Have immigrants swallowed up New Zealand’s productivity?

By Michael Reddell, the paper is here (pdf):

Despite the huge, decades-long, and continuing deterioration in New Zealand’s relative productivity, the real exchange rate has not, on average, fallen. The persistently (and perhaps increasingly) “overvalued” exchange rate – itself a symptom of imbalances across the economy – is central to understanding why, despite the far-reaching reforms of the late 1980s and early 1990s, the large gap between New Zealand’s standard of living and those in other advanced economies has not even begun to close. The exchange rate hasn’t adjusted largely because average New Zealand real interest rates have, surprisingly, remained so much above those abroad. That gap, in turn, appears to reflect New Zealand’s own choices (including policy ones) which mean that at any particular interest rate (the “world interest rate”) there is a bigger difference here between desired investment spending and the available national savings than is typical abroad. Higher New Zealand real interest rates have simply been the rationing device, reconciling the conflicting desires. There is little evidence that our policy frameworks adversely affect savings more than those in other countries, and little sign that house prices can explain much, if anything, about New Zealand longer-term savings behaviour. By contrast, population growth seems to have been much more important than has previously been recognised. New Zealand’s population growth slowed sharply in the 1970s and 1980s, as more New Zealanders pursued better opportunities abroad. But the marked liberalisation in immigration policy in late 1980s and early 1990s resulted in New Zealand once again experiencing materially above-average population growth.

In combination, the substantial real domestic resources required to accommodate a fast-growing population and the quite modest savings of New Zealanders appears to have crowded out (through higher interest rates and a high average real exchange rate) other productive investment. Materially higher productive investment, especially in the tradables sector, was probably required if the big challenge of catching up again with the incomes of other advanced countries, and reversing the decline in New Zealand’s relative productivity performance, was to be met. If the rate of population growth over the last couple of decades had been materially lower, that would have resulted in lower average interest rates and a much lower real exchange rate. And New Zealanders’ long-term income prospects would, most probably, have been much improved.

Loyal MR readers will know that my writings have long stressed the economic benefits of immigration and indeed I stand by my views.  But might there be something to this argument in the New Zealand context?  You can think of the Kiwis as having invested resources in building up the total of their human capital, rather than maximizing physical capital per resident.  But why is capital not more mobile into the country?  Keep in mind that most of the New Zealand banking system is foreign-owned, for instance, so capital there should not be so constrained by domestic savings, even if you believe in some home market bias.  Given “reach for yield,” and the quite small size of the New Zealand economy, more capital could flow in much more readily (see pp.13-14 in the paper but I am not sure why these effects should hold up in the long run).

And yet the foreign capital does not flow in enough to resolve this problem.  So I suspect this hypothesis, while illuminating in some regards, is ultimately parasitic on some other account of New Zealand’s failure to engage in a productivity catch-up.

Here is one previous post on New Zealand productivity.  See this one too.  I would here also cite “brain drain” factors, even though I do not believe the brain drain argument is true in most cases.

Comments

If you Google

New Zealand population

you get Google's graph from 1960 to 2012. There's a definite inflection point in 1991 and the population trend line has been steeper since then.

My recollection from my youth is that New Zealanders boasted of their prosperity in terms of the incredible ratio of sheep per New Zealander they enjoyed. Maybe that old way of thinking wasn't wholly deluded?

Plot the GDP per capita relative to Western Europe and you'll see the same upwards inflection. In other words New Zealand's population moved upwards with its level of economic productivity. Now a simple time trend does not prove anything, but my point is that New Zealand has gotten a lot richer since 1991, so the sheep thing doesn't work out.

In the longer term, this "inflection point" doesn't seem that meaningful.

http://en.wikipedia.org/wiki/File:New_Zealand_population_over_time_-_small.png

In the big picture, since the end of the Ice Ages, what's merely the last 23 years?

Dude, how about actually responding to the graph? New Zealand's population has been increasing quickly since WWII and even before, with a slight slowdown from about 1975-1990, then a return to the previous level of growth. The data does not support your point about a new trend of population growth that replaces an "old way of thinking".

New Zealand 1975: 3.08 million
New Zealand 1990: 3.33 million
New Zealand 2012: 4.43 million

That's a pretty big upward inflection for what seemed like a mature country.

New Zealand's population grew by 1.14% per year from 1990-2013.
New Zealand's population grew by 1.20% per year from 1960-1990.

Your point about immigration may be true, but it cannot be made simply with population numbers.

