The debate on PRC influence on Q&A

Late last week I posted as a standalone item the comments that Peter Jennings, director of the Australian Strategic Policy Institute (and former senior Australian defence strategy official), had made in response to my post about last week’s Asia New Zealand foundation roundtable on People’s Republic of China (PRC) influence/interference in New Zealand.   Jennings was pretty critical of successive New Zealand governments’ attempts to pretend there is no issue.

This morning someone pointed out to me that Jennings had been interviewed on TVNZ’s Q&A programme on Sunday, so I took a look.  His comments were pretty moderate (especially about New Zealand), and largely focused on the Australian situation, and the new foreign interference laws passed with support from both the Liberal-National coalition and the Labor Party.   He highlighted issues around political donations, the Sam Dastyari affair (Labor senator forced to resign over inappropriate activities in this area), and noted that, between Federal and state Parliaments, there was concern that Dastyari’s wasn’t the only worrying case.

Re New Zealand, he noted that New Zealand seemed to face similar pressures as Australia, and that things weren’t that different in Canada, in the UK, and in many EU countries, and that in his view it would be smart if New Zealand and Australia tried to align their approaches.   While noting that New Zealand and Australia had different geographies and different strategic imperatives, he noted some risk to the bilateral relationship (important to both sides) if our governments don’t take the PRC intrusions seriously.

Corin Dann, the interviewer, pushed back, suggesting for example that Sir Don McKinnon would see things differently.  McKinnon is, of course, head of the government-sponsored China Council, designed never to see anything concerning, never to say anything upsetting, about Beijing and its activities.   As Jennings noted, there is an interest in having an effective relationship with the PRC, but that all countries needed to recognise that there were downsides as well as upsides in relationships with such a massive power, in the process of being more dictatorial.   He argued that even if officials were confident they had things under control –  something he was explicitly sceptical of in his comments here –  it was important for governments to take publics with them, and engage in open dialogue on the issues, risks, and responses.

Dann again attempted “what-aboutism” – every country spies, there is no military threat etc.  Tell that to Taiwan –  or countries with lawful claims in the South China Seas –  was my reaction, but Jennings was a bit more emollient, simply pointing out that countries like ours did not engage in large scale intellectual property theft by cyber-hacking etc.

And finally, asked about the PRC backlash to the new Australian laws, Jennings noted that the PRC (and some its populist media) didn’t like the new approach, but that the relationship goes on.  He argued that there was a mutual interest in a “steady relationship”, and that the PRC would come to recognise that Australia couldn’t do less than say “thus far and no further”.   Given past PRC attempts at economic coercion (which I wrote about here) that seemed optimistic.

All in all, it was pretty emollient stuff, and there wasn’t even any material bad-mouthing of New Zealand governments –  an approach which, fair and accurate or not, tends to get the backs of New Zealanders up.

But it was still all too much for two members of the Q&A panel, political scientist Bryce Edwards and former Minister of Defence, Wayne Mapp.  The word “overwrought” appeared so often that one could almost use it to describe their reaction.

Edwards began claiming that there “no compelling evidence of a problem” in New Zealand, and asserted that the new laws continued Australia’s journey down a path towards being an authoritarian illiberal state, where people could no longer participate freely in political debate and protests.  To be honest, I wasn’t really sure what he was on about – and I hold no brief for the specifics of Australian legislation.  The BBC –  no right-wing authoritarian outlet – summarised the law thus

The laws criminalise covert, deceptive or threatening actions that are intended to interfere with democratic processes or provide intelligence to overseas governments.

They are designed to include actions that may have fallen short of previous definitions of espionage.

Industrial espionage – the theft of trade secrets – is among new criminal offences, while people who leak classified information will face tougher penalties.

The government also plans to ban foreign political donations through a separate bill later this year.

But I presume that what Edwards is on about is material in this Guardian article.   But even if the specific points the critics make were sound  –  and both government and opposition disagree with them – they are details, perhaps even important ones, not a challenge to the basic proposition about PRC activities and agendas in Australia and similar countries.

Former Defence Minister Wayne Mapp then joined in, claiming that Australia would not put any pressure on us to follow suit, because our political donations laws were very tight.  That would, presumably explain how former Foreign Minister Phil Goff was able to get a very large donation to his mayoral campaign from a PRC-based donor, through a charity auction organised by, among others, Raymond Huo?  I’m not disputing that the New Zealand laws are tigher than Australia’s, but here is the relevant section from my post on the Asia NZ roundtable last week.

There was clear unease, from people in a good position to know, about the role of large donations to political parties from ethnic minority populations –  often from cultures without the political tradition here (in theory, if not always observed in practice in recent decades) that donations are not about purchasing influence.  One person observed that we had very much the same issues Australia was grappling with (although our formal laws are tighter than the Australian ones).  Of ethnic Chinese donations in particular, the description “truckloads” was used, with a sense that the situation is almost “inherently unhealthy”.

Dr Mapp went on to claim that there was no need at all for new laws in New Zealand, lauded New Zealand’s role as a pioneer in relations with the PRC, and highlighted favourably the New Zealand government’s choice to eschew the term “Indo-Pacific” in favour of “Asia-Pacific”.   I can’t excited about that latter point –   New Zealand has no exposure to the Indian Ocean, and on the other hand Asia is a big place, including Israel and Syria as well as the east Asian bit.  But Mapp went on to declare that concerns about New Zealand were ‘overwrought” and that he would put his trust in his former National Party colleague Don McKinnon, over the perspectives of Peter Jennings.   The McKinnon approach, like that of the China Council more generally, has been to consistently pooh-pooh any concerns, and in the article I linked to a few lines back even asserted that

To suggest we are too scared or cautious to ever rock the boat with China is simply incorrect.

I think most of us –  agreeing or disagreeing with the stance –  will take the evidence of our senses over Don McKinnon’s make-believe.

At this point, Anne-Marie Brady’s work, and her Magic Weapons paper, finally came up.  Bryce Edwards volunteered that she had raised some points, especially about particular MPs (Jian Yang and Raymond Huo) and their closeness to PRC interests, that hadn’t really been debated, and which needed to be debated.  But this was all too much for Wayne Mapp, who asserted that we hadn’t had the debate because we didn’t need to –  the claims were all overwrought.  Weirdly he then went on to assert that we wouldn’t go down the Australian path because we don’t have overwrought debates like the Australians do.  One can only assume he was determined to keep it that way, and keep on avoiding debate and serious scrutiny of the issues.

So, for example, one can only assume that Dr Wayne Mapp, former Cabinet minister, former military intelligence officer, former law professor, and current Law Commissioner, is quite unbothered about such facts as:

  • his own party putting Jian Yang on its list and, through successive elections, never disclosing his past.
  • that past included study and work as part of the PRC military intelligence system, and
  • membership of the Communist Party
  • (experts point out that no one voluntarily leaves the Chinese Communist Party, and that given his military intelligence background he would only have been allowed to go abroad if was regarded as politically sound)
  • Jian Yang himself now acknowledges, after the media exposed his past, that he had withheld key details from the New Zealand immigration authorities, and that the PRC authorities had encouraged him to do so,
  • that in seven years in Parliament he has never once said anything critical about the PRC regime, whether about Tianammen Square or more recent abuses (domestic and foreign),
  • that a prominent former diplomat and lobbyist has gone on record of Jian Yang (and Raymond Huo) that both are close to the PRC embassy, and that he is careful what he says in front of either man.
  • or about the efforts of his own former Cabinet colleague, Chris Finlayson, to tar Anne-Marie Brady as some sort of xenophohic racist –  one of the more despicable events of the last election campaign.

No, according to Dr Mapp, there is no problem here, just a few “overwrought” claims.

