Productivity growth across countries across time

This tweet caught my eye this morning.

The chart is from the latest weekly column from Martin Wolf, the economics columnist for the Financial Times.   It is a sobering reminder of what has been happening among economies rather nearer the frontier: productivity growth recently isn’t what it once was (even if the 50s and 60s are hardly representative historical decades).

But, of course, my main interest is in New Zealand.  And for OECD countries I prefer to use OECD data (which go back only to 1970).    Here is what a similar version of the chart above looks like using OECD data and adding Australia, Canada and New Zealand.   As with the chart above, I’ve ordered the countries from high to low based on average productivity growth in the most recent period (in this case, the last five years).

Real GDP phw OECD

In that most recent period (and, actually, for this decade as a whole) France has had the fastest productivity growth –  not something I’d have guessed –  and New Zealand brings up last place.  It isn’t that the green bar is missing for New Zealand, just that the average annual growth rate on this measure was 0.0 per cent. (Using my preferred measure of labour productivity growth, updated to include this morning’s release we do a little better for the last five years –  we come second to last (ahead of Italy) instead.)

And, of course, the pattern for New Zealand is a little different because we had that truly dreadful decade in the 1970s, when our productivity growth was clearly the worst in the entire OECD.

But here is how we’ve done simply relative to the G7 group as a whole.

NZ and G7 gdp phw

In not a single period has our productivity growth rate matched that of the G7 grouping as a whole.  We came close in the 1980s, but couldn’t match those leading industrial countries even then.  (And for the most recent period that conclusion holds even if use my preferred measure of New Zealand labour productivity.)   And whereas back in 1970, the level of labour productivity in New Zealand was very similar to that for the OECD as a whole, those growth differences cumulate, and now the G7 group has labour productivity just over 50 per cent higher than that in New Zealand.

Is something better possible?   Well, there is a loose relationship suggesting (as one might expect) that countries that had a lower starting level of labour productivity were also those with relatively faster productivity growth in recent years.  Catch-up can and does occur.   There were 10 OECD countries –  more than a quarter of the membership –  which had faster productivity growth than France over the last five years, often materially faster.    All of them were small.

That could have been New Zealand too –  after all, we now start so far behind the leading bunch –  but policy choices by successive governments (much the same regardless of which party occupies the 9th floor of the Beehive) meant it wasn’t so, and left us vying with places like Italy, Portugal and Greece (even the UK) for the unwanted poor performer award.

 

China and Japan

I’ve been reading a wave of books in the last few weeks about modern Japan –  the rapid economic rise from the mid 19th century, the out of control militarism that led to the war from 1937 to 1945, and the post-war revival (rather than the last few decades).   And as I read, it left me pondering the relative economic fortunes of Japan and China.

According to the standard reference source for such things – Angus Maddison’s collection of estimates of GDP per capita since the year 1 AD –  in earlier centuries Japan and China were more or less level-pegging for centuries, with China a bit ahead of Japan (a thousand years ago, China is generally accepted as having the highest material living standards anywhere).  Here are the estimates (in 1990 international dollars) through to the 18th century.

maddison chjp

There was, of course, a great divergence between economic progress and living standards in the leading European (and offshoots) economies and those of east Asia, but today I’m more interested in the less-highlighted, but scarcely less dramatic, divergence between economic performance in Japan and that in China.

Maddison’s estimates report that –  despite having turned its back on the world –  Japan had moved ahead of China over the 18th century and the first half of the 19th century: for 1850 the reported estimates are Japan $679 and China $650.   There are only scattered estimates for China for the following few decades, but here is the reported estimate of average per capita real GDP per capita, China as a per cent of Japan.

China GDP pc as % of Japan
1850 88
1870 72
1890 53
1900 46
1913 40

A bit later, the annual estimates start –  with a break when Japan was attempting to conquer China.  Here is the chart to 2008 when Maddison’s estimates end.

chinajp

The Conference Board has estimates through to the present day, but they only start from 1950.   Here is the PRC’s real GDP per capita as a percentage of Japan’s.

chjp conf board

Productivity estimates are available only for even more recent periods, but on Conference Board numbers they show a pretty similar picture: as at last year, average productivity in the PRC just over 30 per cent of that in Japan.   And that is still probably worse than the situation at the turn of the last century (when –  see above –  China’s real GDP per capita was about 45 per cent of Japan’s).

Of course, it isn’t only Japan that China has fallen so far behind.  Taiwan was a Japanese territory for 50 years after the Sino-Japanese War in the 1890s, and Korea was a Japanese colony/conquest for 40 years.  On the Maddison estimates, 150 years ago both Korea and Taiwan had GDP per capita (estimated at) not much different from that of China.    These days, South Korea (historically less well-developed than the north) has real GDP per capita about 10 per cent less than that of Japan, while Taiwan has real GDP per capita about 15 per cent more than that of Japan.    Both, in other words, are far ahead of the PRC.

taichi conf bd

Relative to Taiwan, the PRC has just now managed to get back up to the relative living standards just prior to the Cultural Revolution.  (And yet this is the regime whose “successes” Simon Bridges lauds.)

