Inconsistent with the scale of the challenge

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Making sense of the national accounts

Doing so is more than usually challenging right now. We had the huge disruption of the draconian national lockdown last year, and some more limited sets of restrictions since then. Some of the economic aspects of that were impossible to measure accurately, although no doubt in many areas SNZ will continue to try valiantly to refine their estimates. Largely-closed borders continue and thanks to the ill-judged decision of politicians and bureaucrats to scrap departure cards a few years ago we are now flying quite blind around recent net migration estimates (SNZ use a model, but – like any model – their model struggles to cope with a dramatic regime shift). Some of the difficulties are amplified by New Zealand’s long-term underinvestment in good economic statistics – a choice of successive governments, sometimes aided and abetted by SNZ management.

New Zealand has two measures of quarterly GDP. The expenditure and production-based approaches are both trying to estimate the same thing (as will the forthcoming income measure) but data collection challenges mean that it isn’t for several years that the two series are more or less reconciled (and even then not always that well).

GDP long term

But if the two series are, eventually, more or less reconciled that isn’t much consolation now.

Here is the more recent period, this time per capita and indexed to 100 in 2016q3, the last date for which the current estimates of the two approaches are almost identical.

nz per capita

Over 4.5 years a gap of 3.7 per cent has opened up between the two series. And there is no good ex ante reason to prefer one estimate over the other.

In per capita terms – using the current SNZ official population estimate – that is the difference between 2.4 per cent and 6.2 per cent growth in real per capita GDP over the period shown. One of those numbers is not too bad, the other is pretty dire. For the Covid period – so since the last pre-Covid quarter in 2019q4 – it is the difference between a 0.9 per cent fall in real per capita GDP and a 0.7 per cent increase. I usually simply average the two approaches, so a best stab in the dark is probably that we are back to around pre-Covid levels, but really who knows.

And it is complicated by the fact that the population estimates themselves are a moveable feast. SNZ’s official estimate – using their 12/16 model-based rule. They estimate that the resident population has increased by 6500 over the year to March on account of immigration. But one of the few hard numbers we know is the number of people coming and going from New Zealand (in total, for whatever reason) and those numbers show a net outflow of 56446 people between 1 April 2020 and 31 March 2021. It is at least possible that as the 12/16 estimate converges to hard numbers (SNZ know with confidence what happened 16 months later) that we end up with a rather low contribution from net migration in the last 12 months or so?

A revision along those lines might sound like a good thing – if the resident population was smaller then given GDP average per capita real GDP was higher. But I doubt it is as simple as that because many of the components of the GDP estimates themselves will have been estimated, from sample surveys, that have behind them a view on the population. Revise down the population and it is likely that the subsequently-reported GDP estimates will also be a bit lower.

One of my favourite charts over the years has been on real GDP per hour worked. My normal approach is to use the two GDP estimate and the two estimates of hours (QES and HLFS), index all the series and simply use the average that results. Here is the chart for the last 10 years

real GDP phw June 21

The decade was mostly pretty bad, but who knows what has gone on in the last 12 months. Some of the apparent noise reflects differences in the two hours series: the HLFS estimates hours worked and the QES hours paid. Usually they are much the same thing, but not in the midst of a lockdown with a wage subsidy. But that was mostly a problem for the June and September quarters last year.

No one is going seriously argue that Covid has been good for productivity, so even if the latest estimate looks quite appealing it is unlikely to endure. Now, of course, you’ll recall the divergence in the two GDP measures, so I could show you are a chart with really big differences in the productivity estimates depending which GDP measure one uses.

Perhaps you think that the lift in productivity shown in the chart is mostly a compositional effect. When hours worked dropped it is often the lowest paid, lowest productivity hours that drop off first. But even there our two surveys report quite different things: QES hours in March were (seasonally adjusted) 1.8 per cent lower than they had been in December 2019, but HLFS hours were 1.4 per cent higher. There is, inevitably, noise in these series, but it does leave analysts somewhat at sea at present. And not even sure where the errors, and future revisions, might be. I’m pretty confident that labour productivity has not really increased by 2 per cent in the last 15-18 months, but what that means for the component estimates I don’t know.

I’ve sometimes shown comparison with Australia, especially for real GDP per hour worked.

Aus GDP 2

There is much, much less volatility than in the New Zealand estimates. Of course, it also seems unlikely that underlying productivity per (stratified) worker has stepped up through Covid, but…..hours worked in Australia are estimated to have been 3.4 per cent lower in the March quarter than in the December 2019 quarter, so there is a a somewhat plausible composition story there. In fact this is what happened in Australia in the 2008/09 recession.

aus 08

And as the labour market recovered, productivity fell back to trend.

Some of the measurement challenges are unavoidable, but it does look as if the (highly regarded) ABS is making a better fist of things than SNZ.