But, as I’ve pointed out previously, calling things “overwrought” or “sensational” is no substitute for dealing with the specifics of Brady’s paper.  I’m not aware that anyone has rebutted anything much in her paper, despite plenty of opportunities over almost 10 months now.  They aren’t just about Jian Yang, or even Raymond Huo.  There are the party presidents grovelling to the regime, whether for fundraising or trade purposes.  There are things like a former MP trying to block out from local Council minutes any record of listening to citizens with an alternative view on the regime.  And it isn’t as if the issues and threats are all in past either –  I was told just this morning about a university which has, under pressure, withdrawn, permission to screen a documentary on campus about aspects of the PRC regime.  And much of it is about pressure on New Zealand citizens of ethnic Chinese orientation, unseen to most of us, but no less real for that.

It was a pretty extraordinary performance from Dr Mapp in particular.  As Jennings had usefully pointed out, it is not as if these issues are unique to New Zealand  But the sustained denial –  whether wishful thinking or a deliberate choice to look the other way –  of any issue, any risk, any problem, does seem to be something rather more specific to successive New Zealand governments and the Wellington establishment.  They seem willing to sacrifice self-respect, and any interest in our friends and allies in other democratic countries including in east Asia, for the mess of pottage –  some mix of trade for a few firms, and keeping the flow of political donations flowing.

Eaqub on nationalism

I guess one views, and experiences, a country differently when one is an immigrant, even one who came involuntarily as a child.   And since all of us are either immigrants or –  mostly –  not (with perhaps a few shades of grey for people who think they have come somewhere temporarily, but year succeeds year and they never actually go/come home) it can be hard for any of us to see the perspective of the other person.

That was my initial reaction when I read Shamubeel Eaqub’s latest column, headed (online, although not in the hard copy version),  Forces of nationalism a spoke in the wheels of trade.   It was, probably, a slightly unfair reaction, as there are staunch globalists (from strands of both the left and the right), almost embarrassed by the particularities and heritage of our own culture, among those whose ancestors have been here for generations.  But it is probably an easier stance to adopt when you have few or no roots in a particular country.   And many of the staunchest opponents of anything resembling nationalism seem to be immigrants themselves.  For them it seems to mean no more to move from one country to another than to move from, say, Hamilton to Tauranga.    Most people, across most pairs of countries, simply don’t see it that way.   Many, perhaps, feel an attachment even more specific: to a town or region where they may have spent all, or most, of their lives.   It is how most people live.  And the pride they often take in place, and the people of that place, is often what helps build strong functioning communities.   There is a sense of identity, shared destiny, and shared assumptions about how things are done.   It isn’t that, at least in any serious sense, one’s own community is in some objective sense “better” than the others, but it is mine, and a bit different (for good and ill) from other places.

Eaqub begins his column lamenting the rise of “nationalistic fervour”.  It isn’t abundantly clear what he means by that phrase, but in his book whatever it is counts as a bad thing.   It isn’t, he says, “just” Donald Trump or Brexit –  as if the two phenomena (two narrow victories) really have much in common.   But it isn’t clear what it is.  And he seems to have no sense that people tend to become more vocal, and intense, in defence of what they value when they perceive that someone is threatening to take it away.   There is nothing in the column that suggests he sees any value in communities (town, regions, countries –  perhaps even families) nurturing their own heritage, and what it is that makes them what they are.  Perhaps he hasn’t noticed the trend, over perhaps 100 years now, for a greater number of independent states to emerge.   It seems unlikely that that trend has exhausted itself.  And the world seems a better place for the Czechs and Slovaks to be able to have their own countries, or the Slovenes and the Croats, or the Poles – unhappily suppressed for 120 years –  or the Dutch, the Finns, the Estonians, Lithuanians or Latvians. Or at least the inhabitants of those countries seem to think so.

Instead, we get this sort of empty stuff.

Nationalism by definition prizes nationhood and pits nations against each other. It makes cooperation between countries harder, and tensions more likely. Nationalists have much in common, but even they cannot get on with each other.

Of the first half of that paragraph, he seems to have things almost completely the wrong way round.  It is no more true than to claim that because I prioritise my own house and family over those in the rest of the street that I either think badly of, or wish ill to, the rest of residents.  I don’t, I imagine Eaqub doesn’t, and I suppose only a very few people do.   At a national level, England/Britain and France both have strong national traditions, and it has been more than 200 years since those two countries were at war with each other.  Do New Zealanders resent Australians because they are a different country/nation?  It seems unlikely.

And “makes cooperation harder”?   Well, again I doubt it, except perhaps in some trivial sense that were there a single world government, its regulatory reach would cover the entire world, and none of us would have any choice, any exit options.  It doesn’t sound remotely appealing to me (and in my culture, has resonances of the Tower of Babel, which didn’t end well).   We managed to fight World War Two, beating such aggressive determined powers as Germany and Japan, without losing sight of the fact that the United Kingdom, the United States, the Soviet Union, South Africa, the Netherlands, New Zealand, Australia, and Canada were all independent states, with a shared commitment to a common goal, as well as individual national interests.

And what of “nationalists have much in common, but even they cannot get on with each other”, well since the phrase is used so broadly, in such an ill-defined sense, no doubt is true –  I doubt Michael Gove and Vladimir Zhirinovsky have almost anything in common, but one could define another side almost as broadly, and meaninglessly, and make almost exactly the same observation.  Close to home, for example, and within a single professional discipline, I doubt Eric Cramption and Shamubeel Eaqub – who would probably both accept a non-pejorative descriptions of “globalist” – have a great deal in common.

Eaqub goes on

The nationalist agenda seems to converge across three main areas: anti-immigration; protectionist economic policies; and a distrust of global institutions.   Anti-immigration and nationalism go hand in hand. At the core of nationalism is the nation state and the right to belong to it.

I’m not sure that this is necessarily true, but it is particularly unhelpful because Eaqub makes no effort to distinguish between legal and illegal migration.  Most of the debate in the United States, for example, seems to stem from the substantial stock of illegal migrants, and the renewed salience of the issue in much of Europe also seems to substantially reflect the wave of illegal migration.   That –  not the high legal numbers –  was also what has given the issue salience at times in Australia as well.

But then we are straight back to casting nonsensical aspersions, with little or no historical foundation

Being a citizen is the critical element, and easily leads to demands for tougher controls on who can come in.

It is then a small step to conflate citizens’ culture and racial makeup as different and better than those looking to come in. Language we have seen previously in precursors to discrimination, war and genocide become easier: like pests, lock-em-up and exterminate.

He simply seems to have no concept that in the same way that I don’t think badly about my neighbour, but I don’t wanting them occupying my house, people might simply value what they have, and the culture – in all its dimensions (about trust, and the way things are done, as well as arts, cuisine, religion, literature, language and so on) –  they and their ancestors have built and fostered, and be uneasy about things which threaten it. I suspect many citizens of Invercargill would be uneasy if 100000 Aucklanders moved south, and they are citizens of one country.   Arguably, it is those mass movements of people –  especially those of quite different cultures –  which sow the seeds of future tensions, and perhaps worse.    Whatever economic gains there may have been to Maori from large scale immigration since 1840, it sowed seeds of tensions that are likely to be with us for generations.  It wouldn’t have been unreasonable –  although it might have been infeasible, given the technological imbalances –  for Maori in 1840 to have said, “no, we prefer to kept these islands predominantly Maori –  we don’t think poorly of you English, and indeed we are happy to trade with you –  but we think we’ll be better, our heritage will better sustained, if we stay here and you stay there (or just in Australia)”.   By what criteria does Eaqub say they would have been wrong to have done so?

I’m not sure if I really qualify as a “nationalist”.  Even though my ancestors have been here since 1850, I feel a strong affinity for the UK and for Australia –  in many respects shared cultures, and common histories – and I count myself fortunate that the interests of those three countries haven’t collided very much, very materially, in my lifetime (let alone the century prior to that).   There are things we do differently and distinctively here,  and memories/experiences/reference points that are specific to individual countries (or regions, or cities) but I suspect I share considerably more in common with middle-aged co-religionists in Australia and the UK (perhaps even the US to some extent) than with my own mayor or Prime Minister.  My views about New Zealand immigration policy –  too many migrants, but it doesn’t much matter for those purposes whether they come from Birmingham, Banglalore, Brisbane, Beijing, or Buenos Aires –  are about the economic interests of a group called New Zealanders, and thus “nationalistic” to that extent.  If that is “nationalism”, then I’d happily sign up.