There isn’t really much debate about why the PRC has over recent decades still been the disastrous laggard among the historically more advanced east Asian economies (North Korea of course marking out an even worse extreme) –  absence of the rule of law, absence of the sorts of incentives that make for the efficient allocation of capital, primacy of the Party etc etc will do that to a country (the Soviet Union in the 80s was closer in living standards to Japan then than the PRC is to Japan now).

But in some ways I’m more interested in how the gaps opened up in the first place –  before 1950, or even before the overthrow of the Manchu emperors in 1911.  It is easy to say that Japan embraced greater openness, Western technology etc –  initially under external pressure –  but what was it that meant Japan (having, if anything, been more isolated than China for the previous few centuries) made that choice and China did not?   In looking around, I’ve found a couple of relevant journal articles, but if any readers happen to have suggestions of good treatments of the issue (book or article) I would really welcome them.

Services exports – another NZ weak spot

Various people in my Twitter feed were highlighting what appears to have been a quite interesting conference in Auckland over the weekend on external-trade related issues. I haven’t seen the papers, but at least from the various tweets I saw I was struck by an apparent air of unrealism, that doesn’t take much account of just how poorly New Zealand has been doing on the foreign trade front.  It is a bit like when MFAT and Cabinet ministers talk up this, that or the other new preferential trade agreement –  there have been a lot of them over the years – and yet we find ourselves now with foreign trade shares of GDP no higher than they were in (say) the early 1980s.   For younger readers, those were widely perceived at the time as dark days –  lots of import protectionism, terms of trade very low, CER not yet signed, and so on.

Services in one of those areas that trade experts seem to like to talk about, a lot.  Here was an MFAT tweet from the weekend conference.

In a way that isn’t surprising.  In the median OECD country, services exports are almost 13 per cent of GDP, and the median increase in that share over the last couple of decades is about 4 percentage points.

But not in New Zealand.

Among the full group of 35 OECD countries, New Zealand has the 10th lowest share of services exports as a share of GDP.   But every single one of the other nine are countries that are far bigger than New Zealand: Australia, with almost five times our population is the next smallest.  For good and fairly obvious reasons, foreign trade tends to make up a smaller share of GDP in larger countries.

But what about the smaller OECD countries?  Almost two-thirds of OECD countries have populations of 11 million or less, and we are by no means the smallest of those countries.   Here are services exports as a share of GDP for the smaller OECD countries, truncating the vertical axis because Ireland and Luxembourg are so much higher than all the other countries on the chart.

services exports small OECD

New Zealand has the smallest share of services exports in GDP of all these smallish OECD countries –  and by quite a margin.       And it isn’t as if we are closing the gap.   Over the last 20 years, services exports as a share of GDP have barely changed in New Zealand (with some ups and downs) while for the median of the other smallish OECD countries, the increase was 6.7 percentage points of GDP.

NZ services exports

Now, of course, distance materially and fairly obviously affects quite a lot of what counts as services exports –  notably, our two largest classes of services exports, tourism and export education.

Here is a long-term chart showing all our travel and transportation exports (which includes freight and export education).

T&T services X

The picture looked quite promising 20 years ago.  Much less so now.

And, on the other hand, here are all the non-travel and transport services exports.   These, in principle, should have been where much hope was reposed.

non T&T services X

It is, perhaps, a more positive story, but not very much so.   After all, despite all the technological advances, and cheaper and better communications etc, this group of services exports is still (in gross terms) less than 2 per cent of GDP, and no higher as a share of GDP than was the case at the turn of the century.    As a share of total exports these (non travel and transport) services exports have risen a bit more, but even that increase isn’t particularly impressive, as there has been no growth in these services exports as a share of total exports this decade.

Out of interest, here is the export education component of services exports as a share of GDP.

X education

Ups and downs but –  even with all the subsidies to this sector (mainly through the immigration system) –  still now below the levels reached in 2004.    And it isn’t as if our universities are relentlessly climbing the global ladder, suggesting that fresh waves of new exports –  attracted by the quality of the product – are likely from this source.

Now, as experts like to point out, there is a services component in all or most goods exports too.  But (a) it isn’t as if New Zealand has been doing well with goods exports and (b) the overall character of our goods exports hasn’t been changing much either (eg lots of fancy manufactured products with a huge design or IP component).

For all the talk, services exports –  including the higher-tech ones people like to talk about in such seminars –  just haven’t done particularly well in New Zealand.

That doesn’t surprise me.   The combination of a persistently high real exchange rate –  direct consequence of other policy choices –  and the continuing constraints of distance (even for many of what may look like “push a button and it is done” services) seem to me to pretty much explain the story.  New Zealand is just not a great location to base many outward-oriented businesses, even as our governments pursue more and more people to live here.   It shouldn’t be surprising that the relative size of the tradables sector in New Zealand has been shrinking.

On such matters, I saw that in advance of the weekend workshop/conference, the Herald the other day had a full page profile of MFAT’s leading trade official, deputy secretary Vangelis Vitalis.     Rereading that piece, and exchanging notes with someone over the weekend about public sector senior appointments and our new Secretary to the Treasury, I was left wondering why Vangelis Vitalis wasn’t appointed to fill the role.  His is an enormously impressive and energetic guy, he knows New Zealand (and is a New Zealander), is open-minded and engaging, and thinks about economic issues and risks.    Perhaps he didn’t apply.  Or perhaps he just doesn’t fit the Peter Hughes model of safe generic public sector managers.  But it does seem extraordinary that the powers that be would pass over –  rather than, say, shoulder-tap –  such a significant economic and policy talent right here among us, already in officialdom.  You can negotiate all the preferential trade agreements in the world, and it won’t matter much for economic performance –  lacklustre for decades –  unless you get to the heart of the underlying problem.

