I was away when Reserve Bank chief economist Paul Conway gave his recent speech, “The road back to 2% inflation”, and since I didn’t see any material commentary on it I didn’t bother going back to it when I got home. But my son – honours student researching monetary policy (anyone wanting a young economist at the end of year, get in touch…..) – prompted me to finally do so. And since I’ve been quite consistently critical of the lack of serious speeches from the MPC members, I shouldn’t overlook the handful (even if they are just selling a party line, rather than really opening up issues and alternative perspectives) that do emerge.

First, some kudos. With the speech on the Reserve Bank website there was a transcript of the following Q&A session (the speech was apparently delivered as a webinar). That should be standard practice, since the unscripted remarks of policymakers can be at least as informative as the scripted and carefully negotiated ones are, and we know central bankers can go off reservation. I’d link to the transcript but can’t now find it again (no doubt there somewhere, but not on their speeches page).

The speech seemed to mainly be an opportunity to report some recent research results from Reserve Bank staff (several Analytical Notes). It is good to see some of those coming out (in a telling comment on how bad things had been, in the Q&A session Conway himself highlights that it was good that they are now “really cranking out” research again).

Conway wasn’t at the Reserve Bank when the big and really costly mistakes were made by the Monetary Policy Committee, joining only in May 2022. One might therefore have hoped that he’d be able to take a more detached and objective view on what had gone before. After all, even though in his management role he works for the Governor (and his grossly underqualified direct boss, the DCE responsible for macroeconomics and monetary policy, with a marketing degree), he does actually hold a statutory position as a member of the Monetary Policy Committee, and isn’t supposed to simply defer to the boss (or institutional interests) in reaching his views and votes.

Conway’s speech is presented as forward-looking in nature (“the road back to 2%), but there is quite a lot of history in it too, and it is the historical dimensions that got my goat. In particular, there is a persistent and repeated refusal to accept (at least in public, which is where it counts in terms of accountability) that monetary policy mistakes and misjudgments are primarily responsible for the severe inflation outbreak, the aftermath of which we are still living with. All the arbitrary and never-to-be-reversed redistributions of wealth, all the dislocations of markets and businesses, and now the recession and significant rise in unemployment which the Bank, no doubt rightly, tells us is necessary to get inflation comfortably back down again.

To repeat one of my consistent lines, human beings are fallible, they make mistakes. Central banks – here and abroad – are made up of humans, so they make mistakes. Really serious ones, of the sort seen in the last few years, shouldn’t happen but they do. One might even offer perspectives in mitigation: the pandemic was something quite extraordinary, and many people (here and abroad) misread the macroeconomics of it for too long. But those responsible need to take responsibility for the mistakes that were made. Those who now hold office who weren’t even there at the time have even less justification for not detachedly owning that those who were there made (really serious and costly) mistakes. Plus, in most human affairs, contrition goes quite a long way…..including (but not limited to) as a sign that one is even interested in learning from the mistakes and doing less badly next time.

Instead, there is avoidance and minimisation right through the speech.

At one point we are told that during the Covid period interest rates were “relatively low”. Not the lowest they had ever been, just “relatively low”.

Then we get attempts to minimise Reserve Bank responsibility by highlighting (correctly) that fiscal policy was also expansionary (“at upper end across OECD economies”) and bemoaning that insufficient attention has been paid to the role of fiscal policy. But Conway knows very well that the system is set up in such a way that monetary policy is the last mover: fiscal authorities do what they will, do it transparently, and then the Reserve Bank does whatever is necessary to keep inflation in check. The responsibility for the high (core) inflation rests with the Reserve Bank, not with fiscal policy.

And so it goes on. Several times we find attempts to blame the labour market, or even border closures, as if the Reserve Bank MPC was not set up to be….the last mover, to respond to all other pressures and risks in a way that keeps core inflation in check. In the Conclusion, Conway articulates it this way

“Inflation spiked higher during the pandemic due to a range of factors, with a shortage of labour and materials in a period of strong demand being particularly important”.

But no mention of monetary policy, which is by design the main tool for influencing aggregate demand and capacity pressures to keep inflation at or near target. There are plenty of references to “demand” in the speech, but hardly any (backward looking) to the demand manager.

To read Conway in isolation, you would have absolutely no idea that the Reserve Bank itself now estimates that the economy got materially more badly overheated than at any time for decades. That is on them: minimising or avoiding such situations is an integral part of successful inflation targeting.

Or that on IMF estimates New Zealand in 2022 had the most overheated economy of any of the advanced countries/monetary areas. It was the result of what were, with hindsight, glaring monetary policy mistakes and misjudgments. But Conway – and no doubt his bosses – would simply prefer we looked the other way, and accepted that it was all somehow out of their control (except no doubt when they will take credit when inflation eventually comes down again).

What of the way ahead? There is an OCR review out tomorrow, continuing the weird RB choice to hold a review the week before the key (especially at present) quarterly CPI data are out. The Bank has signalled that Conway, their chief economist, is away and won’t be attending the meeting (which doesn’t seem like particularly good leave planning). Given that and the weirdly hawkish tone of the May MPS – the one picking an economic recovery even as the OCR is unchanged, or even rise, for the next year – one can’t expect much from the MPC tomorrow (although RB communications flip-flops haven’t been unknown).