And that should be uncontroversial (even if views differs as to how best to advance the economic interests of New Zealanders).   In raising my kids, I look primarily to their interest  –  not exclusively so, not seeking harm or wishing ill on anyone else’s kids, and even feeling some attentuated responsibility (through the political system among other avenues) for those of others.  I’d lay my life on the line for my kids. I can’t automatically say the same for others, and probably no one can.   And those rare people who perhaps profess an equal interest in everyone, often in practice end up neglecting those for whom they have a particular responsibility.  Dickens treated such people in the form of Mrs Jellyby.

So I do think policy should be made at as low a level as it feasibly can, primarily with the end in view of benefiting the group those governing are responsible for.   Had I been British I’d almost certainly have voted for Brexit, and been among the many who did so (so the exit polls tell us) simply on the grounds of wanting to make our own laws.  In that vein, I think it was right that New Zealand should have its own government –  not still be part of an empire administered from London (as it was for a very short period).

And I am “suspicious” (well, more like generally disapproving, and favouring the winding of many of them) of global institutions, regarding many of them as primarily serving the interests of those who staff them (I sat on the board of one of them for a couple of years).  And if some of the more prominent ones are ever effective, it is often in constraining the future (legitimate) choices of individual countries’ citizens, in ways we simply wouldn’t accept within a single country.  So probably in Eaqub’s terms I count as a nationalist.  If so, I’ll wear the badge happily –  I even found a Guardian columnist a few weeks ago noting, perhaps reluctantly, the possibilities of a good nationalism, based around the things –  in many cases the very considerable achievements –  we’ve built together.

And, if I count as a “nationalist”, I’m a free trade and open markets one. Nationalism isn’t and never was, at least in our Anglo tradition, primarily mercantilist  The bit I liked best –  perhaps the only bit –  in Eaqub’s column was his praise of trade (his focus is external but I presume he means internal as well) –  not exports, but trade, exchange, specialisation and so on.  But for all his attempts to write about some very broad-brush “nationalism”, it isn’t obvious that he is even generally right about economic protectionism.  Perhaps I’ve missed something, but last time I looked Michael Gove was pretty keen on something approaching free trade, and whatever the concerns of governments or prominent parties in the Netherlands, Germany, Austria, Poland or Slovakia, there doesn’t seem to be much of those parties wanting to take a protectionist path.  No doubt, the gains from international trade are too little appreciated –  and thus New Zealand still has tariffs in place, disadvantaging New Zealanders –  but the push for increased use of tariffs seems to be a distinctly Trumpian theme, rather than one appearing more generally.  What, perhaps, there will be –  and rightly so in my view –  is resistance to preferential trade deals (often at best orthogonal to free trade) attempting to tie the hands of future national governments on domestic regulatory issues.  Our own government –  and its predecessor –  seem too keen on such deals (even if now, no longer on removing disputes from the jurisdiction of domestic courts).

Eaqub, by contrast, seems rather keen on such deals, and rules, and structures, and institutions.

This is why global rules on trade, travel, finance and standards have developed over time. To make it easier to connect with each other and to also use a rules-based system to deal with bad behaviour by countries.  As nationalists pull away from these global institutions, there seems little realisation that these greased the wheels of global trade, which helped their exporters and domestic producers too.

To the extent, he is specifically referring to the Trump administration approach to the WTO, I share his view.     But mostly trade has grown because of the opportunities it offered (both parties), and those opportunities aren’t going away.

Eaqub has long been a fan of immigration in New Zealand, and he returns to that theme in his columm

The global environment for migration is becoming more hostile. New Zealand can follow on a similar path, or be more organised in nabbing the best and brightest.

Being open in a closed world can be a boon. We need to actively consider our inward migration policy.

New Zealanders who have long been used to leaving for other countries, mainly for economic opportunities, will find their choices becoming more limited.

We should think about what to do with the many bright and hard working locals who will no longer leave.

It could delay the provincial decay of recent decades, which has been hastened by young people leaving.

Which seems wrong on every count.  There is no –  repeat, no –  evidence that our large scale immigration policy has been of economic benefit to New Zealanders as a whole.  There is little reason to believe that we could attract many of the “best and brightest” even if we set out to –  short of the early days of some Neville Shute On the Beach scenario, we are remote and not that wealthy, and it isn’t obvious why anyone (well, many of them) with the sort of drive, creativity and determination that might really make a difference somewhere would choose this “where”.   And as for New Zealanders leaving, perhaps the Australians will make it even harder for New Zealanders (and Australia is overwhelmingly the destination of New Zealanders that leave), but if they can’t go to Australia, I doubt it makes them much more likely to stay in Taihape.   People will flow to where the best opportunities are, whether elsewhere in New Zealand or abroad (and contra Eaqub, I’m not that worried about individual towns rising or –  in most cases –  modestly falling).

Eaqub ends with a call for New Zealand to join some group of countries with liberal views.

As nationalistic tendencies rise in many countries, we can expect a grouping of countries with liberal political and economic views.

New Zealand has an opportunity to be a strong player in this grouping. We have a strong track record in leading multilateral trade negotiations and championing liberal ideals.

We should get our house in order on migration and imports, then lead a charm offensive to place ourselves firmly in the liberal team in a divided world.

I’m not quite sure where he expects to find these countries, given how broadly he cast his “nationalistic” aspersions.  Nor is it likely to be, consistently, in the interests of New Zealanders to do align with them if they are found.  People will, perhaps annoyingly, insist on governing themselves, and form and maintain distinctive communities, and those who attempt to trade away that freedom risk creating in time backlashes, which are typically more unsavoury than a realistic regard for human nature, and the sense of place, or community, and culture that most people value in some form or other.

You’ll have noticed the sly attempt in Eaqub’s article to suggest that any scepticism about immigration is “racist”.  Perhaps because I’m still annoyed at the way Eaqub attacked me as “racist” several years ago for my arguments around immigration and New Zealand economic performance (remember, doesn’t matter: Birmingham, Bangalore or Buenos Aires) I thought I’d draw attention to a chart I saw over the weekend that perhaps captured quite starkly the differences on such issues, at least in the US context.   It was from a New York Times article, in turn reporting some work done a year or so ago by a leading UK-based political scientist Eric Kaufmann

Kaufman chart

I was stunned by the differences.  I’d not have been a Trump or a Clinton voter, and my views on New Zealand immigration (as economic instrument) apply as much to British immigrants as any others, but it reinforced a sense that the word is one that should be retired, as all but useless for any purpose other than abuse.  Debate the substance of the policy by all means –  in a New Zealand context, for Maori to oppose all further immigration to safeguard their position in New Zealand seems a reasonable option (not necessarily one I –  non-Maori –  would welcome) and not in any meaningful, ie pejorative, sense “racist” –  but drop the descriptor.

The PRC and New Zealand: an Australian perspective

In response to my post yesterday about the Asia NZ Foundation roundtable on foreign interference/influence in New Zealand, I received this comment, which I’m elevating into a post of its own because of its source, and because otherwise only a small number of readers would now see it.

When officials are assuring you everything is under control, that’s the moment you know that everything is not under control. As a long-term New Zealand watcher I am deeply disturbed to see how the political and bureaucratic establishment in Wellington wants the problem of Chinese interference in domestic politics to be swept under the carpet.

The idea that the Australian debate on this topic is ‘unhelpful’ is simply ridiculous. Successive Australian governments have ignored the problem but now it has become so painfully obvious that Canberra has had no choice other than to take a stand and set some limits on Chinese Communist Party interference. I believe that a substantial reason why Canberra acted was because of the public focus on the problem.