And why is New Zealand, the 205th most densely populated country, a "mature country" in terms of population?

The graph is misleading because it's not on a logarithmic scale.

Finland and New Zealand are interesting comparisons of 1990 v 2012 populations:

Finland: 5.0 million to 5.4 million
New Zealand: 3.3 million to 4.4 million

Finland is about 25% larger in area (much of it very cold, but much of New Zealand is mountainous)

Finland has a very long border with a country that was much, much poorer for most of that period (Russia) and Finland enjoyed one of the most spectacular one-company booms ever during the first three-fourths of that era (Nokia). And yet, Finland was more prudent about population growth than New Zealand was.

And just imagine how much more successful Finland could be today if they had liberalized their immigration policy.

And used block chains. Don't forget about that.

Well the Blockchain algorithm definetly has applications here

I don't know what data you're looking at, but NZ substantially outgrew Finland over the period in question. NZ sits at less than half Finland's GDP per capita in 1990, by 2012 it only lags Finland by 13%

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&hl=en&dl=en&idim=country:FIN:SWE:NOR#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=log&ind_y=false&rdim=region&idim=country:SWE:FIN:NZL&ifdim=region&hl=en_US&dl=en&ind=false

The famous Tyler Cowen "The more people the better"- philosophy.

Its strange that most economist celebrates the fairly low fertility rates, when at the same time they believe all problems would fade away if we just were more people in this country.

What does Tyler recommed we do to raise american fertility rates to e.g. 5 children pr. woman?
If that could happen we would all be richer, happier, more equal and the standard of living would raise for almost everybody including the poor and uneducated masses.

New Zealand is interesting. Maybe we could learn something.

Bryan Caplan, who's probably the most pro-open borders economist in the world, wrote an entire book encouraging people to have more kids.

I would say I'm even more pro open borders than Caplan as I've been toying with the idea of not only having open borders but offering prizes to people to move countries every 5 years.

The U.S. should unilaterally declare the entire world to be the U.S. There would no longer be any foreign countries, just rebellious provinces.

What sort of prizes are you going to offer? How many will you give out each year? I'm interested.

Tax the people who don't leave their country to provide the prizes for the people who do.

@Steve, that is disappointing if true. I was hoping MR Commentor was going to personally give out prizes.

I know. It was hillarious.

But I was talking about economist in general, not those few like Caplan, whose claim to fame is blogging.

And I hope these "the more the merrier" proponents enjoy eating jellyfish. It will be the only living things left in the ocean.

One possibility is that a high immigration policy doesn't work very well for a country like New Zealand with small cities and a large rural sector. Certainly, immigrants themselves seem to prefer their chances in big Sydney or Toronto over New Zealand's green and pleasant land.

This is a quite interesting point, I'd like to see more data on. Immigrants seem to do worse in continental Europe, which is known for having small capitol cities relative to North American and East Asia.

Another possibility is that agricultural immigrants don't do your economy much good: for example, California's Central Valley has been absorbing huge numbers of stoop laborers for a long time, and small cities like Bakersfield and Fresno where pickers' children wind up are, unsurprisingly, dumps.

Lee Kuan Yew seems to agree with your hypothesis. I remember him having a quote with something along the lines of immigrants being very important, but not the fruit-picker variety. Of course this generated a fair bit of outrage in the Western media. But Singapore's probably executed the most intelligent and well-executed high-immigration policy or any country in the 20th century...

Sadly, in the US context when activists push for immigration restrictions it seems to hurt the intelligent immigrants more than it hurts the fruit pickers.

On the Charlie Rose Show, October 23, 2009:

Charlie Rose: "And immigrants has [sic] been America’s strength."

Lee Kuan Yew: "Absolutely … But, mind you, immigration of the highly intelligent and highly hard-working, very hard-working people. If you get immigration from the fruit-pickers [chuckles for several seconds at the very idea], you may not get very far!"

https://www.youtube.com/watch?v=TXHPmIcy-kI&feature=youtu.be&t=3m14s

It's all just part of LKY and the PAP's grand strategy to continue importing capital and throwing more labor at their economy to grow it, since their stranglehold on power and their culture's resulting intellectual sterility have made labor productivity growth beyond what they can import from the West almost nonexistent.

maybe if he actually practiced what he preached, Singapore imports an increasing number of mainland Chinese laborers, generates rents of offering safe banking services to South East Asians and spends part of that income on putting up something like half of its own population into government owned housing.

