivity rates  –  problems at the frontier –  have also been disappointing to say the least, and
  • our performance relative to other countries that aspired to catch-up has also been dreadful.

I first got systematically interested in New Zealand’s woeful record in a stint at Treasury from 2008 to 2010, in the course of which I was heavily involved with the then-government’s 2025 Taskforce – the one supposedly about catching up (in terms of material living standards) with Australia by 2025. I wrote most of the Taskforce’s first report in late 2009 and in doing so I noticed, and reported that, of the former Communist countries of eastern Europe, Slovenia had then just passed us in terms of real per capita GDP, that Slovakia had real GDP per hour worked approaching that of New Zealand.

There have been some data revisions since then, but if we look at current estimates of real GDP per hour worked, in PPP terms, for 2007, we find that Slovenia was indeed about 5 per cent ahead of New Zealand, although the gap to Slovakia was a bit larger (10 per cent) than those earlier estimates suggested. There are eight former Communist countries in the OECD. In 2007, real GDP per hour worked in New Zealand was already only 16 per cent ahead of the median of those countries, that margin have narrowed markedly in the previous decade. Perhaps that earlier catch-up wasn’t too surprising or alarming – if you stop hobbling your economy and get rid of the state-dominated Communist system, you are almost certain to bounceback to some extent.

But where are things now?

Real GDP per hour worked, 2019, $US PPP
Slovenia 45.2
Slovakia43.8
Lithuania42.5
New Zealand42.2
Czech Republic42.0
Poland41.0
Estonia40.8
Hungary37.7
Latvia37.0

Last year we were really just middle of the pack among these countries, and in another couple of years – on policies, practices, whatever in New Zealand and other countries – you’d have to assume we’ll be struggling to stay ahead of Hungary and Latvia for long. In terms of growth rates over the last decade, Hungary was the laggard of the former Communist countries – still grew faster than New Zealand, but not by that much – but it should be slim consolation if we just manage to stay ahead of Hungary.

Not once previously in the history of modern New Zealand has any of these countries previously had productivity or income per head performances to match those of New Zealand. They still lag quite a way behind the north-west European leaders – although the gap is closing. The standout isn’t them catching up, but us failing.

It isn’t just those former eastern bloc countries. At the turn of the century, New Zealand could console itself that if Korea was growing rapidly, real GDP per hour worked was still not much more than half that of New Zealand. On recent rates of growth, they will move ahead of us in another year or two. Or Turkey – with a history of unstable undemocracy, macroeconomic instability and so on. The old Ottoman Empire was the 19th century’s “sick man of Europe”. In 2017, for the first time in modern history, real GDP per hour worked in Turkey moved ahead of that in New Zealand.

But it isn’t all bad news I guess. If you really want to find advanced countries that have done less well than New Zealand – poorer/less productive and with a slower productivity growth rate – I can offer you Greece and Portugal. But falling on those sorts of comparisons is really head-in-the-sand stuff.

But….in the midst of an election campaign, occurring in probably toughest economic times for an election campaign since 1990, is there any sign that (a) any political parties, or leading figures in parties, care about this dire long-term economic performance, or (b) have either any serious ideas, or a commitment to getting and adopting serious ideas, about making a difference? If there are any such signs I must have missed them.

Presumably, if pushed and at some level, the people grappling for office must know that productivity really matters – here was my story why and how. It is about underpinning higher wages (without pricing people out of the market), about underpinning more leisure opportunities, improving access to better healthcare, underpinning improvements in life expectancy, and underpinning the consumption of the bits and pieces of consumer society that most of us seem to value. Perhaps if you are an extreme Green you might have an excuse not to care about productivity – or, at the other end of spectrum, a zealot for the New Conservatives – but for the rest it is hard to see, at least if they are serious about anything more than simply occupying office.

Perhaps one can find slight and partial excuses for our politicians. After all, it is not as if the government’s self-proclaimed premier economic advisers, The Treasury, have been firing on all cylinders, generating a steady stream of searching analysis and research with suggested solutions to our decades of economic failure. Then again, as things are set up why would they? Successive National and Labour (and even NZ First) Ministers of Finance have had no real interest: bureaucrats respond to incentives to, and the State Services Commissioners have played their part in appointing as Secretary to the Treasury people who weren’t likely to rock the boat.