China will continue to suborn the NZ political system unless your Government is prepared to push back. If the problem is not addressed in time this will become a serious problem for the NZ-Australia bilateral relationship.

My suggestion is that the Australian and NZ Prime Ministers should meet with their intelligence agency heads and have a frank, closed-door discussion about the extent of the problem of Chinese interference in both our countries. We can actually help each other here.

Pretending there is no problem, or failing even to utter Beijing’s name isn’t sophisticated statecraft, its just a failure to come to grips with a major problem for both our countries.

The comment is from Peter Jennings, who has been Executive Director of the Australian Strategic Policy Institute since 2012.

Peter has worked at senior levels in the Australian Public Service on defence and national security. Career highlights include being Deputy Secretary for Strategy in the Defence Department (2009-12); Chief of Staff to the Minister for Defence (1996-98) and Senior Adviser for Strategic Policy to the Prime Minister (2002-03).

I’ll leave his much-more-informed comment as it stands, just observing of his suggestion of a meeting of our two Prime Ministers etc, that for such an event to occur there would have to be a willingness and desire among political leaders on this side of the Tasman to acknowledge and confront the issue.  In fact, what we see in public is a desire to minimise, or to deny that there are, any serious issues, and to refuse to deal even with issues in plain sight.

Regressivity, petrol taxes, and ministerial PR

Someone around home mentioned this morning that there was a confused article on the Herald website about the progressivity (or otherwise) of the fuel tax increase.   I didn’t pay much attention until I read the paper over lunch, when I was a bit staggered by what I found.

This was the centrepiece chart

fuel tax

The line of argument from opponents has been that the fuel tax increase will fall more heavily on low income people.   But according to the Herald’s journalist, channelling Phil Twyford.

 in a startling revelation, the ministers claim that the wealthier a household is, the more it is likely to pay for petrol. They say the wealthiest 10 per cent of households will pay $7.71 per week more for petrol. Those with the lowest incomes will pay $3.64 a week more.

I still don’t understand what the journalist finds startling.  It is hardly surprising that higher income households spend more on petrol than lower income households do.  They spend more on most things.

But he goes on to claim

This is a complete reversal of the most common complaint about fuel taxes, which is that they are “regressive”. That means, the critics say, they affect poor people more than wealthy people.

The suggestion that these data are some sort of “complete reversal” of the claim the tax is regressive is itself just nonsense.  One would need to look at the impact of the fuel tax increase as a proportion of income.  And households in the top decile earn about ten times as much as households in the bottom decline, according to the same Household Expenditure Survey.

So I went and got the income by decline data for the June 2017 year from the Household Expenditure Survey.  The income data is presented in range form, so for each decile I used the average of the high and low incomes for that decile.  And then I took the Auckland fuel tax increases numbers in the right hand column of the table above, and calculated them as a annual percentage of annual household income by decline.  (The income numbers are for 2017, and the fuel tax increases phase in to 2020, so the absolute percentages will be different –  incomes will have risen – but what won’t change materially is that high income households earn a lot more than low income ones.)

fuel tax by decile

On the numbers the Herald themselves used, apparently supplied by the Ministry of Transport, the  direct burden of the fuel tax increase will fall much more heavily on low income people than on those further up the income scale.   The extremely high number for the lowest decile masks how significant these effects are even for other groups: the second and third deciles of household income will see an increase twice as large, as a percentage of income, as those in the 9th decile.

I’m driving to Auckland later this afternoon for a wedding, and planning to get out again on Sunday without having paid the increased Auckland fuel levy.

What the Bank tells you ten times, still isn’t true

“Just the place for a Snark! I have said it twice:
That alone should encourage the crew.
Just the place for a Snark! I have said it thrice:
What I tell you three times is true.”

(Lewis Carroll, The Hunting of the Snark)

This was only the new Governor’s second OCR announcement, but the pattern seems to be getting quickly re-established.

This was the Governor in May

The emerging capacity constraints are projected to see New Zealand’s consumer price inflation gradually rise to our 2 percent annual target.

And this was the Governor today

inflation is expected to gradually rise to our 2 percent annual target, resulting from capacity pressures.

But this was the former (but unlawful) “acting Governor” in March

Over the medium term, CPI inflation is forecast to trend upwards towards the midpoint of the target range

And this was Spencer in his first pronouncement last September

Non-tradables inflation remains moderate but is expected to increase gradually as capacity pressure increases, bringing headline inflation to the midpoint of the target range over the medium term.

And this was the former Governor a year ago

Non-tradables and wage inflation remain moderate but are expected to increase gradually.  This will bring future headline inflation to the midpoint of the target band over the medium term

In one form or another, in fact, it was the story he told throughout his five year term.

And yet it just hasn’t happened.  And, as I illustrated the other day, market prices still don’t suggest it is expected to happen.

In the real world, saying it over and over again doesn’t make it any more likely to happen.   It might happen nonetheless –  there is a great deal of uncertainty about macroeconomics – but the Reserve Bank still isn’t giving us a compelling story as to why, having been wrong for years, we should now believe they have it right.  As I noted at the time of the May MPS, those doubts were only increased by his enthusiastic endorsement of his predecessors’ record

Perhaps even more startling, was his response when asked a question in which it was noted that Graeme Wheeler had failed to hit the inflation target midpoint, and Orr was asked whether he would be happy to be judged on his performance against that metric.  That seemed to set the Governor off in defence of his predecessors, claiming that the economy was in near-ideal cyclical sweet spot, and that he could not imagine a better place to start from as Governor.  A bit later he chipped in that he thought the Bank had been doing a ‘remarkable” job in forecasting core inflation –  a variable that hasn’t been anywhere near the explicit 2 per cent target since that target was put in place by Bill English almost six years ago. 

One can’t expect a full story in a one page OCR announcement such as today’s, but there wasn’t anything much more compelling in the MPS either.  And three months into his term we have not had a single on-the-record speech from the Governor about monetary policy, which is still his prime statutory function.     Lots of chatty greetings, but not a great deal of substance.

And all in a global climate that seems to be getting much more hostile, and risky.

But it isn’t inconsistent with the Bank’s Statement of Intent the other day.  In it, we are told that

 we will promote a deeper understanding at the Bank of tikanga Māori and te Reo Māori.

with no obvious connection drawn, that I could see, with anything in the Bank’s statutory mandate.  It will no doubt win the Governor feel-good points with his political masters, as he fights turf battles in the months to come.  But there was still nothing at all on ensuring that the Bank, and New Zealand policymakers more generally, are ready when the next serious recesssion hits –  stuff at the heart of what we have a monetary policy and central bank for.

In his statement today, the Governor included this, largely meaningless, line

The Official Cash Rate (OCR) will remain at 1.75 percent for now. However, we are well positioned to manage change in either direction – up or down – as necessary.

Of course he can move the OCR up or down 50 basis points (to me, the data –  as distinct from the vapourware masquerading as economic forecasts – suggest down).  But the big problem is that if circumstances ever require him to cut the OCR more than say 250 basis points –  and something in excess of 500 basis points has been more normal in serious downturns, here and abroad –  he can’t do it.  He knows it, and the markets know it.       Failure to do anything meaningful to reduce or mitigate those risks, and to communicate those plans to the public and markets, risks accentuating any downturn when it comes.

(I’ll be away for the next few days, but will come back next week to write about the Bank’s speech earlier this week on digital currency, perhaps best summarised as “how best to serve the banks, rather than the public”.)

 

Foreign government influence, the PRC, and the Wellington establishment

Somewhat to my surprise, a few weeks ago an invitation dropped into my email inbox.   It was from the Asia New Zealand Foundation – a (almost entirely) government-funded entity, staffed at senior levels by former MFAT people, with a mission

to build New Zealanders’ knowledge and understanding of Asia. 

