Inflation bonds and breakevens

Michael Reddell inflation, Interest rates

I spent a large chunk of Friday interviewing funds managers.  In the course of our conversations, talk turned to the yields on government inflation-indexed bonds (a sensible asset for funds offering indexed pensions) relative to the yields on conventional government bonds.  There are a lot more inflation-indexed government bonds on issue now than there used to be, and I was encouraged to learn that, as a result, bid-ask spreads are also tighter.

The gap between nominal and indexed bond yields is what is known as the “breakeven” inflation rate –  the actual inflation rate that, over the life of the respective bonds, would generate the same return whether one was holding indexed or nominal bonds.   It can be seen as a proxy for market inflation expectations.

As regular readers know, one of my favourite charts is this one, showing the gap between those yields in New Zealand for the last few years.

IIB breakevens June 18

10 years from now is June 2028, so something nearer the average of the two series is at present a reasonable fix on a 10 year inflation breakeven for New Zealand.  But whichever series you use, the numbers have been consistently well below 2 per cent for several years now.  By contrast, at the start of the chart, it looks as though 10 year inflation breakevens were around 2 per cent (10 years ahead then was 2024, so the blue line was the more relevant comparator).

You might expect that a chart like this one would bother the Reserve Bank (paid to keep inflation around 2 per cent).  Instead, they simply ignore it.   Their statements repeatedly claim that inflation expectations are securely anchored at 2 per cent, relying on surveys of a handful of economists.  They simply ignore the indications from market prices.

It isn’t as if what we see in New Zealand is normal.   Here is the chart of US 10 year breakevens for the same period.

US breakevens jun 18

At something a little above 2 per cent, US breakevens are around the US inflation target (expressed in terms of the private consumption deflator, rather than the CPI-  which the bonds are indexed to).

What about other countries?  Courtesy of Fisher Funds, here are a couple of charts.  First the 10 year breakevens for the last year or so.

global breakevens

“DE” here is Germany.  As Fisher noted to us, it seemed a little anomalous that New Zealand 10 year breakevens are lower than those in Germany (although the German economy is one of the stronger in Europe, and they have no domestic monetary policy).

And here are the 20 year breakevens

20 year breakevens

BEI 2035 and BEI 2040 are New Zealand.   I’ve always tended to discount the UK numbers, because of the different tax treatment of indexed bonds there, but both the US and Australian breakevens look a lot closer to the respective inflation targets (2.5 per cent in the case of Australia) than is the case here.

One of the fund managers we talked to on Friday made a throwaway comment about people simply looking at the last headline CPI number.    Maybe, but annual headline CPI inflation in New Zealand for the last six years has averaged 1.0 per cent.   The Reserve Bank’s favoured core measure has averaged 1.4 per cent over the same period.  And the Reserve Bank has never reached the limits of conventional monetary policy (the OCR hasn’t gone lower than 1.75 per cent) – inflation could have been higher had they chosen differently.  It might not be irrational for investors to treat the track record of the last several years as a reasonable pointer to the period ahead.  After all, the last six years has been a period with a strong terms of trade, and sustained (albeit moderate) growth.    Even if, as all the fund managers we talked to suggested, we are now in a “late cycle” phase when inflation might be expected to pick up, “late cycle” phases tend to come just before the end of the cycle.  There will be downturns in the next 10 or 20 years.

What of other possible explanations for these now persistently narrow New Zealand inflation breakevens?  In years gone by there was almost no liquidity in the indexed-bond market (for a long time there was but a single indexed bond).  All else equal, that might mean investors demanding a higher yield to hold the indexed bond (relative to a conventional bond), narrowing the observed breakevens relative to “true” market expectations of future inflation.

But if it was true once, it must be a less important story now.  There are four indexed bonds on issue, each with principal of several billion dollars.  As I noted earlier, if bid-ask spreads are still wider than those (a) on nominal bonds, and (b) on indexed bonds in say the US, they are tighter than they used to be.  It isn’t an attractive instrument for high frequency trading, but these are multi-month, even multi-year, trends we are looking at.

The other possible story I heard a while ago was the suggestion that the government had glutted the market by issuing too many indexed bonds.    It had an air of plausibility about it.  It isn’t as if there are many natural holders of these instruments –  there are no indexed bond mutual funds in New Zealand, they don’t count as a separate asset class in many mandates, and so on.  Then again, in a low yield (and yield hungry) global environment, these instruments offer a pretty juicy yield (the government has a AAA or AA+ credit rating, and its 2040 indexed bonds are offering just over 2 per cent real –  there isn’t much around to match that combination).  Here is the 10 year indexed bond yield chart (again from Fishers –  ignore the UK again).

real 10 year yields

Over the last few years, this is the proportion of New Zealand government bond sales that have been in the form of indexed bonds.

indexed bond share

About 24 per cent of New Zealand government bonds on issue are currently inflation-indexed.

I’m not sure how that compares generally with other countries, but in the UK –  long a keen issuer of inflation indexed government bonds – the share is also about a quarter.  The British also appear to be winding back their issuance –  to 21 per cent of new sales this year.  According to a  FT story from earlier this year

Robert Stheeman, chief executive of the UK’s Debt Management Office, said that “no other country regularly issues a quarter of its debt in inflation-linked bonds”, which “gives us pause for thought”. In contrast Italy — the continent’s largest issuer of inflation-linked bonds — raises just 13 per cent of its debt in this way, according to figures from the DMO.

It may well have been prudent then for our own government to have wound back its issuance plans for index-linked bonds.  But that news has now been out since the Budget last month, and there is still no sign that 10 year breakevens are more than about 1.5 per  cent –  still well short of the 2 per cent inflation target, that was recently reaffirmed by the new government.

There is an OCR review announcement later this week.  We don’t get much analysis in a one page press release, but as the Governor mulls his decision, and his communications, and looks towards the next full Monetary Policy Statement, it might be worth him inviting his staff to (a) produce, and (b) publish any analysis they have, as to why we should not take these indications from market prices as a sign that inflation expectations are not really anywhere close to the 2 per cent the Bank regularly claims.  Perhaps there is a good compelling alternative story. If so, it would be nice of them to tell us.  But given the actual track record of inflation, it would be a bit surprising if breakevens persistently below 2 per cent were not telling us something about market expectations (right or wrong) of inflation.

Exports of services: a dismal picture

Michael Reddell Exports, New Zealand economic performance, Uncategorized

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

Michael Reddell New Zealand economic performance, Uncategorized

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.

 

Putting a price on the hair shirt

Michael Reddell Emissions reduction, Emissions targets

A couple of weeks ago I wrote about the government’s consultative document on its proposal to target net-zero emissions by 2050, and particularly the commissioned modelling NZIER had undertaken on the likely consequences of each of several options for future real GDP.    As the consultative document itself put it

The analysis by NZIER suggests that GDP will continue to grow but will be in the range of 10 per cent to 22 per cent less in 2050, compared with taking no further action on climate change.

Those are breathtakingly large numbers (future GDP gains) for a government to simply propose walking away from.  As one comparison, high end estimates of the GDP gains from preferential trade agreements (such as CPTPP or the proposed new one with the EU) tend to be about 1 per cent each.

A couple of days ago NZIER’s final report itself was released, making it a bit easier to make sense of the reported modelling results.    There is a great deal of detail (the report is 90 pages), a considerable number of (necessary and inevitable) caveats, as well as quite a bit of editorial advocacy for their client’s wishes.

The centrepiece remains this table which I ran in the earlier post.

emissions NZIER

From reading the final report, and a few exchanges with NZIER, they would encourage people to focus on the final three columns.   In those scenarios, relative to the baseline (the first column, which is built from The Treasury’s longer-term economic projections/assumptions), the net-zero target sees productivity growth fall quite substantially, such that average annual GDP growth falls by 0.3 percentage points.  Over 33 years, that cumulates to a sacrifice of about 10 per cent of GDP  (real GDP –  per capita, since the population assumptions don’t change – in 2050 is about 10 per cent lower than it otherwise would be).     These are serious numbers: 10 per cent of today’s GDP is about $28 billion.  And the loss isn’t just for one year.  Depending on various possible assumptions, the cumulative loss the next generation would experience could easily be a couple of hundred billion dollars (in today’s dollars).

