Our size is our curse

By TIM WATKIN

As New Zealand fought its way out of the Depression in 1936, the Speaker of the House, Bill Barnard, spoke at a public meeting in Palmerston North proposing an idea that "excited public interest throughout New Zealand", the New Zealand Herald reported.

Barnard was concerned. New Zealand's immigration rate was too low and its birth rate had fallen. He announced he was forming the New Zealand Five Million Club, which would campaign for significant population growth.

A population of five million, Barnard argued, would increase economic activity and help to pay off public debt, which had more than trebled since 1911. It would bring with it economic stability and investment in industries beyond agriculture which this country needed to prosper.

"With a population of only 1.5 million [as the 1935 census showed] we will never get far with the development of secondary industry, and an expanding production is necessary if this production is to play the part in our national economy which is considered desirable and necessary," he told an audience of 400 at the Auckland Town Hall in 1937.

It's safe to assume Barnard would be disappointed that New Zealand's population only reached four million this week, three generations later, and, as predictions stand, may never reach his five million mark.

While it didn't win the day, Barnard's argument of prosperity through population growth has been repeated in numerous forms since. Many still argue that New Zealand must grow for its economic sake, that more people will make us all better off.

Population undoubtedly impacts on economic growth. In simple terms, a growing population means a growing labour force and therefore increased production. In the past 10 years, much of New Zealand's economic growth has come from growth in the labour market rather than productivity gains or capital investment. Yet there is considerable debate about just what impact population has and how much it matters.

Treasury economists have argued that we should aim to double our population over the next 20 years. They point to the citizens of Hong Kong and Singapore - which have doubled theirs over the past 35 and 30 years respectively - and the fact they are richer per capita than we are.

The arguments in favour of rapid growth generally conform to the idea that bigger is better. Economies of scale mean that the bigger we are, the more people there are to pay for the basic infrastructure we need no matter what our size.

Alex Sundakov, former director of the New Zealand Institute of Economic Research and a fan of population growth, says Auckland, for example, would work better as a city of two million than of one.

"When you have a greater concentration of people, per capita spending on roads and rail becomes lower and you can get more efficient services into the system."

Sundakov agrees a bigger domestic market would also make life easier for local businesses, allowing small businesses to profit more from local sales and "find their feet before they tried to export and take on the world".

Some say that argument is no longer relevant. Because New Zealand is an export-driven nation in an era of globalisation, there is little distinction between domestic and foreign markets.

"However, that's not entirely true," says Jacques Poot, associate professor of economics and finance at Victoria University, "because around 60 per cent of our GDP is absorbed locally. We have a large number of small businesses who would benefit from a bigger population."

And Sundakov adds, New Zealand exporters face huge costs to get their goods to market. "Domestic market size doesn't matter if you are like Lichtenstein and have a border you can cross 10 times a day. It does matter if your markets are thousands of miles away."

Just as it is easier to make money when you have money, it is easier to grow when you are already big. A small economy also means certain growth limitations, says Poot, suggesting that if New Zealand were bigger it would likely attract more foreign investment.

He met a New Zealand businessman at the airport on his way to Japan. He had developed new, more efficient heating technology that was in demand in Japan, but he couldn't find the finance or manufacturing infrastructure in New Zealand that he needed to grow. He was getting the capital from Japan and was set to open a factory in China.

Another point in favour of pushing population growth, says Ken Jackson, the director of Auckland University's centre for development studies, is that fast growing populations tend to be younger populations, and there are two reasons that is good - younger people are cheaper for a government than older people and they will stay in the workforce longer, paying for social services, including the pensions older people need. They also bring in new skills which a small economy may lack.

The bottom line is that population growth helps grow GDP by increasing the labour force. As the Government is committed to achieving its much-touted goal of sustained 4 per cent growth, increasing the labour force looks to be the only chance it has of doing it, because productivity gains are hard to come by.

Our participation rate - the number of New Zealanders 15 years and over who are either employed or seeking work - is above the OECD average, as is our employment rate and the number of hours we work a week.

To increase labour and productivity, we need more migrants or more babies. Assuming that immigration continues at around 5000 a year as it has for most of the last 40 years, when Statistics New Zealand predicts the workforce will peak in 2019 before starting to decline, that is bad economic news, right?

Not necessarily, because population growth, while increasing production, also has a cost. More people might make more goods to sell and their new ideas might generate wealth, but that means more congestion on the roads, more sewers needed, more pensions to be paid. Jackson describes it as "a double-edged sword".

Economist Brian Easton points out that high population growth with its high demand for schools, hospitals and other public services, also diverts capital away from business. "If you grow the population too fast it can slow down the growth of the economy," he says. "It can cause dis-economies of scale."

What's more, GDP growth in itself isn't so crucial, Easton says. Your GDP per capita is the more important measure. Countries with big populations - from India to Nigeria and Indonesia - have bigger GDPs, but are hardly economic success stories. The country with the highest GDP per capita is Luxembourg, with a population of around 440,000.

He says size matters little on its own. Poot adds, "if we had rapid population growth we would just expand the size of the pie, but not necessarily the size of everyone's piece".

Look at Norway, with 4.5 million people, or Finland, with 5.2 million people, he says. "Without rapid population growth they have some of the highest standards of living in the world".

Easton adds that from a country like Finland comes a company like Nokia, which dominates the world mobile phone market and contributes hugely to the country's GDP.

So is there an optimal size? Perhaps doubling our population to eight million? "That would draw us level with Haiti," Easton says drily. What about 12 million? "Zimbabwe," he replies.

The World Trade Organisation, in a report published in October, found that "economic size does not seem to have a significant effect on GDP per capita growth".

Poot says British research into smaller island states came to much the same conclusion. "They couldn't say that the smaller ones were doing worst, so there is no simple rule. You can find success stories at any size."

The economists agree that the old saying applies - it's not the size, it's what you do with it that counts.

"I'm not worried about quantity, I'm worried about quality," says Jackson. "The education, the skills we have are much more important than whether we have 3.5 million or four million or more. We have to give local kids and immigrants the best opportunity to realise their full potential."

Population Counter
Continuously updated by Statistics New Zealand