These are the people who occasionally run public surveys, the results of which are marketed to bewail how little people know about Asia.  I managed to get all the latest questions right –  including which (of 4) Asian countries the Mekong river didn’t flow through –  and did surprisingly well on one of their harder quizzes.  But I still can’t name which English counties the Severn river runs through, all the countries the Rhine flows through, or all the states the Mississippi runs through or between.  I don’t feel  particularly disqualified as a result.

The invitation?

You are invited to attend a roundtable discussion being hosted at the Asia New Zealand Foundation on the conversation around foreign influence in New Zealand.

It went on

After observing the unhelpful polarity in the discussion in Australia, the Foundation has given some thought to how it could support a constructive conversation in New Zealand, namely one which:

– encourages expert voices to speak freely;
– sets a constructive tone for challenging these assessments and perspectives, without acrimony.

It was to be what they described as a “Track 1.5” event (in this world, Track 1 apparently involves official to official dialogue, and Track 2 involves non-government people talking to counterparts, but this forum would involve both).   Senior officials would attend, and speak, while as for the others

this event will involve up to 20 members of the business, media and academic community who are thinking strategically about this issue.

We were told that “the Government is keen to hear participants’  views” on issues such as

How can government and others talk about foreign interference, and its response, in a way that is constructive and sends coherent messages to a wide range of stakeholders (ie government agencies, public, business, international partners and state actors)?

I was a bit surprised to be invited.  I don’t lay claim to any particular China expertise, but I am interested in New Zealand policy and politics, and I suppose I had been a little dogged (perhaps even annoying, including to some others who were on the invite list).  So, with a little trepidation and low expectations, I accepted the invitation.  Expectations were low because in the entire document that accompanied the invitation the People’s Republic of China didn’t rate an explicit mention, and because if anything the focus seemed to designed to be about all being nice to each other.

the purpose is to bring different voices to the table on what is a challenging but important issue for New Zealand – and to discuss how we would like to engage with each other moving forward.

The event was held under Chatham House rules.  And since they were rather sensitive on the point (even sending out a later reminder about letter and spirit), this is the explicit rule this post is written under

The Chatham House Rule will apply to this roundtable. This means that participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed. There will be no note or output of the discussions.

Of the attendees, perhaps all I can say is that it was a very Wellington audience –  a description, and a flavour, rather than a criticism.

Every though everyone in the room knew that meeting wouldn’t have been held were it not for the issues around the People’s Republic of China, there was a rather desperate desire apparent to avoid singling out the PRC.   Indeed, the meeting opened with a statement about wanting to “talk as much about the risk as about any risk actor”, and that together with a statement near the end about not talking about the “who” but the “what” tended to bracket the discussion.

We heard that the Prime Minister had said publicly that New Zealand had experienced Russian cyber-attacks, we heard reference to Russian use of chemical weapons, about “fake news” and RT, we heard about the US pulling out of the Paris climate agreement (which, last time I looked, was their perfect right) and about questionable new US tariffs.   On the other hand, National MP Jian Yang –  former member of the Chinese intelligence system, Communist Party member, someone who admits that he misrepresented his past to New Zealand immigration authorities because Beijing told him to –  would have been mentioned not at all, except that I mentioned him (to note the omission) late in the discussion.   Trade ties –  and the heightened exposure some New Zealand entities have created for themselves, knowing the risks, and in turn putting increased pressure on the New Zealand government to keep quiet –  also barely got a mention.   Specifics quickly get awkward and personal.

Speakers were keen to convince us that officialdom was right up with the play (the issue being “owned” overall by DPMC), and working hand in hand with our Five Eyes partners,  They weren’t, we were told, “naive and unprepared” but rather actively engaged in “detecting and countering interference” –  apparently some overseas partners are even envious of some of the telecommunications legislation implemented here a few years ago (an observation that should probably leave New Zealanders a bit nervous).  Any suggestion of a threat to our membership of Five Eyes is, we were told, “spurious”.  I presume that means “false”.

I guess I came away with the impression that officials think they are more or less on top of the outright illegal stuff.   One hopes they are correct.

My own concerns tend to be with stuff that is legal, or just overlooked.   And where political cravenness, fear, and good dose of pursuing short-term opportunities as if oblivious to the character of those being dealt with, seem to matter as much as any active direct PRC intervention here.  Stuff like, for example, the way our major political party presidents laud Xi Jinping or the CCP, or the way a major party campaigns with a Xi Jinping slogan, or the refusal of anyone prominent to ever say anything critical of the PRC in public.  Or the willingness of our public universities to take PRC funding for culture/language learning, with PRC controls over the sort of people allowed to teach (Falun Gong adherents need not apply, nor those pro-democracy, those favouring respect for Taiwan’s independence etc).  Or the way our trans-Tasman school of government is in partnership with the Chinese Communist Party.  Last week our political leaders went back and forward over what to say about the US border/illegal immigrant issues.  The political editor of our largest paper called for our leaders to show we had an “independent foreign policy”.  I’d have thought the treatment of the PRC was more of a test of that one.   South China Sea anyone?  Taiwan –  a prosperous democratic state increasingly menaced by a power we’ve signed up with in some “fusion of civilisations” vision –  anyone?

Or one might look for any sense of real concern for our own ethnic Chinese citizens –  especially those who despise the regime, or have few/no modern ties to the PRC –  whose media, whose cultural associations etc are increasingly in the thrall of regime-friendly United Front entities.  Or concern for the New Zealanders of Chinese ethnicity who face threats to families back in the PRC if they do make a stand, or speak out, on anything.

I’m not suggesting there were no direct references to the PRC at the roundtable, but it seemed awkward, rather than any sort of open or really honest conversation.  I’m sure everyone there knows the character of the PRC regime –  at home, abroad, and here.  But…it was clearly awkward to talk about, and no one wanted to name the PRC as one of the most awful regimes now on the planet –  between its external expansionism, defiance of international law, attempts to rewrite history, attempts to use diasporas to serve its purposes, domestic concentration camps (much of the province of Xinjiang), political and religious repression, organ harvesting, and so on, the Nazi Germany equivalent of our day.  If you won’t name the character of the bad actor, you are unlikely to be serious about resisting or responding.   It is hardly as if the goals of the PRC/CCP, including through the United Front organisations in (various) countries like ours, is any great secret.

Having said that, I was pleasantly surprised in a couple of areas.  There was clear unease, from people in a good position to know, about the role of large donations to political parties from ethnic minority populations –  often from cultures without the political tradition here (in theory, if not always observed in practice in recent decades) that donations are not about purchasing influence.  One person observed that we had very much the same issues Australia was grappling with (although our formal laws are tighter than the Australian ones).  Of ethnic Chinese donations in particular, the description “truckloads” was used, with a sense that the situation is almost “inherently unhealthy”.   With membership numbers in political parties dropping, and political campaigning getting no less expensive, this ethnic contribution (and associated influence seeking) issue led several participants to note that they had come round to favouring serious consideration of state funding of political parties.   I remain sceptical of that approach –  especially the risk of locking in the position of the established parties, or locking out parties the establishment doesn’t like – but it was sobering to hear.

There was also unease about the suborning of former politicians (jobs after politics), and the suggestion of a need for stand-down periods.  And there was something of a call for more open government engagement on these issues (not, obviously, direct intelligence matters).  One person contrasted the speech a few months ago by the Australian head of the Department of Foreign Affairs and Trade, highlighting some of the issues and risks, and the near-silence by our own senior officials and ministers.    But here I suspect there was a bifurcation between those who felt the government should be on the front foot playing down the issues, and those who felt it should be more open in recognising them and engaging in debate with New Zealanders about how best we should respond.  Of the taxpayer-funded China Council’s efforts in this area –  attempting to minimise or trivialise the issue – one participant observed that they had been “unsophisticated and unhelpful”.

