What do wealthy nations make?

In thinking about whether New Zealand can be richer, and what it might have to do to do that, it is worth looking at the fundamentals. What makes a nation rich and what makes it poor?

Looking at industrial production helps understand this a bit better. This comparison and analysis isn't easy. Once again the data is fragmented and difficult to compare. Even using the CIA World Factbook isn't particularly easy in this case. I haven't finished looking at poorer nations yet but some interesting suggestions come out of looking at the rich nations. Once again my rich assessment is based on GDP per capita. The wealth of individuals is more important, ultimately, than the absolute wealth of a large group of people.

So, what are the apparent conclusions from looking at industrial production? Most are intuitively obvious:

• rich nations have high value add (they make products not raw materials)
• tourism, textiles and chemicals are ubiquitous products among the rich nations
• electronics and food processing also feature often
• the availability of raw materials doesn't necessarily constrain value added production but it does make it more likely
• above a certain level extra population doesn't equate to higher individual wealth
• wealth has never been weightless
• the highly valuable products change over time
• New Zealand features well up the GDP per capita rankings but doesn't have enough high value activity to get to the top

The best indicators for wealth seem to be around the production of chemicals, electronics and processed food. Tourism and textiles feature large in high value economies but, at first blush, also seem to in relatively poor countries (except for the very poorest). Tourism occurs where there is some attraction and is highly valuable where it occurs. Textile technology seems to be very widespread and available. Processed food is obviously unlikely in places where they struggle just for staples and, like electronics and chemicals, is high technology.

Some economies, Japan is a good example, import large amounts of raw materials and add a great deal of value to the products they manufacture. However, there seem to be advantages to having the raw materials in the first place. For example, the greatest incidence of petrochemical industry occurs where nations have oil resources. This makes sense. There must be a cost advantage to manufacturing products from local resources. And, it makes sense that expertise will grow when there is a long history with a resource. For example, New Zealand's high technology dairy processing makes sense due to its long history in dairying. Some countries, such as Kuwait, seem to have used their natural resources to ensure that value adding industries were established (petroleum and petrochemicals) rather than just export raw resource.

In a first attempt to think about the role of resources I had a quick look at population densities compared to wealth per capita. The result showed that at low population densities countries were uniformly poor but at higher population densities there was no discernible pattern. Having a minimum amount of available labour is absolutely necessary to gain wealth but that amount doesn't seem to be very high. From that point on the role of population seems to have little to do with the wealth of a nation. High technology development obviously helps support larger populations but the high tech seems to be the prerequisite and not the population.

The most highly advanced economies are not the richest (in per capita terms). The US, Germany and Japan feature highly but each seem to be supporting higher populations than would seem optimal (from a purely wealth per capita perspective). Economies based on little production, and indeed mainly on services, can be quite rich if they are small. For example, Bermuda has among the richest of individuals with only tourism, international business and light manufacturing; and Guernsey ranks quite high on only tourism and banking. Generally, though, services do not support larger numbers. The very richest countries (the top three examples of which are Liechtenstein, Qatar and Luxembourg) are both high tech and small.

Wealth has never been weightless. Weightless in this context means using a relatively low environmental footprint (including, or perhaps, especially energy). Some countries (ie very small ones) can make a respectable living out of services. However, even these countries tend to embrace tourism, which isn't as energy or resource intensive as some but is still far from weightless. Most rich countries are energy intensive. Surprisingly this doesn't necessarily mean heavy industry, big steel things are a source of value but don't seem to be the highest. Highly energy intensive industries like food processing, chemicals and electronics are at the forefront of wealth. The concept of a high value weightless economy based on services seems attractive but history doesn't yet smile favourably on this. Software giants who have established dominant positions seem attractive but ultimately there is more money invested in the 'weightless' internet in PCs, servers, modems and routers.

Notwithstanding the above the high value products change. Textiles once made the fortunes of the Low Countries, English and French but now seems to be spread across the world. Steel and machinery are still highly valuable products but don't seem to be a key indicator of the highest wealth. Electronics and chemicals seem to be the golden products today but will they be tomorrow? Services don't seem to feature that highly yet but is their time still to come, or is the 'killer app' of tomorrow still a fledgling technology today? Many people are promoting the 'green' economy, mainly around energy; but energy has been a major industry for some time yet rarely features as a valuable product. Energy seems to be mainly an enabler. There isn't an inherent demand for energy, only for what it can do.

New Zealand features relatively high on the individual wealth stakes because we have some of the top value earners. Tourism and textiles are nothing special (in the context of being common throughout the world) but they seem to be perennially valuable. New Zealand even does some machinery manufacturing, which although relatively small is also valuable. Food will always be valuable, though, and New Zealand is at the forefront in food technology. Mainly in dairy but also in other high value add products, such as wine. In general New Zealand has a small mixture of relatively high technology industry but mainly 'old school' stuff. We're not at the forefront of high technology and we probably don't have the energy intensity to do it anyway. Nevertheless, we're going backwards in relative terms and it seems to be a population problem. Growing GDP through increased consumption and property values (through arbitrarily high demand) is a poor way to grow GDP.

In terms of increased value add options seem somewhat limited. Food processing is worth sticking with and probably always will be. As will tourism and some limited textile production and manufacturing. Maybe we will find ourselves at the forefront of a 'weightless' economy but history suggests otherwise (and in any event there isn't a relative advantage in a weightless economy almost by definition). As for a 'green' economy well this is ultimately an energy play and energy is an enabler not an objective in its own right. Either we have to dial back the clock a little bit (on both population and expectation) or get busy with real high tech, energy intensive manufacturing (with no guarantee of a payback).

What comes after Google?

One of the reasons that I started looking at the New Zealand economy was due to an inspirational presentation by Dr Paul Callaghan. Dr Callaghan wants New Zealand to return to the top of the OECD wealth rankings through embracing high technology entrepreneurism. "Let's do the business case" he said; and knowing a bit about business cases, strategy and such things I thought I would have a go.

Unfortunately I haven't helped Dr Callaghan much. So far I haven't been able to establish a strategic advantage that stands out that New Zealand could leverage internationally. Those countries that established high technology economies did so because the timing was right and they took their opportunities. Most did it because they had a history of it, some were already wealthy and sought to diversify at the right time and some were opportunists. New Zealand is probably 30 years (maybe even 40 years) late in its attempt to go high technology (except in agriculture which we already do). Still, as I feel I have let Dr Calaghan down I have asked myself the question "Why wouldn't the next Google grow in New Zealand?"

Everyone wants a Google. Google is high technology, it is very 'weightless' and it is enormously successful. In theory a Google could happen anywhere but Googles don't happen everywhere they (if we include Microsoft, Apple and the plethora of Electronic Arts, Facebooks, MySpaces, etc) they happen in one place - the west coast of the United States (technically Facebook started on the east coast but is now based on the west coast).

So how did Google start? It all started as a research project at Stanford University for Larry Page, who was joined by Sergey Brin. They explored a different method for prioritising web searches, successfully. Then they put the software into online production, founded the website and the company, raised $1.1million dollars, identified the profit making business model and exploded into massive success. Pretty easy really - although obviously it isn't.