 

80 years today since we entered World War Two

It is eighty years today since New Zealand declared war on Germany, joining the United Kingdom in responding to the unprovoked aggression of the German invasion of Poland.  Until just now, glancing at one of the government historical websites, this statistic hadn’t occurred to me

New Zealand was involved for all but three of the 2179 days of the war — a commitment on a par only with Britain and Australia.

It is estimated that 11928 New Zealanders died in the course of that conflict, a death rate (per million population) higher than in any other Commonwealth country.  Dreadful as the war was, it still strikes me as something closer to a just war (for our side) than most other conflicts in modern history –  although, of course, the counterfactual is unknowable.

Back in the very early days of this blog, I wrote a short post on some aspects of the New Zealand economy in and around World War Two (while lamenting the absence of a modern analytical book-length treatment).  Here is the gist of a few of the paragraphs from that post

Two things from the period did stand out.

The first is that, while New Zealand devoted almost as much of its GDP to the war effort as any of the major combatants (at peak similar to that in the UK, although the UK held the peak for longer), material living standards for the civilian population seemed to remain relatively high –  notably the quality of the diet, access to petrol etc.  Perhaps that partly reflects just what a rich country New Zealand then was.  Using Angus Maddison’s data:

1939 GDP pc

New Zealand’s GDP per capita in 1939 was second highest of those countries shown (a year earlier –  the US in recession –  we’d been top of the table).  It may have been easier to devote a larger share of GDP to the war in a rich country like New Zealand than in a relatively poor one like the USSR, where a larger share of resources would have to have been devoted to subsistence.

And the second point is the dramatic transition: New Zealand went from being on the brink of default in 1939 to being, in effect, defaulted on just after the war.  In 1939, in the wake of the imposition of exchange controls, Walter Nash emerged from a humiliating mission to London, with a very onerous schedule of overseas debt repayments.  If the war had not been looming –  which made the British government keen on maintaining good relations with the Dominions –  it is quite possible that New Zealand would have been unable to rollover maturing debt at all, probably ending in a default to external creditors.  By just after the war, New Zealand  –  having markedly reduced its external debt ratios during the war – made a substantial gift to the UK (as did Australia): in reality, Britain was quite unable to meet all its obligations and needed some of them written down.

In a paper a couple of years ago, some IMF economists looked at examples of countries that had markedly reduced their overseas debt.  The New Zealand experience during WWII was as stark as any of those reversals, but is too little studied.  It seems to have mainly resulted from a determination to pay for as much of the war as possible from taxation, together with the controls and rationing that limited private sector consumption and investment.  But it was not because of any strength in New Zealand’s terms of trade:

WW2 TOT.png

New Zealand’s terms of trade fell during the war years –  our import costs rose as global inflation increased, but there was little adjustment in the prices of the agricultural/pastoral products New Zealand sold to Britain.

Notwithstanding the lives lost (and the constraints on consumption, free speech etc) New Zealand’s experience of World War Two was pretty mild.  No combat occurred on our shores –  nor was it ever credibly likely to –  and we didn’t even have anything akin to the bombing of Darwin or of Pearl Harbor.

Of all the countries involved, perhaps Poland’s experience was worst.  I wrote a post here late last year, at the time of the 100th anniversary of the end of World War One (in turn leading to the re-establishment of an independent Poland), in which I noted that

My own reflection on Poland is that it is hard to think of a place in the western world (say, present day EU, other bits of western Europe, and western European offshoots – eg New Zealand, Australia, Canada, US, Argentina, Chile, Uruguay) that wouldn’t have been preferable to live in over the last 100 years or so, at least as judged by material criteria.   Perhaps if you were German, you have to live with the guilt of World War Two, but most of Germany was free again pretty quickly.   Romanians and Bulgarians might have been poorer on average, but they largely escaped the worst horrors of the German occupation.  To its credit, Bulgaria managed to largely save its Jewish population, while the Polish record was patchy at best.  With borders pushed hither and yon, and not a few abuses of other peoples (notably ethnic German) post-war, sanctioned by the state, the place then settled into 40 years of Communist rule.   There is a lot to admire about Poland, but I wouldn’t have wanted to live there any time in the 20th century.

And never more so than during and just after World War Two.

But against that backdrop it leaves the story of the Poland in the last 30 years or so all the more impressive.    Some will be critical of various aspects of Polish governance etc, but they are now bringing up 30 years of democratic government –  and changes of government –  something that would have been hard to imagine when I was young, or –  in the late 30s –  when my parents were young.

And then there is the economic performance.  In 1938, it is estimated that Poland’s average real GDP per capita was just a third of New Zealand’s.    The most recent IMF estimates suggest that this year, Poland’s GDP per capita will be 82 per cent of New Zealand.  New Zealand has, of course, been a poor performer, but relative to Germany over the period Poland’s GDP per capita has improved from 40 per cent to 60 per cent.