But, at best, it is a partial explanation, not an excuse. Real political leaders set the agenda, with ideas of their own, drawing on the expertise of others, and demanding – or promising – much better from the public service. There is no sign of any of that at the top of either of our main parties (and, mostly, the others don’t really matter much, but they don’t seem any different either). I’m sure they are all nice people, but what are they doing – or promising – that might make a real difference, in reversing the decline in our relative material living standards, not just for the next year or two (borrowed money, redistributing a static or shrinking pie) but for the next generation or two (your kids and mine, our grand children etc). Short answer – on the evidence of years and years, and on the evidence of what parties are talking about and promising in this campaign – NOTHING. It is shameful. (And it is also not much excuse to suggest there is no huge groundswell of public anger, demanding something better: we don’t expect voters to engage on real GDP per hour worked, but don’t we hear again and again complaints about gaps in what productivity and growth makes more readily possible – health, housing standards and so on?)

Instead, any (expressed or public) concern seems to be limited to same predictably small group. There is me, here – and in a longer-form treatment here. There is Paul Conway, formerly of the Productivity Commission – where he led their work in this area, before frustration got the better of him – and now at BNZ, and there is Kerry McDonald, former economist, former head of Comalco, former leading company director. McDonald’s latest speech pulls no punches in its title, Our Economic Disaster and the Tragedy of NZ’s Political Leadership. And not much beyond that. The point isn’t that the three of us would agree of everything – we wouldn’t – but that our politicians and senior officials, our political parties, aren’t even engaged on the issue at all, let alone on serious options for making a difference.

One area where it looks as though there is some overlap in the policy prescriptions of Conway, McDonald, and Reddell is around immigration, and a sense – more strongly put at least in my case – that decades of high rates of non-citizen immigration, often not of people who are particularly highly-skilled, has not served us at all well in lifting productivity, even though the official case for high immigration to New Zealand asserted that it was a “critical economic enabler”.

I illustrated earlier in this post how the central and eastern European countries have been catching up and overtaking New Zealand. In this chart I’ve shown the populations of New Zealand and the median of these eight OECD countries this century, drawn from the World Bank/UN data.

e europe sept 20

Or this table of population growth rates this century

Population growth, per cent, 2000-19
Lithuania-20.4
Latvia-19.2
Estonia-5.0
Hungary-4.3
Poland-0.8
Slovak Republic1.2
Czech Republic4.0
Slovenia5.0
New Zealand27.5

All these countries have birth rates below replacement (generally lower than New Zealand’s) and all have had outward migration of their own citizens – us primarily to Australia, the Europeans mostly to western Europe. The big difference is that New Zealand – alone – has pursued rapid population growth as a matter of official policy, aggressively running one of the largest (per capita) official immigration programmes on the planet.

(As I’ve argued in numerous previous posts, rapid population growth isn’t necessarily inconsistent with rapid productivity growth, but rarely if ever has rapid population growth been a recipe for sustained rapid productivity growth – arguably the 19th centuries colonies of settlement, with abundant land may have been exceptions. Much depends on the opportunities, and locations matter. And yes, although Korea now has very modest population growth, Turkey’s population growth has been rapid.)

But, even amid the Covid disruptions – which could have been a great opportunity to stop and rethink – no political party seems interested in revisiting whether New Zealand’s large scale immigration policy has worked in the economic interests of New Zealanders as a whole, and all the media chatter is about getting going again with the supply of relatively lowly-skilled workers from abroad into the New Zealand labour market. There is no sign it has worked for New Zealanders for the past 25 years, and no obvious reason to suppose that will change for the better now.

But our political “leaders” show no sign of caring, at least about anything beyond the latest stories of firms in low-wage industries wanting a resumed supply of people willing to work at….low wages.

Perhaps there is an alternative credible model for thinking about how to reverse sustainably our decades of underperformance. But if so, you wouldn’t know it from listening to our politicians, or their officials.

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

.

Regional economies

Some months ago, when all was coronavirus, Statistics New Zealand released their regional GDP data for the year to March 2019.  I didn’t even open the spreadsheet at the time, but went looking for some data the other day and remembered I hadn’t written about the regional GDP numbers this year.

SNZ has been publishing the regional GDP data, by regional council area, for some time now.  The first data are for the year to March 2000, meaning that we now have 20 annual observations.

Here is how per capita (nominal) GDP for each of the regions relative to national (nominal) GDP per capita has changed since 2000.

regional GDP 20 yrs

I suppose it is convergence of sorts.  Even in the very poorest region –  Northland – per capita GDP has increased very slightly relative to the national average, while the three highest GDP regions (Auckland, Taranaki, and Wellington) have all dropped back relative to the national average.    The gap between the South Island and the North Island has more than halved and –  if one is to believe the numbers –  GDP per capita in Marlborough now isn’t much behind that in Auckland.