Professor Jim Collins of Harvard published his key principles of building a great business and Page and Brin followed it exceptionally well. They were really good at what they were doing. They were passionate about it and started the business and raised the capital and then they worked out how to make money from it. Google also ticks the strategic marketing boxes - create a demand no-one knew they wanted, mass-customise it for both demand and supply, suppliers flock to you, clip the ticket. Think how successful this is by also considering Sony's Playstation and Apple's Ipod (or Iphone). Create something people want, make it accessible to both customers and alternative suppliers with as much flexibility and capability as you can. Clip the ticket. Page and Brin went one better. They tapped into the enormous content of the internet and made it freely available. Free supply and free demand means huge use. Work out that the same technology that makes the search engine so successful will also be perfect for automatically matching advertisers to people searching for their stuff and there you have a new economic empire.

But how did two students manage to suddenly become software corporate superstars (in a story not too different from Microsoft by the way)? Well, let's not underestimate Stanford whose alumni are also responsible for Nike, Hewlett-Packard, Electronic Arts, Sun Microsystems, Nvidia, Yahoo!, Cisco Systems and Silicon Graphics. Is it an accident that Silicon Valley grew up around Stanford?

How about the environment? I can't remember the article but I remember reading about the environment of places like Seattle and Palo Alto. The young people are published and known to the industry and the cafes, shops and general environs are full of the top guns. These are safe and pleasant environments where everyone mixes. People meet, deals are done and ideas flourish. In what environment in New Zealand would two students meet the founder of Sun Microsystems (or equivalent) who would then decide that he liked their ideas and hand over a check for US$100,000?

Interestingly it wasn't Google who worked out (technically) how to make money from advertising, it was a crowd called Overture (originally Goto.com) who were bought by Yahoo! A legal battle ensued between the two competitors and resulted in a deal that I just don't think could ever be done in New Zealand. Google got the final piece in their business model puzzle and Yahoo! got a share of the Google action. I feel confident that such a battle in New Zealand would have gone on (bitterly) for ever in the courts to the detriment of both parties. Some might argue that Google got the better of the deal but Yahoo! got a share of that success and went on to find their own niche.

Then Google went on to the second stage of its success story. Stay true to the business model (free service to internet demand and clip the ticket on advertising and supply) but be prepared to buy the new ideas (such as Google Earth).

So why wouldn't it happen in New Zealand? What would we need? A couple of brilliant PhD students with a good idea, a world leading University, an almost cultural attitude to entrepreneurism (a desire to be good at something, to be passionate about it and how to make money), an environment of good ideas, collaboration and some spare money, an attitude of getting the deal done and getting on with it and lots more available good ideas.

And what does New Zealand have? Apparently we have the students. New Zealand ranks well in the world for education quality (although we also manage to have quite high levels of illiteracy - ie we're good and bad). Supposedly we have the good ideas but we are under represented in patents, which suggests that we either don't have the good ideas or we don't follow through.

We don't have the world leading universities. We have universities that are dedicated to fractious infighting under a funding system that makes them scrap for morsels. We have universities expending enormous effort in explaining why they should get public money rather than demonstrating that they should get public money. We have universities almost completely divorced from business (although this is as much business fault as the universities); and when they do collaborate it is again to fight for the public purse. We have universities rooted, for all practical purposes, in medieval fuedalism. Only the heriditary lordships are gone, instead the lordly posts are given out on time served without being difficult.

Dr Callaghan suggests that a major problem with entrepreneurism in New Zealand is cultural; and I agree. New Zealanders like to be good at things (to an extent) but one should never ever be proud and passion is for those foreign types. Part of New Zealand is almost calivinist in its attitude. Only those who suffer in their work are morally worthy. No wonder the young people of New Zealand want to go overseas to experience life while they are young. New Zealand may be a great place to live but it is a crap place to work. Academically gifted New Zealanders who manage to escape the medieval fiefdoms become destined to either give in to the technocratic bureaucracies of political Wellington or the technochratic bureaucracies of corporate Auckland; or go overseas. In the absence of a passion of purpose then the need to make money becomes devoted to the passion of consumption.

In terms of the rest of the environmental piece, the good ideas, the collaboration, the spare money and the positivist attitudes; well I think that this comes only when a country is rich. History suggests this strongly. The Renaissance was triggered by wealthy patrons who had the leisure time to take an interest themselves. The scientific discoveries of the Reformation and the Enlightenment were triggered by wealthy patrons (who often had the leisure to do the science themselves). The great thinkers of the enlightenment were either proteges of wealthy patrons or wealthy landowners themselves. The industrial revolution was triggered again by wealthy patrons (who again often did the science themselves). The great American universities, schools and museums were nearly all created by philanthropy during the United States great wealth boom.

Entrepreneurism isn't, I think, the trigger of wealth; it is triggered by wealth. Perhaps the old adage "the rich get richer" is a truism. If New Zealand wants to get generally entrepreneurial then it needs to be generally richer. Dr Callaghan makes the point that New Zealand has its success stories. Weta Workshops is a great example. However, I think that Weta shows that the really strong plants can survive in all but the most dessicated of deserts. The point isn't that the desert can have life. The point is that a desert will only become a jungle if its whole climate changes.

Unfortunately, I think scale is also important. Silicon Valley gestates so many good ideas because it has many well educated, connected, wealthy people. New Zealand could only achieve this kind of scale in a city the size of Auckland, but Auckland is spread out. Much of Auckland doesn't even consider itself one city.

Can the next Google come from New Zealand? Yes, it could. It is, however, very unlikely. It is most likely to come from where it has come before. A jungle of growing entrepreneurism is most likely where there is already some wealth. Where there is both scale and intensity. Where there is passion and optimism. And, where there is excellence and pride in learning and knowing.

It is worth listening to Dr Callaghan. If we do some things better then we should improve our technological development. However, this will only improve things, I fear, at the margin. To make a big difference in New Zealand's fortunes would need reforms far more fundamental. Ones we may not actually be willing to make; and certainly not the sophistry preached by our political elite.

The spread of wealth of nations

This post has taken me ages and I'm not sure it was worth it. It began because I was interested in understanding better how New Zealand's reducing relative wealth might manifest in a social sense. This lead me on a quest to better understand how wealth and the distribution of wealth affects a country. I'm not sure that I have reached any useful conclusions but it was an interesting voyage where I did at least learn a few things.

Let me start by, once again, remarking on the availability of data. One would think that the governments of the world's free countries would be interested in making data about their country available. I can't comment on many countries but if New Zealand and Australia are anything to go by then most governments are far from the forefront of data presentation on the internet.

One might expect that international organisations such as the United Nations might not only make data available but also provide good comparative data. However, it would seem that the United Nations is only interested in providing data once it has been 'correctly' interpreted by their experts.

I had high hopes for the likes of WolframAlpha and my solid fall back the CIA World factbook. The problem for WolframAlpha is that the world's data is horribly fragmented and unless someone sorts it out properly it is unuseable. The CIA, it turns out, seems to be the most open, available, transparent and objective supplier of world data - who knew? Nevertheless, even the CIA can't publish data that isn't there, which comes back to the problem of countries not being very open about their own data. For example (according to the CIA World Factbook), 237 countries publish their population data, 227 publish their GDP, 205 publish their external debt, 107 publish their current account balance and 133 publish their GINI index (a measure of the evenness of income distribution).

Anyway, I was interested in the perennial discussion of fairness vs wealth. Therefore, I wanted to look at the GINI index vs GDP per capita. The GINI index is a measure of inequality. It determines how far away a country's income distribution is from perfectly equal (everyone earns the same). A GINI of zero means that every household has the same income and a GINI of 100 means that one household earns the country's entire income. Published world GINI numbers vary from 70.7 to 23, which is quite a spread.

My hypothesis is that rich countries will tend to be more equal than poor countries. This was on the basis that prosperity spreads when people spend and a willingness to share comes from income surpluses. As the chart below shows there is a general relationship between individual wealth and the evenness of income distribution but it isn't as strong as I expected.