And then, of course, there is productivity: real GDP per hour worked.   We don’t have very long runs of data for this variable, but here is the ratio of Poland to New Zealand for the 25 years for which there are data for both countries.

poland real GDP phw

Them doing better doesn’t make us worse off (of course).  Their success is great for them and their people.

But, as we ponder the deeper issues of loss, sacrifice, freedom, the threat of tyranny etc –  all exemplified in the story of World War Two –  it might still be worth reflecting on how extraordinary New Zealand’s relative economic decline  (relative to every single country on that first chart above) would have seemed to our leaders in 1939 if someone could have told them then how poorly New Zealand itself would do over the next 80 years.

 

National on the economy

On Monday the National Party released their “The Economy” discussion document, the latest in a series of such documents they’ve published in recent months as they move towards setting policy for next year’s election.    The documents actively invite feedback, and if one should be sceptical of crowd-sourcing policy programmes mostly it seems like a worthwhile initiative.

A few weeks ago I was quite critical after Simon Bridges’s conference speech about the apparent lack of recognition of the structural failings of the New Zealand economy, let alone of any hint of a serious strategy that might reverse the decades of underperformance.

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

Sure, it wasn’t primarily a speech about economics, but there has been nothing from Bridges or his colleagues elsewhere, and no hint of a recognition here, that much-improved productivity performance is the only sustainable path to much better material living standards.  And not a hint of a recognition that these failures were already well apparent in the government in which he served (latterly as Minister of Economic Development)

I went on to note that National appeared to be glossing over the fairly woeful overseas trade performance: exports and imports have been shrinking as a share of GDP.

I’m much less critical of the discussion document.   This line appeared on the first page, the leader’s own statement

New Zealanders’ productivity and income levels have fallen behind countries we once had similar income levels to, like Australia, the United States and leading European economies.

And from Paul Goldsmith’s opening

Improving productivity remains New Zealand’s most important economic challenge and the ideas discussed in this paper provide ways to meet that challenge, with the goal of raising incomes for all New Zealanders.

National understands that significantly lifting productivity is the only way to materially improve New Zealanders’ living standards. Increasing productivity means we can produce and sell more of what the world wants, at better prices, using fewer resources.

Good stuff.  And he goes on

New Zealanders’ living standards will not improve by simply redistributing what we
already have. Instead, we need to be absolutely focused on lifting New Zealand’s relatively weak productivity levels.

and

New Zealand’s core economic challenge is to lift our relatively weak productivity. To do that, our economy needs to become more internationally competitive. The world does not owe us a living. We are a small, isolated country far from global markets, which creates both opportunities and challenges.

and

The only way to materially improve the living standards of New Zealanders over time is to become more productive. Higher productivity means more in the back pockets of New Zealand families. New Zealand’s productivity is a more productive and competitive economy that lifts household incomes approximately 30 per cent below the top half of the OECD and 25 per cent below Australia.  New Zealanders also work more hours a year than any countries in the top half of the OECD. In 2017, for example, workers in Denmark, Germany, the Netherlands and Norway worked 300 hours less than New Zealanders.

Since the late 1990s, New Zealand’s productivity growth rates have been similar to that of the top half of the OECD. We need to be doing better to catch up and close the gap. That’s hard. It requires a relentless focus on productivity growth.

National is ambitious for New Zealanders and believes we should target higher rates of productivity in order to close the income gap with countries like Australia, the United States, Canada and leading European economies.

There was even talk of adopting a productivity growth target.

On foreign trade, we read this

New Zealand is a small country with a domestic market of only about five million people – so we depend on trade for generating greater prosperity. Trade supports over 600,000 jobs across our country, and is responsible for a higher standard of living and better quality of life for New Zealanders.

However, New Zealand has a relatively low exports-to-GDP ratio compared with other small, advanced economies. Lifting our exports will take further improvement but create new jobs and raise incomes.

So the rhetoric and some of the framing isn’t bad at all.    They could have made the same points even more brutally:

  • relative to the top tier of OECD countries (US, and leading half-dozen north European economies), productivity (real GDP per hour worked) has kept on slipping (in the last 25 years, productivity here has fallen from around 65 per cent to 60 per cent of those in the top-tier OECD countries while in, for example, Poland it has risen from around 30 per cent to around 55 per cent),
  • New Zealand has managed hardly any productivity growth at all over the last five years, and
  • not only are foreign trade shares (exports and imports) low for a country our size, but they’ve been shrinking.

But even if Simon Bridges in his introduction did note of the previous government “we didn’t everything right”, to have done so might have prompted too many hard questions about National’s own record.

What of the policy proposals and ideas?

