Timothy Taylor has an interesting post Is the World Bank Becoming Obsolete?   My most telling memory of the World Bank is the year it, and its legion of visiting experts, won the prize for the biggest single customer of the Lusaka Hotel Intercontinental.

But the same question should be asked about the International Monetary Fund (IMF).  I’ve had a lot to do with the Fund, here and overseas, including two years as Alternate Executive Director on the Board of the Fund.  Indeed, participating in an IMF technical assistance and training mission to China paid for our honeymoon.

The IMF was founded in the wake of World War Two, to preside over the new global system of fixed exchange rates, and provide short-term credit to members with temporary balance of payments difficulties.  For various reasons, New Zealand was late to join the Fund – not until 1961.   By the time the membership became near-global (in the 1990s), the original mission was no more.

It is a curious institution.  The structure looks highly technocratic (and the organisation has many highly capable people), but in fact it is highly political.  That isn’t intended as criticism – relations between sovereign states are as political a matter as any, and decisions to commit large amounts of money to other countries quite probably should be as well.  Indeed, before the IMF existed, short-term loans were made to countries in need bilaterally, based on the potential lenders’ assessments of their own interests, the importance of relationships etc etc.   The recently approved loan to Ukraine might have looked much more defensible as a loan from major Western powers based on their own national interest considerations than it does as an allegedly technocratic assessment of Ukraine’s economic prospects and of the Fund Board’s own Exceptional Access Criteria (all occurring with a Russian Executive Director at the Board table).

The IMF now has a number of roles:

• Article IV surveillance discussions and reports on each country’s macro-economy and financial system.  The most recent New Zealand Article IV report is here.
• Research and statistics
• Technical assistance
• Lending

Statistics are good and useful.  Someone probably needs to collate and disseminate them internationally, and provide a central point for guidance on international standards of comparability.

But it is by no means obvious what other useful or important roles the IMF is now fulfilling.

The Fund provides technical assistance to many countries on technical aspects of monetary and fiscal policy, financial system infrastructure etc, mostly in the less developed parts of the world.  Much of it is worthy stuff.  But why do we need a multilateral government agency to do it?  There is a myriad of consulting companies, large and small, around the world, often staffed with former officials.  And if it is argued that poor countries often can’t afford such advice, there are at least two points in response.  The first is to note the tendency of international agencies to want to install gold-plated systems that go well beyond the actual needs of many of these countries.  Having to write the cheque oneself, should induce a more hard-headed assessment of what is really needed –  and can be maintained – when weighed against other domestic spending priorities. Second, if advanced countries do want to provide aid to help an emerging country acquire outside technical assistance there is nothing to stop them doing so.

Article IV surveillance reports used to be confidential to the member country and to the IMF Board.  These days, inevitably and perhaps appropriately, almost all Article IV reports are published, and are written with publication in mind.  Publication doesn’t mean that no confidential discussions occur between visiting Fund missions and senior officials and Ministers.  But the focus is on what goes to the Board, and then goes public – and often on the wording of the published concluding statement and press conference at the end of the mission.  Simple messages dominate, and important intractable issues get too little focus.

But is there a gap in the market for the reports of organisations like the IMF?  In 1945, with tight controls on private capital flows, perhaps there were big gaps.  But these days, local and international banks churn out frequent reports on a wide range of countries, and entities such as the Economist Intelligence Unit cover many more on a lower frequency basis.  Macroeconomic analysis on Kiribati is certainly limited, but so (apparently) is demand for such analysis.