(Perhaps encouraged by their client) NZIER try to play down these numbers a bit by encouraging people to focus only on the difference between the third to last and last columns.  They argue that the 50 per cent net reduction is already government policy, and so the relevant metric is the marginal additional losses from moving to net zero.   But, of course, actual policies to deliver the previous government’s own vapourware objective (the 50 per cent reduction by 2050) aren’t in place, and that target itself is not binding in any real sense.

Some readers might think that a 10 per cent loss of future GDP isn’t too bad –  big as it is. it certainly isn’t as large as the 22 per cent loss referred to in that quote above.

But the 10 per cent of GDP annual cost by 2050 (the final scenario in the final column of the table) relies on some really rather optimistic assumptions  (and assumptions they all are, as is clearly identified in the NZIER report).

First, they assume quite a lot of technological innovation in some sectors that might be most exposed to a higher carbon price.  For example, it is assumed that by 2030 methane vaccine is readily available, commercially viable, and widely used, which would reduce methane emissions by 30 per cent.  It is also assumed that global demand for dairy and sheep/beef products falls quite substantially (even though, all else equal, this would make New Zealand poorer, it would make farmers more ready to shift away from emitting-animals).  It is also assumed that much faster improvements in energy efficiency are achieved and that (without subsidies or regulation) electric vehicles make up 95 per cent all light vehicles on the road in 2050 and 50 per cent of all heavy vehicles.

No doubt a much higher carbon price (globally) would encourage additional R&D in affected sectors, and so some of these innovations may well occur.  But in my earlier post, I described these assumptions as assistance from the “magic fairy”, because while it is probably fine to assume that big changes in relative prices, imposed by governments, will foster innovation to economise on what is being taxed more heavily, it is unreasonable to assume –  as is done here –  no offset in the rest of the economy.   On these assumptions (presumably developed jointly by MfE and NZIER) a government-driven huge change in the structure of the economy (driven away from the market baseline) is a net positive source of new economic innovation.  It doesn’t seem very likely.  It isn’t at all obvious what precedents could be cited in support of such an assumption.  On that basis, for example, putting on import licensing and exchange controls after 1938 might have been hugely positive for business innovation in New Zealand.   Enthusiasts at the time probably hoped so, but the typical reading of the evidence would suggest not.

In the consultation document these “assume innovation” scenarios were all described solely as technological innovations (as described above –  and the text is reproduced in my earlier posts).  But what becomes clear, and quite explicit, in the full NZIER report is that much of what is going on in these “assume innovation” scenarios is in fact different assumptions about increased sequestration of emissions by a permanent increase in land used for forestry.  The model can’t cope with generating increased afforestation endogenously, and so assumptions have simply had to be imposed.

In the net-zero scenario (far right column), so much additional sequestration is assumed that the authors state that it would require a 140 per cent increase in the land area devoted to forestry (a really big increase, and the baseline presumably includes not just plantation forest but forests in, eg, national parks).  The big step up in the assumed forestation between the 75% and net-zero columns is the reason why the GDP growth rates are the same in the two scenarios.

It does seem reasonable to suppose that a much higher carbon price (and in the NZIER modelling, the carbon prices goes very high on some scenarios) there will be changes in land use in favour of forestry.  But here again, the magic fairy is at work.

We assume that additional forestry planting does not materially reduce the amount of productive land available for other uses. This could be seen as assuming that additional planting occurs on scrub land, rather than substituting for sheep and beef or dairy land.
If afforestation occurs on productive land, the economic costs of imposing emissions targets will increase, as the productive capacity of the agricultural and horticultural industries will decrease, which will also have negative flow-on effects for downstream primary processing industries.

In other words, NZIER is assuming that a big change in relative prices (the carbon price) makes economic a whole lot of resource that has not hitherto been used for anything much.  I’m sure there is such land – a considerable portion probably Maori land, with all the issues around title/collateral that make it difficult to use  – but is it reasonable to assume that all, or even most, of the land newly devoted to forests will be land that wasn’t previously being used for anything?  Why, for example, wouldn’t one assume that land that has been converted from forestry to dairying in recent decades (eg much between Taupo and Tokoroa, and Taupo and Rotorua) be among the first that would be converted back to forestry?  If so, as NZIER acknowledges, there will be additional real economic losses.

As in the Productivity Commission’s draft report, this NZIER modelling makes no allowance for the possibility of a lower population growth rate (by lowering our annual immigration approvals targets).  It is quite an extraordinary omission, given the cross-country data I’ve shown previously illustrating (the rather obvious point) that more people tends to mean more emissions.  If they are your own people, there isn’t much governments can do about it, but in New Zealand a large (and increasing) part of trend population increase is about discretionary immigration policy.

One would need to have NZIER rerun their models to get really good estimates (and since they ran and published sensitivities on a variety of other alternative assumptions, there is no good reason not to have done so as regards population growth –  although no doubt to have done so would have been unwelcome at MfE and in the Minister’s office).  But since the increased afforestation assumptions are a bit like a free lunch (raise the carbon price, and a whole lot of previously unused land is brought into play, sequestering carbon emissions), one can get a sense of what a difference a similar free lunch assumption might make.  Lowering the projected population growth by 0.7 per cent per annum (the difference lowering residence approvals from 45000 to 15000 per annum would make) would reduce expected future emissions enormously, without needing the see the carbon price driven sky-high.  Perhaps then a net-zero target –  on this definition – might really be feasible with a 10 per cent sacrifice of annual GDP per capita, or perhaps even something a bit smaller.

However, even then there are areas where the NZIER numbers are underdone if the government is really serious about a true net-zero goal.  I checked the Labour Party’s and Green Party’s climate change policies, and the net-zero goal is there in a pretty stark and unqualified way.  There is no suggestion that they are only interested in net-zero emissions on some UN definition –  and fair enough, for them this is a moral cause, not a bureaucratic one.

But what isn’t always appreciated among the wider public is that emissions associated with international aviation, real and substantial as they are, are not included in the UNFCCC (UN framework convention on climate change) definitions (neither is international shipping).   This wasn’t because of any high science.

The international aviation and shipping sectors are not included in the recent Paris Agreement, which was negotiated under the United Nations Framework Convention on Climate Change (UNFCCC). The precedent for excluding these sectors from global climate agreements was set in 1998, when both sectors were excluded from national targets established under the Kyoto Protocol. This was largely due to a lack of agreement on how emissions should be attributed to particular States.

From the planet’s perspective, it doesn’t appear to matter whether the emissions comes from your car, or from Air New Zealand’s aeroplane.  In the UNFCCC numbers –  the base NZIER uses for their modelling –  it does.  But if you “care about the planet”, and want to give a strong “moral lead”, in the way the governing parties claim to, surely you need to offset international aviations as well.   Domestic aviation is included in the ETS – so I learned, New Zealand was among the first to do so –  but not international aviation.

There was a government document published on this issue a couple of years ago.  As it points out, at present the numbers aren’t unduly large

Domestic aviation accounts for 1.1 percent of New Zealand’s total emissions.

and international emissions are about 2.5 times domestic

aviation 1

International tourism has been booming since then.   And here are Ministry of Transport projections.

aviation 2

Even if we take the middle two lines, international aviation emissions would almost double by 2050.