I’ve discussed previously the relative underperformance of Auckland.   There aren’t many OECD economies where the biggest city has per capita GDP only about 12 per cent above the national average (let alone where that gap has narrowed this century).  But it is only fair to note that Auckland had been staging something of a recovery. Here is the time series chart of Auckland’s per capita GDP relative to the national average.

auckland GDP

Population surges and associated building tend to be good for Auckland –  but there is no sign of productivity leadership, when per capita incomes in Auckland are still a bit lower (relatively) than they were 20 years ago.  I think it was the economist Andrew Coleman who suggested, only slightly tongue in cheek, that the business of Auckland was building Auckland.  Here is construction as a share of GDP for Auckland (these data lag another year behind).

auckland construction

Having said that, I was a little surprised to stumble on this chart.

akld popn

Of course, if the Auckland economic performance this century has been underwhelming –  especially relative to the rhetoric and political capital invested in talk of our “one global city” (the one just a bit smaller than Columbus, Ohio) it is as nothing compared to the relative decline of Wellington, despite all the puffery from the Wellington City Council, its “economic development” agencies, and the like.  Here is GDP per capita for the Wellington Regional Council area (largely greater Wellington).

Wellington GDP

Recessions might be good for Wellington’s relative position –  not many public servants get laid off in downturns (including the current one) – but otherwise it is a pretty stark and consistent decline.   Wellington’s share of the national population has also been falling steadily – albeit perhaps more slowly than the decline in per capita GDP might suggest was warranted.

At least if you live in Wellington, one often hears talk of the Wellington IT sector and, of course, the heavily-subsidised Wellington film industry.  The regional GDP breakdowns don’t show either directly, but the red line in this chart remains somewhat sobering.

wgtn sectoral

Last year SNZ decided to discontinue its annual screen industry statistics –  claiming (no doubt fairly) budgetary pressures, although it must have been convenient for the government (this one, like its predecessors) keen to talk about the alleged economic benefits of their massive subsidies to the film sector, even as what evidence there is rarely offers much support for their claims.     The last such data came out a year ago for the 2017/18 year.  Here is a snippet from the gross revenue table, by region.

gross film revenue

And here is the same snippet for 2012 and 2013.

gross film rev 2012

So gross revenues of Wellington production and post-production facilities/services –  mostly feature films (unlike Auckland) in the most recent year were not even three-quarters of what they’d been in 2012.

(There is a longer series of earnings for jobs in the total production and post-production sector – including the domestic-oriented bits – of the screen industry: relative to GDP it was no higher at the end of the period than when the series started in 2005. And estimated number of jobs in the sector has gone from 20400 to 20300 over the same longer period.   It looks like a classic infant industry  –  remaining infant and kept going by massive subsidies that keep the rest of us poorer.)

All this is, of course, against a backdrop in which national-level productivity growth remained very weak, and New Zealand continued to drift behind more and more countries that, not too long ago, we never even thought of as relevant comparators.

queen 4

 

On “ancient history” (the last business cycle)

One very slight side-benefit to the savage collapse in economic activity that began a little over a month ago is that we now know, with a great degree of certainty, when the last business cycle ended.  In the quarterly series that we mostly rely on in New Zealand the peak will have been the December quarter of 2019.

The nice thing about knowing when the cycle ended is that we can then look at the full cycle and see how things went over that full period, encompassing the previous recession and recovery and more recent years of relative normality.  And we can compare the most recent business cycles with the previous couple.   In time, we will be able to do some useful comparisons with other countries and see how our business cycle compared with those of other advanced countries, but it will take a while for all the relevant data to turn up in OECD databases, so this post is almost all about New Zealand.

If we use as the basis for dating business cycles the period from peak to peak in real GDP –  which seems reasonable for New Zealand, absent a business cycle dating committee –  the last cycle ran from 2007q4, the previous peak just prior to the domestic recession and global crisis, to 2019q4.   That is a fairly long growth phase for New Zealand.  It was interrupted by a “double-dip recession” in the second half of 2010, but people tend to discount such dips for these purposes because GDP had not yet got back to pre-recession levels before that modest setback took place.

What of earlier periods?  The official quarterly New Zealand GDP series only go back to 1987, and official quarterly population series only starts at the beginning of 1991.  So here I am going to focus on comparisons only with the cycle that ran from 1990q4 to 1997q3, and the cycle from 1997q3 to 2007 q4 –  so all peak-to-peak comparisons.

(It is worth noting here that there will be revisions to the data for several years to come, probably most substantially after the annual national accounts for the year to March 2020 are produced at the end of the year –  coronavirus permitting.  But there is no obvious reason at this point to suppose the GDP numbers are biased one way or the other.)

Here is average annual growth in real per capita income for the three full business cycles.

