Friday, April 18, 2014

Why isn’t New Zealand richer and more productive?

This is a good summary of this important study. It is critical that we try to understand and learn from it – not react either politically or defensively. Denial will not be helpful in the slightest.

 Tyler Cowen on April 18, 2014

Here is a new study from the New Zealand Productivity Commission, and here is the basic puzzle:

Based on its policy settings, the authors estimate that New Zealand’s GDP per capita should be 20% above the OECD average. But it is actually over 20% below average, making New Zealand a clear outlier. The size of the gap indicates an apparent “productivity paradox” that costs more than 40 cents in every dollar of output.

Here is one problem:

The increasing importance of global value chains – where production activities are spread across countries – may have worsened the impact of New Zealand’s geographic isolation on trade in goods.  Because global value chains typically require intensive interaction and just-in-time delivery, they tend to be regionally based. For New Zealand, international transportation costs for goods are about twice as high as in Europe. This reduces access to large markets and the scope for participation in global value chains , where the transfer of advanced technologies now often occurs.

More generally, the “gravity equation” — also known as distance — makes it harder for New Zealand to trade with the rest of the world.

Another big problem has to do with problems of underinvestment in knowledge-based capital:

Most of the rest of New Zealand’s productivity gap…appears to come from an underinvestment in knowledge-based capital. Knowledge-based capital encompasses a wide range of assets including product design, inter-firm networks, R&D and organisational know-how. Knowledge-based capital can be used simultaneously by more and more firms without re-incurring the initial development costs.  This generates increasing returns to scale – an important property that makes ideas and knowledge a key engine of productivity growth.  It can also be difficult to prevent others from using knowledge-based capital, an example of “spillovers” of knowledge and ideas between firms.

While comprehensive data on knowledge-based capital are currently not available, indications are that New Zealand ranks well in software investment and trademarks but very poorly in R&D and, to a lesser extent, patents. Indeed, R&D intensity in New Zealand – particularly business R&D – is among the lowest in the OECD. This not only reduces capacity for frontier innovation but also the ability of firms to absorb new ideas developed elsewhere, constraining technological catch-up.

In part, New Zealand suffers a low return on R&D due to its limited access to large markets, which reduces the likely payoff from the successful commercialisation of new ideas. New Zealand’s economic structure may also play a role. The industries in which New Zealand specialises typically have low R&D intensity. For instance, across countries, R&D in agriculture rarely exceeds 0.5% of value-add.

Here is a good FT summary blog post on the study.

I would have liked more comparison with the time when New Zealand was one of the world’s wealthiest nations per capita, and when, pre-1973, privileged access to British markets for Kiwi lamb and dairy was enough to maintain such high living standards.  And might we be reading a very different piece if the Chinese had a stronger taste for milk?

I recall the Michael Porter report from the 1990s, arguing that New Zealand did not have enough strong economic sectors which could lead to the accretion of cumulative advantages.

Overall, if there is any nation which should be aiming to double or triple its population, it is New Zealand.

Wednesday, April 16, 2014

Farm Management not Urban Hysteria is the answer

Extract from “Smarter farming the answer for waterways” ODT, Wed, 16 Apr 2014
Ciaran Keogh – former CE Southland Regional Council.

To put the issue of further agricultural intensification into perspective, a comparison between the Netherlands and Southland is illuminating. The Netherlands is roughly the same land area as Southland (34,000sq km).

Southland has a population of 100,000 and about 600,000 cows and an annual agricultural production with a value of about $2 billion.
The Netherlands, in contrast, has a population of 16 million and a dairy herd of 1.5 million cows (it used to be 2.5 million but got reduced in the 1980s to contain the environmental damage).

The Netherlands produces $55 billion in annual agricultural and horticultural production. It produces 20 times as much revenue from the same land areas as Southland. It gets seven times the milk production from a little over twice the number of cows.

It does this with very tight environmental regulations, and because of this it farms far more scientifically and responsibly than we do in New Zealand.

It would not be difficult to double New Zealand's dairy production while at the same time reducing the adverse consequences to a 10th of their existing level. There are farms in in New Zealand doing this already, and unsurprisingly many of these are farmed by Dutchmen.

