Less political bickering, more New Zealand Inc actioN

Climate change, complex geopolitics, rapid technology change, ageing populations and expensive housing inequities will all have disruptive and divisive effects on New Zealand’s economy and society over the next 20 years.

This Green Paper, prepared for BusinessNZ, highlights that New Zealand Inc must make some critical decisions about how to respond to global megatrends. We cannot sit idly by, gazing at our own navels and expect everything to work out OK.

Productivity and living standards will suffer, and New Zealand will fall further behind our peers. It will become even harder to keep New Zealand’s best and brightest on our shores.

This isn’t the future we want, but it might be the future we get unless governments of all political persuasions and business can start working better together.

In an increasingly uncertain world, businesses will want politicians to commit to policies that allow ready access to labour and incentivise capital investment to boost productivity and prepare for a decarbonising world. They will be seeking bipartisan regulatory stability so they can invest and plan for the long term with greater confidence.

A question then is what can businesses, small and large, do now to try to encourage such policy stability? And what might businesses be prepared to offer in exchange for it?

Our paper makes some suggestions, with the aim of prompting a discussion about how we want New Zealand to look in 2050, and what we are collectively prepared to sacrifice to get there.   

The economic contribution of ethnic communities in Auckland

Around three quarters of New Zealand’s ethnic communities (Asian, Continental European, Middle Eastern, Latin American and African) live in Auckland.

This report for the New Zealand Government Auckland Policy Office describes the extent that Auckland’s economy benefits from its ethnic diversity, and finds there are opportunities for improvement.

In 2018 ethnic communities made up 37% of the Auckland population and 30% of the Auckland economy. The difference reflects younger populations and thus experience, but also lower incomes (even after controlling for occupations, industry and qualifications) and lower rates of entrepreneurship and business ownership.

The ethnic communities tend to be well qualified (possibly reflecting immigration policy), but have lower than average employment rates and are more likely to be in part time work, and have lower than average incomes — though there are clear differences between these ethnic communities. Unobserved factors in qualifications and mismatches between skills and experience and jobs will explain some of these differences, but biases in hiring may also be a barrier.

While migrants are often credited with being more entrepreneurial, measures of entrepreneurship among ethnic communities are lower than that of the Auckland population overall. This too may reflect immigration policy (favouring migrants with jobs) though access to capital may also be a barrier.

Cost and benefits of the medium density residential standard

Land use regulation is impeding the ability of housing supply to respond to high prices.

Sense Partners worked in partnership with PwC to prepare a cost benefit analysis of a Government proposal to amend the Resource Management Act to implement a new default Medium Density Residential Standard in tier one urban areas. This would allow the building of up to three homes, each up to three storeys, per site without a resource consent.

The analysis indicated material net economic benefits from the resulting increased supply in residential housing, in Auckland, Hamilton, Tauranga, Wellington, and Christchurch. It also quantified the value of avoided transfers of wealth to property owners that would otherwise occur due to continued rapid growth in house prices.

Tools to respond to the infrastructure deficit

Te Waihanga - the Infrastructure Commission - released its draft New Zealand Infrastructure Strategy in October 2021.

Sense Partners contributed through two reports. 

The first report quantifies the infrastructure deficit and the tools to respond to it. 

The current deficit is accumulated underinvestment over several decades and is substantial at $104b. The deficit will double over the next 30 years if we keep investing at the current rate, partly because nearly 60% of investment is in renewals, not new capacity. 

We can’t fix it by just investing more. We need other tools such as demand management (pricing), better spatial planning, and efficiency improvements in project finance and delivery.  

The second report compares functional local areas with more fractured Territorial Authority boundaries. Resulting fractured institutional complexity make it harder to coordinate land use regulation and infrastructure investment, taking a toll on the economy and environment. For example, job growth in cities is limited by decisions on infrastructure (water, electricity, transport, amenities) in surrounding councils.  

Decision-making can improve through amalgamations or new decision to unlock economic, social, and environmental benefits. 

Wanted! New FTA partners

New Zealand needs to be actively thinking now about how best to approach its next set of Free Trade Agreements (FTAs).

NZ has been successful in securing Free Trade Agreements with key trading partners over the past few decades. But looking beyond the current set of FTA negotiations with the UK, EU, India and the Gulf Cooperation Council, it's much less obvious what NZ's approach should be.