I’m less interested in what they will do than in what they should do, and have come to believe that, on balance, an OCR cut would be appropriate. These are – or should be – almost always matters where risk and uncertainty are real considerations. If a monetary policymaker is 100% sure of their stance, they either aren’t thinking hard enough or have left things far too late, given the fairly long lags with which monetary policy works. I’m certainly not mounting an argument for a move to a neutral monetary policy stance – wherever the neutral nominal interest rate might currently be (itself highly uncertain) – but simply for taking the foot a little off the brake, and easing back a little on the extent of the disinflationary pressure. As I said, uncertainty is a pervasive factor in any forecast-based monetary policy regime. Quite possibly, time will show that by now the OCR should already be quite a bit lower, but I don’t think that is yet a view one could reach with great confidence, so mine is simply a call to begin edging in that direction (and to reverse May’s curious hawkish rhetoric and numbers).

Why? Annual inflation is still above the top of the target range after all. But it is clearly falling, and there are numerous indicators – hard data and surveys – pointing in the direction of a further material accumulation of excess capacity and disinflationary pressure, which will play out – even just on today’s policy – over the next 12-18 months. The worst of inflation is clearly past, and with it fears that some new and really bad rate of inflation was going to become embedded. And while the RB likes to talk up non-tradables inflation – which has no special role in the Remit – it is also true that a fair proportion of those pressures (insurance and rates) are resulting from non-monetary shocks (one clearly a supply shock, one about government charges), which really should be “looked through” by an inflation targeting central bank, unless (and to the extent that) they were spilling into public expectations of medium term inflation and wider price-setting and spending behaviour.

A move now to a 5.25 per cent OCR would not, of course, be game-changing in macroeconomic terms. It would, however, be a step in the right direction. One can understand the personal incentives on the Governor – who cares about the excess capacity so long as I finally am 100% sure inflation is back down again – but perhaps it would be easier for him and the MPC to take some of the risk, that is an integral part of the business they are in, if they hadn’t spent so much time and effort blustering and minimising the extent of their own mistakes from several years back.

(Post refers to my Saturday post on recent reported comments by the Reserve Bank Governor)

Who said this?

The world is awash with savings yet New Zealand does not provide a gateway that makes it easy for that capital to enter the country.

Well, that was one Christopher Luxon on the campaign trail three months out from the election last year.

At the time, Labour was in office. This was how their Minister of Finance had articulated the Labour government’s general attitude to foreign investment, in an official directive letter required by statute and addressed to Land Information New Zealand which runs New Zealand’s overseas investment regulatory regime

He went on to outline some caveats, and no one could accuse the 2017 to 2023 governments of being unequivocally keen on all and any foreign investment (they were, after all, the government of the ban on foreigners buying houses here).

But what of the Governor of the Reserve Bank? Normally, one might expect Governors to keep any opinions on FDI to themselves (once upon a time the Reserve Bank administered the relevant legislation, but no longer) or at very most to articulate something close to government policy. It isn’t, after all, their area of responsibility (debt inflows might be a different matter).

But this was what he told his Queenstown audience a couple of weeks ago, in a speech delivered in his official capacity

Our central bank Governor seems to be saying that there is something wrong with having so much foreign investment in New Zealand, and that it is somehow related to what holds back productivity growth in New Zealand?

As I noted in Saturday’s post, it really isn’t clear what he is on about or what he is basing these quoted comments on.

It isn’t, after all, as if New Zealand has a particularly large stock of inward foreign investment.

In fact, among OECD economies we are in the bottom third, expressed as a percentage of GDP (the chart doesn’t show Ireland, Luxembourg or Netherlands which are off the scale to the right on account of company tax regime distortions – although the “true” level of FDI in each country will be quite large).

And New Zealand is well known for having a not-exactly-welcoming regulatory approach to foreign investment

People debate quite what the New Zealand number really means in substance, but our governments don’t go out of their way to make it easy.

What about the current government? Well, as it happens, the Associate Minister of Finance with responsibility for the Overseas Investment Act issued a new one of those directive letters to LINZ just a few days ago. In his press release he noted:

And in the official directive letter he wrote

That seems pretty clear (although a shame about that absurd foreign buyers ban that is still in place).

But it seems to be utterly at odds with the public views, expressed in his official capacity, of the Governor of the Reserve Bank. Not only do Orr’s comments seem out of step with most conventional economic analysis and advice (I guess there is always the Greens and Bill Sutch of dubious memory on the other side), but – on a area in which he has no policy responsibility – quite out of step with the government. He has always been free to resign and run for Parliament or establish a think-tank. But for now he is a senior and very powerful official delegated huge powers (which, as it happens, he hasn’t even exercised well).

The Governor often likes to cite the, mostly meaningless (because it simply explains what the point of having the Bank is, and nothing about powers or specific goals), purpose clause in the Reserve Bank Act

Both governments he has served under have stated that they see foreign investment as having an important role in helping lift prosperity etc. But not, it seems, the Governor.

Look, if at a private dinner party with close friends or over a beer with his mates Orr wants to muse in some neo-Sutchian or Green Party way then who are we to object (although even then good central bank Governors should be very guarded about what they say to anyone), but this was in an official speech in his official capacity. And if he reckons the ODT’s journalist has quoted him badly out of context, the onus should be on him to clear things up (but he is only likely to do so if journalists start asking him hard questions, of which there is no sign so far).