It certainly seems that being rich is the best indication of being likely to have a more equal income distribution but there is a lot of variation. The interesting thing is that poor countries have pretty much a random outcome with respect to income distribution. It should be noted here, however, that many countries do not publish their GINI indexes. The tax havens are absent as are some of the most oil rich nations in the world.

My second hypothesis was that the attitudes of a society are driven by its middle income earners. That is say that when a majority of people are well off then wealth spreads but if not then everybody, including the rich, tends to hoard. This is where finding data got very hard. The GINI index is relatively widely published and aggregated but this is about the limit of readily available income data. I probably could have searched through each country's data to find the morsels I was looking for but I would still be doing this well after Christmas and time is a scarce commodity. Therefore, I used what I had. GDP and population data provide an indication of the quantum of income and the GINI index tells us about shape. By doing some curve fitting I was able to come up with some interesting comparisons. These results are too inaccurate to publish any numbers but they did help lead to some logical conclusions.

The first thing that became obvious is just how poor some countries are. Many people already know this but in making comparisons it became more real for me. For example, (based on financial wealth only) one would rather be poor in Malaysia than rich in Ethiopia (and the poor of Malaysia are pretty poor). Here it becomes obvious why the equality of income distribution is random in the very poorest countries, because here the evenness of income distribution is meaningless. Zimbabwe is a very unequal country (a GINI of 50.1) and Ethiopia is a surprisingly equal country (GINI of 30). However, Zimbabwe's inequality is a distribution between those that have practically nothing and those that have the merest pittance. Zimbabwe is poor even compared to Ethiopia. The distribution of wealth in Zimbabwe probably comes down to which village's goat survived the drought season.

It is interesting to note the other extreme as well. Those countries that are very rich. A pertinent example is that one would rather (considering financial wealth only) be poor in Norway or Luxembourg than middle income in New Zealand. In fact, one would rather be poor in Luxembourg than middle income in the US, which is saying something. But richness is when the equality of income does matter. Here we look at the three outliers (of the countries that report GINI) Hong Kong, Singapore and the US. Here are rich countries that are also very inequal.

Here there is evidence that wealth can offset inequality. Not so much Hong Kong but the poor of Singapore and the US are still much better off than most of the world. The poor of New Zealand may only be marginally better off than the poor of Singapore and are roughly equivalent with the poor of the US. But, the rich of Hong Kong, Singapore and the US make the rich of New Zealand seem pretty poor. The rich of these countries even match (and probably exceed in the case of Singapore and the US) the rich of Luxembourg. They are the uber-rich. One can only imagine the numbers that would come out of the tax havens (no wonder they don't report).

Of the world's countries there are some which don't really have a poor. All countries will have a number of people who unfortunately or deliberately fall through the cracks. Nevertheless some countries have poor who generally aren't really poor. The line is obviously somewhat arbitrary but in my view these are countries who don't have a general poverty problem. There are the outliers, of course, Luxembourg (who is benefitting from centuries of careful diplomacy playing off its larger neighbours) and Norway (the most democratic and free of the oil rich nations) who really don't have a general poor. But I think you can add to these two Iceland, Sweden, Denmark, Austria, Belgium, Ireland, Germany, Netherlands, Slovenia, Finland, Australia, Canada and Switzerland. There are some close seconds but the numbers fall away quite quickly (there is quite a lot of difference even between Iceland and Switzerland).

What do these countries have in common? They are relatively rich and relatively equal. They are all democracies and most of them are Western European. Two of them (the I-lands) have been hit very hard by the world recession but still feature high. They vary in their economic leaning from Sweden (quite left of centre) to Switzerland (quite right of centre). They do not have large populations, except for Germany which has almost three time Canada's (no. 2)population. One of them (Slovenia) has recently been freed to democracy and is tearing up the economic growth charts. Two of them are former British colonies that maintain a Westminster parliament system (New Zealand alone fails to represent in this group).

It is inconclusive what makes these countries both fair and rich. Some on the left might argue that these countries are rich because they are fair. This doesn't seem right to me. Ethiopia is very fair but almost the whole population would rather be poor in the United States (or New Zealand). Kyrgyzstan is much wealthier than Ethiopia and is almost as fair but (based on financial wealth only) most of the population would still rather be poor in the US. Albania is much richer again than Kyrgyzstan, and is also fairer, but about half the population would be better off being poor in the US. The United States, Hong Kong and Singapre prove that wealth doesn't necessarily translate to equality of income but I think that it is still the right place to start.

So, what of New Zealand? I think New Zealand properly belongs to the group which includes Japan and the United States. All three of these countries are countries that have been relatively richer than they are now. All three feel that things are slipping away from them. All of them show some degree of a middle income bracket that are tightening their belts and hardening their hearts. All three have poor who are just on the edge of comfortable subsistence and with many more people falling into poverty as time passes. All three are relatively high on the inequality stakes (especially the US). All three, I think, are going to experience significantly more social upheaval and distress as population increases and economic growth doesn't match the rest of the world.

And which are the lucky countries? Norway is, perhaps, the clue. Luxembourg is a very special example but Norway is a real economy. Norway is a resource rich country with a relatively small population. The moral hazard with this post is that I have to firmly remind myself of the non financial benefits of living in New Zealand to avoid packing my bags and heading for Australia or Canada.

It is about freedom of speech

Obviously there have been many copious amounts of opinion pieces on the Hone Harawira affair. I have actually been strugging to make sense of it all. It seemed mostly to be a storm in a teacup to me. However, now I do feel much more strongly about it thanks to the opinion piece by Tapu Misu (http://www.nzherald.co.nz/opinion/news/article.cfm?c_id=466&objectid=10609430).

Ms Misu's piece is, by far, the best opinion of an otherwise pretty poor bunch. Hers is the best because she has hit the nail directly upon the head. It is about freedom of speech. It is about one of the most fundamental of our constitutional protections. And, as Ms Misu also implies, it is also about representation.

Most of the response to Mr Harawira's comments have been the worst kind of political correctness. Political correctness can have its place. In its least objectionable form then political correctness calls into question langauage that is needlessly disrespectful and insulting; and, in fact, this is exactly what Mr Harawira did apologise for. In its worst form political correctness is censorship. Censorship, it should be remembered, has done far more for Fascism and Stalinism (and other forms of authoritarianism) than it has ever done for freedom or democracy.

Mr Harawira is an angry man but he believes in something and forcing him not to say what he believes in doesn't make it go away. But, Mr Harawira is more than an angry man. He represents angry people who consider, with some merit, that they have a genuine grievance. The whole point of a representative system of democratic parliament is that all points of view are to be represented broadly in proportion to the population. Trying to force Mr Harawira to be silent on these issues is failing to represent a significant proportion of our population that wants their say.

Mr Harawira has apologised, genuinely I think, for being needlessly disrespectful and insulting; but not for the sentiment. Perhaps, rather than going down the extremely dangerous path of trying to control what he says, we should accept his apology and listen to those that have such a view. I'm not sure that I agree with the constituents of Mr Harawira's point of view but I sure as hell think that they should be represented in parliament.

The really bizarre thing is that this whole storm began simply around a sneaky day off. A bad thing perhaps but is it for this that the fabric of representative democracy should be ripped to shreds?

The Lucky Country?