I found a reasonable amount to like:

  • they haven’t fixed on a public debt target yet, but I liked the articulation of the flow fiscal goal (“Governments should aim for balanced budgets over time, so that surpluses in the good times offset the bad times”).  With little evidence of an overheating economy at present, that should have them arguing for a balanced budget now, not for surpluses,
  • I was pleasantly surprised that they remain committed to lifting the NZS eligibility age, and to introducing a somewhat more demanding residence requirement.    They should have gone further on both fronts (my thoughts on NZS here) –  said from the perspective of a household where my wife is 10 years younger than I am and still won’t be affected by National’s proposed change.  But we should be thankful for small mercies: on this issue, National has moved decisively on from the Key irresponsibility.
  • I like the idea they are toying with of adjusting for inflation the interest earnings and interest payments that are tax assessable/deductible.   Various people, including at times the Reserve Bank, have argued for this for years.  It is just and right to do so, but……there isn’t that much in the issue.
  • I like the mention of possibly using congestion pricing on some parts of the roading system.
  • I am encouraged that they are willing to think seriously about the possibility of lowering the company tax rate (although disquieted by talk of favouring small businesses through the tax system).  That said, given our imputation system, a lower company tax rate benefits foreign investors (we would generally benefit from more of such investment), and if they are serious about addressing this issue –  and productivity growth –  substantively then they need to think about options for lowering the taxation of capital income earned by New Zealanders as well.  Whether they have the political skills to manage the narrative around that sort of proposal is, at very least, an open question.
  • The talk –  not specific in this document –  of a proper overhaul of the RMA and serious liberalisation of the urban land market is encouraging.  The ability of the next generation to afford decent houses (and gardens etc –  the sort of place most New Zealanders seem to want) depends on it.
  • And I like the idea of a much tougher approach to new regulation, and some sort of commitment to reducing the overall volume of economic regulation.  On that count, I like the (adopted first in parts of Canada) idea of eliminating two old regulations for each new regulation (ie a shrinking cap on the volume of regulation itself).   There are risks around such an approach once it in turn becomes bureaucratised –  ministers and bureaucrats will game the system skilfully, so it would need serious leadership from the top, and sustained follow-through –  but for now the value is in the signal it sends.

And there is other stuff I like, often undoing bad calls by the current government (eg the ban on new oil and gas exploration and the planned labour reforms  – I found this note valuable on the latter).  There was even talk of possibly unilaterally lifting all remaining New Zealand tariffs, recognising that tariffs tax New Zealanders.

They were even surprisingly muted on immigration.  I thought this line from early in the document was quite cleverly drafted, with the focus on creating a climate in which New Zealanders no longer want to leave permanently.

New Zealand is also competing with the rest of the world for skills. If we aren’t internationally competitive our best and brightest leave for overseas and our living standards worsen relative to the rest of the world.

And if I disagree, quite firmly, with their paragraph on immigration itself  – after all, we have one of the highest levels of workforce skills among natives of any OECD country

Immigration can help to deliver a more skilled and willing workforce. National understands the benefits of sound immigration policy from an economic, social and cultural perspective. The skilled migrant levels should match industry needs and the administration of visas needs to be prompt and predictable. New Zealanders must be at the front of the queue for the jobs created by our growing and changing economy, but immigration will remain an important complement to that growth.

at least the “critical economic enabler” gung-ho rhetoric is gone, and this paragraph is a long way down the document.

Of course, there is other stuff I didn’t like.    Their section on regional development is about as devoid of a serious framework –  real exchange rate anyone? –  as anything from Shane Jones.  They still seem enamoured of big taxpayer subsidies to “glamour” industries (screen grants), and when they talk of privatisation it is never about efficiency or competition or accountability or things like that, but rather silly arguments about freeing up cash to spend on other things (when, as they know, the Budget is in surplus and the debt is low).   And they seem tantalised by the idea of more infrastructure spending without offering much assurance that the sort of schemes they might proceed with would be any better –  in economic return terms – than those of the previous National government.   Perhaps I’ve mentioned that there was next to no productivity growth economywide over the last five years or so?

But when I got to the end of the document, I guess my overriding reaction was a bit similar to my reflections on the reports of the 2025 Taskforce (the body set up by the previous National government to provide analysis and recommendations on closing the income and productivity growth gaps to Australia  –  by 2025, a date that mocks us now).  I had quite a lot of involvement in that process, and largely wrote the first report.  I also largely agreed with most of the recommendations the Taskforce themselves made –  very few of which were ever adopted.   And yet, as I reflected on the report in the months after it was released, I became increasingly convinced that, sensible as many/most of the recommendations were, they weren’t enough to make a decisive break in New Zealand’s economic and productivity performance.  Some important things were missing (although at the time I wasn’t really clear, even in my own mind, what they were).

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

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

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

Why does good government matter?

That was the title of a speech Jacinda Ardern gave in Melbourne a couple of weeks ago.   For the short trip to Melbourne, the Prime Minister had eschewed commercial flights and taken an RNZAF plane instead, only to have the plane break down.  It later emerged (page 11) that her office knew how badly this bit of New Zealand’s government was run

757.png

There must have been some wry chuckles in parts of the Australian government and public sector.

The “progressives” who turned out to hear Ardern (it was an ANZSOG event, so I presume lots were public servants and academics) appear to have loved her.  Stuff reported that

The event on Thursday night attracted more than 2000 people. Ardern appeared to rapturous applause, and was told that she had put fire in the belly and power in the hearts of Australians.

In The Guardian one particular left-wing Australian academic, a former adviser to Julia Gillard, lost all sense of reason and perspective, claiming Ardern as “one of the world’s great leaders”, and hankering for something different, for New Zealand type politics and reform.

In more recent times it seems that for every policy success achieved by New Zealand, Australia has suffered an equal and opposite failure.