Sense Partners was asked by the New Zealand International Business Forum to provide recommendations on NZ's future FTA targets. We developed an FTA Partner Suitability Index which ranked countries based on 29 attributes of an 'ideal' FTA partner, and shortlisted 22 countries as potential targets.

None turned out to be 'ideal' at all. Some were large markets offering potential, but they were often poor and less likely to want to open up the agricultural sector to competition. Others were rich and fast-growing, but very small.

Once we get beyond the current negotiating agenda, and should the US be persuaded to re-join CPTPP, then we might struggle to justify investing considerable political and negotiating capital in expanding our FTA network. Diminishing marginal returns will set in.

One alternative approach may be to consider industry-centric agreements or a greater focus on trade facilitation to reduce trade costs. Regardless, New Zealand needs to be actively thinking now about a strategy for identifying its next portfolio of FTA partners, or contemplating how best to engage with them outside of FTAs.

COVID-19 and the use of non-tariff measures by APEC economies

We examined the use of non-tariff measures (NTMs) by APEC economies on essential goods like food and medical equipment during the COVID-19 pandemic.

Our key findings in this report commissioned by the Ministry of Foreign Affairs and Trade were:

• APEC economies introduced 86 NTMs in 2020, mainly on food and Personal Protective Equipment (PPE).

• Export bans and restrictions - many on facemasks - were most common.

• However, over 1/3 of these NTMs were trade-facilitating. There were also 29 instances of economies introducing tariff reductions on essential goods, and no tariff increases.

• The implementation of NTMs moved at a broadly similar pace to changes in APEC economies’ broader health measures and economic support policies. This timing suggests NTMs on essential goods were part of APEC governments’ suite of pandemic health responses, rather than a strategic response for political economy or protectionist purposes.

• 40% of these NTMs have since been removed, suggesting many APEC economies used NTMs temporarily to buy time to organise their supply chains during the pandemic.

• Seven case studies show NTMs can be designed, implemented and communicated to stakeholders in ways that promote a joined-up, flexible and open approach to trade policy.

• Through careful design, NTMs can achieve their legitimate public policy objectives while avoiding unnecessary costs, reducing unintended distributional consequences and only being kept in place for as long as necessary.

The report has been endorsed by APEC's Committee on Trade and Investment, and will feed into trade-related initiatives in New Zealand's APEC host year.

Climate action in Aotearoa - comment on the modelling of economic costs

Our submission to the Climate Change Commission asks for significantly better reporting of assumptions, model set-up and results from the Commission’s Computable General Equilibrium (CGE) modelling of the costs of getting to net zero emissions by 2050.

There has been much commentary that the model hasn't yet been released by the Commission to date because it is somehow flawed or has been used in an odd way. We think this line of argumentation is misplaced.

From what we can tell, the CGE model has worked exactly as we would expect, given the assumptions the modeller was asked to use. Instead, our attention should be on the inputs to the modelling and the way the model is set up, rather than worrying about the provenance of the model itself.

This is where the Commission's reporting to date has not been up to scratch. We have little idea of how the model is set up (the model's closure settings). Key modelling results like welfare and real wages have not yet been reported. And there has been insufficient sensitivity analysis around central assumptions like electric vehicle uptake or the impacts on New Zealand of international efforts to combat climate change.

The Commission's recommendations are far-reaching and will shape the way we live and do business over the next few decades. Therefore it is essential the economic logic and modelling sitting behind their recommendations are robust and transparent, and able to be carefully scrutinised by experts.

We hope the issues we raise in our submission can be addressed in the Commission's final report. Doing so would enhance the Commission's credibility and improve the quality of the public discussion on the vital matter of pathways for moving to a low emissions future.

Dynamic CGE modelling of climate policy is a key research strength of Sense Partners, and we have developed our own sophisticated model - MDG6-NZ - for this purpose. We have recently used MDG6-NZ in projects for The Treasury, MBIE, MoT, and various private sector clients. Contact John Ballingall for more information.

Economic impacts of changes in Covid-19 border settings and resurgence scenarios

What would be the economic impact of further Covid-related lockdowns in NZ? How does this compare to the costs of keeping the borders shut? We were engaged by the Treasury to use our advanced dynamic Computable General Equilibrium model to answer these questions, both at the economywide level and for 106 industries, for each year out to 2026. The report highlights the significant industry and intertemporal nuances that can be explored using dynamic CGE models.