Perhaps IMF reports are more incisive or enlightening than the other reports?  Unfortunately there is no evidence of that.  The IMF probably typically has more resources at its command, but they are not that well used –   I have repeatedly lamented to IMF staff how relatively poor the institution is at marshalling cross-country perspectives and experience to shed light on New Zealand’s challenges and issues.  And if the IMF has more resources, the incentives it faces often encourage blandness and inoffensiveness, and rehearsing an optimistic conventional wisdom.  Check out Fund advice in the early 2000s for many European countries, and the euro area as a whole.   Or think of the incentives on staff and management to pull their punches when writing about the Article IV report on a country whose finance minister is chair of the ministerial oversight committee, the IMFC (Gordon Brown comes to mind)

And what of lending?  The Fund has a mix of concessional and (allegedly) non-concessional lending facilities.  The concessional facilities are really just foreign aid, and are not my focus here, except to note that they are far from the Fund’s original mandate.  The idea of the non-concessional lending looks good in principle, but is too-often bad in practice.  For a country with a large (private) external debt, and the possibility of sudden stops, the option of being able to secure short-term credit as a backstop has some value.  In earlier decades – notably in the late 1960s – New Zealand borrowed from the Fund to ease adjustment to a nasty terms of trade shock.

But in more recent decades  Fund lending too often quickly looks a lot like “extend and pretend”,  with an emphasis on the “pretend”.  Fund lending to Argentina enabled the authorities to defer, and defer, and defer an inevitable adjustment.  Fund lending to Greece in 2010 was not remotely defensible in terms of the Fund’s own policies on large loans (although it served the short-term interests of many of the major Board members, and the then Managing Director).  And the recent loan to Ukraine looks harder to defend, from the start, on technocratic grounds then even loans to Greece and Argentina.  If the Fund didn’t exist, lending to troubled countries would still occur, but since the loans would be made directly by national authorities in lending countries, perhaps requiring direct votes in national Parliaments, the prospects for democratic scrutiny would be greater.  And the absence of the so-called “preferred creditor status”, which has mostly protected the Fund from financial loss, might mean more searching scrutiny upfront about the sustainability of a borrowing country’s debt.   There is a role for lenders of last resort, but to be valuable they need to know when to say “no”, and the IMF isn’t set up to do that job well.

International agencies don’t go away easily.  The Bretton Woods agreement, for example, provided for the dissolution of the BIS and yet the BIS is still with us.  I expect the IMF will reach its century –  perhaps by then, as per the Articles, headquartered in Beijing.

This morning’s Herald points readers to a Weekend Australian feature  suggesting that New Zealand has become the place to be (“What has happened is that somewhere, somehow, perhaps in the dead of night when no one was looking, Australia and New Zealand have swapped sides”) and that thousands of Australians are flocking to New Zealand, for its better-performing economy (and government).

A couple of weeks ago, I highlighted this curious tendency in Australian commentary (especially that from the centre-right), which seemed quite detached from anything in the data.  But, still, I wondered if I had missed something in the migration numbers.

Here is the chart of the monthly seasonally adjusted net flow from/to Australia, broken down between New Zealand citizens and others (the latter mostly Australians).  And, sure enough, there has been a noticeable increase in the net inflow of Australians.  That tends to happen whenever economic cycles are out of sync and temporarily in our favour.

But, even now, the inflow of (mostly) Australians is running at around 5000 per annum.  And even in recent months, with the Australian labour market as tough as it has been for 25 years, that inflow is still outweighed by the net flow of New Zealand citizens to Australia.

Yes, the labour market is a bit easier in New Zealand at present than it is in Australia, although at 5.7% our unemployment rate is not something to be complacent about.  But nothing has happened to even begin to reverse the decades-long widening in the now very large gap between New Zealand and Australian incomes and productivity.  And favourable commentary from the other side of the Tasman will be a false friend if it distracts from the serious economic challenges that our own policymakers should be grappling with.

Patrick Honohan, Governor of the Central Bank of Ireland, gave a fascinating presentation earlier this week on Currency Choices in Ireland Past and Present.  There was even something for geeky history buffs ( I didn’t realise, for example, that for the first 25 years after the Act of Union, Ireland and Britain had had separate currencies, with a variable exchange rate between them).  But the more immediate interest was in Honohan’s attempt to put Ireland’s choice of, and experience with, the euro in historical context.  From 1826 to 1979 Ireland had either used sterling, or had an exchange rate firmly pegged to sterling.    Effective monetary independence lasted for less than 20 years.