As a reminder, the Associate Minister of Finance making those foreign investment comments wasn’t just the minister actually responsible, but also the leader of the ACT Party, a senior Cabinet minister and someone who will be Deputy Prime Minister a year from now. He is also the author of a letter to the then Minister of Finance – who was required by his own new law to consult other parties in Parliament – strongly opposing the reappointment of Orr as Governor (page 15 here). There is no sign Orr has changed for the better (Seymour objected under three headings: Poor Leadership, Poor Outcomes, and Poor Focus – and you’d have to think Orr’s weird and unsubstantiated FDI comments fall smack within that third category).

It was always a bit staggering that Grant Robertson, having passed a law himself requiring that the other parties in Parliament be consulted on the appointment of a Governor (one could argue this was an amendment with merit, consistent with the idea that even if people didn’t always agree with a person serving as Governor at least it should be someone who commanded pretty wide-ranging respect across the political spectrum) went ahead and reappointed Orr over the explicit written objections of the two largest opposition parties, knowing that the law made it very difficult (probably rightly so) for him later to be dismissed if the government changed.

But Orr has shown no signs of buckling down and acting in a disciplined way that might command grudging respect from those who had been openly sceptical in his first term, even though that was the sort of line the egregious Reserve Bank Board chair used to make the case for reappointing his man

We’ll see a new, different and better Orr next time round seemed to be the suggestion…..

Orr was back on form a couple of weeks ago with his abuse of banks and of the New Zealand Initiative, when the Initiative (a body to which the main banks belong) had the temerity to disagree with and criticise the Governor and his policies. He just doesn’t get the idea that reasonable people might differ from him, let alone that as a very powerful regulator he has particular responsibilities to operate in a restrained and disciplined manner, not by implication opening the possibility of taking out on regulated entities his vengeance for daring to openly disagree.

Fortunately perhaps, the ACT Party is not an entity regulated by the Governor. On their official Twitter account I spotted this 10 days ago

Now, Todd Stephenson may be not much more than a backbencher BUT (a) he is actually a PPS to David Seymour, so not exactly marginal within ACT, and b) this statement (“he is temperamentally unfit as a steward of banking regulation”) is posted on the official Twitter account of a party that is a full member of the coalition government, a party headed by an Associate Minister of Finance no less. And, 10 days on, the post is still there (clearly wasn’t some junior staff’s fit of excess enthusiasm quickly pulled down by the powers that be).

It really is extraordinary that we have a central bank Governor:

• openly articulating views on foreign investment (something he has no responsibility for) apparently at odds with views of successive govts,
• attacking private entities for having the temerity to disagree with him, and implicitly holding over  bank members of that body a reminder of all the regulatory power he wields over them,
• being openly attacked as unfit for office by a political party that is a component of the current coalition government, whose leader is an Associate Minister of Finance.

And all this with a Minister of Finance who seems not to care a jot.  A week or so ago when that NZ Initiative story broke she was at pains to try to disclaim any responsibility, but the Act is quite clear that responsibility for the Governor and Board rests squarely with her (the one person in the process accountable to Parliament and the public)

(I don’t think it is plausible to use these powers to sack the Governor – I don’t think behaviour since March last year (his reappointment) rises safely to that level, and any attempt could be judicially reviewed, in a very messy and disruptive way, but……Orr is her problem, and she so far displays no sign of any interest.)

I might suggest it was all rather Third World, but that might be unfair to them. But it is rather unsatisfactory all round, and really needs sorting out (like so many aspects of our failing public sector). Journalists with access asking hard questions might be a good start.

I’m sure there are more important issues right now amid the spiralling decline in New Zealand public institutions. One could argue there are even more important matters around the Reserve Bank (you know, the body that lost $11-12 billion for taxpayers’ in its reckless Covid interventions, gave us the worst core inflation for decades (still outside the target range several years on), and still has outstanding billions of dollars of concessional loans to banks (this even as the Governor openly bags banks for being too profitable for his tastes)).

But this one caught my eye.

Just before the last MPS a few weeks ago the Bank sent out a routine advisory about post-MPS engagements senior managers would be doing. It included this snippet

Quite probably no one much outside Queenstown and lakes area gave it another thought. The clear implication was that there’d be nothing new or newsworthy in what the Governor was saying.

But I happened to be in Dunedin a couple of days later, where I stumbled on this article in the local paper

which made it quite clear that even if Orr had been using presentation slides from the MPS that hadn’t come even close to being the limits of what he’d said.

Again, there were a few things that caught my eye.

First, there was that weird – but not new from Orr – suggestion that “price setters” might choose to alter their behaviour to help out the Bank. Rather odd really. Not only do those firms have shareholders to whom they owe legal duties, but next time inflation undershoots the target midpoint should we expect the Governor to be urging firms to make a bit more profit by helping him out and raising their prices? Charitably, I guess that probably wasn’t what he had in mind, but whatever his intent he feeds a narrative in which core inflation is anyone’s responsibility other than the Bank’s and MPC’s.