This post follows my previous post that was considering the question of how much influence agricultural resources influence New Zealand's economy. This post considers the influence of mineral resources to Australia. Both posts are in reaction to a speech by Dr Don Brash available at:
http://www.nzcpr.com/guest168.htm

In looking at the Australian statistics differences to Statistics NZ are interesting. Australia's GDP is better broken down into component industries but New Zealand has more imformation on the contribution to manufacturing and trade categories. The statistics only seem to be broadly comparable. ABS (Australian Bureau of Statistics) seems to be partial to nominal dollars while Stats New Zealand seem highly partial to their 95/96 real dollars which can also make things tricky.

The first obvious thing is that Dr Brash had incorrect information in his speech. He claimed that mining is about 5% of Australia's GDP but it is closer to 8%. It will be no surprise to anyone that Australia's mining industry is very much larger than New Zealand's, so big in fact that it would be fair to say that (compared to Australia) New Zealand doesn't have a mining industry. If we add agriculture, forestry, fishing and mining together to arrive at a ball park number for the current annual value of developed natural resources then New Zealand has about NZ$37billion (nominal) and Australia about A$133billion (nominal). Using an exchange rate of 84c and with population estimates of 4.3million for New Zealand and 22million for Australia then New Zealand currently has natural resource wealth of roughly NZ$8,600 per capita and Australia NZ$6,100 per capita. So Dr Brash seems to be correct. If anything New Zealand has the natural resource advantage in wealth per capita. But does Australia's mineral wealth leverage greater wealth overall?

Another obvious factor in Australia's GDP is their construction industry. Compared to New Zealand it is massive, approximately 12 times New Zealand's (way more than can be explained by population). The Australian electricity, gas and water contribution is also significantly higher than New Zealand's. Australia also seems to perform better in personal and community services (education, health, recreation, culture, etc). Most other parts of the economy seem to be broadly comparable.

I don't have the time or energy to put much more effort into investigating the leverage of mineral wealth in the Australian economy; and I still have to look at exports. If my assertion holds from my previous post; that it makes sense that an economy would naturally become expert in industries surrounding its natural resources then perhaps it shouldn't be a surprise that Australia does so much construction. In theory developers should consider the opportunity cost of minerals (ie compare their internal use to what they could sell the resources for). In practice, however, people (and politicians) will want to use cheap resources to their personal direct benefit. Perhaps this is why there is so much construction in Australia. Some forms of energy are not easily transported great distances. Electricity and natural gas have, effectively, far lower opportunity cost than easily transported oil and coal. This gives Australia very cheap access to energy and this must stimulate significant output leveraged value adding activity in Australia.

I am not going to put much effort into exploring the input industries for Australia's mining activities. Mining is a resource intensive activity and it must drive significant levels of economic activity to supply. Australia's mineral exports are A$140billion compared to a GDP mining value add of A$85billion. Therefore, without even considering internal consumption, mining must generate at least A$55billion of other economic activity in Australia. New Zealand's whole economy (in GDP terms) is currently NZ$180billion. It seems intuitively obvious (my empirical analysis isn't comprehensive enough to be conclusive) that Australia's mineral wealth does translate to relatively more financial wealth than New Zealand's agricultural resources.

In the area of personal and community services these are not, as a rule, stimulated by resource availability. They tend to be, predominantly, luxuries (there is of course a basic level of need in health and education but I suspect that Australia's health system is supported by far more elective procedures than New Zealand's). Luxuries (especially imported luxuries) are funded by cash surpluses and cash surpluses generally come from exports. Not surprisingly Australia's exports are much larger than New Zealand's. For the purposes of this debate I will only look at goods, although services also seem to be consistent with the export story in goods. Australia has A$230billion of goods exports compared to New Zealand's NZ$43billion. Normalised for currency and population this gives Australia about a quarter more export dollars than New Zealand. Not massive but significant. Interestingly mineral and metal exports contribute 60% to Australia's exports but agriculture only contributes something in the order of a quarter of New Zealand's exports.

On the face of it Dr Brash is correct but I think he is wrong. Australia's mineral wealth does give it a large advantage over New Zealand in terms of financial wealth. How does this resolve to New Zealand's greater natural resources per capita? It does because financial wealth is different to the total consumer benefit (the totality of health, wealth, well-being and happiness). Australia's financial wealth directly affects their consumer benefit. Money can't buy you happiness but it sure can buy you a lot of things that make you happy. New Zealand, on the other hand, has a lot of things that make you happy. This is why New Zealand regularly features at the top of lists of desirability to live despite relatively low first world levels of financial wealth.

This will make it very hard for New Zealand to grow financial wealth. Our natural resources seem to be fully leveraged with only marginal opportunities available. We don't appear to have any other strategic international advantages. We are still wealthy in a consumer benefit sense and we are a lucky country in that sense. However, if we want to increase our GDP per capita comparably to other first world countries (and avoid diluting our consumer benefit) then increasing the GDP bit probably isn't going to work. It's time to look at the per capita bit.

The role of resources: NZ vs Australia

I recently read Dr Don Brash's speech on "NZs economic outlook - Can we ever catch Australia?" available at:

http://www.nzcpr.com/guest168.htm

I found the speech quite interesting, especially his analysis that some of the problems that are perceived to be problems actually don't seem to be. He is concerned about debt, as anyone should be, although my latest analysis on the debt problem lead me to conclude that debt, in and of itself, may not be a fundamental problem but that area needs a lot more work yet. The most interesting piece in Dr Brash's speech was the identification of a phenomenon in the Australian economy that was already perplexing me about New Zealand.

The popular opinion on Australia is that it is the lucky country due to its mineral wealth. Likewise the accepted mantra in New Zealand is that agriculture (and dairying) is the engine room of our economy. One might say that Australia is a giant mine and that New Zealand is a giant farm. The problem is that neither of these assertions appears to be true.

Dr Brash makes the assertion that the entire Australian mining industry only contibutes about 5% to the Aussie GDP. Likewise, from Statistics NZ, agriculture is the same about 5% of Kiwi GDP. So, which is it? Logically natural resources should be a significant driver on financial wealth but the statistics suggest that neither of New Zealand's or Australia's perceived main industries is actually our main industries.

The most likely reason I can think of that each of our main industries may hit above their weight is leverage. By leverage I mean that each of our main industries stimulates other commercial activity in significant volumes. Such leverage can either be what I call output leverage or input leverage.

There are a number of ways in which GDP can be calculated. It appears that Statistics New Zealand uses the value add method where the GDP contribution of a category is the direct cash sales less direct cash costs. In theory the resulting number is the value that that activity adds to the cash economy.

My definition of output leverage is that the output from an industry stimulates other commercial activity. For example, tourism not only generates its own direct sales but also stimulates retail and service trade. Here it seems agriculture generates signicant economic activity in New Zealand. Manufacturing and retail trade seem to be particularly driven by value adding on agriculture production. In New Zealand perhaps a third of retail trade and approaching half of manufacturing is oriented around food production and agricultural products.

My definition of input leverage is where the commercial activity around providing input to an industry stimulates business activity. It is very hard, from the available statistics to work out how much of New Zealand's economy is driven by providing goods and services to agriculture. It is reasonable to assume that infrastructure type services such as electricity, communications and construction support agriculture roughly in proportion to its economic activity. Therefore, agriculture may, prima facie, contribute as much as 30-40% to the New Zealand economy.