Are there any immigration policies that even encourage agricultural immigrants? I think that explains why immigrants flock to cities. Returns on brainpower are higher in urban areas.

There's a big current federal program to bring in agricultural workers, and the immigration bill the Senate passed last year would expand the number of stoop laborers brought in significantly. Just Google:

crops rotting in the fields

for years of credulous New York Times articles about how we're going to be paying $5 for a head of iceberg lettuce if plantation owners can't import lots more indentured servants right now.

"Crops rotting" just gets a litany of farmer complaints. But what federal program are you talking about that let's me enter & settle just to work on a farm?

I believe the federal policy is: "Don't ask, don't tell and never talk about the policy."

The H-2B visa nonimmigrant program permits employers to hire foreign workers to come temporarily to the United States and perform temporary nonagricultural services or labor on a one-time, seasonal, peakload or intermittent basis.

Per the wiki

And the H-2A visa.

Canada has a seasonal worker arrangement with the Mexican government, but the Mexicans allowed into to Canada to pick are 96% male, and remarkable restrictions are placed on them keep them from fathering any children while in Canada. It's pretty hilarious to read the details.

In contrast, in America, nobody ever seems to think about temp works producing anchor babies.

The other point is that New Zealand doesn't have a huge sector like The Valley in the US which is starved for talented workers, therefore New Zealand can't make appropriate use of these highly talented immigrants.

Oh, thats to bad. All those incredibly talented people, who just dont know how to do anything on their own. They couldn't in their country of origin, and then they move to New Zealand, but they are of no use their either.

Its strange how all these talented people have to use their many skills at something that is already there - howcome they didn't create at Valley in NZ?

And why did they go there in the first place, if all they can is ordinary work for established companies?

How much is New Zealand just an outlier? Would we expect a small, extremely remote country to be as rich as other countries, all else being equal?

The only laws that countries have to follow are those of geography. These article reminds me of an hilarious one, I don't remember if here or on Nextbigfuture, about a very rosy prediction for Chinese economy, extrapolating for internal provinces the same growth rates of coastal provinces. The author stated "I see no reason why the internal provinces could not grow at the same rate that coastal one experienced". Find the fallacy: you win nothing.

Well, I'm part of the brain drain they talk about. I don't know about it's economic impacts, but it was very real and disproportionately included people with higher education degrees (including me). Even if it had no direct economic impacts, I've felt that that the cultural ones were real.

As a counter-point though, while it's palpably evident that the material standard of living in New Zealand is lower than here in Australia, I'm far from convinced that the real standard of living is lower - I think it's a good life, and would like to go back (*except for the house prices in Auckland*)

Back when the brain drain was just getting going, a famous New Zealand Prime minister quipped that Kiwi's immigrating to Australia "raised the average IQ of both countries"

The fact that you can't afford to move back kind of proves the point about standard of living, does it not?

Who said anything about affording? my professional network is here, my friends are here, my wife is from here, my kids are settled here... and I have such politics here in Australia too :-(

As for the house prices in Auckland - just stupid. Nearly as stupid as the prices in Sydney.

Sorry if I misunderstood. You said you would like to go back, except for the house prices, which I took to mean that the prices were the reason for not moving back.

Well I could afford to. But I choose not to live somewhere that requires that much money invested in a fixed asset that's only better because of where it is. The rest of New Zealand - great place to live, if you can get work

This is very anecdotal, but I had an acquaintance that was a speculative equities investor from New Zealand. He bemoaned the problem that Kiwis were very risk averse with their savings. It was very hard to find clientele who would allow their savings to be invested in risky assets. He moved to Australia.

The problem is with the New Zealanders, the Immigrants are there with their high skills ready to benefit the country if things were organized better there. This is why the US shoud extend H1B visas and take advantage of this opportunity.

Clueless. You have no idea what you're talking about.

Is that old tax avoidance scheme using NZ interest rates still in effect? It's been so long (10 or 15 years) since I last heard of it that I can't even remember what the details were but the amount of capital deployed that way should have been plenty big enough to distort such a small economy and possibly create a post-unwinding hangover in the data.

In response to Tyler's question about why the capital doesn't flow in ... In the 80s we Kiwis thought the capital would flow in if we liberalised financial markets. It sort of did - the world loves our currency, short term (Australian owned) bank deposits, government bonds. Private capital is less able to permeate in - New York and London are 18-24 hours flight away, and the opportunity cost of monitoring a small direct investment far away is too high.