Which is, no doubt, why so many hundreds of thousands of New Zealanders have migrated to Australia and so few Australians to New Zealand (even though we make it easier for them to come, than it is for us to settle in Australia) and why when our two countries were once more or less economically level-pegging, Australia is now so much richer and more productive than New Zealand is.  Don’t take it from me: as Australian Labor MP Andrew Leigh put it in his recent article, productivity makes a real difference, and creates real opportunities and choices.

For a time there was a strange phenomenon whereby people on the right in Australia tried to talk up John Key and Bill English as great leaders and economic managers (mostly, it seemed, in reaction to people they didn’t like in Australia –  whether Rudd, Gillard, Abbott or Turnbull).  Curiously, this particular left-wing academic manages to embrace that strange line as well –  Jacinda Ardern is great and so was John Key (“exceptional leadership”).  Going by results, could we perhaps trade these stellar figures for someone Australians think is less impressive, but who might actually address some of the serious New Zealand problems and failures?

But the real point of this post was about the Jacinda Ardern’s text.   When I first heard the title (“Why does good government matter?”) my immediate reaction was along the lines of “how would she know?”, but I guess it is possible to recognise what good government might be even if, as a serving Prime Minister, you aren’t presiding over such a beast.   A good start might be recognising that as Prime Minister you might perhaps be thought of as chief executive of the government but not –  contrary to the PM’s suggestion in her text –  of “the country”.

I’d have thought the question of why good government matters was pretty straightforward.  Governments exercise enormous power –  actual and potential (the latter especially in a country like New Zealand with few formal checks and balances) –  take an enormously large share of our incomes (equal to more than 30 per cent of GDP), and any agency that powerful needs to be kept in check, and we need assurances that those in charge of the goverment are operating efficiently, effectively, compassionately, honestly, openly, knowing their own limitations, and so on.    Good goverments can do some good.  Bad governments can be incredibly dangerous and damaging.  Look, after all, at the productivity or housing records in New Zealand –  or at the 10 per cent of working age adults living on welfare.

But there is little sense of any of this in Jacinda Ardern’s speech.  I guess she is a socialist –  former president of the International Union for Socialist Youth –  speaking to an audience of people with pretty similar beliefs about the desirability of a big and active government, with little emphasis on how –  time after time –  governments mess things up.

Ardern’s imperial mindset is on display early in the speech

Good government matters, because government affects everything.

Breathtaking.  The love of husband for a wife (and vice versa).  Of a parent for a child?  Our core beliefs –  those under the label of religion and others –  that shape what we value?   Friendships?  Whether or not the All Blacks win the World Cup?

I suppose you could mount a defence of the Prime Minister along the lines of bad governments can interfere even in these things, but there is not even a hint of that in her address – no sense at all of the appropriate limits of government or of the failures of even the most capable and well-intentioned governments.    In fact in the very next sentence she – I guess she is a Socialist –  goes on to suggest that this “government affects everything” line is something “we” (she and the smart active government types) “perhaps take for granted”.  She tells us, quite seriously, that she was “gutted” that an old school friend had no interest in politics: but then Ardern has never known anything but politics, and that simply isn’t (fortunately) the case for most people.   But she really wants to a better class of citizen to be worthy of people like her.

She goes on with unsupported stuff

Around the world, democratic values and institutions are under threat in a way that many of us never expected to see in our lifetimes.

It would perhaps be good if she were a bit more specific.   Perhaps she had the PRC in mind, and the way she and her colleagues repeatedly defer to PRC interests and pressures, allow PRC regime/Party-affiliated individuals to serve in our Parliament?  But I’m guessing not.

Perhaps she isn’t too keen to Vladimir Putin (neither am I) or Viktor Orban (not ideal either) but most adults are old enough (“our lifetimes”) to remember when these places were far far worse.   She surely can’t mean Brexit –  which was, after all, the choice of the British voters in a hotly-contested energised referendum?   And yet I fear she might, because in the next sentence we read

Nationalist sentiment that closes off the possibility of countries working together is surging.

Except that it doesn’t, does it.  Free and independent nations often choose to work together on specific items of mutual interest (eg no sign of the UK pulling out of NATO).  Aren’t Australia and New Zealand proudly independent countries –  doesn’t the PM tell us at every opportunity about her “independent” foreign policy? –  and yet we work closely together and are still able to disagree, and not subsume ourselves in one combined “New Australasia”.

Strangely, in her paean to good government, the Prime Minister talks of how

Norms that we in New Zealand and Australia take for granted – the rule of law, the peaceful transfer of power, freedom of expression – are being challenged in new and more explicit ways.

Must have been the PRC she was talking about again surely? But I guess not.

I’m old enough to remember when military coups in various African and Latin American countries were the regular fare on Morning Report, and when from the Fulda Gap eastwards few had the benefit of the rule of law, freedom of expression, and Party rule was something akin to the end of history.    Things are better now in so much of the world.  And 23 Democrats are lined up across the political spectrum to try to defeat Donald Trump in an open and contested election.

But she also mentioned “freedom of expression” –  the same Prime Minister whose government is beavering away on plans to restrict that freedom in New Zealand, whose government made mere possession of the manifesto of Brenton Tarrant an offence punishable by many years of imprisonment.

To this point she seemed to be merely warming up with some generic tropes for his left-wing audience.  And then it was into the red meat with a strong denunciation of the reforms of the 1980s and early 1990s –  all this from a Prime Minister of the same party that did many of the reforms.