Then there was that crass line about “you’ll see one chubby former ginger dancing in the streets of Wellington when that number [inflation under 3 per cent] is reported”. I’m guessing those whose businesses were closed down, those whose jobs were lost in the process, probably won’t be sharing in the Governor’s jubilation.

Look, I’m quite sure the Governor will genuinely be pleased when inflation is below 3 per cent – hopefully, even more so when it gets near the 2 per cent midpoint he is required to focus on – but this is the same Governor who has never expressed even a shred of contrition for his part in the inflation (let alone those huge, utterly unnecessary losses – which would have paid for many many (eg) cancer drugs). It was the sort of juvenile line one might expect from a junior official. From a Governor one might have hoped for a little more gravitas. Yes, even from Orr.

But what really prompted me to write this post was those comments on productivity, immigration, and related issues. Remarkably – and they really are quite remarkable comments from a long-serving advanced country central bank Governor – they’ve had no other coverage anywhere, and seem to have sparked no follow-up comments to (for example) the Minister of Finance, the person who is responsible to Parliament and public for the Reserve Bank and the Governor.

He is reported as having said that “New Zealand’s productivity record was the OECD’s lowest” in the last couple of years. I’m not sure quite which data he is using. but our productivity growth (or lack of it) has been pretty bad. In fairness so has productivity growth in a bunch of other OECD countries (the US tends to stand out at the other end of the scale). And this is, it seems according to the Governor, due to our immigration policy. Big news if true, especially when it comes from…..the Governor of the Reserve Bank (even if it is a matter for which he and the Bank have had no responsibility whatever). He goes on – and here we get quote marks – “if we have a problem, we pour more people into it”. Look, I have been quite vocal over the last decade or more on the way I think immigration policy has been systematically harming New Zealand’s (and Australia’s for that matter) longer-term productivity performance) but a) I’m just a private commentator, while he’s the Governor, and b) I don’t think even I’d be quite that reductionist, especially in a formal setting (like a speech from the central bank Governor).

And then he is reported as going on: “Until we get capital deepening going on in the economy, we will remain in this space” [presumably meaning low productivity growth]. Which is all rather mechanistic and not very insightful at all. There aren’t just lumps of capital that some central planner decides to allocate more of, but firms in markets, making profit-maximising choices against the backdrop of the opportunities they perceive and the regulatory etc environment governments impose.

And, to save you scrolling up and down, here is the crowning set of quotes

Not entirely clear who “we” is here, but presumably he means businesses operating in New Zealand taken as a whole. And note that his comment is about reinvestment, not investment per se (as it happens, total investment as a share of GDP has been higher in New Zealand most of the last 15 years than the median of the IMF grouping of advanced countries), so quite what is he on about? We know that New Zealand has a corporate tax system (dividend imputation) that does not generally double-tax profits earned by companies with New Zealand shareholders, and so – like Australia – tends to have quite high dividend payout rates. But what is the Governor’s beef? Is he seriously arguing for a more distortionary tax system, to stop companies distributing profits as readily? You might have thought that if he was going to weigh in on such issues he might have highlighted that we (and Australia) now have one of the highest company tax rates in the world, and company tax rates really bit on foreign investment (since foreign investors can’t use imputation credits).

But no. In fact, what we get from these comments is that the Governor isn’t very happy about the foreign investment we do have. In fact, unlike almost every serious economic commentator (and in fact the government), he seems to think there is too much of it, falling back on that rank populism beloved of the Greens, the left wing of the Labour Party…..oh, and the marketing department of TSB Bank (my photo from a few years ago). Oh no, the dividends are going to…..well, the people that provided the capital.

As it happened, when I looked up the detailed balance of payments data, there had been $21.4 billion of reinvested earnings by foreign-owned companies operating here in the five years to March 2023. Quite probably some of it was more or less compelled by Orr’s own OTT additional requirements for bank capital (the staggeringly expensive insurance policy that was never subject to a proper cost-benefit analysis) – and the banks are the biggest foreign investors (collectively) in New Zealand. But you are left wondering quite what Orr is on about, and based on what. Just more of the unedifying Australian bank-bashing that he has become known for (recall how keen he seemed when those capital proposals were around for one of the Australian banks to divest and throw their business on the tender mercies of the NZX).

But just what, substantively, was the Governor on about? And how did he conclude that it was his place – charged with delivering price stability (oops) and maintaining financial system stability – to be suggesting, and it does seem to be the implication, that really we’d be better off with less foreign investment? This the same Governor who in the same speech seemed (see above) to be lamenting the relative lack of capital investment in New Zealand.

The account in the ODT ends with a couple of rather cryptic comments. The first (“that is a fundamental thinking change…”) seems to relate to his lament about foreign-owned firms paying investors dividends – which is presumably what they do when they don’t have great investment opportunities presenting themselves here. But, according to Orr, somehow the answer lies there: on this count “the more that productivity story is thought about the easier it is”. What, we should discourage foreign investors and somehow prevail on those who remain to invest here even when it isn’t financially attractive to do so? I can’t imagine that that is really what he means, but it is certainly what it sounds like.