Overall Reddell's historically-grounded, generalist approach is the best overall narrative I have seen of the NZ economy. I think he is overly pessimistic about the potential to increase savings. New Zealanders take the view that the Australian compulsory-private pension system has simply moved existing savings around, whereas inside Australia it is seen (correctly) as an important engine of savings, investment and institutional-quality funds management. I was interested to note in George Megalogenis' recent book he quoted Paul Keating, the architect of modern Australia's prosperity, as saying savings-short countries had to ration capital in favour of productive investment, which is more or less what Australia did.

Fortunately New Zealanders have other reasons to come home: the country is the freest in the world and the most socially advanced, according to two recent studies; it's beautiful, people eat and drink well, and kids love it.

It is interesting to wonder what the implications of Reddell's reasoning are for the US. The current account deficit is smaller, but the airports and trains seem unworthy of a great nation. I understand this is something to do with corruption at the municipal level though.

Of course a importing masses of smart engineers from India to design a block chain that could pull New Zealand closer to New York or London could help cut down the time of those flights and make New Zealand more attractive to FDI.

BP

If you'd like to get in touch directly at some stage - my email is on my paper - I'd be interested in exchanging views on savings: both the ability of policy to make much difference, and how to interpret the Australian experience. In part, Australia's gross national savings rate has been high because of the very high corporate investment needs in the mining sector. Depreciation provisions are a major component of business savings, a dimension of the overall savings story that is often forgotten. For NZ, I suspect we would see materially higher business savings if more business investment opportunities were perceived as profitable, and of course the high real interest and exchange rates (over decades) are part of what undermine perceived profitable investment opportunities, especially in the tradables sector.

That could be.

But that reminds me of a general Burkean point: the value of prudence in population policy, because nobody can be right all the time about economic policy. No doubt, in hindsight, New Zealand could have picked somewhat better economic policies. But, for whatever complicated reasons that no doubt seemed like a good idea at the time, it turns out that they didn't. If they'd been more prudent about their population policy, they'd still have an amazing sheep to people ratio to fall back on. But they don't.

It's like Finland, which was reasonably prudent about immigration, v. Spain, which was imprudent: both enjoyed some good times in the 2000s, but those came to an end. But Spain is still stuck in 2014 with a massive unemployment rate.

Similarly, a decade ago everybody -- Alan Greenspan, George W. Bush, Dick Fuld, Angelo Mozilo, Tyler -- all thought immigration-driven and Hispanic Baby Boom-driven population growth in the Sand States was free money. What could go wrong?

Well, two things:

-- Those rising home prices and falling credit standards in the Sand States turned out to be houses built on diverse sand: the new borrowers couldn't actually afford those houses.

-- Although some went back to Latin America, we're largely stuck with the Subprime Era's anchor babies, who are starting public school about now. And if they turn out like the last four or five generations of their relatives, they aren't going to grow up to pay in vastly more taxes than they take out.

Like Burke said: prudence is a virtue.

How's Japan doing?

In terms of GDP per working-age adult, Paul Krugman says, not bad at all: http://krugman.blogs.nytimes.com/2013/02/05/the-japan-story/

I guess it'd look even better if they reported "GDP per working age male adult with 115+ IQ" The denominator is everything!

I've a 12 member family & exactly one earning member but aha our income per employed adult looks great.

Very Japanish -- the way the Japanese like it.

Australia, the obvious point of comparison, has had much stronger migration-driven population growth, and yet it has a track record of lower interest rates, more capital deepening, stronger productivity growth and higher standards of living. There may be something to this but it falls well short of a complete explanation.

On capital flows, it's interesting that New Zealand has one of the worst scores on the OECD's FDI restrictiveness index (see www.oecd.org/investment/fdiindex.htm). The sticking point seems to be that foreign investments of any reasonable size effectively require approval at the ministerial level, whereas the responsibility tends to be more devolved in other countries. I can only think of one instance in recent years where the minister has vetoed a major investment, but who knows how many investments may never have been attempted because of this risk.

That's politically endogenous, surely. Small country, facing large investments from distant investors (and often culturally distant ones) - high risk of local community resistance. Not reasonable for any minister to say "it's not my problem, deal with it at a lower level", because it is their problem and there is no lower level.

All you have to do is be the local resource source while China is going through the biggest infrastructure boom in history. But when that's over ...

In contrast, Finland went through an incredible period of good luck with Nokia. And yet they had the prudence to not import a lot of servants.