Federated Farmers suggest that the actual contribution of agriculture to GDP is 17% (http://www.farmday.org.nz/page12.html), but without sources. This is a credible number as my analysis includes activity that would occur anyway (people need to eat). Coming up with a real number is very hard as there is no way to properly consider dynamic effects. In theory New Zealand could still add value in the economy if it imported the agriculture produce. Japan, for example, imports raw material and exports high technology products. But one has to consider the degree to which having the resource stimulated the value adding industries that we now have. It seems intuitively obvious that if someone has an excellent agricultural resource that they would become very good, and continue to be good, at manufacturing excellent valuable food products.

One must also consider other welfare effects that come from having access to relatively low cost, high quality food with little external dependancy. Having a major industry based on primary agricultural produce may limit the opportunities for financial wealth but, with a partisan strategic hat on, having a surplus of good food is a significant benefit to any country. It seems to me that most countries protect their agriculture because the strategic implications of being able to be cut off from the food supply are huge.

But is agriculture the engine room of New Zealand's economy? What else drives the economy? Well agriculture seems to be the largest grouping of economic activity (and dairying and meat in particular). We seem to do a lot of other things but nothing particularly large. We make machinery, we make chemicals and plastics, we do a lot with wood and paper, we certainly build a few houses. We seem to do a lot of things. On the whole we seem to be a nation of small business people. Even farming is predominantly built on the small business model, although there has been signficant rationalisation in recent years.

That we would be a nation of small business people makes sense to me. New Zealand is a country of relatively well educated people far from international markets with substantially pastoral resources. It makes sense that much of our economic activity (apart from agriculture) would be based on being flexible opportunists.

I'm not sure whether agriculture is the engine room of our economy but one thing does seem clear to me. It is the only industry in which New Zealand has a clear strategic advantage of any scale.

As this post is now seems large enough as it is I will consider Australia in a new post.

The ACC question

There was recently a useful contribution to the ACC debate in the New Zealand Herald.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10604027

In this article Simon Collins sought the opinion of Sir Owen Woodhouse, who chaired the Royal Commission that proposed the Accident Compensation Commission in 1967. This was a useful thing to do. Not because we should necessarily cling to history for history's sake but because it helps us remember why things were done in the first place. In this regard I think the current debate is missing a few important points.

The so-called solutions for the ACC budget blow out include increasing levies (including differential levies for high risk categories) and reducing entitlements. In considering the merit of these solutions we should compare them to the counterfactual, that is to say what might have happened if the ACC hadn't been put in place.

One key point in the debate is that ACC was not put in place because of insurance or funding efficiency. It was put in place to reduce litigation. This is a point made by Sir Owen. The two models at the heart of the debate were either:

1. A fully socialised accident compensation mechanism with no rights to sue, or
2. Fully privatised compensation decided through the civil courts.

Hybrid options could also be chosen and one could argue that the opening of ACC to competition or the third party provider scheme were hybrid options in that they partially privatised some of the compensation scheme.

The main reason for choosing the socialised model for ACC was that it was assessed that the reduction in litigation costs would make the ACC scheme the least cost overall. The ACC scheme would also have significant implications for insurance eliminating the need for workers compensation insurance and aspects of medical and public liability insurance.

In all other respects, that is to say, that people would be entitled to full compensation for accidental injury caused by others was held to be roughly equivalent between the two options. This is a very important point when considering the proposal to reduce entitlements (in particular). Reducing entitlements is reducing the rights of people compared to both original major models. To simply reduce ACC entitlements would constitute an reduction of New Zealander's rights. The correct policy option that leaves rights broadly intact is to reintroduce, with the reduction of ACC entitlements, a limited right to sue. If the original Royal Commission was correct (and remains correct) then this would reduce ACC's costs but increase costs to New Zealand overall.

When it comes to the issue of increasing levies then I think the real problem becomes more relevant. In the Herald article Sir Owen makes comment, "Sir Owen said he saw the scheme as part of the social welfare system, not as an "insurance" scheme in which all future costs of this year's accidents needed to be funded immediately." In this I think that Sir Owen misrepresents his own reforms. At the heart of the debate there was no issue of people not being compensated for accidental injury but whether the mechanism would be public or private. The public mechanism was chosen mainly to reduce the total cost of litigation but the ACC scheme also constitutes mandatory socialised insurance. The equivalent counterfactual would be mandatory private insurance. In this regard I think the limited privatised model is superior to Sir Owen's original scheme. ACC, as an insurer, is expensive. It is after all one of our most monolithic bureaucracies. And here in, in my view, is the real problem with ACC.

Thirty years ago a friend of mine made an excalamation in a movie theatre. My friend was in the middle of a personal experience with ACC. For some reason ACC had decided they needed to advertise and had the catchline in television and movie adverts something like getting people back to work is our first priority. On this occasion the advert drew the response, and keeping people tied up in paper work forever is their second. In thirty years they have not improved and this is, I believe, directly affecting their costs and the health of New Zealanders.

It is current conventional thinking, and obvious common sense, that the best results from injury occur when diagnosis, treatment and rehabilitation are done as quickly as possible. The ACC fall well short of the as quickly as possible criteria. They don't even meet the as quickly as reasonable criteria. Not responding quickly to the medical needs of injured people has real and significant consequences. Untreated conditions of even a relatively minor severity can become long-term ailments. In addition, when left without treatment or rehabilitation and in relative isolation, injured people can develop other long-term ailments (such as chronic pain syndrome).

ACC's chronic bureaucracy leaves health professionals with a dilemma. If they treat patients quickly and enthusiastically attempt a comprehensive diagnosis then they risk not being paid. However, if they wait, then the patient is at risk of developing a long-term condition with possible complicating syndromes. As Tim Harford and Steve Leavitt would point out health professionals (in aggregate) rationally respond to their incentives.

I strongly suspect that ACC, and New Zealand overall, is the victim of its own bureaucratic inefficiency. Not just in the huge overhead costs that are incurred but, far more importantly, in the long-term obligations to people whose enduring suffering was entirely avoidable.

Sir Owen and his commission made a well reasoned policy judgement in 1967. On balance, though, I can't help but wonder if mandatory insurance and a few more rich lawyers may actually have been the lower cost.

Back to today. A response to the ACC problem that only looks at increasing levies and reducing entitlements is a cop out. As is policy based on soundbites and populist opinion. This is a major societal issue. What is needed is quick and proper diagnosis, treatment and rehabilitation. But, for goodness sake, don't leave this to the ACC.

Increase the numerator or decrease the denominator?

Obviously I am not going to win the headline title of the year awards with my obscure effort above. I remain concerned with New Zealand's standings and efforts with regards to its productivity. I am not alone in these concerns. The current National government has the explicit objective of increasing our wealth (and productivity) to being equal again with Australia by 2025. While not always a good measure of prosperity the key statistic used to compare ourselves to the Australians (and others) is GDP per capita. GDP per capita is a measure of production and consumption arrived at by comparing payments to producers (either for production input or direct consumption) to population. New Zealand's GDP per capita isn't particularly bad but neither is it particularly good. And, it is decreasing quite quickly if normalised against other developed economies.

As with any ratio GDP per capita can be influenced in two ways. First by increasing the numerator, increasing GDP. Or, second by reducing the denominator, decreasing population. All public policy efforts are focused on increasing the numerator GDP. My concern is that this is a vain endeavour.

Reviewing the excellent CIA World Factbook (available at www.cia.gov) begins to help illuminate the relative strength of all the world's economies. The Factbook has many useful statistics but also very well written, concise and well considered commentaries.