And then an old favourite of Orr’s – with almost nothing whatever to do with his actual responsibilities – is all that talk about needing “intergenerational investment”. One supposes that perhaps he had in mind really long-lived infrastructure projects – things New Zealand entities, many of them government ones, seem woefully bad at executing in a cost-effective way – but actually depreciation (whether of the market value of new ideas, or of physical capital) means that most investments anywhere are much shorter-lived than “intergenerational”. And if the Governor thinks he can be confident about what ‘intergenerational” opportunities are out there that private firms might sensibly lay hold off, perhaps he might reflect on his own state of knowledge about the things he’s actually responsible for. That inflation, for example, wasn’t exactly something he set out to deliver.

It really is woeful stuff coming from the Governor of the Reserve Bank. If one of his junior managers had gone off reservation with such thoughts at a briefing far from home one might put it down to youthful enthusiasm and inexperience. But this is one of the most powerful government officials in the land, the long-serving Governor of our central bank. And, sure, it no doubt wasn’t a fully scripted speech, but…..he was apparently on-the-record (and even if he wasn’t central bank Governors are supposed to speak guardedly, perhaps especially about things that aren’t their responsibility)….and the onus is on him when he speaks to speak well and not just throw out glib populist lines.

But it seems that – once again – there is no price to pay. The ODT journalist who wrote the story even had her email address in the article, so it would have been very easy for specialist political or business journalists to have followed up on these loose comments (and who knows what else he might have said – ODT readers probably having a limited appetite for reports of the Governor), but apparently not. No one seems to have challenged the Minister of Finance, about whether it was really appropriate for the Governor – who hasn’t been doing his day job well – to be masquerading as some sort of Green Party economic nationalist stand-in (but then just a week ago the same Minister told the press the Orr was not her responsibility – even though the Act explicitly says otherwise).

What does the rest of the world (markets and RB watchers) make of it? I guess if they didn’t happen to read the ODT they’d not have known.

Once again, it really isn’t good enough. Another government agency head still in place after failing badly (my 20 reasons why Orr should never have been reappointed, not then including the inflation numbers). And a government that seems to barely care (in Orr’s case, there is still no sign of any attempt to clip his wings – eg foreshadowing deep budget cuts, letters of expectations, forcing the MPC to be more open, appointing a Board chair who make actually represent the public interest etc; really just nothing).

There was an old line of Alan Greenspan’s that “if you think I have been particularly clear you have probably misunderstood what I said”. Orr, by contrast, straying beyond his bailiwick seems quite troublingly clear. Is there any other advanced country central bank Governor who is on record in recent times lamenting (simultaneously) the lack of investment in his economy, and the presence of too much FDI?

This is really just a quick information post.

The Reserve Bank’s website has a complete set of Monetary Policy Statements from and including December 1996 onwards, but for some reason they have not put online the first few years of Monetary Policy Statements (which began being published, under the provisions of the Reserve Bank of New Zealand Act 1989, in April 1990). New Zealand’s inflation targeting regime (origins and early development here) took formal shape (with attendant legal obligations) when that Act came into effect, and the first Policy Targets Agreement between the Governor and the Minister of Finance was signed on 2 March 1990.

In the early years of inflation targeting there were (as the law required) only two Monetary Policy Statements a year. At the start, these documents were very light on specific forecast content. The Monetary Policy Statements were complemented by published Economic Forecasts documents, which had been released twice a year for some years (but which then had little impact on anything, and were once – in a meeting with the Minister of Finance I was attending – memorably disowned by the Bank’s Deputy Governor as “just the Economics Department’s view”). With the commencement of formal inflation targeting, and a growing recognition of the crucial importance of inflation forecasts in an inflation-targeting regime, the Economic Forecasts document took on a somewhat greater degree of prominence. For some years (until 1997) the Bank published both documents, in time on a schedule of alternating quarters (before eventually moving to the still-current model of four Monetary Policy Statements a year).

The Economic Forecasts documents for the period 1990 to 1997 are thus potentially of use to anyone seeking to study the entire New Zealand inflation targeting experience, and particularly the experience in the early years when we pathbreaking to some extent (often more like “groping in the murk”), and running a monetary policy implementation approach that was idiosyncratic to say the least. Neither they nor the early Monetary Policy Statements have been readily available.

I had had in my own files hard copies of some of these publications (with bits and pieces stuffed in them, including the September 1992 forecasts for which I was responsible and which the then Opposition Finance spokesman had described as “looking as though a public relations firm had written it” – on this occasion reality (notably fiscal reality) turned out better than the numbers he hadn’t liked)

But this complete set became available through the efforts of my son, who is doing an honours thesis in 2024 on some technical aspects of New Zealand monetary policy in recent decades. He requested the documents from the Bank and was provided with the full set from 1990 to 1997 (and my understanding is that it took a bit of work from the Bank, for which thanks). With his permission I am posting them here as a more permanent record and to make them generally available to anyone interested.

There is a full page, with a link on the front of this website, with links to all these documents

A while ago, after the post I wrote prompted by my return visit to Zambia, a reader suggested I might like to read Cobalt Blue: How the Blood of the Congo Powers Our Lives. The relevant bit of the Democratic Republic of Congo (DRC) is right next to Zambia, and the two countries share the geological Copperbelt, rich in copper (biggest export for both countries) and cobalt. There is now huge demand for cobalt as a component in lithium-ion batteries, and more than half the world’s fast-growing output currently comes from the DRC. It is no secret now (various reports in recent years) that, shall we say, labour conditions in cobalt-mining in the DRC are not the best. The focus of attention is around so-called artisanal mining, in which rocks with cobalt ore are gathered, broken, washed etc by hand (large scale industrial mining isn’t in focus at all). Wages (or earnings) are low, safety standards usually barely existent, injury and death rates apparently quite high,

The author of the book, Siddarth Kara is a professor in human trafficking and modern slavery at Nottingham University in the UK, and the book is based on several trips to the Katanga region of the DRC, with observations and interviews (often in some secrecy, and now with anonymity, given the very real risks that interviewees in particular often seemed to be running in talking to him.). Much in the book is pretty harrowing.