Honohan’s goal is to hose down a narrative that says the entering the euro was a mistake for Ireland.    As he notes “poor economic choices and bad luck are more reliable determinants of episodes of poor economic performance than choice of exchange rate regime”.

Serving Governors can’t exactly go round publically bagging their own country’s exchange rate regime.  But the claim that adopting the euro is just another currency choice, of second order importance, seems a step too far.   The Irish Famine aside, the recent  post-crisis shakeout has been the worst sustained period of (no) economic growth in Ireland’s modern economic history.  Ireland actually got through the Great Depression relatively well.  And while Angus Maddison’s estimates don’t cover the few years  leading up to independence and the civil war following it, even if that period was worse economically the benchmark for good modern exchange rate regime choices has to be set a little higher than “well, out-turns weren’t quite as bad as those in the civil war”.

In fairness to Honohan, he isn’t indifferent to the dislocations and huge cost of the last few years.  But he argues that the fault “lies not so much in the system’s design as in the inadequacy of national economic and financial policies to take account of the risks that were still associated with the euro”.  Oh, and he notes that in non-euro countries there were crises too.

In principle, so it is argued, very stringent fiscal policies and very conservative bank supervision and regulation – neither of which featured in Ireland – might have made all the difference.  But this looks like some sort of counsel of perfection – and perfection isn’t a standard we can expect from our politicians and policymakers.  Would a central bank that tried to impose consistently very tough prudential standards have been allowed to get away with it?  Would the Governor of such a robust institution have been reappointed?  And while Ireland no doubt should have run bigger fiscal surpluses, and (in particular) made its tax system less dependent on sources that would dry up when property turnover did, large surpluses invite electoral auctions.  We saw it here in 2005.  Institutional choices –  including exchange rate regimes –  need to take account of how democracies actually work.

The Irish could, and no doubt should, have managed the boom years better.  But what they got  looks a lot like what one would expect if one takes an economy with a neutral interest rate that might have been similar to New Zealand’s and gives it an actual interest rate set mainly for Germany and France.   If New Zealand nominal interest rates had been set at German, or US, levels since the late 1990s we would have ended up with a pretty spectacular bust as well.    Honohan runs the Irish version of this chart in his speech.

Ireland will survive, and in time will prosper again.  Exchange rate regimes don’t shape long-term prosperity.  But with hindsight, it is difficult not to think that Ireland would have been a lot better off with a floating exchange rate, like New Zealand, with interest rates set for its own domestic economic conditions, than in the euro.  Floating exchange rates are no panacea –  and the last decade hasn’t seen great economic performance here either –  but it is hard to escape the point that the worst performing advanced countries since 2007 have almost all been members of the euro.

But read it yourself, and see how persuasive you find Honohan’s story.

While there are, typically, many more important aspects of public policy, in this blog I am going to talk quite a lot about matters that touch on the role and responsibilities of the Reserve Bank of New Zealand. It is a significant part of what I know, and have thought about over the decades.

Having been purged by Graeme Wheeler, I no longer work for the Reserve Bank.  That leaves me free to comment.  But I am conscious of the risk that any comments could be seen through a lens of “embittered ex-employee”, so this brief post is context and invitation.

Over several years I had voiced to many people a growing desire to spend a lot more time with our growing children.  I’d always been grateful that my mother was mostly around when I was growing up, and I wanted to do the same for my kids.  A wonderful long-term nanny just isn’t the same.  Making the change became financially feasible late last year and so my plan had been to leave the Bank anyway.  I’ve never been a person to carry grudges and, in any case, now feel only a sense of liberation and opportunity.  Emotion often clouds analysis, and impairs the ability to clearly identify what is going on.

Sometimes I’ll be critical of the Reserve Bank, and of choices governments (through Parliament) have made about the Reserve Bank.  (At other times, I expect I’ll stick up for them). And I will, for example, be using the provisions and presumptions of the Official Information Act to seek to improve (and argue for improving) the openness and transparency of the Bank.   But in almost all cases I can think of right now, I expect to be saying many of the same things I was saying within the Bank.  Free and frank internal debate and advice are critical to the successful long-term functioning of public (or private?) institutions   – indeed the Official Information Act explicitly recognises that.  External challenge and robust scrutiny of powerful public institutions is equally, or perhaps more, important.