Cycle GDP pc

Allowing for terms of trade effects improves the picture for both the 97 to 07 cycle and the most recent one, but doesn’t do much to close the gap between the two: the latest cycle just wasn’t that good.

What about productivity?  You’ll recall that my preferred labour productivity measure is real GDP per hour worked, in this case using both measures of GDP (production and expenditure) and both measures of hours (HLFS and QES).  Here is the same chart for that series.

cycle GDP phw

As it happens the average rate of productivity growth for the last five years was even lower than for the full cycle.   And this in an economy starting (a) so far behind the OECD leaders, and (b) therefore less affected by any slowdown in productivity growth at thre frontiers.

What about foreign trade?  Our ministers and officials like to talk up our commitment to open trade and all the special trade deals they like negotiating.

But here are exports and imports as a per cent of GDP.

cycle foreign trade

Highly successful economies tend to be ones that, for their size, export and import a lot.  We don’t.  (It isn’t a great starting point for a time when quite a bit of trade is going to be disrupted by the coronavirus, perhaps for several years to come.)

The poor overseas trade performance may have something to do with whatever mix of factors delivered us such a high real exchange rate.

cycle real TWI

I couldn’t help myself and did take a quick look at how other OECD countries had done on the headline growth numbers, in per capita terms.  Here are the top ten OECD countries

Avg ann % growth in real GDP per capita: 2007q7-2019q4
Poland                                           3.4
Lithuania                                      2.8
Korea                                             2.4
Hungary                                        2.1
Slovak Republic                          1.9
Latvia                                            1.7
Estonia                                          1.6
Israel                                             1.5
Chile                                              1.4
Czech Republic                            1.3

Every one of those countries started the business cycle well behind the productivity leaders, and gained ground relative to those countries over the 12 years.

On this particular metric –  real GDP per capita –  we didn’t do too badly, in that we more or less matched the performance of one of the leaders (the US), which had been at the epicentre of the crisis at the time of the last recession.   There isn’t cross-country comparative data for productivity growth for the full period yet,  but –  using annual data –  for the eleven years to 2018, our productivity growth lagged behind most of the OECD leaders, including the United States.  For us, the gaps to the leaders –  opening out for 60 years or more now –  have just kept widening further.

Sadly, whether in the latest speech from the Minister of Finance or what little we’ve seen from the Opposition, there is nothing to suggest any major party contesting this year’s election is going to offer an alternative that might make a real difference for the better.  Amid the coronavirus implosion I’m guessing productivity failures won’t even get much attention this election.  But they should, and any serious recovery plan should go hand in hand with a strategy that has some credible chance of finally beginning to reverse decades of failure.  Turning inwards and looking more heavily to the state is most unlikely to be such an answer.

National’s economic plan

I’d seen a few underwhelmed comments on the speech by Simon Bridges earlier in the week, “National’s economic plan for 2020”.   But just possibly some of those critics had missed some real gems, that might signal an Opposition party really serious about addressing New Zealand’s longrunning economic failures. For anyone wanting the short version, there was nothing of that sort.

I was quite critical of Bridges’s speech to the National Party conference last July

But, for all the almost ritualised mentions in Simon Bridges’s speech of the importance of a strong economy (even the Prime Minister mouths those sorts of line from time to time), there was nothing –  not a word –  to suggest that he recognises that the biggest obstacle to higher material living standards (whether in the form of cancer care or other public or private goods and services) is the woeful productivity record that successive governments –  led only by National and Labour –  have presided over.    There is plenty of talk about cyclical issues, but nothing about the structural failures, and nothing about what National might do that would conceivably make a real difference in reversing that performance.

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development) –  and if you think politicians never make such acknowledgements then (and in fairness to Bridges) I should point out that in his brief speech at the start of the conference he did acknowledge that National hadn’t done that well on housing (“but we weren’t Phil Twyford”).

But I was a bit more positive about the economic policy discussion document released a month or so later.

Quite a few of things National is proposing look sensible. The general direction looks sensible.   The rhetoric is better than it was –  although, by itself, such rhetoric is cheap, and is the sort of thing most Oppositions for 25 years have eventually come round to saying.  But the scale of the policy response they are talking about is simply incommensurate to the scale of the problem (much of the policy mix they are suggesting is carrying on a broad approach they adopted in government, and productivity growth was very disappointing then).  For New Zealand average labour productivity to match that in top-tier OECD countries would require a 60 per cent lift from where we are.    That is simply huge.  Huge problems are rarely successfully answered with small changes (even a succession of them).