Remember too that fuel costs are a very large proportion of airline operating costs (especially for long-haul operations) and that tourism spending is quite price-sensitive (you might be determined to take a holiday, but price affects location choice).  If the government is really serious about a moral crusade for net-zero they can’t but include international aviation in the framework (and in the goal) –  and if others were to follow their moral lead, the industry will have to have been included globally by 2050.  And what will that do to the viability of our international tourism industry –  almost everywhere is closer for almost everyone than New Zealand is, and we don’t have many unique offerings?   Given a choice between taking your electric vehicle to the Croatian coast or flying to New Zealand, the economics won’t favour New Zealand.

In other words, if the government is serious about a genuine net-zero target, they really need to start factoring in international aviation emissions, especially as these are set to rise absolutely and (especially) as a share of total emissions.  Perhaps they can just assume into existence some more forests, at no cost to other production, but it would seem highly risky to just do so.

For all these reasons, the 10 per cent sacrifice (a deliberately chosen act) of annual GDP estimated by NZIER seems to be very much at the low end of the plausible range, especially if they are serious about offsetting all emissions, not just ones that international convention negotiators happened to agree on.  The 22 per cent number comes from MfE and NZIER and doesn’t seem implausible.  Of course, any modelling, and any estimates, are inevitably highly imprecise.  Something could turn up to set all these costs at naught, but it would seem rash –  to say the very least –  to set out upon such a journey in the idle hope that something will turn up, and if not well –  never mind –  our children will simply be up to a quarter worse off than otherwise.    Productivity growth in New Zealand hasn’t been rapid in recent decades, but lopping a quarter off future incomes would be the equivalent today of simply giving up all the economic gains (in real GDP per hour worked) of the last 20 years.  Simply breathtaking.   And meanwhile people lament child poverty concerns, constraints on the health system, and so on.   Productivity is about new possibilities.  Are we really happy to give up such possibilities for the next few decades?

There is a lot of other interesting stuff in the NZIER report, but I wanted to end with the chart on the estimated distributional impact.   In my previous post, I quoted the MfE text

Our modelling suggests the households that are in the lowest 20 per cent bracket for income may be more than twice as affected, on a relative basis, than those households with an average income.

Which is quite bad enough. But it is all the more stark when you see the chart in the NZIER report, drawn from some work done for them by Infometrics  (in this chart they are looking only at the additional estimated losses from moving from the 50 per cent target to a net-zero target).

emissions distribution

Specifically, people in the bottom two income quintiles will be hit six times as hard as people in the top quintile.    Like MfE in the consultation document, NZIER rush to the client’s defence and suggest that redistribution policies could alleviate this.   You wouldn’t thought that sort of advocacy was their role –  having been commissioned to do modelling –  but more importantly, they should know as well as anyone that when governments adopt policies to materially shrink the economy, it is even harder than usual to persuade voters in the upper quintiles to agree to give up even more to mitigate the losses the worst off are exposed to.   Redistribution tends to win more favour when everyone is getting better off.

Has any government anywhere ever consulted on policy objectives that, if seriously pursued could cut future GDP per capita by anything from –  on their own numbers –  10 to 22 per cent?  If so, I can’t imagine when.  It is a huge price to propose for what seems to be mostly a moral crusade –  hence the title about pricing the hair shirt.  If you doubt that interpretation, check out Labour climate change policy.

New Zealand must do its part, along with the rest of the world, in reducing climate pollution. It is not good enough to say we are too small to matter – most countries individually could claim the same. We must take our share in the effort however small, just as we did when dealing with CFCs, or opposing apartheid, or fighting fascism. Kiwis are not shirkers. 

Opposing apartheid will have cost almost nothing to New Zealand GDP (albeit some utility losses for some rugby supporters) –  same goes no doubt for opposing French nuclear testing in the Pacific.  And I’ve never seen any large estimates for the cost of dealing with CFCs.

What of the World War Two comparison?  I alluded to it in the my earlier post observing

Wars, of course, come at a very considerable cost –  and sometimes are worth fighting –  but again, I doubt any democracy (or perhaps even any tyranny) ever entered a war thinking that as a result of doing so they would be so much poorer 30 years on.  

Awful as wars are –  and with staggering losses of life in some countries –  there is simply no way that any of the Anglo countries, that voluntarily entered the war to resist Hitler, were 10 per cent poorer, let alone 22 per cent poorer, thirty years on as a result.

Perhaps there is a legitimate moral cause at work here, but the government is inviting citizens to offer up a fearsome price –  in lost incomes and opportunities –  all while refusing to even consider the lowest cost option for substantially reducing the volume of emissions in New Zealand.   For a country that has done so badly as regard productivity, under successive governments over many decades, it seems breathtakingly reckless.  It seems all the weirder to be proposing to take some global moral lead in a country where, as even the IPCC reports have noted, there are both gains (eg better crop yields in many areas) and losses apparently on offer from rising global temperatures.

 

Another champion of regional development policy

Michael Reddell Regional development, Uncategorized

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 Regions, was 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.

 

 

Avoiding upset to Beijing: the Wellington establishment

Michael Reddell China, Uncategorized

A week or so ago I wrote here about some comments made by Jason Young, the (then) acting director of the Contemporary China Research Centre, which is based at Victoria University.   Dr Young’s contribution appeared to be to claim that any New Zealand debate around the People’s Republic of China, including its activities in New Zealand, was some sort of “fact-free zone” –  while ignoring all the facts in plain sight –  and to lament the absence of better quality debate, while not himself seeking to add much to it.  It seemed like an attempt to play distraction.

As I noted in that post

The chair of CCRC is Tony Browne, former New Zealand Ambassador to the PRC, who also just happens to be the chair of the PRC-funded (and controlled) Confucius Institute at Victoria University (CCRC and the Confucius Institute seem to share an administrator as well).  The CCRC itself seeems to work hand-in-glove with MFAT……and its advisory board is largely made up of public servants (MFAT, MBIE, Treasury, NZTE, Asia New Zealand Foundation) plus the chair of Education NZ and the former chair of the New Zealand China Trade Association.

It didn’t seem like an organisation that was ever likely to say anything critical…..and in the unlikely event it did, there would be repercussions all round.

A day or two later, Stuff had an article on the Contemporary China Research Centre, prompted (it appeared) by some mix of those Jason Young comments I’d been writing about and the announcement that Jason Young had been confirmed as director of the CCRC.  Young was, as one might expect, championing his institution

Young said the debate around the role China played in New Zealand, and the wider region, was more complex than had been discussed in the recent media reports and academic articles in New Zealand.

“Sensationalist claims about extensive Chinese influence in New Zealand highlight the importance of the knowledge and understanding the Victoria University of Wellington-led New Zealand Contemporary China Research Centre (NZCCRC) brings to public debate,” he said.

“It is crucially important we have a New Zealand institute that can think about New Zealand interests and New Zealand needs and New Zealand values and New Zealand problems.

“Obviously, we can draw on what American, Australian and other scholars are saying, but there are unique elements that need to be addressed from a New Zealand perspective.”

The new head said the centre’s advantage was its independence, and ability to speak with “a New Zealand voice”.

At that point I began wondering how he could say all this with a straight face.   He doesn’t appear to have been misquoted or misrepresented either (I kept an eye on his Twitter feed and on the CCRC website and there were no corrections or clarifications) –  what Stuff quote him as saying appears to be what he believes.  Remarkable what one can come to believe when one’s job (and recent promotion) requires it.

To their credit, Stuff picked up the point about the close ties betwen the PRC-funded Confucius Institute at Victoria and the CCRC.

The centre shares a location, chairman, and administrator with the Confucius Institute, which is funded by the Chinese Government.

Chair Tony Browne told Stuff the institutes operated independently.

Rebecca Needham, director of the Confucius Institute at Victoria, said she wouldn’t stand for any political influence from the Chinese Government.

So let’s try to unpick this a bit, including the web that ties together MFAT, the CCRC, Tony Browne personally, the Confucius Institute and so on, in ways that make it exceedingly unlikely that the CCRC will ever be able to (or interested in) providing detached critical commentary on any threat posed by the PRC.   When he speaks, Dr Young is likely to be expressing his real views, but he’ll have been chosen for the role in no small part based on the inoffensiveness (to his patrons and sponsors, and their funders –  in Beijing and the Beehive) of his views.