My aim is to highlight issues, and provide alternative ways of thinking about some things.  It is about issues and institutions that matter to New Zealand, and about good quality detached analysis and argument.  If you think that I’m losing perspective at any point, do let me know –  either comment or email me (mhreddell at gmail.com).

As the euro crisis has begun to re-intensify, as stresses around Greece’s position increased, I pulled off my bookshelves and read several recent books on the crisis.

Jean Pisani-Ferry is adviser to the Prime Minister of France, and is a former adviser at the European Commission and former director of the Brussels-based think tank Bruugel.  His book The Euro Crisis and its Aftermath comes with blurbs from the great and good of the social democratic economics elite –  Olivier Blanchard, Charles Goodhart, Dani Rodrik, and Larry Summers.  For those without much background in the euro, it is a worthwhile and pretty succinct account of how things came to be, and has some suggestions on the way forward.  But they are all quite technocratic perspectives, that don’t seem to really engage with the political stresses, which reflect the fact –  captured in opinion polls – that most people in euro-area countries see their primary identity as national rather than European.  The elites might wish it was otherwise, but if there is any movement in the data  in the last decade it has been more towards national than supranational identity.  In a mild form, that is what Martin Feldstein warned about long ago.

Vito Tanzi has written Dollars, Euros, and Debt: How We Got into the Fiscal Crisis, and How We Get Out of It, ostensibly about fiscal stresses across the advanced world, but really focused on the euro crisis.  Tanzi was director of the IMF’s Fiscal Affairs Department for almost 20 years, and has(among many other things)  co-authored two fascinating books on the long-term evolution of public spending in advanced economies.   The old joke was that IMF stood for “it’s mostly fiscal”, and that is certainly how Tanzi interprets the euro crisis.  He makes some useful points about how the differences between the euro area and the US, as monetary unions, can be overstated (in particular there is no “transfer union” in the US).  The biggest single difference is that the US Federal government (but was not in, say, the 1930s) while any European central spending is small.  That makes a lot of difference, and Tanzi reasonably notes that no one has ever set up a strong central government to do macro-stabilisation.  I suspect Tanzi overstates the significance of the fiscal institutional issues, and understates the importance of bringing together countries with quite different neutral interest rates.

The last of the three books was The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs, by Hans-Werner Sinn, a leading German academic and economic advisor.  For my money, it is the best of books (and the longest and most richly detailed), but that partly reflects my Eurosceptic biases.  Sinn has been a key contributor to the German debate and played a leading role in highlighting the role of the clearing and settlement system, TARGET. He argues that through it, capital flight from the periphery has been accommodated by the ECB, both delaying adjustment and incurring considerable risk for taxpayers in creditor countries.  A pan-European centralist might, of course, argue that that is exactly what it was supposed to do.   I can’t do justice to the book in a singe paragraph, but if you want to learn more about the crisis –  from an author who wanted (and I think still wants) the euro to succeed – this is the one to read.  As ever, whether one agrees with the author in the end should be incidental.

A conversation yesterday about markets in the 1890s prompted me to dig out some data on government bond yields in the period.  The chart below shows a not-entirely-consistent (different maturity dates, period averages vs ends of periods) selection of data on bond yields for the UK, New Zealand, and New South Wales (Australia not existing as a political entity until 1901).  There are spreads between these yields, but recall that they were, on the one hand, the securities of the most powerful country (and a major net lender) and those of two small highly-indebted colonies.   The Australian colonies and NZ both went through episodes of financial crisis in the early 1890s (with severe and long-lasting effects in Australia’s case), and that presumably accounts for the spreads in the chart below widening temporarily in the early 1890s.

Rather more recent yield differentials will feature in a post probably next week (school holiday obligations permitting).

“Very.”