It soon becomes obvious by comparing various attributes and characteristics what indicates likely success for a country in terms of either high per capita GDP or high growth. High growth is the easiest by far. To be a high growth economy you need to be a developing economy. The global recession is obviously a factor currently but in some ways this reinforces the message. Many developing economies are surging ahead despite the recession. Whereas we have to drop to number 122 (Liechtenstein) on the list to find a western developed economy on the growth table (depending on your definition of developed). Historically this makes sense. All historical economic growth spurts have been driven by the development of economic resources (as opposed to the ongoing consumption of a developed resource).

When it comes to the GDP per capita standings then being a developing economy isn't so handy, which also makes sense because the cumulutive benefit of developing resources must be at a maximum at the point where they are fully developed. Nevertheless, the GDP per capita standings make for interesting observation and the following generalisations can be made.

Being small and opportunist makes for high wealth. Liechtenstein, Bermuda, Jersey, Guernsey and the Cayman Islands are all good examples. Each one has substantial protection and patronage from a powerful neighbour and each one benefits from leveraging the wealth of its powerful neighbours by undercutting them on tax, corporate accountability and/or financial regulation.

Being awash with resources is a big factor, particularly if the resource is oil or natural gas. This factor gets relatively small countries like Qatar, Norway, Kuwait and Brunei near the top and is a major factor for the large lucky colonials Canada and Austalia. Canada also benefits from being both politically and geographically close to a rich and very hungry neighbour.

The final 'natural' factor is found in those economies who have significant economic power from their development history. The United States of America and most Western European nations fall into this category.

Well none of these natural factors work to New Zealand's advantage. New Zealand is too large to be a small opportunist, and this wouldn't sit well with us culturally in any event. We are not awash with resources compared to our population, and we did not have the size to build a huge residual economic heritage through our high development years. If New Zealand is going to seriously increase GDP then it will need one of the new methods.

The knowledge economy is touted as being our strategic saviour but I have my doubts here. The top knowledge economies are the US, Japan, Germany, the UK and France and there is no doubt their economies are held up (to some extent) by their high technology industries. I don't have room to explore the argument in this post but the prerequisites for high technology excellence on any scale is large populations of highly educated people in high density population centres with lots of stake capital. I don't see how New Zealand can compete on the world stage here. We do not have the large populations to allow for the highly educated large centres of urban density and we do not have good access to capital. Even if we did have these attributes in a relative sense we would still be well below the absolute levels needed to be globally competitive. In any event the high technology industries are suffering badly in the global recession and this is a factor affecting even those knowledge economies that were not caught up in the financial credit crunch, such as Japan and Singapore both of which are now trying to diversify. A knowledge economy may not even be the right goal for New Zealand.

The final way then seems to be the way of Iceland and Ireland. At least New Zealand is broadly consistent with the naming format. The two I-lands embraced globalisation with open arms. Nevertheless, in Iceland's case in particular, this was to some extent done by the development of resources (eg Iceland's significant geothermal and hydropower resources). Both countries made it very easy, even very attractive for the big global industries to set up shop. They gave particular ease of access to high technology industries and high technology people and they were the darlings of economists for their reformations. New Zealand has had its own experiences with this globalisation approach, which was a feature of Think Big, but this was a fairly clumsy effort. New Zealanders in general tend to be anti-big business and one does wonder how much sovereignty Iceland and Ireland have foregone in their modernisations. However, most New Zealanders tend to believe that such global businesses are inherently inequitable whereas, interestingly, Ireland is significantly better than New Zealand in the GINI index (the GINI index is a measure of how well income is distributed across the population) and Iceland is a great deal better.

Both Iceland and Ireland have been hit hard by the global recession. Iceland's banking system completely crashed. This is a stern warning against their strategies although, even with significant wealth contraction, their GDP per capita still well exceeds New Zealand's. It is too early to call the I-land experiments a success but it is also too early to call them a failure. I sincerely doubt that New Zealand has the appetite to pursue these strategies in any event.

Our politicians and policy makers are currently clutching at straws when it comes to increasing New Zealand's productivity. I do not advocate that they give up but, as a credible alternative, perhaps we should consider what level of population New Zealand's natural resources can comfortably support. Then, maybe, our immigration policies should reflect this goal rather than continually fuelling consumption driven growth for growth's sake.

Debt may not be such a big deal

There has been a great deal of news and discussion around New Zealand's debt. This is also a significant feature of my September 2009 "Where is the wealth going?" series. Now, however, I am not so sure that debt is the problem that I first thought.

In an attempt to understand the place of debt on the relative performance of economies I went searching for more data. One of the best sources for data, which I found somewhat surprising, is the CIA's information site. Interestingly the CIA has more useful information tabulated in one place than can be easily found on our own government website.

I have used the CIA information to try to normalise debt for population. A table of the results is displayed below:

The source is the CIA world factbook and ED (External Debt) is "This entry gives the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services. These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms." ie US dollars. The population numbers are taken from the same site as of today.

The timing of the data isn't quite right but this would only introduce at most a year's growth worth of error, about 1-2%.

What is clear is that debt on a per capita basis doesn't seem to be a factor in prosperity. Although the above table includes a number of countries with poor current account balances (including New Zealand) it also features countries who have very strong economies, such as France and Germany.

It still seems to me that the problem with New Zealand's economic performance is likely to be a fundamental mismatch between consumption and production; and debt seems to be a factor in our consumption. Nevertheless, debt may not be the primary cause of concern.

What is strange is that it is quite difficult to find statistics that directly compare productivity and consumption. Most measures of economic prosperity, such as GDP, treat them as equivalent. Admittedly consumption drives production; and this must be true globally over time. A single nation can develop consumption without production, though, and this combination is not good.

Where is the Wealth?

New Zealand’s slide down the OECD rankings in terms of per capita GDP is relatively well known. Also well known is a variety of anecdotal reasons why this is happening, and even more on what should be done. Surprisingly little robust analysis seems to be available on the matter. Where statistics are quoted they often seem to be misused to reflect the personal predilections of the commentator rather than necessarily being compelling statistics in isolation.
Figure 1

Source: International Monetary Fund World Economic Outlook Database (IMF)
Figure 1 above shows the decline in New Zealand’s relative performance since 1980. The group of countries in Figure 1 is the IMF Advanced Economies grouping rather than the OECD but the point is still obvious. New Zealand was close to average in 1980 and was ranked just below the middle of the group but has steadily dropped to well below average and now only beats four advanced economies (the Czech Republic, Malta, Portugal and the Slovak Republic).
In my desire to try to find the ‘truth’ about New Zealand’s decline from the facts I discovered what is intuitively obvious, that the issue is complicated. Ultimately the truth of such a matter will only be found by examining the matter in full daylight and with the opportunity of many minds to contribute. The contribution of many minds doesn’t necessarily discover the truth, this occurs every day in most newspaper’s websites and other blogs, and seems to mostly yield a complex picture of emotions rather than much in the way of evidentiary fact. Therefore my desire is to try to distil the emotion away from the debate and establish instead intellectual principles underscored by evidence.
A wiki first seemed like the best approach for such an objective, given a wiki’s principle design is around citation and sources, but a wiki is fundamentally editorial and not a debate per se. So, a blog it is, but hopefully one that is guided to rational debate and evidence.