We can be confident that the economy is in much better heart than it was last June, but – per official statistics anyway – that really is about all. Fortunately, we have business opinion surveys because perhaps more than usually we really rest on them for anything much of a sense of where the economy is right now. And for some things that matter longer-term, notably productivity, we really are just flying blind at present, backed perhaps by basic theory that whatever good shutting borders has done for public health (a real gain) it is almost certainly at least somewhat bad for productivity.

Productivity growth: failures and successes

As a parent I find it particularly disheartening to observe the near-complete indifference of governments and major political parties that might hope to form governments to the atrocious productivity performance of the New Zealand economy. If the last National government was bad, the Labour or Labour-led governments since 2017 have been worse. It is hard to think of a single thing they’ve done to improve the climate for market-driven business investment and productivity growth, and easy to identify a growing list of things that worsen the outlook – most individually probably quite small effects, but the cumulative direction is pretty clear. Before I had kids I used to idly talk about not encouraging any I had to stay in New Zealand, so relatively poor were the prospects becoming. It is harder to take that stance when it is real young people one enjoys being around, but…..at least from an economic perspective New Zealand looks like an ever-worse option, increasingly an inward-looking backwater.

One of the ways of seeing the utter failure – the indifference, the betrayal of New Zealanders – is to look at the growing list of countries that are either moving past us, or fast approaching us. Recall that for 50 years or more New Zealand was among the handful of very highest income countries on earth.

For doing those comparisons I prefer to focus on measures of real GDP per hour worked, compared using purchasing power parity (PPP) exchange rates. It is, broadly speaking, a measure of how much value is being added by firms – mostly in the private sector – for each unit of labour those firms are deploying. Real GDP per capita can be useful for some purposes – actual material living standards comparisons – but can be greatly, directly, affected, by demographics, in ways that don’t reveal much about the performance of the economy and the environment for business investment.

When I run charts here about productivity comparisons across countries I mostly use OECD data. Most – but not quite all – of what we think of as advanced economies are in the OECD (as well as a few new entrants that aren’t very advanced at all, and seem like “diversity hires”, incidentally making New Zealand look a bit less bad in “whole of OECD” comparisons). But once in a while I check out the Conference Board’s Total Economy Database, which has a smaller range of series for a rather wider range of countries, advanced and emerging. The latest update was out a few weeks ago.

As regular readers know I have highlighted from time to time the eastern and central European OECD countries – all Communist-run until about 1989 – that were catching or moving past us. I first noticed this when I helped write the 2025 Taskforce’s report – remember, the idea that we might close the gaps to Australia by 2025, when in fact policy indifference has meant they’ve kept widening – in 2009, so that must have been data for 2007 or 2008. Back then only Slovenia had matched us, and they were (a) small and (b) just over the border from Italy and Austria. The OECD and Conference Board numbers are slightly different, but by now probably four of the eight have matched or exceeded us (and all eight managed faster productivity growth than us over the last cycle). Turkey – also in the OECD – has also now passed us.

But what about the central and eastern European countries that aren’t in the OECD? As I glanced down the tables I remembered a post I’d written four years ago about Romania and comparisons with New Zealand’s economic performance. Romania had been achieving quite strong productivity growth prompting me to note

….one of the once-richest countries of the world is on course for having Romania, almost a byword in instability, repression etc for so many decades, catch us up.  It would take a while if current trends continue.  But not that long. Simply extrapolating the relative performance of just the last decade (and they had a very nasty recession in 2008/09 during that time) about another 20 years.

So how have things been going?

romania 21

Even if we focus just on the last hard pre-Covid estimate (for 2019) they were up to about 84 per cent of average New Zealand labour productivity. If these trends continue, they’d catch us by about the end of the decade.

To be clear, it is generally a good thing when other countries succeed. It is great that these central and eastern European countries moved out from the shadow of the USSR and non-market economies and are now achieving substantial lifts in living standards. The point of the comparisons is not to begrudge their successes – which have a long way still to run to match most of western Europe – but to highlight the failure New Zealand governments have presided over. We were richer than all these countries for almost all of modern New Zealand history, and soon our economy will be less productive than all or most of them. We were also richer and better off than most or all of today’s most productive advanced economies, and now we just trail in the their wake. Even as the most productive advanced economies have experienced a marked slowing in their productivity growth in the last 15 years or so

prod growth advanced

we’ve really only managed little more than to track their slowdown – and recall that the median of these countries has average labour productivity two-thirds higher than New Zealand’s so – as in the central and eastern European countries – there were big gaps that might have been closed somewhat. Most of those countries did so, but not New Zealand.