Take the connection between the CCRC and the Victoria University Confucius Institute.  It isn’t just that they share a:

  • location
  • administrator
  • chairman

which seems quite a close tie, all things considered.  I went back the other day and read the Annual Reports of the CCRC, and this is what I found.

From the first report in 2009

12. Confucius Institutes. The Centre has supported and facilitated the working on the establishment of a Confucius Institute at Victoria University. Canterbury University is also establishing a Confucius Institute in Christchurch.

and from the 2010 Annual Report

confucius

That was Xi Jinping himself.

The two bodies seem to operate hand-in-glove.  It is hardly likely that the NZ CCRC –  chaired by Tony Browne –  will ever be publishing critical material on the PRC, which would make difficulty for, say, the Confucius Institute, chaired by the same Tony Browne, and funded by the government of the PRC to propadandise for the regime in our universities and schools.   Presumably not even Dr Young or Mr Browne would pretend that the CCRC could ever be a source of critical scrutiny of the Confucius Institute programme itself  (which has raised serious concerns in other countries, to the extent of a number of universities discontinuing the programme).    NZ CCRC and the PRC are partners in all but name (in addition to the various formal partnership arrangements CCRC has with PRC universities and government agencies).

What else do we learn about the CCRC?    From the 2017 Annual Report

The Centre has continued the successful partnership with the China Capable Public Sector Programme, managed and funded by the Ministry of Foreign Affairs and Trade for officials from across the public sector.

The Masterclass is an intensive five-day course on China designed and taught by the China Centre. It is exclusively for public sector workers and is delivered through a series of introductory talks and roundtables, followed by scenario-based activities. This year the Centre has put on two Masterclass events with excellent feedback.

It looks like a worthwhile programme, but it is also a significant business arrangement and financial arrangement with MFAT, who will be most unlikely to welcome anything that rocks the boat (and I’ve heard that MFAT/CCRC have been quite selective in which perspectives get presented at these courses). I don’t suppose CCRC would be running MFAT’s course for them had they ever openly made life difficult by casting doubt on the “never ever upset Beijing” line that seems to guide officials and ministers.

From that same annual report we also find

The Centre’s Executive Chair [Tony Browne] has continued in his role as a member of the Executive Board of the New Zealand China Council. He has also been appointed to the International Steering Committee of the Silk Road NGO Cooperation Network.

The China Council?  The (largely taxpayer-funded) advocacy group, on the board of which sit the chief executives of MFAT and NZTE, to champion the relationship with the PRC, apparently by never ever saying anything critical, and pooh-poohing anyone else who does.

As for the Silk Road NGO Cooperation Network, it appears to be another PRC government facilitated body.

Tony Browne, the former New Zealand Ambassador to Beijing, must be a busy man.   I remembered that I had met him once.   Among his many hats is that he is co-director of the China Advanced Leadership Programme, run by the Australia-New Zealand School of Government (itself a partnership involving various Australian universities and Victoria University).

The China Advanced Leadership Program (CALP) is an annual three-week program for Chinese officials, delivered in Australia and New Zealand. The aim of the program is to develop productive relationships between high level public officials of Australia, New Zealand and China.  The program has been operational since 2011 and is delivered across multiple Australian and New Zealand cities.  The program is made possible due to ANZSOG’s relationship with the Organization Department of the Chinese Communist Party.   

It must be a quite a revenue-generator for the universities concerned.

Who attends

Who are our participants?

Senior and emerging Chinese public officials from central and provincial governments – Up 25 senior officials in China are carefully selected by ANZSOG’s program partner, the Organization Department of the Central Committee of the Communist Party of China. The Organization Department occupies a unique role in the hierarchy of the Chinese government – it oversees appointments of all key positions within the administration. Previous delegations have included Vice-Ministers from the Central Government, Party Secretaries, City Mayors, and Directors-General.

All, quite explicitly, CCP members.

Who speaks?

Contributors

ANZSOG brings together the highest levels within government, business and academia in Australia. Previous contributors have included Prime Ministers and Deputy Prime Ministers of Australia, the Australian Minister for Foreign Affairs, the Governor-General of Australia, state Premiers, the Treasurer, former Prime Ministers, Chief Justice of Australia and other top political leadership, CEOs of federal and state government agencies, business and industry bodies. The program provides a world-class learning opportunity in Australia and New Zealand for senior Chinese officials. Past contributors include The Hon Susan Kiefel AC, The Rt Hon Jacinda Ardern, The Hon John Howard OM, AC, The Hon Bob Carr and The Hon John Brumby AO.

And me.  I don’t think Graeme Wheeler ever quite got the message about the PRC.  The organisers were keen to have him speak, and twice the job got passed down the line, ending up with me.    The day I last spoke, they’d also had John Key, Gerry Brownlee, Phil Goff and Iain Rennie speaking.  It is all taken very seriously.   (If anyone is interested, I got the Reserve Bank to release the text of my 2014 address, on the evolution of economic management in New Zealand over almost 200 years.  I think I avoided upsetting the visitors or being nauseatingly obsequious.)

You might suppose that being a partnership between numerous Australian universities and Victoria University, ANZSOG wasn’t of much moment in New Zealand.  In fact, the state and national governments are members.  And of the Board, three are New Zealanders –  in the chair is Peter Hughes, the current State Services Commissioner.  And what of ANZSOG’s ties with the PRC?  It isn’t just a commercial relationship involved in running that course.    Instead, ANZSOG lists as “affiliate partners” a small number of agencies including

Affiliate partners

It is all terribly cosy.  The presence of the Chinese Communist Party speaks for itself.  But CELAP describes itself as

China Executive Leadership Academy Pudong (CELAP), a Shanghai-based national institution, is funded by the central government and supervised by Organization Department of the CPC Central Committee.

Does it amount to much?  Probably not, but it is hardly a sign of governments ready to take a detached, and perhaps critical, approach to the PRC, or to foster such free and frank perspectives among their own public servants.

Reverting to the Victoria University Confucius Institute, the director Rebecca Needham was quoted in that Stuff article as saying that

she wouldn’t stand for any political influence from the Chinese Government.

And no doubt that is quite true as written.  But presumably she doesn’t count as “political influence” the sorts of prohibitions in these arrangements that, for example, screen the Mandarin language teaching assistants for their own political and religious soundness (Falun Gong need not apply)?   Perhaps, since she is a skilled and experienced bureaucrat, the “Chinese government” in that quote does not include the entity in the PRC that funds the Confucius Institute?  The Office of Chinese Language Council International (colloquially Hanban) apparently describes itself as a “non-government and non-profit organization”, but is chaired by a PRC vice-premier and reports to the PRC Ministry of Education.

Apparently, the directors of these Confucius Institutes are typically appointed by the host institution, not by anyone in the PRC.    And yet, when your institution is launched, here in Wellington, by Xi Jinping, when your institution depends on ongoing PRC funding, lets not be cute and suppose that anyone slightly risky –  or ever needing “political interference” to do the “right thing” –  would be appointed to the job.

And what of Ms Needham?  When I looked her up, it turns out that she was a long serving MFAT staffer, including a stint as New Zealand Consul-General in Guangzhou, leaving MFAT only a year or so ago.   Remarkably, despite serving now as the director of a PRC funded entity, devoted to the advancement of PRC interests in New Zealand, she is listed on the MFAT website as part of the “China Capable Public Sector Community of Practice”   which

brings together a core group of China experts from across the public sector who provide input and advice to the CCPS programme and connect people to share knowledge, learn, and collaborate around common concerns, problems, opportunities, or interests regarding New Zealand’s engagement with China.