Where to start?
I had first hoped to start with a stunning piece of analysis that sets the ball rolling immediately but the complexity of the matter precludes this, and the data isn’t always obvious or available, so instead I am starting with what I have and am looking to continually refine the view; hopefully with the help of like minded people with something to contribute. Anyway I will outline my first theory and then we shall see how well I can defend it empirically.
I start with the Fundamentals to give a foundation for the ‘building blocks’. I also start with a fundamental assumption that New Zealand is a developed economy. It may be going relatively backwards but it is developed. In the Fundamentals I reason that, ultimately in the long run, no country will be able to achieve a level of wealth greater than its available physical resources, which once fully developed only grows as a function of technology. I propose that countries can ‘punch above their weight’ but only for a limited time. Finally I point out that average individual wealth is a function of not only the numerator (the number being divided - GDP) but also the denominator (the number used to divide – population). A larger GDP divided by a larger population results in a smaller increase in GDP per capita.
I then ask the question “Are we more productive?” I raise this question because my hypothesis is that growth in GDP in New Zealand is driven entirely by population driven consumption and, being fundamentally unproductive, is financed by debt. I therefore present some evidence that New Zealand’s GDP growth is funded (net) by external capital (significant direct investment but mostly debt); and once economic growth is normalised for this foreign capital then the portion of the productive economy hasn’t been growing for a very long time. This assumption follows from the principle that productive growth (in the long run) produces economic surpluses that are at least self-sustaining (ie only require short term debt at most).
The third part of my hypothesis considers the Role of Population. Under the Fundamentals I raise the point that increasing population puts downward pressure on average individual wealth unless wealth is growing relatively faster. However, a growing population doesn’t necessarily explain why productivity isn’t growing well. This section also explores the components of population growth and identifies that New Zealand is able to choose the level of population growth that it experiences.
The fourth section looks at the way in which countries can achieve relative advantage due to the time it takes for wealth and technology to spread across the globe. However, New Zealand doesn’t seem to have benefited from this to any great degree and raises the point “Our timing also seems to be wrong”. This section doesn’t come to any firm conclusions for why this might be the case except to consider whether this was a function of an absolutely small economy when we were relatively rich. This section also considers that we enthusiastically adopt consumer technology but don’t seem to adopt productive technology.
The fifth section summarises my theoretical position on “Where is New Zealand?”
The final section (What can we do?) starts to suggest a way forward on this complex subject. It proposes that the problem is very complex and that there are no easy fixes. The section agrees with those that claim that our current consumption is unsustainable and must, sooner or later, change. The only practical suggestion put forward is that we need more honest and robust debate on the issue and that, ultimately, there will need to be some tough decisions made.

The Fundamentals

Let’s start with fundamentals and build the picture. Wealth, in the truest sense of the word, is generated when resources are developed that benefit human individuals, communities and nations. Such benefits graduate from the basics of survival (food, water, shelter, heat, health, etc) and go through the less necessary but important (communication, travel, comfort, education, etc) to the higher order wealth benefits such as (leisure, entertainment, art, culture, festival, the monumental, etc). Benefit is generated, at a cost, by the exploitation of resources which is to say by using labour to develop resources. If the benefits are greater than the effort to develop them then wealth is increased.
In civilised societies (ie for the last 5,000 years) we have also enjoyed the division of labour. Greater productivity results from specialising in what we are good at and trading our surplus production for items that we are not so good at producing. In early civilisations the trade was barter but since then the system has developed money and financial systems of tradable equivalents that represent goods and services. Therefore, a modern individual, community or nation maximises its wealth by developing resources using specialised labour (focusing on what it is good at) and using capital to procure the resources it doesn’t have or the skills it does not possess where the money is generated by selling raw resources or production surpluses. In addition, and again since ancient times, financial systems have been developed that allows a portion of future earnings to be traded away (at a cost) in return for capital now (debt and/or investment) so that resources can be developed that otherwise could not. Generally the system works quite well, but not always.
Finally technology plays a role as well as technology reduces the labour (ie cost) of developing resources and/or increases the benefit of those resources (eg colour TV over black and white) and also increases wealth.
Therefore, over time (that is to say ignoring timing differences in trading surpluses and the dispersion of technology – which we can only ignore theoretically) the wealth of a nation is fundamentally down to the amount of resources it has property rights over and the availability of labour to develop them. For developed countries like New Zealand labour is not constrained. Populations have stabilised and immigration provides a ready source of labour. Therefore, for a developed country (still ignoring for the moment short term effects) total wealth is constrained by the resources that the country has property rights over. Many people debate this and suggest that countries can ‘punch above their weight’. This is obviously true when timing differences are taken into account but the most fundamental principles of statistics suggest that, in the long run, no normally distributed population can have a relative advantage in terms of intelligence, entrepreneurship or work ethic compared to any other normally distributed population. Although larger populations will have absolutely greater amounts of every human attribute. Timing effects can create concentrations of wealth (that can encourage non-normal population distributions) but such advantages should ‘trade away’ over time.
Average individual wealth is total wealth divided by population. Therefore, a developed country with population growth that exceeds the ability of technology to allow for greater resource development over time leads to lower rates of growth of average individual wealth. Population growth in developed countries is not necessarily a good thing. Population growth can lead to increases in the total wealth as more people can consume more but consumption can be fuelled by debt, which seems to have been the case in New Zealand for many years. Debt, by definition, means spending now and paying back later. Therefore, debt fuelled consumption is not sustainable and does not mean that underlying wealth has actually increased. If the population has increased, without increasing true wealth (ie the economic development of resources), then the drain on future wealth will be even worse as the true underlying wealth is stretched even further, back to debt-holders and across a bigger base.

Are we more productive?

The statistics show that New Zealand’s GDP has been growing but an economy can grow in many ways. If the growth of an economy is sustainable then it should, allowing for short term fluctuations, generate sufficient economic surpluses to substantially self fund further growth. In theory we should see that, for a sustainable economy, if we subtract the net international investment position (the net amount of capital that is brought into a country to fund growth) from GDP then we should still see growth. The extent that foreign capital is required to fund growth indicates the extent to which internal growth is not productive (ie generating economic surpluses).
Figure 2

Original data source: Statistics New Zealand (www.statistics.govt.nz)
Preparing Figure 2 also highlighted a significant problem with assessing problems in New Zealand. The data can be very hard to find and even harder to compare. As can be seen some of the data above was not readily available and some was estimated. The portion of the “Net international investment position” that was estimated was done so by keeping the likely returns of the estimated curve broadly consistent with the actual data of the “Net international investment income” series and the general shape of the curve consistent with the actual data series “Net international investment income”. There is little doubt that this introduces quite a lot of error into the derived series “Difference (GDP less NIIP)”. However, the curve is credible and cannot be sufficiently in error to prevent reasonable conclusions, which are also adequately demonstrated by the actual data from 2003.
Net foreign investment in New Zealand has been growing as fast as GDP, while the difference between them has been fairly constant. This suggests that all GDP growth since about 1983 has been funded by the importation of capital, mostly through debt. The difference, the suggested GDP contribution not funded by importing capital, ie generated internally, has not been growing. Our GDP appears to be coming from debt fuelled consumption. The cost of this debt the “Net international investment income” is growing steadily as well and is already significant compared to the piece of the economy that might be considered sustainable.