In many countries, while the very wealthiest have grown consistently wealthier, the rest have seen little or no real rise in their incomes or their living standards – over decades.

Inequalities that deepened with the great deregulating reforms of the 1980s and 90s have become a permanent feature of these economies – not a brief moment of pain.

That is certainly the case in New Zealand.

Except that very little of that stacks up against the evidence.  In New Zealand wages have been rising faster than the capacity of the economy to pay (growth in nominal GDP per hour worked), income inequality hasn’t widened for decades, and to extent there have been issues in New Zealand they have to do largely with housing –  where successive governments have presided over grossly over-regulated urban land markets.

And look at her try to distance herself from and disown all sorts of reforms  (notice that “said to”)

Starting in 1984, through to the 1990s, we removed regulations that were said to hamper business, slashed subsidies, transformed the tax system, dramatically cut public spending and massively reduced welfare benefits paid to the sick, those caring for children and the unemployed.

Now we can argue whether those regulatory reforms were necessary, but regardless the numbers speak for themselves.

And yet she shows no sign of even understanding the numbers, repeating the same line she took into the 2017 election, claiming that in aggregate the economy did well, but the “right” distribution didn’t happen, as if oblivious –  or uninterested –  in the continued widening gap between the level of productivity in New Zealand and that in leading advanced OECD economies (and than in Australia).

She does go on to devote a paragraph to housing markets, but shows no sign of actually understanding the issues, suggesting that low interest rates are the cause of the problem.  Similarly she laments technological advance putting “people out of work” (it is called productivity –  doing more with less), seemingly oblivious to the incredibly high labour force participation (and employment) rates we actually have in New Zealand (higher, for example, than in Australia).

And in a line of (stunning) naivete, we read this

Stunningly, our most connected generation in New Zealand, has also been found to be our loneliest.

And in the next line (emphasis added),

what does good government look like, not for us but for the very people who are turning away from us?

The Prime Minister of the ANZSOG (public servant and academic) audiences, “people like us”.

And so she goes on

Domestically, some have chosen to reject the independent and expert public service and the possibility of a mutually respectful and diverse nation.

Could we perhaps have one of those “independent and expert public services”, instead of the degraded (for example) Treasury we currently have in New Zealand?

Abroad, they reject the international institutions that they paint as responsible for both economic and cultural problems when they aren’t necessarily at fault.

One of my old bosses used to jump up and down when we (unspecifically) tarred unnamed individuals.  She might be a fan of the EU, but there is no reason why the British public should be, or why them choosing the pull back from the push for a federal Europe should be any sort of marker of societal failure or decline.    And if the IMF, the World Bank, the UN etc do little harm, they don’t do much good either.  And if she wants to criticise the US over the WTO, perhaps she should say so directly –  or perhaps even live the view that free trade benefits most those who take off restrictions on their people, and take a lead and remove New Zealand’s remaining tariffs and import restrictions.

And then

So this is one answer that is available to people – and that some are signing up for. After all, fear and blame is an easy political out.

Except that some people –  parties and individuals, Labour included –  are to blame for our housing disaster, our dreadful productivity performance.  That blame should be sheeted home.

We get several mentions in the speech of high rates of GDP growth but (I think) not a mention of immigration –  which the PM and the ANZSOGers love –  and not a hint of per capita income growth, let alone the (lack of) productivity growth.  Productivity creates possibilities and options, eases hard choices etc.  But Ardern seems to prefer not to know.

And we get stories about “social and economic inequality” driving deprivation, poverty and crime, but nothing at all about cultural failures (a point Winston Peters was making this week), family breakdown, or choices and individual responsibility.   Free societies can’t flourish without strong and functioning families and cultures.

As she was talking to public servants, there is several pages of talk about public services reforms –  but nothing about transparency, nothing about accountability, nothing about excellence, nothing about (say) fixing a system in which the head of the State Services Commission largely exonerates his buddy the outgoing Secretary to the Treasury after a monumental stuff-up, revealing an inability to operate under pressure at the very top of our public sector.  Once upon a time Labour talked of being the “most open and transparent government ever”.  Now even people on the left just scoff and make fun of the claim.   And if the public service is in such good shape (as she claims) doesn’t it make it very clear that responsibility for the severe ongoing policy failures really lies with her (and her colleagues, and people elected before her from her party and others).

The speech ends with the claim that “Good government need not be an oxymoron”.  At one level that is obviously true, and yet at another it invites the reaction “and yet surely in New Zealand in recent decades it has proved to be so”.   And if it weren’t for the ideological blinkers of her audience (for whom her main appeal seems to be that she is the “not Scott Morrison” or the “not Donald Trump”, you’d have to marvel at the presumption of the Prime Minister offering lectures on good government to a country that is so much richer and materially more sucessful than New Zealand is, to which so many New Zealanders have moved in recent decades, and when her government has done so little.

For those –  as many do –  who praise Jacinda Ardern as a great communicator it was also striking to read the speech and not find a single fresh or interesting idea, not even a fresh or startling way of making an old point. It was as if some public servant or PMO staffer had simply turned the handle and churned out a set of cliched notes, empty of almost any substance, with nothing to leave people thinking.   Is there anything to this alleged communication skill, beyond the level of individual empathy –  not an un-useful quality in a Prime Minister, but hardly the foundation for any sort of transformative government.