The rest of the list is made up exclusively of current New Zealand public servants.   It looks like a good initiative, and the role of this “community of practice” is described as

The role of the CoP is to:

  • Act as a trusted advisor to agencies to inform strategic thinking, broad policy direction, and operational issues on China matters when invited
  • Provide advice and guidance on the New Zealand perspective and China context in the development and delivery of CCPS curriculum initiatives
  • Share knowledge and experience through participation in CCPS curriculum activities
  • Foster networks with China experts across the sector
  • Model a collaborative approach to develop a cross-sector mindset on China capability.

But Rebecca Needham works for an organisation funded by the government of the PRC, devoted to the advancement of various PRC interests in New Zealand.  Did MFAT not even recognise the potential for conflict, for differences of interest or views?

And, of course, Needham shares a location, an administrator, and a chairman with the Contemporary China Research Centre.

To repeat, no one should look to the New Zealand Contemporary China Research Centre for any independent perspectives on the PRC, or its relationship with New Zealand.   That will, presumably, serve the government and MFAT (and perhaps Beijing) well, but sadly it will also mean that even when the CCRC does put out good material, or host worthwhile workshops, that might offer some (fair) perspectives on Beijing, its contribution will be tainted by the knowledge that it would be most unlikely to ever offer anything on the other side.  The CCRC is neutralised by construction, and by appointments (chair, director, board members), by business dealings, and by association.

And thus we’ve heard nothing from it on, say, the presence in our Parliament of a former member of the Chinese military intelligence establishment, former (?) member of the CCP, close associate of the PRC Embassy and various United Front organisations, who misrepresented his past to voters, who acknowledges that he misrepresented his past to New Zealand immigration authorities at the encouragement of his former PRC masters.   None of those facts is in dispute.  And the silence, or attempts to play distraction, by the CCRC, the China Council, and so on is deafening, and sadly telling.

A puzzling government economic target

Michael Reddell Productivity

An occasional reader pointed out to me a government economic target that I wasn’t aware of.   Late last year, Communications Minister Clare Curran announced that

“The Chief Technology Officer will be responsible for preparing and overseeing a national digital architecture, or roadmap, for the next five to ten years,” Ms Curran says.

“This Government intends to close the digital divides by 2020, and to make ICT the second largest contributor to GDP by 2025.

At least one tech firm seems to think that goal is in the coalition agreement, although I couldn’t see it there.

There doesn’t seem to be much around on this goal, which is perhaps not surprising as it doesn’t seem a particularly realistic or well thought-through goal.  There are no obvious definitions or compators.    Would such an outcome even be desirable?  How would we know?

But I did find this chart in an MBIE report from last year, using data that isn’t readily available to the public.

ICT mbie

Which looks like a reasonable aount of activity, except of course that GDP in 2015 was $230 billion. so these ICT sectors in total account for about 4 per cent of GDP.

The OECD doesn’t seem to have data for all member countries, but I found this chart.

OECD ICT

New Zealand’s ICT share doesn’t seem out of line with (although perhaps a bit less than) the median OECD country.

But then I went to Infoshare to look at the breakdown of GDP by production sector.  These are the sectors that were bigger than MBIE’s ICT number in the year to March 2016 (which presumably aligns most closely with the 2015 data they quote).

GDP in year ending March 2016
Construction 15,290
Wholesale Trade 12,691
Retail Trade 11,057
Transport, Postal and Warehousing 12,377
Financial and Insurance Services 14,604
Rental, Hiring and Real Estate Services 18,021
Owner-Occupied Property Operation (National Accounts Only) 16,429
Professional, Scientific and Technical Services 19,935
Education and Training 11,436
Health Care and Social Assistance 15,095

Which industries, I wondered, did the government envisage being displaced by the ICT sector?  For example, the government also seemed to be aiming to build a lot more houses, and encouraging more people into education and training.   Which industry do you expect will still be ahead of ICT by 2025 (only seven years away now)?

And how realistic is any of this anyway?   That MBIE chart above looks quite impressive at first glance.  But as a share of total GDP, those ICT subsectors in total did not change from 2007 to 2015.   What policy changes, already announced or in the works, are likely to transform the prospects of these sub-sectors in just a few years?

In a post last year, I pointed to some other indicators of how these technology sectors just haven’t been growing to anything like the extent the boosters would like us to believe (although of course there are individual firm success stories).   Sadly, of course, that is really the story of our tradables sector as a whole –  which has managed no per capita growth at all this century.

UPDATE: From some digging around it appears that the government’s target, championed by Clare Curran is even flakier than I imagined.  Apparently at a recent select committee hearing she claimed that the technology sector was New Zealand’s third largest exporter and that she hoped it would become the “second largest contributor to the economy”.   This “third largest exporter” claim appears to come from last year’s TIN report (critiqued here), where the total foreign sales of NZ-owned tech firms are treated as New Zealand exports (for comparisons with official export data of other sectors).  As I noted in my critique, this is a nonsense claim: much of the value in many of these foreign sales is generated abroad (eg both F&P companies have large manufacturing operations abroad).  In their 2017 ICT report, MBIE talk of ICT exports of around $1 billion per annum (about 0.3 per cent of GDP).    As I showed in my earlier post, tech-like services exports as a share of GDP has barely changed this century (and the profitability of New Zealand firms operating abroad also seemed pretty weak).

To put the numbers in perspective, here is an extract from a recent SNZ table

Total exports
By top 30 categories
Year ended March
Commodity / service Exports (fob)
2017 2018
NZ$(million) % of total NZ$(million) % of total
Milk powder, butter, and cheese  11,547  16.5  14,174  18.2
Business and other personal travel  10,012  14.3  10,879  14.0
Meat and edible offal  5,983  8.5  6,797  8.7
Logs, wood, and wood articles  4,133  5.9  4,828  6.2
Education travel  3,547  5.1  4,025  5.2
Fruit  2,758  3.9  2,648  3.4
Air transport  2,158  3.1  2,451  3.1
Wine  1,627  2.3  1,723  2.2
Mechanical machinery and equipment  1,596  2.3  1,683  2.2
Fish, crustaceans, and molluscs  1,586  2.3  1,619  2.1
Preparations of milk, cereals, flour, and starch  1,213  1.7  1,558  2.0
Miscellaneous edible preparations  1,162  1.7  1,305  1.7
Aluminium and aluminium articles  982  1.4  1,152  1.5
Electrical machinery and equipment  999  1.4  1,071  1.4
Casein and caseinates  826  1.2  904  1.2
Optical, medical, and measuring equipment  829  1.2  873  1.1
Wood pulp and waste paper  721  1.0  858  1.1
Telecommunications, computer, and information services  875  1.2  848  1.1

A new reform for Wellington’s mayor

Michael Reddell Wellington

Wellington residents –  at least those still buying a hardcopy newspaper –  woke on Thursday to find that the shrunken Dominion-Post newspaper had given itself a temporary Maori masthead, and an apparently permanent change of name, to something that looks as though it might be the longest newspaper name anywhere in world.

I guess private businesses can do whatever they want to try to boost sales –  or in the case of newspapers, temporarily stem the decline.  And given that pundits offer odds on how much longer daily hardcopy newspapers will survive, I don’t suppose this particular marketing effort will be with us for long.  In today’s paper, they claim to have been flooded with messages of support, but in the letters to the editor, the only letter in favour was an over-long (and thus abridged) effort from the head of the Maori language commission.

What was perhaps considerably more questionable is the way the newspaper and its proprietors launched their new name to coincide with, and explicitly to celebrate, Wellington City Council’s own new Maori language policy.   Since one role of newspapers used to be to provide scrutiny and criticism of those in power, I guess we can’t expect any such scrutiny of this particular act of culture war and virtue-signalling.