And so my challenge to National is along the lines of that the rhetoric is great, and I hope it reflects a shared sense that New Zealand’s long-term economic performance really is deeply disappointing, and has not sustainably improved –  relative to other advanced countries –  for any prolonged period for many decades now.  As they say, that has real implications for us, our children and our grandchildren, for the material living standards –  and public and private services –  we can achieve for the population as a whole.

But if you are serious, and you really mean what you say – all those good quotes I posted earlier –  you need to keep thinking harder, digging deeply, consulting broadly and testing and evaluating the proposals and analysis put to you.   Great ambitions need to be matched by excellent analysis, courageous policy, and skilful management of the political challenges.   Perhaps for many in the National caucus, winning the next election is all that matter, but I’d urge the party, and its members, not to focus on the small ambitions, but on the really big challenge that, successfully confronted, would so much transform New Zealand for the better, for almost all New Zealanders.

That was six months ago,  The election is now only seven months away, and if the speech earlier this week wasn’t intended to set out too many details (specific tax rate changes etc), if there was any sign at all that they were serious about more than just gettingback into office, it should be showing through by now, reflecting some sort of integrated story –  and telling that story –  about what has gone wrong, what needs to be done quite differently, and how National under the leadership of Mr Bridges proposed to set about doing it.   But no.

So what does he have to say?

It is pretty much all cyclical stuff.

The first page is pretty much a boilerplate recitation of the woes and challenges of the wider world, and there isn’t anything very much to disagree with.    Then we get this

Our commodity prices are high and our terms of trade are near the best they have ever been. From our primary sector through to our technology and innovative sectors, New Zealand should be booming and the envy of the world.

Perhaps there is a small amount to such a story on a cyclical basis, but no one in their right mind would envy our structural performance, among advanced economies, at any time this century (arguably, for most of the previous half-century either).

I’m not going to disagree with much of the shorter-term stuff

Because Jacinda Ardern’s Government has failed to deliver on its promises, has piled on the tax, cost and red tape, made things more uncertain domestically at a time of global uncertainty, and as a result New Zealand has become a country of lost opportunities.

They [people] deserve a government that does what it says it will, that delivers with certainty and removes barriers and burdens like tax, cost and red tape.

But then it starts getting a bit odd.

We have slipped to the seventh lowest GDP per capita growth in the OECD. We are behind countries like Chile, Hungary, Poland, Latvia, Estonia, Lithuania, Spain and even Greece.

Which is a rather odd list to be anguished about, seeing as all those eight countries have lower per capita GDP than we do (Spain is very close).  In conventional analysis of such things, one might reasonably expect (and hope) that poorer countries will grow faster than rich countries so that, over time, economic performance converges.    Oh, and Greece was coming off the back of probably the most savage economic downturn in the advanced world in almost a century, so it would be a surprise –  nay, a worry –  if they did not eventually begin to limp back towards full employment.

So, really strange list of countries, but it is certainly a fair point that seventh lowest per capita GDP growth in the OECD is pretty bad.    Unfortunately it has become par for the course.  For the whole period since 1970, we’ve had the third lowest growth in real per capita GDP in the OECD (small sample of countries for which there is data for the whole period).    There is complete data for the whole OECD membership since 1995, and over that period –  after all the reforms we did, but also period presided over by both National and Labour governments – we were 11th worst (out of 36 OECD countries).

And on productivity growth –  real GDP per hour worked – the only secure underpinning for long-term improvements in living standards, we’ve been 7th worst in the entire OECD over that whole period since 1995.

We’ve been doing poorly, mostly drifting backwards, relative to other advanced countries for a long time.     And if one year’s growth –  thrown around by all sorts of things, including measurement challenges (who knows how our latest annual growth rate will finally be measured, or ranked against those of other countries, when all revisions are in several years hence) makes for short-term political headlines, it is mostly a distraction from the real long-term failures.    A deliberate one one might suggest.

I couldn’t exactly replicate the Bridges claim that we were 7th worst in per capita growth –  I’m sure it is so on some or other series, but the ones I happened to check gave slightly different results.   I’m assuming he was using annual data, for which the most recent numbers are of course 2018 –  quite a lot (good and ill) has happened since then. I also checked the OECD quarterly seasonally adjusted per capita data, and as happens can offer a factoid Bridges might like: in the two years to September 2019 (latest official data, and covering the full period of this government) New Zealand’s per capita GDP growth shows as being 11th worst in the OECD, while for the previous three years (final term of the National government) we were 14th best –  ie actually better than the median OECD country.

But…..productivity.  Have I mentioned productivity?  (Bridges didn’t)   Over that whole five year period, our labour productivity was fifth worst in the OECD.   That was National’s failure, and it is Labour’s failure.  It would now take a 67 per cent lift in average New Zealand labour productivity to match average productivity in the leading OECD group (a bunch of north European countries and the US).