The role of population

If the assumptions and analysis of the prior two sections is correct then population growth in and of itself does not seem to be in New Zealand’s best interests. Growth seems to have come from the importation of foreign capital, which means it is likely to result from consumption spending rather production, which is then divided by an increasing population.
Figure 3

Original data source: Statistics New Zealand (www.statistics.govt.nz)
Figure 3 shows that, while natural population growth has been relatively constant, net migration has varied significantly with many more people migrating in and out of New Zealand than are dying or being born. The bold red line shows total population growth and the bold black line shows the population growth without immigration; immigration being the only component of population growth that is directly controlled by the Government. These lines show that New Zealand can have any population growth it wants from significantly negative to significantly positive. It also shows that New Zealand has chosen significant positive growth with 434,000 extra people over the eleven year period. Of this growth the uncontrolled components are 638,000 births, 306,000 deaths and 761,000 migrants leaving. Over the same period New Zealand has allowed 863,000 migrants to settle in New Zealand. The point here is that New Zealand could have selected the level of population growth that has occurred.
We can make the following provisional observations. It is likely that population has increased consumption. It seems that increased consumption has been sustained by debt only. Increased population has not increased sustainable production, but has thinned out that production across a bigger base. Even the debt driven productivity that has occurred is well below the levels achieved in other advanced economies on a per capita basis.
While New Zealand’s per capita GDP relativity has been dropping steadily for years, for practical purposes things don’t look so bad. New Zealand still comes near the top of the world in the quality of life standings[1] and so the consumer surplus in New Zealand (the amount that benefits exceed costs) still seems to be very high. This is another, more measured, way of saying that New Zealand is a cheap, nice place to live. Interestingly surveys that are more focused on lifestyle don’t tend to rank New Zealand cities so high. This suggests that New Zealand is a nice but not desirable place to live, which could be a significant factor in emigration.
Our problem is that population growth without an underlying increase in true wealth (economic resource development) puts downward pressure on all of New Zealand’s good attributes. The combined effect of higher populations (particularly where highly urbanised as in Auckland and Wellington) and low, and dropping, average individual wealth leads to an increasingly poor society. The colonisation of space without the underlying wealth to fund infrastructure leads to the deterioration of services, pollution and congestion; and starts to convert reducing wealth towards slums and poverty. All of which tends to lend a sensation of negative development, which is also an anecdotal element of New Zealand’s current status.
[1] For example the 2009 Mercer Quality of Living survey ranked Auckland the 4th best city in the world and Wellington 12th on a broad range of criteria which includes education, political stability, recreation, etc.

Our timing seems to be wrong

Our timing also seems to be wrong
So far I have ignored timing differences. It is tempting to think that the developed countries remain developed countries and that developing countries remain developing countries. But, things change. While people generally bemoan the disparity of wealth between nations wealth does migrate. As rich nations expect better standards of living and higher wages then production moves to developing countries where labour is cheaper but productivity is reasonable. As a function of income the health, wealth and education of the developing nation increases and so does the quality of life. As skills, education and expectations increase then so do wages and production moves progressively to the next cab on the rank.
Technology disperses in a similar way. The initial benefits of technology fall to those who are educated and skilled enough to develop them and who can afford to pay. As more people become educated and skilled technology develops over a more dispersed area. More people can afford the technology and so it disperses faster.
Eventually, without any other influences, labour, wealth and technology will equalise across the world and relative wealth will be entirely down to the resources that a nation controls and can protect. This will, however, take many generations yet, plus there are other influences at work (such as protectionist political policies, ‘diplomacy’ and war). In the meantime, a nation can benefit from this timing difference.
Very rich countries such as the USA and the UK have been able to leverage these timing differences very effectively. The huge financial surpluses built by these two nations have allowed them to dominate global financial systems. Most other Western European countries have also had a share of this to some extent. They have had initial advantages in technology too. With the concentration of wealth and education comes concentration of technological development. Gradually this spreads out across the world. Since the Industrial Revolution it has already spread from England to Western Europe to the US and North America to Japan and increasingly South-East Asia. There can be significant advantages to utilising the early adopter opportunity.
Arguably New Zealand had the opportunity to use economic surpluses to leverage a bigger economy but New Zealand never seemed to take advantage of its wealth; neither does Australia for that matter (despite its natural resources). New Zealand was very wealthy in the 1950s. Admittedly this was driven by primary produce (with little value add) but then again the wealth was spread across a fairly small population. Perhaps it was the size of the population and the therefore small absolute volume of wealth in world terms that made it difficult for New Zealand to capitalise on its surpluses, but our economy never diversified or expanded to any significant degree.
Technology has played a greater role with our primary produce now including significant value-add. New Zealanders also tend to be early adopters of technology but this seems to be concentrated around consumer goods. By comparison our take up of automation seems to be poor with most people working harder to achieve performance well below other developed economies.

Where is New Zealand?

New Zealand is a developed[1] country. Real underlying wealth is only increasing through the productivity increases from technology. New Zealand doesn’t have significant natural resources in the world context. New Zealand has moderate economic growth year on year, which seems to be driven primarily through the extra consumption of population growth and seems to be financed substantially by debt. On a per capita basis New Zealand is getting steadily poorer in relative world terms.
New Zealand’s growth is sustained by immigration, which is offsetting high emigration. New Zealand compares well to the rest of the world in educational quality and achievement, but this still doesn’t seem to translate into any concentration of entrepreneurial or technological excellence (in fact New Zealand seems to be below average in this regard). In the interests of brevity I haven’t included any data on this feature of our economy but reference to Chapter 1 of “From Wool to Weta” by Paul Callaghan[2] will demonstrate some of these problems.
New Zealand doesn’t have a strong financial position and actually has a very poor balance of payments, which seems to be driven by debt and the export of dividends to foreign nationals. New Zealand’s balance of imports and exports (goods and services) is not particularly bad and would be quite favourable if consumption were reduced, which would also reduce debt.
Prima facie New Zealand seems to be starting to face the problems that might be expected with a growing population and no real growth in underlying wealth. It seems clear that New Zealand is getting poorer in real terms. We work very hard to achieve relatively little. Even middle class families are under financial burden and our rich seem only moderately rich on the world scene.
More objectively we are struggling to afford even average levels of infrastructure investment for a developed economy.
[1] By developed I mean that the application of labour will not yield any significant extra economic development of resources. On occasion in recent years New Zealand has seemed to be labour constrained but this appears to have been in the context of debt fuelled growth through population and consumption growth.
[2] And/or refer to his Treasury guest lecture at http://www.treasury.govt.nz/publications/media-speeches/guestlectures/callaghan-oct06

What can we do?

Who knows? There are many points of view on this, of course. There are also many who would claim to know why we have a problem and who caused it. The truth is, however, that this has been a problem that has been developing for a very long time. To the extent that Figure 2 can be read accurately it would seem that the economy has been stagnant for 25 years, while Figure 1 would suggest that the rot started in 1987 (although I suspect that a longer data sequence would show a longer trend of deterioration). One could argue that it was the result of Muldoon’s National Government’s ‘Think Big’ strategy. Another argument could say that ‘Think Big’ was working and it was Lange’s Labour Government that did the damage. Another point of view could say that we never recovered from the 1987 stock market crash. Against all these arguments is that these events were many years ago, with many different governments and political philosophies since then. There must be something more fundamentally wrong!
For my part I think the problem is comparatively simple. We don’t have any more economic resources to develop!
Adjusting New Zealand to a level of equilibrium where productivity pays for consumption at relatively good levels of average wealth is not going to be easy. For a start we’re not sure what the problem is and we’re already beholden to a significant amount of foreign call on our capital. One thing is sure, this is a complex problem and the solution will be complex. We can be sure that there will be a solution though. The current situation is unsustainable and will change eventually. The question will become how much pain will we suffer?
For my part I think halting population growth (through reduced immigration) would be a start. We could reduce population by this method as well but we might find that the foreign investment position doesn’t unwind, which would make things worse.
Beyond that I think we need to better understand the problem, which is going to require a far better understanding of the fundamentals than we seem to have; and, to be frank, perhaps a little more honesty in our public debate as well. Ultimately solving the problem is going to require some real political courage. Maybe we really are in trouble.