Wellington City Council is a beacon of awfulness, pursuing political visions and cultural agendas that (a) aren’t really any business of local councils, and (b) seem to be a substitute for doing the basics well.    As I’ve noted here before, there are smallish things like the Island Bay cycleway –  millions and millions of dollars on something ugly, and largely useless, which the residents (a clear majority) have indicated strongly that they don’t want.  There are staggering sums wasted on convention centres, film museums, and saving an old Town Hall, and rather smaller sums (so far) devoted to plans to tip tens of millions in to help pay to extend Wellington airport runway.  And then there is a scandal of house and urban land prices.  Perhaps Wellington City Council is no worse than most other councils on this score (all are reprehensible) –  in a city with abundant land, the council is determined it won’t be used, and instead want to compel future generations to live on top of each other (often literally), while delivering house and land prices that are simply unaffordable to most.     It is like some San Francisco model (on a smaller and poorer scale), pricing out ordinary people, and in a city with some big captive businesses (central government).   Life might be sweet for the middle-aged liberal elite; shame about anyone else.

The Council’s latest initiative –  approved unanimously on Thursday –  was the new Maori language policy, aiming to make Wellington “a te reo Maori city” by 2040.   Which is puzzling –  except for the culture war/virtue-signalling angle –  given how scarce people of Maori descent/identity actually are in Wellington city (and likely to remain so, given the housing/land use policies which increasingly crowd-out lower income people –  a group Maori are overrepresented in).

If one ranks all the territorial local authorities by the percentage of the population identifying as Maori in the 2013 census, the top 10 TLAs (mostly central North Island, plus Far North and the Chatham Islands) averaged 46.3 per cent Maori.  The bottom 10 TLAs in 2013  –  all in the South Island –  averaged 6.6 per cent Maori.  Wellington City was 7.6 per cent Maori, just a touch ahead of Dunedin.

What compounds the oddity is that Wellington is one of only two TLAs in the entire country with a far larger Asian population (“Asian” of course encompassing a whole range of quite different ethnicities) than the Maori population.

Per cent of population identifying as…. (2013 Census)
Maori Asian
Auckland 10.1 21.7
Wellington city 7.6 14.9

It seems likely that the relative share of the different Asian ethnicities will have increased further in this year’s Census.

The Council claims that their goal is that the city should become a “bilingual capital”, with the aim of “making te reo a core part of Wellington’s identity by ensuring it is widely seen, heard, and spokem in the capital”.

All of which, frankly, seems highly unlikely, given the demographics, aided and abetted by the Council’s own housing and land use policies.    It isn’t, say, like Wales where efforts to save the language actually involve a language that was the heritage of most of the current residents.

Not that it stops Justin Lester and his crew of councillors.   In future, new streets will preferentially be given Maori names and (whatever this means) they plan on  “incorporating te reo in its decisionmaking processes and functions” (when roughly one in 14 residents identifies as Maori).     Some place names in the council precinct are being given Maori names now –  there was talk of the heart of the city being renamed, but the stark windswept Civic Square is barely used most of the year.   Already, the annual civic fireworks display has been shifted from Guy Fawkes to Matariki –  a “festival” barely anyone had heard of even 20 years ago.  Fortunately, councils don’t get to decide public holidays, but Mr Lester is also calling for Queen’s Birthday to be scrapped as a public holiday in favour of the same pseudo-festival Matariki (an occasion which appears to be observed mostly by taxpayer and ratepayer funded entities –  my in-box is awash with newsletters from schools proposing that I attend such events).

These people seem to be embarrassed by their own heritage (almost all the councillors appear to be of predominantly Anglo or Celtic descent).   I’m pretty sure that even in secular Wellington the churchgoing share of the population is roughly equal to the Maori share (with some overlap of course), but I can’t recall the last time the council was championing Easter celebrations to anything like the extent they champion Matariki (and nor would I want them to –  it simply isn’t the role of a council (roads and drains and rubbish –  oh, and land use)).  And while the Mayor is no doubt embarrassed that New Zealand is a constitutional monarchy, it is –  with clear public support at present.   Even civic heritage is for the chop: the lagoon down on the waterfront was named for decades for an eminent former mayor (not one of my particular political sympathies) but now the councillors –  but probably no one one much else –  want to call it Whairepo Lagoon.  But no doubt Mr Lester and his team will feel better for it, having (as he puts it) provided a lead for New Zealand –  including most of the rest of New Zealand where Maori actually largely live.

I’ve another idea for Mr Lester and his bunch of culture warriors.  Guess who Wellington is named for?  The dreadful old Tory, the Duke of Wellington –  former soldier and Prime Minister of Britain and its empire of which we are now apparently supposed to be ashamed.  He might have beaten Napoleon, but what’s that to anyone now, here?   The Wellington City Council’s buildings are on Victoria Street (yes, she the Queen-Empress) and Wakefield St  (Edward Gibbon, master colonial expansionist –  who spent time in prison for abducting an heiress).   Lambton Quay is named for chairman of the New Zealand Company, Cuba and Tory streets for two of the first ships carrying settlers and the bacillus of western culture to Wellington.  And so on.

I hesitate to mention it lest I give someone an idea, but this particular virus is already afoot elsewhere, with a story recently about people calling for name changes in Levin, Hamilton, and Gisborne (although, to be honest, and notwithstanding the history, I have some sympathy in respect of Poverty Bay).  But why stop there?  Surely the culture warrior left must be embarrassed to live in a country with places named for

Lord Auckland

Lord Nelson  (with streets named for Hardy, Victory and Trafalgar)

Sir Charles Napier  (“The best way to quiet a country is a good thrashing, followed by great kindness afterwards. Even the wildest chaps are thus tamed”)

Lord Palmerston (twice over)

and when our third largest city is named for an Oxford college, itself named (with such uncomfortable particularity) for the Messiah, when a southern city’s name celebrates Scotland and its leading role in the empire, and when Hastings surely evokes memories of militarism and conquest,

then surely it is past time for reform.  Lets just junk our heritage –  the roots that built one of the better societies on earth (amid all its flaws) –  for some expensive feel-good campaign.

Or perhaps the Council could refocus and actually make Wellington an affordable city, for Europeans, Maori, Pacific people, Asians and whoever else chooses to live here.  It really isn’t so hard –  except of course that it runs head on into the planners’ mentality that pervades our local government.  They know best…..and we’ll suffer it.

 

 

 

Economic coercion PRC-style

Michael Reddell China

The great fear that seems to pervade official circles in New Zealand (bureaucratic and political) is “what could China do to us if ever our government upset Beijing”, whether that involved speaking out forcefully against PRC military expansionism, doing something about Jian Yang, meeting highly-respected pro-democracy leaders from Hong Kong, pushing back against PRC control over local Chinese-language media, or whatever.

No one supposes any threat is military in nature.  What seems to worry people is the possible economic cost.      Governments led by both major parties have retailed (and perhaps believe) the nonsense that somehow New Zealand was “saved” by the PRC in the last recession, or that our alleged prosperity (no productivity growth in the last five years, and the shrinking relative size of our export sector) owes much to the good graces of the butchers of Beijing  If Xi Jinping should once avert his glance, our economy would be imperilled.   It is never openly stated quite that explicitly, and perhaps even the more thoughtful believers would use more-moderate language, but you get the gist.

All self-respect is long gone by this point.  Generally, if you find yourself over-exposed to someone else (some person, some business, some country), and especially one of questionable character, the prudent thing to do is to gradually reduce your exposure, diversify your risks, and regain your (perceived) freedom to act in accord with your values.    But when it comes to the PRC, prevailing opinion –  ministerial speeches, taxpayer-funded lobby groups, and so on –  seems to be that we should double-down, increasing our exposure to a country that they know to be an international thug and bully.  Thus, for example, our commitment to the geopolitical vision represented in the PRC Belt and Road Initiative, a scheme now being actively promoted with your own taxpayer dollars.