The author’s focus seems to be on big international companies that are keen to shield themselves from reputational risks and loudly proclaim their commitment that (for example) no child labour is being used in the mining of the cobalt that is so necessary to the batteries that power their products (be it phones, EVs, lawnmowers, or whatever). It is pretty demonstrably clear that any such claims are simply false, and are knowably false (any company board or executive that claims a child-labour free supply chain is almost certainly either consciously lying or consciously choosing not to look any more closely). The amounts of cobalt obtained from rocks collected, broken etc by “artisanal” labour are not marginal, peripheral or incidental. They seem to be a significant chunk of total Congolese production. As the book explains, it is often more economic to get some of the higher grade cobalt-rich rocks this way (lots are very near the surface) than through more traditional industrial processes. The conventional mining and processing companies are typically the buyers for these rocks.

If Kara is harsh, and probably fairly so, on the companies producing products that use cobalt, there are glimpses of recognition in the book that the responsibility runs more widely. He’d really like to be able to tell a relentless tale of the unremitting evils of global capitalism, destroying Congo since the first Portugese explorers arrived in the 15th century, on through the simply-evil phase of Leopold’s turn-of-the -20th-century Heart of Darkness immensely lucrative private estate. Colonialism and all that.

But he does recognise that a whole variety of interests are at work, and that successive Congolese governments and their factotums have scarcely shown (or show today) much sign of unremitting dedication to advancing the interests of the Congolese people. And while Patrice Lumumba is his hero, heroes who were killed before their own record in government was really able to be tested are handy rhetorical devices but not much more.

The DRC is staggeringly rich in natural resources. And yet (perhaps partly because of it?) it is one of the worst failures of modern post-colonial Africa. Here is real GDP per capita for the sub-Saharan African countries, from the IMF’s latest WEO database.

Africa is the world’s poorest and least productive continent, but there are poor performers, really bad performers, and then countries like the DRC – 4th lowest per capita incomes anywhere in sub-Saharan Africa. As it happens, the three poorest countries happen to border the DRC, but so do Angola, the Republic of Congo, Zambia, and Tanzania which are in the top half of countries in the chart.

Some will want to blame empire and colonialism for Africa’s overall performance, but it was a widespread story across Africa, and simply cannot credibly explain why the DRC has done so poorly. Independence came 63 years ago now, and actually – evil as earlier Leopold regime was – in the late 1950s what is now the DRC had fairly high rates of literacy and average GDP per capita is estimated to have been not much lower than Zambia or Zimbabwe or Kenya. South Korea wasn’t that much richer. Then.

For that longer-run of data we can turn to the Maddison Project database.

Barely two-thirds of the real GDP per capita of 1960. Only five countries seem to have gone backwards over that period, and not even Haiti has done as badly as the DRC. To the extent such long-term comparisons across countries make sense, real GDP per capita in the DRC now is about a fifth that of New Zealand 150 years ago.

It isn’t all bad. Life expectancy is about 50 per cent greater than it was for the hugely increased population

But the material living standards for ordinary people have gone backwards over 60+ years.

And this is a dimension that got not a mention in Kara’s book. I’m not really criticising him for not writing a different book – his real focus is companies in the West – but consider that the countries ranked 2-5 in cobalt production last year were Indonesia, Russia, Australia and Canada. You don’t hear alarming stories about artisanal cobalt mining in those countries – even in neighbouring, much richer, Zambia artisanal mining seems to be mostly for gemstones – not first and foremost because such activities would be regulated out of existence, but because they are priced out of existence. Workers in Australia or Canada have much more remunerative options than grubbing for cobalt-bearing rocks at, for many in the DRC, something like US$1 a day (a bit more if you take risk of tunnelling underground in tunnels with few/no supports for veins of cobalt). In the DRC they seem to not have such options. That is what long-term mismanagement, misgovernment, and productivity failure means (in extremis). Given the chaos and failure around them people do what they have to do, for themselves and for their children, even when that means children having to drop out of school very early, even when injury, illness, sexual assault, even death are foreseeable and realistic risks.

I’m not sure what Cobalt Red’s author would propose in response to the situation uncovered in his book. There are suggestions that the artisanal mining be properly regulated, regular wages paid, safety standard and equipment put in place and provided. Which sounds all well and good, but this is the deeply corrupt PRC where most often the financial interests of those around those in power, or able to pay them off, are really what matter. Kids are taken out of primary school mostly not because parents don’t want them to have schooling but because state revenue is used for other things (personal enrichment) – often never reaching the state coffers – rather than more-conventional basics. Rules already in place are blatantly circumvented, for just a few dollars. When your country has been gotten into such a deep mess by its own leaders, it is very hard to dig yourself out again, and quite impossible for other countries to do it for them (even more so, when as the DRC is, the rivalry between the West and China is very much in play, Chinese companies doing most of the cobalt processing). Heart-wrenchingly sad as it for ordinary people of the DRC.