In his Herald column last week, Matthew Hooton brought me up short with this summary

The Ardern Government is the emptiest and most incompetent in living memory,

But it is hard to disagree (despite some competition for the title) and the problem starts at the top.  So much of what the Prime Minister says is vacuous –  almost devoid of content –  and it has been matched by an absence of any serious steps to deal with pressing failures (or utter failure in, for example, an actual initiative: KiwiBuild), in turn presumably built on  no compelling narrative about what has been done wrong in the past, and what might make a material difference in the future.  Endless blather about wellbeing doesn’t change that failure.

For those who doubt the “vacuous” charge, consider finally this

Someone I debate these things with, perhaps inclined to making a few more allowances than I am, observed “even I have to agree that is pretty vacuous”.

We really need good  –  disciplined, rigorous, courageous, open, self-aware, limited – government.  We don’t have it.

 

Thoughtful analysis of productivity from the Opposition

The Opposition in the Australian Federal Parliament that is.

In my post yesterday, I noted  that Simon Bridges’s latest speech continued the pattern in which our Opposition pretends there is no real structural problem in the New Zealand economy: no decades of productivity underperformance, no near-complete absence of any productivity growth in the last several years (whether under National or Labour).

And so it was some mix of refreshing and depressing (would that it were so in our country) to yesterday read a new paper by the Australian Shadow Assistant Minister for Treaasury on “tackling Australia’s productivity crisis”.  No doubt it helps that the Shadow Assistant Minister was previously a professor of economics at the Australian National University (I wrote about a paper he gave in New Zealand last year here).   And perhaps the political context is different: it is now six years since the ALP was in (federal) office and it is three years until the next election.  And Leigh isn’t the highest profile ALP politician.  Nonetheless, a moderately senior figure in the main opposition party actually went to the effort of writing a serious paper on productivity failures in Australia (not even engaging mainly in gotcha politics –  all the fault of the other lot).   Would that it were so here.  If National doesn’t have any former professors of economics, I’m sure there must be some serious economists around who would be National supporters and might be happy to help, were the party to be seriously interested in addressing –  rather than avoiding –  the issue.

And I don’t say any of this because I agree with Andrew Leigh’s prescriptions.  Mostly I don’t –  in fact, to a first approximation I think he has the wrong mental model of the Australian economy –  but he is a politician showing every sign of trying to take the issue seriously.  Productivity growth is what underpins any long-term sustainable improvement in material living standards.  As he puts it (with his particular left-wing emphases)

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Here is how Leigh introduces his article

At the start of June, the Productivity Commission quietly dropped a bombshell. Australia’s productivity growth had basically stalled. Labour productivity — output per hour worked — was more or less flatlining. After a generation in which labour productivity had grown at almost 2 per cent a year, it had tumbled to just 0.2 per cent.

The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

Note that in the final paragraph of that extract is one difference between Australia and New Zealand.    In New Zealand wage growth has outstripped growth in nominal GDP per hour worked (ie the combination of terms of trade and productivity) for some time, but this is the Australian version of that chart

wages in aus

There is a variety of possible explanations, but the comparable New Zealand chart slopes upwards, not downwards.

But how does the aggregate productivity picture look for Australia?  This is quarterly ABS series of real GDP per hour worked.

aus prod.png

In the last two or three years, the picture is quite as bad (no growth at all) as in New Zealand –  bearing in mind that the average level of productivity in Australia is far higher than in New Zealand.

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century.  In doing so he relies on a recent speech from a senior Australian Treasury official on productivity (another contrast to New Zealand), reporting some research work Treasury had done.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

Go to Quinn’s speech and you find this chart (unfortunately a bit fuzzy)

quinn

The left hand panel is the point Leigh is making.  It doesn’t look very good.

On the other hand, the economywide cross-country comparisons really don’t look so bad at all (and being annual data you don’t see the recent flattening in the way the quarterly chart above shows).

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch (as I’ve used in previous charts and tables for NZ comparisons: US, France, Belgium, Netherlands, Germany, Austria, Denmark, Sweden).

AUs prod 2

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms.   Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work.   It isn’t a good performance at all –  the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process –  but it is a rather different emphasis than in the Federal Treasury chart Leigh draws on.

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years –  all those newly developed iron ore and LNG exports.  There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy).   I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance  (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which –  in this context –  I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders.  Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

aus norway

Australia –  still building up its fresh wave of resource exports –  has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years.  And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article.  There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia.  My own story of Australia’s underperformance is much like that for New Zealand.   Remoteness and distance are huge issues –  perhaps even increasingly important globally –  and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation).  It isn’t just a matter of simple division –  but it is close to it, bearing in mind what else we know about the Australian economy –  to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

There are lots of detailed points in Leigh’s article, some of which seem more compelling than others (I’m not persuaded that getting more people into tertiary education is likely to make much economywide difference, when the people not going now are likely to be those who would benefit least from doing so –  it hasn’t been worth their while to do so). And I’m not convinced he has the right model to think about Australia –  where the bigger issues seem more macro in nature – but it is just refreshing to see a moderately senior active politician actively engaging in thinking about, writing about, talking about, how productivity performance might be markedly improved.  Because, as he says, it really matters to all of us.