This mental model ignores a whole bunch of relevant points:

  • mostly, individual countries make their own success and their medium-term prosperity does not depend on the fortunes or favours of a single other country, no matter how large.   We (and Australia for that matter) were rich –  further up international league tables –  when China was mired in its own self-destructive behaviours,
  • the share of New Zealand GDP represented by trade with the PRC isn’t especially large by international standards, and
  • much of what we do sell is relatively homogeneous products traded on world markets.

(None of which is to downplay the risks to the world economy and New Zealand if something were to go seriously wrong in the PRC economy –  something I wrote about several years ago when still at the Reserve Bank ( Discussion note 2014 what if China slowed sharply ) most of which still seems valid – but that is a different issue, where the New Zealand government’s political stance towards the PRC is largely irrelevant.)

I’m also not attempting to minimise the PRC’s willingness or ability to play the bully-boy and attempt to exert coercion over New Zealand should our government ever find within itself a modicum of courage and self-respect.   These are people who play rough: with tens of millions of their own people dead at the regime’s hands, a whole province these days functioning much as an open air concentration camp, why stop at the odd sovereign independent country?  They haven’t.

Earlier this week, a US think-tank, the Centre for a New American Security, released a fascinating study on China’s Use of Coercive Economic Measures. The think-tank appears to be quite well-regarded, and has among its senior figures various people who served in the Obama administration.   The study appears to be a pretty careful description and assessment of the way the PRC has attempted to use economic coercion on a serious of democracies over the last decade, and to draw some lessons from those experiences.

They looked at seven such episodes:

  • a 2010-2012 episode in which the PRC halted rare earth exports to Japan (at the time, China accounted for 97 per cent of world production) over a specific incident related to the Japan/PRC dispute over the Senkaku islands,
  • the PRC’s measures against Norway (concentrated on salmon exports) over 2010-2016 after the (private) Nobel Committee awarded the Peace Prize to dissident Liu Xiaobo,
  • the PRC’s use of additional quarantine controls on the Philippines from 2012 to 2016, throttling agricultural exports (especially bananas), over the Philippines defence of its South China Seas claims, including those later upheld under the Law of the Sea by an international tribunal,
  • PRC attempts to coerce South Korea in 2016/17, with the intent of encouraging South Korea to reverse permission for deployment of the THAAD anti-missile system,
  • the PRC’s attempt to punish Mongolia for hosting a 2016 visit by the Dalai Lama,
  • pressure around the 2016 Taiwan elections, in which the PRC objected to the winning party and acted to cut back tourist numbers, and
  • the current pressure being exerted on Australia, via warnings to overseas students (and, although this study doesn’t mention them, delays in clearance of eg wine imports from Australia).

This isn’t the sort of thing normal countries do.

(The study also touches on the PRC pressure on Iran and North Korea, episodes which, while interesting, are a bit different from those involving democracies.)

 

There are other examples, including direct coercion on companies, and some telling snippets about the general approach

During the Hu Jintao era [when, as a whole, the PRC was less assertive than it has become under Xi Jinping], meetings between a head of state or head of government and the Dalai Lama led, on average, to a reduction of exports to China of between 8.1 percent and 16.9 percent. Trade subsequently recovered during the second year after the visit.

I haven’t got space to go into all these episodes in detail (all the material is there on pages 42 to 49 of the report), but there are a number of interesting points that emerge:

  • the clever targeting of politically salient sectors.  The coercive measures were rarely applied to sectors directly related to the issue that was directly bothering the PRC, but rather where they thought they could get leverage  (the Norwegian example was an extreme case, given that the initial “offence” wasn’t even done by the government,
  • coercive measures are rarely officially announced, allowing plausible deniability, and also calibration of any escalation and de-escalation,
  • measures are rarely applied in sectors where coercion could directly hurt PRC entities themselves.   As the authors note of the Korea example, there were 43 retaliatory measures taken by the PRC, estimated to have knocked 0.4 per cent off Korean GDP last year, but “Beijing made sure not to target Korean sectors where economic retaliation might harm China’s own supply chain” (thus, China still imports 65 per cent of its semiconductors),
  • where possible, the coercive measures involve restrictions not amenable to complaints to the WTO (where the PRC loses such complaints it has altered its behaviour to comply).  Tourism has been an obvious example, and perhaps the foreign students case in Australia.  More generally, “China typically imposes
    economic costs through informal measures such as selective implementation of domestic regulations, including stepped-up customs inspections or sanitary checks,
    and uses extralegal measures such as employing state media to encourage popular boycotts and having government officials directly put informal pressure on specific
    companies.”
  • in many cases –  but not always –  China wins (at least in the short-term) and the targeted countries adjust, often in a rather craven way.   Those that yielded did so in the face of rather limited overall economic costs (but large concentrated costs in a few sectors).

As an example of the victories, here is the report on Norway

Finally, China has achieved symbolic victories even when the practical impacts of coercive economic measures appear to be limited. For example, after the Norwegian Nobel Committee awarded Chinese dissident Liu Xiaobo the Nobel Peace Prize in 2010, China retaliated by banning imports of Norwegian salmon. The import ban appears to have had little real-world impact, as Norway found alternative markets and appears to have routed fish to China via third countries.  Yet, as part of restoring normal relations with Beijing in 2016, Norway nonetheless issued a public statement acknowledging China’s “sovereignty” and “core interests” while Beijing hoped that Oslo had “deeply reflected” on how it had harmed mutual trust.

There were limits even then

Initially, China also requested a secret “nonpaper” with a more strongly worded apology, but then-Prime Minister Jens Stoltenberg denied the request as at odds with Norwegian foreign policy.

But reality was craven enough

In its rapprochement with Norway, China achieved both its deterrent and public apology objectives. In 2014, Norwegian officials declined to meet the Dalai Lama. When the two countries normalized relations in 2016, China obtained a formal, public apology. Norway acknowledged China’s “sovereignty” and “core interests,” while Beijing hoped that Oslo had “deeply reflected” on how it had harmed mutual trust.  The salmon trade resumed. Upon Liu’s death in July 2017, Norway’s more muted statement compared to its European neighbors’, could be viewed as a sign of the continuing deterrent value of the Chinese policy A few weeks later, the countries revealed progress in their free-trade agreement negotiations.

Between coercion and inducements (stick and carrot), the Philippines government greatly softened its stance around the South China Sea.

Of Mongolia –  84 per cent of whose exports went to the PRC –  the authors note

After initially standing up to Chinese coercive measures, Mongolian leaders eventually relented. As part of the rapprochement between Ulaanbaatar and Beijing, Mongolian leaders, like Norway, offered a public apology.  They expressed regret for the invitation and emphasized that they would no longer host the Dalai Lama during the government’s term. Chinese leaders said they hoped that Mongolia had taken the lesson of not interfering in China’s “core interests” to heart.

South Korea went ahead with the THAAD deployment, and any concessions seem to have been modest and face-saving more than substantive.

South Korea eventually relented to Chinese pressure in October 2017 by issuing a list of assurances, the “three no’s,” on further missile deployment and military alliance with the United States. Korea officials argued that these assurances were a reiteration of long-standing policy, suggesting the advantages China can gain from informal measures that give it flexible off-ramps from economic pressure rather than tying it to specific—and falsifiable— results.  Additionally, though China did welcome the development, it still urged Korea to “follow through” on its statement and did not lift the pressure as quickly as it has in other cases of coercion. As of February 2018, more than four months after the rapprochement, tourism was still 42 percent lower than the previous year and Lotte still had not received relief from the regulatory pressure.

In the Japanese case, strong international support (EU and US) combined with WTO remedies meant the PRC didn’t win –  although domestic political imperatives may well have been served by stirring up anti-Japanese popular sentiment.

The specific pressure on Taiwan around the 2016 election doesn’t appear to have “worked” but is presumably still just part of the long-term PRC goal to isolate and weaken Taiwan, and exert pressure on firms (Taiwanese and international).