I’m not one of those who ever runs the line about people being “lucky” to be born in particular places or times. Cultures are built and sustained, not just magicked into existence. We are heirs to what our ancestors built or adapted. But reading the book is a helpful occasional reminder that for all the faults, failings and frustrations of New Zealand, we shouldn’t take lightly, or dismiss readily, the cultures and cultural disciplines that still put us in top quartile of countries in terms of GDP per capita, that mean we can be pretty confident that losing parties will turn over the keys of office when they lose elections, that public officials mostly can’t be bought, and so on.

There are plenty of egregious examples of public sector waste (think lavish welcomes and farewells for senior public servants) or lack of discipline combined with questionable – well, really poor – process (think this morning’s post about the sly but huge increase in approved Reserve Bank spending).

But my core interests are macro in nature. There have been a series of posts in the last couple of weeks about aspects of the inflation and monetary policy story in the last few years, including yesterday’s on the external economy backdrop which should, if anything, have made New Zealand better placed than some to have kept core inflation near target (and that without even mentioning our lack of exposure to last year’s extreme European gas price shock).

It occurred to me that it might also be interesting to look at how fiscal balances and public debt levels had changed across the group of advanced countries (with their own monetary policies) that I’ve been using for comparison in these posts. I was less interested in the specific pressures put on monetary policy, since I’ve already written a couple of pieces dealing with the spin the Governor is (yet again) engaging in, trying to downplay fiscal impulse measures (developed for monetary policy purposes) in favour of ones that seem to have no macroeconomic foundation at all. I’ve asked the Bank for all/any analysis research in support of what looks to be a highly questionable alternative view, but am not holding my breath (if there were anything much they’d either have referred to it in the MPS, or they might even have been keen to send it to me by return of email to allay my doubts). So my focus was on fiscal developments in their own right.

Sometimes when one heads off to OECD databases to download lots of cross-country comparative data I already more or less knows the story and just want the hard numbers to illustrate it. Other times I’m taken by surprise. This trawl was one of those surprising ones, and not in a good way at all.

But first the good news. This is my preferred (since all-encompassing) measure of net debt. The OECD doesn’t have data on quite all the countries (and Norway data isn’t up to date, but at last read was about -350 per cent of GDP). These are the OECD’s mid-year estimates for 2023

We have lower debt than the median country. Many people (including me, but certainly not everyone) count this as a pretty good thing. But a debt stock is an accumulation of choices by successive governments over a long time. And I was more interested in looking at how things had changed over the Covid period, so since 2019. After all, every government faced some big spending in 2020, and when economies were temporarily closed down tax takes fell too.

So here is how net general government financial liabilities is estimated to have changed from 2019 to 2023 for this same group of countries.

And this is where the surprises started.

The median country in this chart – Sweden – saw basically no change in net debt to GDP over this period. New Zealand, on the other hand had the third largest increase. Australia had a slightly larger increase, but interestingly that was concentrated in the actual Covid period: from 2021 to 2023 net debt in Australia is expected to have risen by 1.5 percentage points while in New Zealand is estimated to have risen by 7.5 percentage points. Of course, for highly-indebted countries the unexpected surge of inflation typically lowers net debt to GDP – helping the US notably among these countries – although in the UK’s case having a large proportion of inflation-indexed debt on issue prevented that happening (as it was designed to do).

The OECD forecasts include 2024 as well, so we can see how they think net public debts levels will have changed across these countries from 2021 (the end of the big Covid spends) to 2024, which they base more or less on policy as at the time the forecasts are done (so mid 2023). Here’s that chart

No comment needed really.

That’s debt, but what about flow measures? Deficits and the like.

Here, we can’t look at the operating balance measures we in New Zealand usually focus on. And all the measures are for “general government” (all layers) rather than just central government (although of course in New Zealand central government absolutely dominates the numbers). There are two sensible metrics to look at:

• the primary balance (ie excluding financing costs) as a per cent of GDP, and
• net lending (so saving minus investment) as a per cent of GDP

Both are available either cyclically-adjusted or plain, and the OECD also identify idiosyncratic one-offs to go beyond the cyclically-adjusted measures to something more like structural balances.  Covid was a common shock, and there are very few identified one-offs for the years focused on here.

The primary balance is a deficit measure pure and simple.  Excluding finance costs makes sense for these purposes not because they aren’t real costs, but because a country with higher inflation will tend over time to have higher interest rates and much of those higher nominal interest rates aren’t a real burden, but just maintain the real purchasing power of the debt.  At present, 6 per cent inflation and 4 per cent bond rates gives you negative real financing costs, but still a significant line item of expenditure on interest.  The other reason for excluding them is that a basic maxim in public finance is that if you are running a primary balance or material surplus, your debt won’t be escalating as a share of GDP (precise definition depends on the relationship between the interest rate and the GDP growth rate).  Countries don’t need to run headline surpluses to see debt ratios stabilising or falling, but sustained primary deficits (especially in cyclically-adjusted terms) are typically a bit of concern –  the sort of thing the IMF might focus on in struggling countries.