That was the Executive Summary to a discussion note I put together one Saturday a few months ago.

productivity just how badly has nz done

In one sense, there is nothing new  (the data have always been there) but there was a certain relentless bleakness about putting it together, and rereading it now.  If only the New Zealand political and economic elites treated the failure as seriously as it deserves.  But then countries fail mostly because of the choices of their elites –  sometimes including the well-intentioned ones.

The paper mentions another note of mine, which I included with one of the first entries on this blog.

Much of the debate around housing in New Zealand seems to involve “urban planners”, and people with similar inclinations, trying to tell people how they should live, and what sort of houses (and what sized sections) they should live in.  In particular, the planners seem to have quite strong preferences for higher rates of urban density.  Some of this seems to be about their own lifestyle preferences, and some the alleged agglomeration benefits.  We’ll come back to agglomeration over the coming months.  But here I thought I would just highlight some fascinating data I stumbled on a while ago on the Demographia website on urban historical densities.    Here is some of the data on historical urban densities.

First, a newer city; New York since 1800

And then two older European cities.

London since 1680

And Paris since 1650

I haven’t looked at how the data were put together, and I’m sure there must be considerable margins of error around any of the older estimates.

But….they paint a pretty clear time series picture for each of three of the rich world’s great cities: as cities get richer, their citizens seem to demand more space, not less.  This shouldn’t be a surprise –  think of the tenements that the poor lived in in earlier stages of urban development, and of the congestion and squalor of much-poorer developing cities today.

Of course, governments and “urban planners” can stymie these trends –  by applying land use restrictions.  But in whose interests are such restrictions applied, and who is positioned to make those judgements?    Shouldn’t policy facilitate private preferences, whether for more density or more “sprawl”?

And none of this bears on questions of why some rich cities (eg in US or Australia) are much less dense than comparable size cities in other places.  And it has nothing to do with the point that in any country the biggest population centres are likely to be more dense than smaller places.

But…to repeat…history suggests that, all else equal, as cities and countries get richer then. all else equal, their inhabitants prefer more space not less.

I spent Saturday in Christchurch visiting family. I haven’t lived in Christchurch since I was six, but in some respects it is still “home”.  People close to me lost a lot.   I get down every few months and have followed progress since the earthquakes with both professional and personal interest.  Among the (not original) observations was the striking contrast between the quick private sector action on the periphery, and the mostly glacial pace of activity in the central city government-controlled zone (where, not coincidentally, owners’ property rights had been quite severely impaired).

Saturday’s Press had an interesting feature on “the growing number of rebuild-related firms going bust despite a building boom in Christchurch” –  presumably not a reflection of lack of work, but of the dislocations and opportunities that major economic shocks bring.  Some will have prospered enormously over the last few years, and others –  a minority – just won’t have coped with the challenges of, say, going out on their own and running their own business.

On this visit, even the government-controlled zone was finally starting to look more like a building site than a bomb site  (and I noticed that the Sunday Star Times had a big article yesterday on the scale of the central city developments).  And it is good to see an increasing number of new buildings up and open.  But I noticed on my previous visit, and again this time, that the new buildings often still have “for lease” signs up, and several vacant floors.  Wandering around the city it was not hard to imagine that Christchurch might already have passed “peak starts”, not just for commercial buildings, but for houses as well. Of course, there is years of work still to go –  and some of the questionable vanity projects (convention centre and sports stadium) are not even near commencement –  but it is difficult to envisage that the level of activity goes higher than it has been over the last year or so.  Four to five years on, presumably everyone has a roof over their head, and fewer firms are operating from very unsatisfactory temporary premises.  Housing market pressures look to be easing, and if the early commercial buildings aren’t quickly filled, what prospect for many more starts in the next five years beyond the projects that are already underway?  At an aggregate level, construction sector activity as a share of production GDP ran up very sharply (and much of that was Christchurch), but it has gone sideways or backwards for the last few quarters.

Once again, the Australian resources investment boom, and its aftermath, spring to mind.  With the difference that, vital as it was, the diversion of resources into repairing Christchurch doesn’t leave us with a new large productive sector at the end of it all.