I guess my sense was that few of the people at the roundtable were at all comfortable participating in wider public or political debate: many were or are bureaucrats, not accustomed to visibility or audibility.  And many of the non-government people had business or similar interests that would make speaking out difficult, and potentially threatening to finances and professional opportunities.  There wasn’t even much sign of robust debate around the table of the meeting itself –  occasional awkward observations typically being left to stand, with no response or debate (although this may partly have reflected time constraints).

Many seemed to feel a real distaste for the nature of the debate in Australia over the last 12 to 18 months.   One discussant pushed back, arguing that what was needed was a robust public debate, not just involving subject experts, but citizens, and that –  moreover –  some heat was often an inseparable part of shedding light, and that arguably the Australians had done the debate better.  I’m in that latter camp.   On the other side, someone plaintively quoted one of the participants in the Australian debate as accepting that he had occasionally overdone things on Twitter, but surely that is almost in the nature of the medium?   Civility is a considerable virtue, but it isn’t the only one, and sometimes civility and politeness can be a cover for avoiding really confronting issues.  It is fine to quote –  as someone did – the old line about playing the ball not the man, but people are the actors here:

  • Jian Yang, personally, is in our Parliament, is a former member of Chinese military intelligence, did misrepresent his past, is closely associated with the PRC Embassy,
  • Bill English and Simon Bridges (on the one hand) and Jacinda Ardern and Winston Peters on the other sit silently by,
  • Chris Finlayson did openly attack Anne-Marie Brady (none of whose significant claims has been overturned or substantively challenged) as some sort of racist xenophobe,
  • Raymond Huo is closely associated with United Front bodies, and did adopt a Xi Jinping slogan for Labour’s campaign among the Chinese community,
  • Peter Goodfellow and Nigel Haworth do laud and magnify Xi Jinping and the PRC,
  • successive foreign and trade ministers make up stuff about our economic reliance on the PRC, and keep very very quiet whenever any awkward issues arise.

No one makes these people do any of these things. They choose to.   There are explanations perhaps, but not justifications.

In the end, I appreciated the invitation to the roundtable, and I did learn a few things.  But it didn’t leave me really any more confident than I had gone in that the establishment was at all keen or willing to have New Zealand stand up and do things differently, not just safeguarding our formal institutions (which probably aren’t that threatened), but with some self-respect, standing up for the sort of the values countries like our own have long stood for, and which the PRC/CCP is –  in many cases –  the antithesis.   Roosevelt’s four freedoms, and things like that –  on all of which the PRC either falls well short, or seems to simply regard them as “not applicable here”.

Then again, the real issue isn’t advisers per se, but the reluctance of successive elected governments to do or say anything that might prove awkward with Beijing.  Implied threats  – to individuals or to the economy (economic coercion and the like) –  are interference, even if there is nothing direct for intelligence agencies and the like to pick up on, and even if –  as in the case of economic coercion –  politicians are often excessively fearful.  Political donations may be part of that story, I don’t think they are anything like the entire picture.  And yet none of that was discussed.

 

 

Some more real exchange rates

A couple of recent posts have highlighted the really significant sustained increase in New Zealand’s real exchange rate.  I illustrated that with this chart

ULC jun 18

which shows the OECD’s relative unit labour costs measure.

Measures such as this, working back from a nominal exchange rate index, tend to be quite cyclical (around whatever longer-term trends are underway).  But there is another approach to the real exchange rate, an internal measure that looks at developments in the prices of non-tradables relative to the prices of tradables.    A rise in the ratio of those two sets of prices suggests, all else equal, that the tradables sector of the economy is becoming relatively less competitive.

Unfortunately, good long-term series of tradables and non-tradables prices are pretty few and far between.  The official series in New Zealand only date back to 1999 (and the Reserve Bank doesn’t publish the earlier versions that we calculated ourselves using highly disaggregated SNZ data).    Here is the chart of that measure of the real exchange rate, and the same derived series for Australia.

internal RER 1

To look at that chart, one might suppose that non-tradables almost always increased in price faster than tradables (although even at the start of the series –  when both countries’ nominal exchange rates were very weak –  there are hints otherwise).

Fortunately, Australia has these data back to 1982.

internal RER 2

For the first 20 years of the series it was fairly flat –  the difference between tradables and non-tradables inflation rates was only around 0.5 per cent per annum.   Since around 2001, the annual difference has been more like 2.5 per cent per annum.   Such differences have come to be taken for granted, but it isn’t a normal state of affairs.

Another way of getting a fix on the internal real exchange rate was suggested a few years ago by former Victoria University academic Geoff Bertram, in his chapter on the modern economy for the New Oxford History of New Zealand.  His measures calculates the real exchange rate as the ratio of the GDP deflator (prices of all the stuff produced in New Zealand) relative to the average of export and import prices.   Stuff that is exported is captured in both the numerator and the denominator, but all the non-tradables are in the numerator only, so that this measure will rise (fall) when non-tradables prices rise faster (slower) than tradables prices.   For New Zealand there are estimates of all the relevant deflators back to 1914.   Here is the resulting chart.

internal RER 3

For 70 years, there was no trend in the series. On average, over that full period tradables prices and non-tradables prices seem to have increased by about the same amount.  The cycles were quite prolonged, but no trend was apparent.   And then everything changed, and the sort of appreciation we’ve seen on this measure over the last 30 years is unlike anything seen before.

What about Australia?  Here is the same chart, going back to 1900.

internal RER 4

Much the same sort of picture –  a flat trend for 80 years, and then a sharp sustained move upwards (although not quite as large a move as that for New Zealand).

(It isn’t a universal pattern: the official US data go back to 1929, and although there has been an increase late in the period, the current level is not even 10 per cent above the previous peak.)

To be honest, I’m not sure quite what is going on in New Zealand and Australia, although the numbers would be consistent with both countries having experienced very weak productivity growth in their non-tradables sector (thus economywide cost increases spill into prices).  In New Zealand, weak productivity growth translated into weak overall economic performance, while in Australia the windfall of huge newly-tapped mineral resources has kept their overall economic performance looking better.  It is, after all, a real income gain.

Export volume growth in the last 30 years as a whole has outstripped the growth in real GDP in both countries, but that margin has been far larger in Australia than in New Zealand.  In Australia, export volume growth over that period was almost twice as fast as real GDP growth.

I noted that even on those internal real exchange rate measures, the increase in New Zealand has been larger than in Australia.     The same thing shows up, much more starkly, with a simple calculation of a New Zealand/Australia real exchange rate, taking the nominal exchange rate and adjusting for inflation differentials.    This chart shows that measure going back to 1914.

rer nzd aud

Again, a reasonably flat trend for 70 years, and then the move up to the new much higher level from the late 1980s.   And this, even though our productivity growth has continued to drift further behind Australia’s.

And for those keen to fall back on terms of trade stories, they don’t help.  This chart shows the terms of trade for New Zealand and for Australia back to the early 20th century.

TOT aus and NZ jun 18

Over 100 years, the two countries’ terms of trade have done much the same thing, ending up almost in an almost identical place.

So Australia was able to bring to market huge new mineral resources, and managed much faster productivity growth than New Zealand, and yet New Zealand has had much the larger real exchange rate appreciation.

Beginning to make inroads on New Zealand’s dismal productivity performance seems almost certain to require getting to the bottom of what has given rise to such an appreciation –  on almost any measure one cares to look at, internal or external.

(Meanwhile our bureaucrats avoid the real issues, while looking busy.  Yesterday I stumbled on this on an MBIE website, touting a new panel of experts –  half academics, a third public service economists –  to help fix businesses.

It’s common for small businesses in New Zealand to be passionate about what they do, but pressed for time. So working “on” the business instead of “in” the business often stays at the bottom of a long to-do list.

Business owners and operators tell us they would love to improve their systems and processes to get better results, and to save time and money. But getting these up and running takes time they just can’t spare.

This lack of time to work “on” the business is one reason why New Zealand’s productivity is comparatively poor. This poor productivity is a problem, whether you want happier workers, bigger profits or a better work/life balance — or a combination of these goals.