Anyway, here are the OECD’s primary balance estimates for 2023 (Norway, as so often at present, runs off the scale)

So that would be the third largest primary deficit this year or any of these advanced economies. Japan is….well….Japan when it comes to public debt and deficits. Poland is dealing with a big influx of Ukrainians and a huge increase in defence spending, and then there is New Zealand. By far the largest primary deficit of any of the countries we are more prone to comparing ourselves to (Anglos and other north Europeans), in an economy where this calendar year the output gap will be about zero (in other words the deficit isn’t exaggerated by a deeply below-capacity economy). I did check the cyclically-adjusted picture and it looks very much the same, altho the Czech Republic just sneaks past us.

And while the median country in this grouping has seen its primary balance deteriorate (into small deficit – see above) over the Covid period since 2019, New Zealand has had the third largest widening (again, cyclically-adjusted numbers are similar, although we are second worst on that measure)

Adjusting the New Zealand numbers for the OECD’s series of estimated one-offs (mostly around the earthquakes) produces this time series chart.

From which I take two points:

• We have never (outside Covid peak itself) run primary deficits anywhere near as large as those run last year and (estimated) this year.
• In almost every year in the history of the chart we have a stronger (cyclically adjusted) primary balance than the median advanced country in this grouping.  Not only were our primary deficits materially larger in 2020 and 2021 (the Covid outlays years), they are still materially larger now.

The other set of measures is for net lending.  I haven’t used these data often here, but they are totally standard framework for analysing macro (im)balances (the Reserve Bank even had a nice chart of these sectoral balances, for firms, households, and general government in the latest MPS.  It is a measure of savings less investment, saving (in the public sector context) typically arising with operating surpluses.  It is set within a national accounts framework, unlike the primary balance (which is more of a pure fiscal thing, since OECD primary balances typically include capital spending).

Here are the OECD’s numbers for 2023

We are fifth from right here, with a rather large gap between government saving and the government deficit, but even that position flatters us because the saving numbers take finance costs into account, and (as discussed above) in the presence of high inflation the numbers for highly-indebted countries (think US and UK) show as worse than they really are. Simply paying out interest equal to the inflation rate is not a real burden (or hence real dis-saving), they just maintain the real purchasing power of the bondholders without worsening the real position of the government. (If you want to know more about this issue in a New Zealand context Google work Grant Scobie did at The Treasury.) Since economies are getting back towards balance this year, the cyclically-adjusted picture isn’t much different for New Zealand.

And here is the change since just prior to Covid

Third from the right when even the median country’s position has deteriorated – and remember almost all of these countries have been grappling with high inflation – is probably not the ideal place for New Zealand to be.

I could, but won’t, show you the time series chart for this measure cyclically-adjusted and with adjustment for earthquake one-offs. I won’t because the picture is so similar to the time series comparative chart for the cyclically-adjusted primary balance. We used to be better than the median, our government sector used to be net lender most years, while now we are a net borrower and quite a bit more so than the median of these advanced countries.

As I suggested towards the start of this post, I was genuinely surprised by these numbers for the last few years. I knew, of course, that New Zealand’s position had deteriorated, and have banged on here about the lack of any robust economic case for running operating deficits last year and this while the economy was overheated or (this year) getting back to balance, and the Reserve Bank was belatedly grappling with the inflation challenge. But if you’d asked me, I guess I’d have assumed that other countries had probably had similar deteriorations. Mostly, they haven’t.

None of this – except the initial debt charts – are materially influenced by the costs of Covid – lockdown support etc- themselves. Those costs were borne, and often were very heavy, in 2020 and 2021, while my charts have focused on the changes in balances from 2019 (pre Covid) to 2023 (post big Covid expenditures and with fully employed economies). They are pure political choices.

I can see an arguable case for a country that had rapid productivity growth and rapid population growth to be a net borrower (investment in anticipation of future income gains). But other than the central European countries, rapid productivity growth has been scarce among advanced countries, and although our population growth rate is now rapid again, so are those of Australia and Canada, neither of which is running anything like our net lending deficit.

And in a fully employed economy (as ours is this year) there is just no good case at all for running any sort of operating deficit (the New Zealand specific measure), let alone a material primary deficit.

In flow terms, our public finances now – fully employed economy, and terms of trade which have still been high by historical standards – just aren’t what they once were (under governments of either stripe) until quite recently. And the numbers are still flattered by that boost an unexpected surge of inflation gives to the public accounts – but which you never hear either government or Opposition parties engage with – in that public sector wages (with a considerable element of central control) tend to be slow to adjust. The government recently more or less forced secondary teachers to accept a material real wage cut. They are trying to do the same now with senior doctors. And it is probably the case, in a bigger way, for any moderately well paid public servant who hasn’t changed jobs in the last three years. None of those cuts is likely to prove sustainable (when private sector real wages are flat or rising) longer term if we care at all about the capability and quality of the services we expect governments to provide. Pressures like that really should, but won’t (given the way these things are done), be reflected in next month’s PREFU as part of the big fiscal challenge facing whoever takes office after the election.

There are lots of numbers and concepts in this post. Apologies for that but it is largely unavoidable in trying to do meaningful cross-country comparison. The bottom-line, through all the charts and numbers, is that first sentence of the previous paragraph.