As for Australia, it is probably still early days (the article I linked to above appeared only yesterday).  Whatever the PRC has yet done –  plausible deniability and all –  is only a token of what they could yet do, if the Australian government continues to push back against PRC influence activities in Australia, and against PRC military expansionism.  For the moment there is no sign of the Australian government backing down, and bipartisan concern about PRC influence activities assists their position (as, presumably, does the coming election) but, equally, pressure from the sectors that are, or could yet be, targeted must be building.

The authors of the CNAS report are not optimistic that the PRC will become any less willing to use these coercive techniques; if anything, the continuing relative rise of China’s economic fortunes could increase the willingness, and perhaps ability, to exert pressure on individual firms, business and political leaders, and countries, blended perhaps with inducements (trade agreements) and other blandishments.

They offer a series of recommendations, many of which are quite US focused (and, as they note, for various reasons the US has not yet been subject to PRC coercive efforts yet).  Many of the recommendations focus on better understanding the issues and risks, at a detailed levels, raising awareness, and encouraging a forceful and supportive response to the PRC when other countries are targeted.  The advice for private sector companies is to take steps to ensure that they are not unduly reliant on PRC suppliers or the PRC market.   In the end, other countries (especially small countries) can’t stop the PRC attempting to act the bully-boy, but success (giving in) will only encourage the thug, and so there is something important about building resilience, reducing exposure, and being willing to take a stand alongside whoever the PRC picks off, rather than cowering in a corner, thankful that the bully has chosen someone else this time, and determining to be even more submissive next time the government engages with the PRC.

What does it all mean for New Zealand?

I hope our Ministry of Foreign Affairs and Trade has already been thinking hard about these case studies and about the lessons for New Zealand, and that in doing so their response is to advise the government on reducing exposure, not doubling down and living in the sort of fear of the battered wife –  too scared to leave, unable to resist.

But we don’t see any sign of that sort of approach, at least when our ministers and Prime Ministers (advised by officials) speak.  This is, after all, the regime that our government last year signed an agreement with, supposedly working towards a “fusion of civilisations”.

There is no point pretending there are no areas of vulnerability, if our government ever took a stand, even rather politely.  Quarantine and other related rules could be enforced rather more tightly.  I don’t suppose milk powder is a big risk –  the Chinese need it, and would only have to buy it from somewhere else if somehow trade with New Zealand was disrupted.  But higher-end lamb exports might be –  fresh product, not consumed by the mass Chinese market.  But I still reckon that the biggest, and most obvious, area of vulnerability is around export education and tourism, exports actually delivered here, rather than in China.  There are plenty of other places in the world for Chinese tourists to visit for a year or two, and other places –  often with better-rated universities –  for PRC students to study.   Put a ban on group tourism to New Zealand, or issue official warnings about safety here etc, or raise difficulties about landing rights and the numbers coming would be disrupted quite materially.  Being a small country –  and selling nothing critical to Chinese supply chains –  we might be a good case to try to “make an example of”

These sorts of threats aren’t some existential threat to our economic health and wellbeing –  recall the central bank estimate of a 0.4 per cent of GDP effect in Korea last year –  but they could be a big issue for some operators in the industries concerned.  As the Taiwanese example illustrates, tourism source markets can change, and can even do so relatively quickly (although perhaps as a long-haul destination the challenges are a bit greater here), especially if public money were put behind marketing campaigns.

In a way, the export education industry worries me more, especially the universities.  Last year, half all student visas were issued to Chinese students, and foreign students make up a huge share of university (and PTE, and some schools) income, in a system in which domestic fees are capped at (typically) below long-run average cost.   Universities and polytechs are government agencies, but ones with their own agendas to serve, and empires to preserve (Waikato, for example, has a degree-granting arrangements in China itself, presumably at risk of regulatory enforcement changes quietly implemented by the PRC, and several have Confucius Institute where they receive direct PRC funding).

A prudent industry would not have so many eggs in one basket, particular a basket controlled by a regime that has shown willing to act the international bully (one might have a quite different view if half the student visas were going to German students, Korea students, or Canadian students).  A prudent industry would be stress-testing itself (and its prime domestic funders and regulators would be insisting on such stress-testing) and adjusting its marketing accordingly.   But a rent-seeking one, knowing the feebleness of our governments, will continue to pull in the revenue from Chinese students knowing that (a) they can put a lot of pressure on governments to go along, and never upset Beijing about anything, and (b) even if things go wrong on that score, the financial risk will really lie with the government itself, not those who now run the universities (who would no doubt run an effective marketing and political campaign about how NZ students would suffer without a government bailout.

We might be small, and thus vulnerable on that count.  On the other hand, we are a long way away –  New Zealand is just a great deal less important to China than, say, the issues around Korea, Mongolia, Japan, Taiwan, and the Philippines.   And in aggregate we just aren’t that exposed to specific Chinese markets (even allowing for the fact that the PRC is a large part of the world economy now).  Even a bad year or two is just that –  not the abandonment of all future prosperity.

But we’ve allowed a couple of industries –  one highly-subsidised, through the immigration connection –  to flourish, and politically salient sector risks to develop, which now depend on the New Zealand government cowering in the corner and never upsetting Beijing.    Neither industry is at the leading edge of productivity growth –  indeed, our services exports in total are smaller now as a share of GDP than they were 15 years ago – but the probable political clout is undeniable.  It should be a matter of priority for any self-respecting government to look to reduce those specific exposures, encouraging greater resilience in the respective industries, so that one day we could have the courage to stand for what we believe –  assuming that among the political classes, belief is still about something more than the last trade dollar, and the next political donation.   In time –  one hopes, in a day (decades hence) when freedom comes to China –  we should aim for a relationship of trust and mutual respect, not one of the battered wife cowering in the corner.

(But as I reflected on this issue, my admiration increases for successive New Zealand governments decades ago –  most notably that led the Prime Minister’s predecessor Norman Kirk –  who were willing to openly take on France over atmospheric nuclear tests in the Pacific.)

A modestly indebted advanced economy

Michael Reddell Financial stabilty

Sometimes people like to give the impression that New Zealanders are highly indebted.   And so this summary chart, which I stumbled on this afternoon, is some helpful context.

total debt

Among advanced economies, only in Israel and Germany is total debt/GDP lower than in New Zealand.

And also among advanced economies, only Denmark, Israel, and Germany had less of an increase in economywide debt/GDP over the 10 years to the end of 2017 (encompassing the recession and aftermath and subsequent recovery).

A decade ago, a comparable chart would have looked quite different.  I recall getting someone to dig out the data in about 2008 or 2009 which showed that our total debt/GDP ratio had increased in the previous few years about as much as the increase in Japan in the late 1980s (and all the increase was business and household).   And with most other advanced countries having materially increased their debt/GDP ratios over the last decade, New Zealand a decade ago would have been nearer the middle of the pack for the stock of debt than it is now.

Total debt to GDP calculations include household, corporate, and government debt.    As I showed in a post a couple of weeks ago, household debt to GDP hasn’t changed much here.  Government debt to GDP has increased a bit, and corporate debt to GDP also won’t have changed much.

Of course, those who want to remain worried about the New Zealand situation –  if I recall rightly the Governor said he was `scared’ –  will point out the role that big increases in government debt played in many other advanced countries.  Household debt to GDP has not changed very much in some of those other countries either.   But who is government but a collection of households?  We are the ones who have to service government debt.  And in many of these other countries, the total debt/GDP numbers will be understated because public service pension liabilities (contractural obligations) are not typically included in the debt numbers.  In New Zealand, there are almost no such liabilities, and those there are are properly accounted for.

Add in the reduction in the ratio of the net international investment position (net liabilities) to GDP over the last decade, and the picture is one in which debt should be much less of a concern here than in almost all advanced economies, and than in many – perhaps most –  emerging markets economies.  In a better world –  more business investment, on a path to more productivity –  we might perhaps have hoped there would have been more business debt being taken on.