Now, in fairness to Bridges, there is one vestigial reference to such gaps

In comparison, if our GDP per capita were as good as Australia’s, the average Kiwi would be 35 per cent richer.

By my reckoning that is more like the productivity gap than the GDP per capita gap, but either way it is a big number.   No narrower now that it was –  wider on the productivity measure –  before the last recession.

Bridges goes on

That doesn’t happen by accident, it doesn’t take a country the size of Australia to achieve it. It happens when you have a strong economy focussed on you. Led by a competent government with a track record of delivering.

As Economic Development Minister and Associate Finance Minister, I saw how real this is.

Except that the gaps didn’t narrow then either, and all he goes on to enumerate is a series of either modest cyclical points or wholly rhetorical ones

It’s about getting up in the morning and seeing New Zealand ambitious and confident about itself again.

National’s response

National’s focus is simple and resolute.

  1. We will keep taxes and red tape low and grow incomes to help with your cost of living
  2. We will be responsible managers of the economy
  3. We will focus on growing the economy for all
  4. We will invest more in core public services like health and education
  5. Finally, we will create more jobs and opportunities for all New Zealanders

Except for the first half of item 1, Labour could – probably did – trot out exactly the same list in 2017.

He then gets a little more specific

To do this, today I am announcing five key measures that I want the sixth National Government’s first term to be measured by. They are things that matter to Kiwis because they impact us in our everyday lives.

  1. New Zealand’s economic growth is back to at least three per cent per annum.
  2. New Zealand’s growth rate per person is in the top half of the OECD
  3. We are reducing the after-tax income gap with Australia
  4. More New Zealanders feel they can reach their potential at home, rather than overseas
  5. We have revived business confidence so that businesses feel like they can take more risks and create opportunities for you and your family

Nothing very wrong with that I guess, but not much ambition either –  nothing about the level of GDP for example.   Nothing about productivity, and –  re the final point – business investment was really rather subdued under the previous government as well.

How will this be done?

Over the next few months I will be announcing our comprehensive Economic Plan.

The five major planks to it are five packages on:

  1. Tax relief
  2. Regulation reduction
  3. Infrastructure
  4. Small Business
  5. Families

Details to come, to be sure, but it is hard to believe it will amount to much, beyond a bit of political product differentiation, and (no doubt) a few useful steps at the margin.     If you plan to spend more, and keep the budget more or less in balance, for example, there is hardly room for game-changing tax reform.     And if I really quite like this

We have already promised to cut red tape and regulation. We will light a regulations bonfire in our first six months of government, and cut two regulations for every new one we create.

it isn’t much different to what National always says in Opposition, which never amounts to very much in government.  Why will this time be different?  Did Bridges have a reputation as a reforming liberaliser when he was a Cabinet minister?

The speech goes on with some soft-soap stuff that I won’t trouble you with.   And then we get to the conclusion

National’s view is that the 2020s should be New Zealand’s decade.

Which sounds good, but there is nothing in the speech suggesting thought, ideas, plans, ambition commensurate with the scale of that challenge.   It is really just a promise to manage a bit more compentently –  not an unworthy goal necessarily, but just part of keeping our ongoing relative decline tidy.   Ours kids deserve better.

Then there is this sentenc.  I read it first yesterday and read it again today and it still makes no sense –  or, most generously, just repeats itself in saying nothing.

Our ambition as a country can never be too great for what we need to achieve.

The decades of economic failure just keep on mounting up, on watches overseen by both National and Labour.  The scale of the failure –  the extent to which relative material living standards here have slipped away – is huge.  But while Bridges –  just like Ardern, or Key, or Clark, or Shipley –  might like to leave the impression they might finally be the one to wave a magic wand, all the evidence is that they (a) they don’t really care, and (b) have no serious ideas about what went wrong and no serious interest in knowing, or doing, what it might take to really turn this country’s economic future around.

If, perhaps, none of that is a surprise, I suppose we should simply be “grateful” that Bridges’s speech, just a few months out from the election, makes that indifference utterly clear.

 

 

Annual productivity data

Statistics New Zealand last week released their annual measured sector and individual sector labour and multi-factor productivity data for the year to March 2019.  It isn’t data I tend to focus on, mostly because my interests are substantially in cross-country comparisons and also because my focus is whole-economy rather than on specific sectors and sub-sectors.  But it is still useful for thinking about productivity performance within New Zealand over time and we are now beginning to get a reasonable run of time series

(I can’t quickly find the official SNZ definition of the measured sector, but think of it in terms of what it isn’t (non-market bits of the economy like government administration).)