Maybe what you need to do is adjust New Zealand output into Maori and non-Maori shares, so to speak. Maoris are something like 15% of the NZ population and their personal income is about 60% of non-Maori income. Having such a large population of an underperforming minority is something which makes NZ a big outlier amongst the rich countries. Except for the USA of course, which makes US output per workers excluding NAM workers even more remarkable than generally realised.

And they are up to about 7 or 8% Other Pacific Islander -- It's done wonders for their rugby team, of course.

Slaps forehead! Of course! While analysing the subtleties of interest rates, government fiscal policy etc etc, we all overlooked the obvious. The problem is nothing to do with any of that - the root cause is melanin. Leftards just don't get that simple fact.

Nothing makes someone seem more ignorant in 2014 than assuming race is about melanin.

If, as I've read, Maori personal or household income is ~60% of Pakeha income, it stands to reason that Maori output per worker might be at least as low. Most of the income gap between NZ and the OECD average is in output per man-hour. And the labour force participation rate is lower, and the unemployment rate higher, for Maoris than for Pakehas. So if you "filtered out" Maoris from the NZ economy, the loss in GDP should be less than proportionate to the loss in population, and GDP per capita would be higher. Not sure what would be a realistic adjustment for capital stock per worker but one could come up with scenarios in which half the gap in GDP per capita between NZ and the UK or France might be closed. So NZ's low income is definitely not all because Maoris are nearly 15% of the population, but that's got to be at least a non-trivial part of the reason.

I gather a fair fraction of the current Maoris didn't use to be Maori until various benefits started being handed out to Maoris.

Thanks for the coverage of my paper.

On whether. population trends actually changed in NZ, relative to the rest of the advanced world, this Australian blog entry reproduces one of the charts from my paper that makes the point starkly http://www.macrobusiness.com.au/2014/04/rbnz-slams-the-population-ponzi/ . The critical point is that, without the big changes in immigration policy around 1990, New Zealand's population growth would have been much lower (perhaps even negative by now), not one of the fastest among OECD countries. As some of the cross-country charts in my paper suggest, advanced countries with very low population growth (or even falling population) have tended to perform at least as well, if not better, than countries with rapid population growth. Israel is quite a telling example - over the last 20 years or so, the most rapid population growth rate in the OECD, and a productivity performance as bad, or worse, than NZ's.

Tyler poses the question of why capital does not flow into NZ freely. The argument in my paper is that in fact financial capital has flowed freely into NZ, and the quantity constraints have only rarely been an issue (through 170 years of dependence on foreign capital). But money isn't the constraint in a real economy: real non-tradable resources are. Labour is the ultimate non-tradable resource. And thus my story is not that immigration is generally bad - indeed, generally I accept all the standard economic arguments that there are gains from migration (biggest gains to the migrants) - but that in the specific circumstances of NZ - a low savings rate over many decade on the one hand, and relatively rapid (and almost entirely policy-induced) population growth on the other, that puts pressure on real resources. Labour has to be devoted to building the physical capital stock that a growing population requires, and that same labour can't be used for other things - building highly productive export industries for example. The short-run pressures are unquestioned in NZ (net immigration increases boost demand more than supply) but Tyler poses a fair question as to how the pressures can be persistent. My answer is, essentially, that each year there is a new policy impulse - a whole new wave of migrants, each of whom requires an additional to capital stock equivalent to several years of the additional labour provided. Migration policy in NZ is even odder when it is leaning so heavily against the flow of native NZers; the large scale move to Australia that has been happening for 30 years would tend to equalise factor returns in the two countries, a process migration policy then undermines. Changes in savings preferences would material alter the issue for NZ (rapid immigration in high savings Singapore is a complement to the available domestic resources), but as I argue in the paper there is little sign that policy distorts savings more severely in NZ than in other advanced economies.

This recent New Zealand Treasury Working Paper reviews the NZ experience with migration, including reviewing the hypothesis advanced in the paper Tyler links too and in another, more speculative paper looking at the whole post WW2 NZ experience.
http://www.treasury.govt.nz/publications/research-policy/wp/2014/14-10

Who are the 'immigrants'?

The top five sources are Australia, UK, China, India, US. A large share of the first two will be returning expats.

from http://www.wetafx.co.nz/jobs/applying_for_a_job_at_weta_digital/

"Non-New Zealand applicants

Due to New Zealand immigration laws, we can only take non-New Zealand recruits with a minimum of three years’ experience in feature film digital effects. An exception can be made if you possess unique skills or experience that compensate for your lack of production experience.

Please note that Australia Permanent Residents/Citizens do not require a work visa."

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