Full article at the Brent Wheeler Group website.

Wednesday, April 9, 2014

What a little thinking shows….

Mark Perry’s and Andrew Biggs’s essay – “The ’77 Cents on the Dollar’ Myth About Women’s Pay” – in today’s Wall Street Journal; today, by the way, is so-called “Equal Pay Day”:

These gender-disparity claims are also economically illogical. If women were paid 77 cents on the dollar, a profit-oriented firm could dramatically cut labor costs by replacing male employees with females. Progressives assume that businesses nickel-and-dime suppliers, customers, consultants, anyone with whom they come into contact—yet ignore a great opportunity to reduce wages costs by 23%. They don’t ignore the opportunity because it doesn’t exist. Women are not in fact paid 77 cents on the dollar for doing the same work as men.

Far too many policy proposals are premised on the absurd notion that privately available profit opportunities exist but remain unnoticed by all but professors, politicians, pundits, and preachers.

Café Hayek

Notice it is still possible for women to be paid, on average, less than men… but not for the same work under identical conditions,

Sunday, April 6, 2014

Get out of my pantry you interfering agenda toting neo wowser

In this thorough summary David Farrar demonstrates more than adequately why politicians of all hues but especially the local body variant, have no place in the bedrooms, pantries or bank balances of the nation. Unfortunately it also benchmarks the size of the “slow learner” brigade in Aotearoa NZ.

Monday, March 31, 2014

The F word

There is little doubt that one of the most troublesome words in the entire English language is the word “fair” and its inverse “unfair”. Unfortunately it is also one of the most popular words being slipped out at regular intervals by those who feel they are hard done by both generally and on numerous specific occasions.

Even the Economist has written on the topic. Rent seekers who dislike removal of their protection from competition intone with it regularly. Invariably it is a thin and poor disguise for simple envy or lack of cognitive capacity.

Here is a true life example found recently in an actual letter of complaint to a travel company:

"It  took us nine hours to fly home from Jamaica to England . It took the  Americans only three hours to get home. This seems unfair."

When finding oneself tempted to use the F word, stop re-think motives, try for the word which describes accurately and truthfully what you want to say and then ask yourself if you still wish to say it. You may be surprised.

Sunday, March 30, 2014

People with learning difficulties–still failing trade 101

It is said that the hardest lesson to understand and learn in all of economics is why free trade benefits all of society. We have been consistently failing to learn this thoroughly and in numbers for many centuries – and bearing the cost accordingly.

The most obvious example of this failure in modern times can be seen in the Corn Laws debate prior to the reform of that legislation in 1846.

Its current manifestation may be seen in protests about the idea of a Pan Pacific Free Trade Agreement. Just how tough it is to learn and understand is evidenced by the very considerable number of extremely intelligent people from all walks of life – all of whom have benefited from free trade – who fail miserably to understand it.

The economists' job it seems, is never done.

Friday, March 21, 2014

Do try a little scientific reasoning now and again….

Don Boudreaux explains exactly why some logical thought would be a  good idea…

This famous Sidney Harris cartoon (below) captures what is wrong – what is deeply unscientific – about far-too-much modern economics.  The miracle assumed by the unscientific ‘scientific’ modern economist is that government will act (1) apolitically, (2) without any of the human imperfections, myopia, and psychological quirks that (are assumed to) give rise to the market imperfections that allegedly justify government intervention, and (3) with more information and wisdom than is discovered and used in markets.

All the fabulous ballistics(a term that I understand was used by


the late Jack Hirshleifer) that lead up to the miracle and that describe matters following the miracle might well be the flawless products of unquestionable brilliance.  But it is simply, deeply, and inexcusably unscientific for economists (or any one, for that matter) to simply assume that government will perform as the social-engineering theory requires it to perform. 

Put differently, despite more than a half-century of scholarship in public-choice economics, too many economists mysteriously regard warnings about government failing to act ‘perfectly’ as being unworthy or, at least, only of secondary or tertiary significance.  It’s unscientific – deeply so.