Here is labour productivity for the measured sector.  I’ve shown both the actual data (in logs) and the extrapolation of the trend line for the 1996 to 2008 period.

measured sector LP

The difference at the end of the period is roughly equal to 10 per cent productivity foregone.

Here is the same chart for multifactor productivity (MFP).

MFP to 19

Those who are inclined to minimise New Zealand’s longstanding and ongoing productivity failures will, of course,  (correctly) point out that productivity growth in the advanced world as a whole has been slower in the last decade.    That might be some sort of excuse for countries at or very close to the productivity frontier –  best in pack.  It is no excuse at all for a country starting so very far behind the leaders (and, as I’ve pointed out here before, hasn’t stopped a bunch of eastern and central European countries –  often now about as productive as New Zealand, having been communist basket cases 30 years ago –  continuing to put in strong performances).

What about further disaggregated data?  SNZ publishes data/estimates for labour productivity for a wide range of individual sectors and subsectors, in many cases – making up what is known as the “former measured sector” – going back to the 1970s.   (Sadly, even if I run the trend line through the data all the way from 1978 to 2008, the gap around the last decade’s performance still looks stark.)

What about some more disaggregation?  SNZ show results for three high-level groupings: goods, services, and primary production.  The latter can be quite volatile (droughts and the like).  Here are the MFP numbers for those groupings.

MFP sectoral

The primary industries performance was pretty impressive –  doubling in twenty years –  but that good performance itself ran out more than twenty years ago now.    Within primary industries, agriculture itself still does quite well relative to productivity growth in the rest of the economy.

And finally a couple of charts on individual sectors.  Here is the MFP estimate for something SNZ call “Information and communication technology industries”

MFP tech

Not much growth this century   –  in fact, less than for the measured sector as a whole.

Then again, rather better than the performance in these two sectors.

health MFP

And for anyone interested, these are the six sectors with the highest (estimated) MFP growth over the last 15 years as a whole.

Per cent increase in MFP, last 15 years
Rental, Hiring and Real Estate Services 19.1
Forestry, Fishing, and Services to Agriculture, Forestry and Fishing 20.1
Textile, Leather, Clothing and Footware Manufacturing 27.1
Information Media and Telecommunication 33.4
Retail Trade 42.6
Wood and Paper Product Manufacturing 45.2

Quite a mixed bag.

Overall, however, the productivity performance of this economy remains dismal.  Sadly, there is little sign any of our major parties care.

 

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.

 

Poor answer, poor economic performance

I don’t generally watch or listen to Parliament’s question time. But my teenage son has finished school for the year and, being a nascent political junkie, turns on the TV each afternoon to watch the jousting.

I was doing something else yesterday afternoon when this exchange caught my ear

Hon Paul Goldsmith: Isn’t the most relevant current economic indicator the fact that New Zealand has the highest terms of trade in recent modern history and we’re still growing very slowly and running a deficit?

Hon GRANT ROBERTSON: We can all pick our most relevant economic indicator, but the one I want to leave with the member is this: we, as a country, are growing faster than the UK, Australia, Canada, Japan, and the eurozone. No country with which we trade or compare ourselves is growing how they were two or three years ago. We are ahead of the pack and we’re doing well as a country.

Hon Paul Goldsmith: Which of the countries he listed in the answer to my previous question are we growing faster than, on a per-person basis?

Hon GRANT ROBERTSON: On a per-person basis, I don’t have the information the member asked for, but what I can tell the member is this: when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward. On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

That “34th in the OECD” I knew to be wrong.    There are only 36 OECD countries and without even checking the others everyone knows Chile, Portugal, and Mexico are poorer than we are.  I had a very quick look at some data and put it in this tweet.

I checked the IMF numbers because –  with so many more members and countries in their data –  being 34th sounded about right.  Perhaps the Minister had his IMF and OECD confused: it certainly looked like a first for any Minister of Finance to be boasting that New Zealand was 34th (or 32nd) on anything in the OECD.

But out of curiosity I decided to take a closer look.  There are, after all, both constant price and current prices GDP per capita measures, each converted at respective PPP exchange rates.   And you’d have to be pretty sceptical of putting much weight on movements over just a year or two, give both measurement and conversion challenges.

The IMF numbers go back to 1980.  Here is how our rank looks on these two measures and across time (2019 being an estimate/forecast).