To help Kiwi businesses find practical ways to improve their performance, we’ve brought together a panel of experts from New Zealand and around the world, and combined their insights with our own research with small businesses.

I suspect small business owners are often rather busy whichever country they are operating in (high productivity or low), that we are better off assuming that private sector people make the best of their opportunities, and that the answers to the question of why New Zealand now lags so badly behind lie rather more with the politicians and their public service advisers than with the private sector.  Skew the playing field, and it is hard to get a good game.  Perhaps –  as in areas of financial conduct –  the (self-proclaimed) physicians should “heal themselves” (fix things they are directly responsible for) rather than touting their alleged skills in fixing private businesses.  Apart from anything else, there are professionals running their own businesses offering advisory services, and they actually face a market test.)

 

 

 

Exports of services: a dismal picture

In my post yesterday, I highlighted the pretty stark divergence in the performance of the tradables and non-tradables parts of the economy.  As the key chart in yesterday’s post illustrated, in the 1990s and into the early 2000s both the tradables and non-tradables sectors were growing strongly, even in per capita terms.   Since then, the non-tradables sector has continued to grow pretty strongly, but there has been no growth at all in per capita tradables sector GDP –  in fact, the current level is almost 10 per cent below the 2004 peak.

One element of the tradables sector that is commonly supposed to be doing well is exports of services: tourism, export education, and the rest.   The government has indicated that it hoped the ICT component would surge ahead and, on some definition or other, be the “second largest contributor to our economy by 2025”.

But how have services exports  actually being doing, as a share of the economy?  Here is the New Zealand chart.

services X june 18

There was really strong growth over the 15 years or so to the peak (marked) in around 2002.  Services exports lifted from less than 7 per cent of GDP to in excess of 10 per cent.  Since then, the trend has been back downwards again –  the current level only a touch above 8 per cent.  And, at that, one of the largest components –  export education – is, in effect, quite subsidised, by being bundled together with the ability to get work rights and residency points.

How have other advanced countries done?

Here is a chart, using annual OECD data, showing (a) New Zealand, (b) the median for those small OECD countries with complete data since 1986, and (c) the median for six small former Communist eastern and central European OECD countries, countries engaged in the sort of catch-up that New Zealand was supposed to experience.

services X 2 june 18

I don’t fully understand what was going in the former Communist countries in the first few years of the century, although since in many there was a big boom in domestic demand and credit, the export sectors (especially the bits not involving FDI) were probably under pressure.   Whatever the story for those countries then, both lots of small advanced countries have seen rising shares of their economies accounted for by services exports over the past decade.  We haven’t.

Here is another way of looking at our experience, looking at the percentage point change in the services exports share of GDP since our peak in 2002.

services x 3 june 18

There were two –  of 34 – OECD countries that saw a slightly larger fall in the GDP share of services exports.  In one case, the growth in goods exports more than offset the fall.  In the other –  Chile –  both goods and services exports shrank as a share of GDP, as happened in New Zealand.

As ever, foreign trade isn’t everything.  But when your per capita incomes and productivity are so far behind the leading countries in the OECD, the typical way in which a country would undergo a sustainable lift would involve a larger share of the economy accounted for by both exports and imports  That just hasn’t happened in New Zealand –  and, of course, neither has there been any catch-up.   Which isn’t surprising when, on the measure I illustrated yesterday, the real exchange rate over the last 15 years has averaged 27 per cent higher than the average level in the previous 15 years.

That higher real exchange rate didn’t get there by chance.  It was the consequence –  mostly unwitting – of deliberate government choices.

On which note, it is nine months today since the election.  In other words, a quarter of the government’s term has gone.  And, as far as I can see, there is nothing in policy announced, or foreshadowed, likely to do anything to close the productivity gaps,  materially alter the real exchange rate, narrow the large average interest differentials, or sustainably increase the export share of our economy so that in turn we can support a larger import share.  Oh, and market prices suggest no confidence that the manifest evil that is the housing market is on the way to being fixed either.

An old familiar, still depressing, chart

I’m tied up in a meeting all day, so just a quick post to update one of my standard charts, following the release yesterday of the quarterly GDP numbers.

In this chart, initially developed by an IMF mission to New Zealand 14 or so years ago, GDP is fairly crudely allocated between tradables and non-tradables sector.  Tradables consist of primary industries and manufacturing, with exports of services added in.  Non-tradables is the rest of GDP.  Flourishing economies tend to have a strong tradables sector: local firms doing well taking on the world (whether as exports or import-substitutes).  It isn’t that one type of activity is inherently superior to the other, but when your tradables sector lags behind it usually isn’t a promising sign.

Here is the chart, expressed in per capita terms with both series indexed to 1991q1 when the official quarterly population series starts.

GDP T and NT june 18

Tradables sector activity performed quite strongly in the 1990s, and even up to 2004.  But the current level of real per capita activity was first reached in 2000, 18 years ago.  The current level of real per capita tradables sector GDP (on this measure) is almost 10 per cent lower than it was at peak in 2004.

There are plenty of sceptics of this chart, and it isn’t entirely kosher to add together bits of production GDP and bits and expenditure GDP.  So here are the individual components of the tradables GDP indicator.

tradables jun 18

Over 27 years, there has been no growth at in real per capita GDP in agriculture, forestry and fishing, in mining (includes oil and gas –  see the spike up in 2007), or in manufacturing.    There has been growth in real per capita exports of services, but almost all that growth was in the 1990s and early 2000s –  really strong growth back then, and very little, overall, since.

What changed 15 or so years ago?  The (real) exchange rate did.

ULC jun 18

27 per cent higher, on average, over the last 15 years than in the previous 15 years.   And it isn’t as if the increase has resulted from the superb performance of the tradables sector of the economy.

Real exchange rates aren’t exogenous instruments that governments (or central banks) can change at will.  But if the authorities care at all about getting to the bottom of our economic underperformance, they really need to get to the bottom of what pressures have resulted in such a marked increase in the real exchange rate, sustained now for so long (hint: the terms of trade is at best a small part of such a story).   15 years ago it was almost possible to believe that the New Zealand economy had been turning a corner, becoming more productive and more outward oriented, that it might even begin to close the gaps with the OECD peers.  But no longer….and that is before the oil and gas exploration sector was summarily given notice, before net zero carbon emissions targets looked like becoming a real factor.

A successful economy will, almost inevitably be a more outward-oriented one, in which more and more firms operating here are successfully taking on the world.  At present, nothing in government policy suggests any improvement, any reversal of the 15 years of sliding backwards, reliant ever more on “taking in each other’s washing” –  the (population-driven) domestic non-tradables sector.  It is simply not a robust foundation for a more prosperous future.

 

Another champion of regional development policy

Yesterday the Productivity Commission hosted a seminar at which the Maxim Institute’s Julian Wood presented his ideas on regional development policy.  The Maxim Institute is a policy think-tank, often seen as towards the conservative end of the spectrum, based in Auckland, and over recent months they have published a couple of papers on related issues.  The second of these Taking the Right Risks: Working Together to Revitalise our Regionswas the focus of yesterday’s presentation.

(The seminar ran under Chatham House rules, which means I can’t name the person who championed the success of planning in Auckland, and lamented that we don’t yet have such a plan in Wellington.)

Wood –  a former Department of Labour researcher and policy analyst –  began his presentation with this chart from the first of the two papers.

wood popn

The first panel highlights the TLAs where population has been static or is estimated to have fallen between 2013 and 2018, and the second panel is the projections in 25 years time (2038 to 2043) from the SNZ subnational population projections.  On those numbers, the national population will still be growing quite a bit, but most TLAs would be seeing flat or falling populations.   These numbers apparently excite a lot of interest in provincial New Zealand –  or at least in the local authorities and local “economic development” agencies.  There is, we are told, much gnashing of teeth.