We found, unsurprisingly, that lockdowns have short, sharp economic costs that hurt almost all industries in the short-term. But there are longer-term impacts of lockdowns too: all industries invest less as profits fall, constraining future growth in the capital stock and reducing NZ's productive capacity. This suggests policies to rapidly stimulate business investment would be beneficial during future lockdowns.

Restricted border settings, in contrast, have deeper and longer-lasting impacts and are felt disproportionately by tourism-related industries and tertiary education, as well as the industries supplying them. When borders remain restricted, the NZ economy faces demand-side shocks through lower tourism and export education revenue plus supply-side shocks associated with slower labour force growth and a declining capital stock. By 2024, the accumulated real GDP impact is $4.0 billion to $5.9 billion below baseline.

Continued tight border settings could see 36,000 to 59,000 fewer full time equivalent jobs created by March 2024, relative to the baseline. The overall picture is an environment of ongoing lower economic growth and government revenue pressures, with the most severe impacts felt by a handful of industries which may warrant additional, targeted government support.

Firm Dynamics and Productivity Growth

We investigated the state of knowledge about firm dynamics in New Zealand for the Productivity Commission.

Research in New Zealand on the role of firm dynamics (starting, operating, and exiting) has been, at least in recent years, predominantly descriptive. Such descriptive analyses provide only mixed evidence on important causal questions such as whether new firms contribute positively to productivity growth.

In this research note we recommend that research shifts from mostly descriptive analysis to models of how firms operate in practice, to provide greater policy-relevant insight into:

• why firms grow

• how firm performance affects aggregate productivity growth

• what role policy can play in improving productivity growth.

We also provide an updated decomposition of the contribution of firm dynamics to productivity growth, using improved firm-level productivity data and improved decomposition methods proposed by Diewert and Fox (2010).

Business UNCERTAINTY during COVID-19

Business uncertainty in New Zealand has never been higher than during the lockdown periods associated with COVID-19. This is the finding from our new text-based index of New Zealand Economic Uncertainty (NEU). The index analyses mentions of phrases related to business uncertainty in New Zealand media back to 1995.

Uncertainty has material impacts. Firms’ investments in assets and staff are not easy to reverse. Firms prefer to wait and watch rather than invest in uncertain times. 

Using our index we estimate that business uncertainty will reduce private investment by $2.5 billion by the end of 2021, reducing economic growth by 0.5 percent. Jobs could fall by 30,000.

The timeliness and high frequency of the uncertainty index makes it a useful new tool for monitoring economic uncertainty to better understand its economic impact.

How many eggs in how many baskets?

This report for the New Zealand China Council contributes facts and figures to the ongoing debate about whether NZ is too economically reliant on China. China is certainly very important to NZ's exporters, accounting for over 60% of goods exports growth in the past decade. 

We find that for some export and import products China accounts for a very large share of NZ's global trade. Concentration risks are real: should export demand decline or supply chain disruptions occur for these products, some firms will be exposed.

But it's not at all obvious what "should be done" about these concentration risks. What are the economic and political risks associated with exporting to other markets? Are there other large, fast-growing markets out there that really want what NZ produces? Why aren’t we selling to them already? 

The changing nature of work- Presentation

We regularly present to boards, management and conferences on the implications of macro trends for firms, sectors, and policy makers.

In 2018 we presented to the Career Development Association of New Zealand on how the world and jobs are changing, why this matters, and what to do. in this presentation we link global trends to New Zealand regions and conditions to stimulate strategy- and policy- focused discussion. The changing nature of work- Presentation

Impact of global trade distortions on NZ log and wood product exports

MFAT commissioned Sense Partners to investigate distortions in the global log and wood products markets. Using a structural gravity model of global trade, we first developed a benchmark for frictionless trade. We then constructed a measure of relative trade costs, comprising economic geography costs and policy costs, and estimated how these costs affect trade flows relative to the frictionless benchmark. This approach is replicable for other New Zealand industries and products.

Our results, estimated across 104 countries, 19 years and 615,846 observations, show that global markets for logs and wood products are highly distorted. Non-tariff measures - such as Russia's export tax - play a large role in distorting global trade. At least 39 countries have log export bans of one kind or another. These measures have pushed up global trade costs for logs and wood products. New Zealand's trade costs are at lower levels and have risen less rapidly, indicating policy changes and shifting patterns of global demand appear to have been favourable to New Zealand log and wood product exporters, relative to our global competitors.