GDP per capita, PPP, New Zealand rank
Constant price Current price
2019 35 35
2018 34 34
2017 34 34
2012 37 37
2007 40 40
2000 34 35
1990 31 31
1980 29 29

On these measures we were indeed 34th in 2017 –  looks like that was what the Minister might have had in mind.  But, if anything, there is a little slippage in the last couple of years.    Over the longer run of data, there has been some improvement in our rank since 2007 –  back then subsequently crisis-hit places like Greece, Italy, and Puerto Rico had got ahead of us (and Equatorial Guinea too) –  but we are in much the same position we were in 2000.  The significant worsening in our ranking occurred in the 80s and 90s, and there has been no consistent improvement since.

But our more usual comparators –  the comparison the Minister claimed to be making –  is with the OECD countries.

GDP per capita, PPP, New Zealand ranking
Current prices Constant prices
2018 20 21
2017 20 20
2016 20 19
2012 20 20
2007 21 22
2000 22 21
1990 20 21
1980 20 17
1970 11 12

It is mostly a pretty similar story.   People most often focus on the constant price numbers.  Again, if anything there has been a little slippage in the last year or two, but on these numbers our ranking is broadly where it was as long ago as 1990, and the real drop down the rankings occurred in the 1970s and 1980s  (and no doubt earlier if the consistent data went back further).    Those long in the tooth will recall that in 1990 we were about half way through the extensive reform programme –  itself implemented in response to the deterioration in New Zealand’s economic performance –  that was going to be lift us back up the OECD rankings.  Shame about that.

But what about productivity?  It wasn’t what Paul Goldsmith was asking, but it is the foundation of all sustained improvements in material living standards.   Here is the OECD data for GDP per hour worked

GDP per hour worked, PPP, New Zealand ranking
Current prices Constant prices
2018 27 26
2017 24 25
2016 22 23
2012 22 21
2007 23 23
2000 22 21
1990 21 20
1980 19 17
1970 15 15

(I mostly refer to the constant price series, in all such international comparison on this blog this is “real GDP per hour worked”).

If I were a Minister of Finance I wouldn’t be boasting anything here.  Then again, if I were the Finance spokesperson for the other party that governed New Zealand for large chunks of this half-century I’d probably keep quiet too.

The data are what they are, for now.   That said, I don’t want to make much just yet of the apparent sharp fall in our ranking over the last couple of years (and even if it is for real, it isn’t yet this government’s fault any more than that of its predecessor –  it is 2018 data and policy, or the lack of it, works with a lag).    It both looks too bad to be true and we know that there are significant revisions being published tomorrow by SNZ which are expected to raise productivity growth a bit over the last few years.  In the grand scheme of things, the differences are unlikely to be very large but a levels shift of 2 per cent –  which might happen –  would be enough (just) to lift us from 26th to 24th on the constant price measure.

On the data as they stand today, here are the 10 OECD countries with the next highest productivity and 10 (all the rest) with the next lowest.

OECD real GDP phw 2018

Three former communist countries are now ahead of us, as is Turkey, and the Czech Republic and Poland have had recent productivity growth records that mean they will almost certainly go past us in the next couple of years (even with New Zealand data revisions).

So, to revert to where this all started, what about the Minister’s claims

We are ahead of the pack and we’re doing well as a country.

No

when we came into Government we ranked 34th in the OECD on GDP per capita, and we’ve improved that. We’re up to 32nd and we will keep moving forward.

No.  Hasn’t happened so far, and no sign things are about to improve.

And there was that final puzzling claim

On another measure that the OECD has in terms of per capita on real expenditure, when we came into office we were at 30th and we’re now 18th, so we’re making good progress.

I have no idea what he has in mind, but whatever he had in mind perhaps the Minister should keep in mind the old mantra that if a number sounds too good to be true it probably is.

Sure in cyclical terms the economy isn’t in a dreadful state.  But in any longer-term sense we are underperforming, have underperformed for decades, there is no sign of any structural improvement underway now, and neither main party shows any sign of serious policy thinking that might finally –  decades after those promises from both major parties –  make a difference for New Zealanders.   As things stand –  and by reference to that final chart –  if we just keep on doing policy as we have it isn’t inconceivable that in 2030 we could have the third lowest labour productivity in the entire OECD.   Convergence with Uruguay may still happen.

 

UPDATE: In the House this afternoon the Minister made clear that he had been talking about annual growth in real GDP per capita.  Per the OECD data –  as it stands today, before significant SNZ revisions to be published tomorrow – New Zealand’s growth rate did rise from 34th (of 36) in the OECD to 32nd (the latter for calendar 2018).  It seems very odd to boast about having the 5th worst per capita GDP growth among the OECD countries (and quite clarifying given the rhetoric the PM and Minister often use claiming New Zealand’s growth record is materially better than that of advanced countries we typically compare ourselves too).  Clearly –  given that this was an off-the-cuff response to a supplementary question – they’ve known the dismal (on official data) per capita picture all along.