To revert to Romania for a moment, it is not as if it is without its challenges. It ranks about 55th on the World Bank’s ease of doing business index, and has been slipping down that ranking (although still doing very well on a couple of components). Corruption seems to be a major problem. The neighbours aren’t the best either – including Ukraine and Moldova. Reading the latest IMF report (pre-Covid) there were signs of some looming macro imbalances but the latest IMF forecasts suggests a pretty optimistic outlook still, including investment as a share of GDP climbing back to about 25 per cent of GDP. Perhaps something is going to derail that productivity convergence (with New Zealand) story but it isn’t there in the forecasts at present. And if corruption has to be a drag of some sort (but how large can that effect be?) government spending and revenue are both smaller as a share of GDP than in New Zealand.

In GDP per capita terms the picture (Romania vs New Zealand) is not quite as grim. That mostly reflects differences in hours worked

Romania hrs

Some of that is demographics, some not. Either way, hours worked are an input – a cost – not (mostly) a good thing in their own right. New Zealand struggles to maintain upper middle income living standards for the population as a whole by working a lot more hours (per capita) than many other advanced countries.

And then of course there is the difference that must be quite uncomfortable for the political and bureaucratic champions of “big New Zealand” – those politicians (both sides) just champing at the bit to get our population growing rapidly again.

romania popn

Romania is a pretty big country. When this chart started it had almost six times our population. 25 years on Romania’s population is a bit under four times ours. I mentioned earlier the investment share of GDP: Romania’s is averaging a little higher than ours, even with these massive population growth (shrinkage) differences, so just imagine how much more of those investment resources are going to deepen capital per worker (even public infrastructure per citizen). (For those interested the total fertility rates of the two countries are now very similar: the differences in trend population growth are largely down to immigration/emigration.)

Now, of course, I haven’t mentioned being in the EU or being located not too far from many of the most productive economies on earth (although Bucharest to Zurich isn’t much less than the distance Wellington to Sydney). Those are advantages. Of course they are. But then why do New Zealand officials and policymakers continue to champion a (now) purely policy-driven “big New Zealand” when (a) almost nothing has gone right for that story in (at least) the last 25 years, and (b) when so much else of policy choices only reduces the likelihood of the future under such a strategy being any better?

Romania really is a success story, and I’d like to understand a bit better why (for example) it has been doing so much better than Bulgaria and Serbia. But it isn’t an isolated success story: in addition to the OECD eastern and central European economies, Croatia isn’t doing too badly either.

But – and taking a much longer span – this chart still surprised me. It draws on different database – the Maddison Project collection of historical real GDP per capita data. Since it is per capita data it includes all those differences in hours worked per capita (data which simply isn’t available for most countries in the distant past). I’ve started in 1875 simply because that is when the Romania data start. I’ve shown only the countries for which there is 1875 data (the last observations are 2016 simply because that is when this particular database stops), with the exception of China and India which I’ve added in for illustrative purposes because there are a couple of estimates for years between 1870 and 1887 which I’ve simply interpolated. The chart shows the ratio of real per capita incomes in 2016 as a ratio of those in 1875.

romania maddison

Best of them all. New Zealand not so much (and yes we were about the top of the class in 1875, but the New Zealand story is submergence not convergence, given how many of these countries are now richer than us).

To be clear, over the last 140+ years New Zealand has been a far better – safer, more prosperous, fairer, more open – country in which to live than Romania. Whether it will still be so for most the next century is increasingly a very open question. Our politicians seem unconcerned, and if any of them have private concerns they do nothing about them – no serious policies in government, so no serious policy reform options in Opposition. Nothing. They seem to just prefer nothing more than the occasional ritual mention.

Still on matters productivity, I finished reading last night an excellent new book on productivity: Fully Grown: Why a Stagnant Economy is a Sign of Success by Dietrich Vollrath, a professor of economics at the University of Houston. It is incredibly clearly written, and is a superb introduction to economic growth and productivity for anyone interested (I”ll be commending it to my son who has just started university economics). I’m not really persuaded by his story about the US, but it is well worth reading if you want to think about these issues as they apply to one of the highest productivity economies on earth. It suffers (as so many US books) do from being exclusively US-focused, even though there is a range of northern European economies with productivity levels very similar to (a bit above, a bit below) those in the US and one might think that their data, their experiences, might be a cross-check on some of his stories. To be clear, his focus is on a frontier economy, not ones – whether New Zealand or the central and east European ones, or even the UK and Australia – which start so far inside the frontier. But it is a very good introduction to how to think about sum of the issues, and a summary of many of the papers that the research-rich US economy generates.

No idea apparently, probably not much interest

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

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

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

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

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

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

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

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

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

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

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

Shame about the prospects for our country.

Productivity, Productivity Commission, and all that

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

mix of econ data

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

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

productivity 07 to 19

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

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

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

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

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