It isn’t entirely clear why.  In most cases, the places with (projected) flat or falling population 25 years hence, “flat” is more accurate a description than falling, and most of the projected falls are pretty small (eg a couple of per cent over five years).   Taking the full 30 year period, from 2013 to 2043, TLAs that have currently less than 5 per cent of New Zealand’s population are expected to shrink in population over the 30 year horizon.  And given that New Zealand fertility rates are now well below replacement (about 1.81 children per woman), a future of fairly flat or falling populations seems like one that New Zealanders individually are happy to contemplate.  It is, after all, the situation now in much of the advanced world.   There is a handful of TLAs where the population falls projected do look quite stark – eg Kawerau, Opotiki, South Waikato –  and there may be some specific issues for local authorities in those area (especially dealing with central government infrastructure mandates), but it hardly looks like a case for widespread concern.  And it isn’t as if isolated substantial falls in population are a new phenomenon: Taihape’s population now is about half what it was in the 1960s;  Hokitika’s population is not much more than half what it was in the 1860s.

Not only is population decline not a new phenomenon –  even in New Zealand –  but we can, when we look abroad, see that it also isn’t inconsistent with productivity growth and improved material living standards.  Most eastern and central Europe countries have flat or falling populations, and those countries are typically doing rather well economically (Japan’s population is also flat or slightly falling, and South Korea’s is rapidly getting to that point, both countries that continue to rack up productivity growth.)

It also wasn’t clear whether Wood was framing his proposed policy responses around the prospect of falling populations in some of these areas or around some perception of poor economic outcomes in some regions at present.   And the two don’t seem well-aligned.  Thus, if we look at the regional GDP numbers, the regional councils with the lowest average per capita GDPs are Northland and Gisborne.  And yet on the SNZ projections, the population of Northland is expected to be 20 per cent higher in 2043 than it was in 2013, and the population of Gisborne is expected to be 6 per cent higher (although falling a bit by the end of the period).  Whatever the issues in those two regions, population doesn’t seem set to be one of them (unless, arguably, too little outward migration to regions offering better opportunities).

But whatever the precise motivation, –  and some of it simply seems to be the advent of Provincial Growth Fund and a dedicated Minister of Regional Development –  Wood (and Maxim) seem keen on the potential of regional development policy (or “customised regional development pathways” harnessing “the great potential benefits of spatial policy tools”).   I came away from the seminar –  and from reading their paper –  no more convinced than I was by the evangelical spiel offered up by a former MBIE staffer at a Treasury lecture on this stuff last year.

There was, as far as I could see, no analysis at all of what the market failures were, and why then there might be a role for active targeted measures, whether taken by central or local government.  And even though one of his key themes was that locations matter, it was striking that the overwhelming bulk of the hundreds of studies he drew from were of experiences in Europe.  Thus, featuring prominently in the paper was a table described as a checklist of indicators of regional growth and decline, explicitly stated as being drawn from European experience.  Among the items on the “indicators of decline” were “an economic base founded on resource exploitation and/or the primary processing of this exploited resource”.   Not only does that substantially describe New Zealand (and Australia) as a whole, but it also specifically describes Taranaki –  the region with the highest average GDP per capita in New Zealand –  and Western Australia (highest GDP per capita in Australia) and Alberta (highest GDP per capita in Canada).   Marlborough –  without oil or coal – had much the same average GDP per capita as Auckland last year (the sort of relative performance one doesn’t see in any EU country).

The author has been around long enough to have a certain scepticism.  As he notes

Spatial policy introduces “serious risks” like “misallocating resources, creating a dependency culture and favouring rent-seekers over innovators.” Even the Minister of Regional Economic Development has outlined that the new Provincial Growth Fund is a “bloody big risk…”

But in any rational calculus, big risks require a reasonable prospect of big rewards to make the punt worthwhile.   And nothing in the report suggests any real basis for confidence that such rewards are in prospect, no matter how well targeted, designed, and governed the interventions are.   The author knows the pitfalls –  and so he can write sensibly about the need for clear and explicit goals, for a heavy investment in evaluation, for a governance model that blends top-down and bottom-up perspectives, and also about the need to recognise that any experimentation involves allowing for the possibility of individual failures.

But as I listened to him talk, and as I read the paper later, I was still at a loss to know what he really favoured.  There was enthusiastic talk of R&D tax credits –  including by reference to Israel, a country with as poor a productivity performance as our own –  but nothing to indicate why such a measure was particularly suited to regional development (let alone any analysis of why firms don’t find spending on R&D more attractive).    There seemed to be some enthusiasm for immigration, although he knows some of the caveats there.  Weirdly, the concluding paragraph of his entire “smart growth” section is all about labour supply –  which seems mostly to put the cart before the horse, as people will typically be ready to move to where the opportunities are (indeed if the opportunities are in the provinces, more of their own talented young people will stay or come back).  And any policy approach which includes as one of its key items –  as this one does –  requiring local authorities to include even more pages in their long-term planning documents (vapid enough anyway) will struggle to be taken seriously, at least outside government departments.

My own take on these issues is that people who talk about regional development –  whether under the previous government or the current one –  are usually looking in the wrong place.  There seems to be a knee-jerk political need to “do something” and to be seen to do something, even when the action isn’t based on robust analysis specific to New Zealand (and thus the laudable call for good governance, careful targeting etc is mostly a forelorn hope, whistling in the wind).    I searched both Maxim documents and was struck (if not greatly surprised) to find no reference at all to the way in which the real exchange rate –  persistently high even in the face of our relative productivity decline  and itself a reflection of domestic demand pressures –  has reallocated resources away from the regions (generally with quite export-oriented production bases) to Wellington and (in particular) Auckland.   A real exchange rate that was 30 per cent lower  –  and that is the sort of change implied by real interest differentials –  would make a huge difference to the relative prospects of places like Hawkes Bay, Nelson, Otago, Southland, Gisborne, and so on –  orders of magnitude more so than the best of the smart active initiatives Maxim seems to be calling for.   (I was also struck by the fact that although there were numerous references to tax incentives and R&D tax credits, there was nothing at all about the basic rates of business taxation –  if you want more of something, tax it less heavily.)

But as I look at the New Zealand data, I’m also struck by the way there isn’t an overall New Zealand regional story, and even to the extent there is, the differences between the richest parts of the country and the poorest seem no larger (and generally smaller) than those elsewhere.    I had a look through the EU regional data this morning.  GDP per capita in London, for example, is 150 per cent above that in regions like Durham, South Yorkshire, Lincolnshire, and West Wales.   The margins are almost as large between Paris and some of the outer French regions.   Margins of 100 per cent seem pretty common looking across EU countries.   And what of New Zealand?    Northland and Gisborne last year had average GDP per capita of almost 65 per cent of that of Auckland (and 58 per cent of that of Wellington) –  ie Auckland is about 50 per cent higher than them.   And as I noted above, Marlborough had much the same GDP per capita as Auckland –  and there is nowhere in provincial France, UK or Germany with anything like the average GDP per capita of Paris, London, or Hamburg respectively.

Regional development policy, however cleverly designed or governed, isn’t what this country needs –  arguably it never has been (and Maxim has a nice appendix on past failures).  What it needs is hard-headed policy focused on lifting overall economic performance, notably productivity growth, based on a compelling and carefully scrutinised narrative that explains how we got where we are, not just grabbing bits from some generic OECD handbook, from a need to do something/anything.  In practice, that approach –  adopted in New Zealand for a quarter of a century now, at least –  responds to symptoms not causes, and if it sometimes seems to produce benefits (albeit rarely) it is by chance rather than by the inherent merits of the policy approach.  I suspect that a better-designed set of policies in New Zealand would tend to boost the regions relative to Auckland and Wellington, but that wouldn’t (and shouldn’t) be the goal: the goal should be lifting opportunities for better material living standards for all New Zealanders, and enabling New Zealanders to move to take advantage of those opportunities wherever they are to be found.