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Oz & NZ

July 28th, 2013

For a variety of reasons, I’ve been looking at the relative economic performance of Australia and New Zealand over the postwar period. For most of the 20th century, income per person in New Zealand grew in parallel with Australia. According to the Penn World Tables, income per person in New Zealand was within 10 per cent of the Australian level for most of the period from 1950 to 1970. Since the 1970s, NZ has declined greatly relative to Australia. On the latest Penn World Table figures, income per person is about 70 per cent of the Australian level. Over most of this period, NZ has been governed by radical advocates of the free market[1]. As part of my research, I’m collecting some of their claims about NZ economic performance, relative to Australia and the OECD. I’ve listed some over the fold (links a bit scrappy, as some predate the rise of the interwebs). Further contributions welcome, as would any interesting examples of more accurate assessments (I have some already).

After decades of policy errors and investment blunders, New Zealand appears to have finally diagnosed its predicament appropriately and is on a trajectory to maintain its economy as a consistent high performer among the OECD’ (Evans et al., 1996, p. 1895).

By managing its economy more effectively than [Australia has] since 1988, by undertaking courageous steps towards reform and opening up its economy to the world, and by dealing roughly, though at some considerable cost, with the cosy institutions of the past, it shows every sign of being on the brink of overtaking Australia perhaps before the centenary of Federation in terms of living standards and economic performance. PP McGuinness (quoted in Rankin 1995)

Those who argued for the reforms have been proved right and their critics have been proved wrong. (R Kerr, ‘No time to stop and smell the roses’, New Zealand Herald, 21/05/2005)

A decade [after 1984], New Zealand had one of the most competitive economies in the developed world. The government’s share of GDP had fallen to 27 percent, unemployment was a healthy 3 percent, and the top tax rate was 30 percent. The government went from 23 years of deficits to 17 years of surpluses and repaid most of the nation’s debt.Maurice McTigue, former Cabinet minister, writing in Reason (libertarian magazine, 2010)

a look across the Tasman shows Swan and Labor are victims only of their own appalling policy choices … The Key government cut itscloth to fit circumstances and chose prudence, tax cuts and growth. In contrast, Swan’s economic management looks dismal. Luke Malpass, New Zealand Initiative (formerly NZ Business Roundtable), in AFR 24/4/13

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  1. kevin1
    July 28th, 2013 at 14:44 | #1

    Swinburne economist Malcolm Abbott wrote a book about this a couple of years ago but I haven’t read it.

  2. Jim Rose
    July 28th, 2013 at 14:49 | #2

    see Tim Kehoe “Recent Great Depressions: Aggregate Growth in New Zealand and Switzerland 1973–2000,” New Zealand Economic Papers (2003) 5–40, with Kim J. Ruhl.

    Throughout the 1950s and 60s real GDP per working-age person in New Zealand and Switzerland grew at rates at or above the 2 percent trend growth rate of the United States.

    Between 1973 and 2000, however, real GDP per working-age person in both countries has fallen a cumulative 30 percent below the trend growth path.

    Our growth accounting attributes almost all of the changes in output growth to changes in the growth of total factor productivity (TFP), and not to changes in labor or capital accumulation.

    A calibrated dynamic general equilibrium model that takes TFP as exogenous can explain
    almost the entire decline in relative output in both New Zealand and Switzerland.

    To understand the recent growth experiences in New Zealand and Switzerland, it is necessary to understand why TFP growth rates have fallen so much.

    NZ’s total factor productivity growth rate fell a cumulative 30 per cent below its trend rate of 2% between 1974 and 1980. Why such in collapse in such a short period? Muldoonism?

    Trend GDP growth of 2% per year resumed in 1992 onwards, but there was no rebound to recover the ground that was lost between 1973 and 1992. That is the mystery.

    Canada fell 10 percentage points further behind the USA in relative labour productivity between the mid-1970s and the mid-1990s. Canada stopped falling further behind after 1995 but, in common with New Zealand, Canadian labour productivity did not rebound to recover the prior ground lost against the USA. Another mystery?

  3. Ikonoclast
    July 28th, 2013 at 15:32 | #3

    It’s no mystery.

    “Over most of this period, NZ has been governed by radical advocates of the free market.” – J.Q.

    Radical free market policies destroy mixed market economies. The proof is in N.Z., now in the US and especially in the Euro Zone. Russia’s economy also fell into a great big hole when it was subjected to radical free market shock thearapy.

  4. Kevin
    July 28th, 2013 at 16:22 | #4

    Does the mining boom have any major effect on the comparison?

  5. BilB
    July 28th, 2013 at 16:22 | #5

    There is no mystery to it Jim Rose, it was Europes butter mountain, and then the there was the meat mountain. NZ’s decline in fortunes was a product of Europe’s farm production coming up to speed to no longer need the food NZ supplied it since the end of the war.

    NZ does not have the rourse mountain that Australia has and the massive shift that took place in NZ production direction was not an easy transition. A small resource of oil and gas helped but that soon ran down.

  6. John Quiggin
    July 28th, 2013 at 16:49 | #6

    @Kevin

    Not a great deal, and similarly for the butter/meat mountain. Most of the relative decline had taken place by the time the Clark government was elected in 1998, but our mining boom didn’t start for some years after that.

    The relative decline persisted long after the EU reformed the CAP, and continued to grow even as world food prices rose along with other commodities in recent years.

  7. BilB
    July 28th, 2013 at 17:09 | #7

    ” Over most of this period, NZ has been governed by radical advocates of the free market”

    It is unclear which period you are refering to JQ.

  8. Ikonoclast
    July 28th, 2013 at 17:33 | #8

    @John Quiggin

    OK, so offer us your theory with specifics. Which particular NZ policies are wrong and different from Australia’s? And/or what other factors (if not mining and agriculture) caused and cause the difference?

    For example, did mass migration to Australia drain NZ of good labour and good brains? (I doubt that one as they still have an unemployment problem anyway.)

  9. BilB
    July 28th, 2013 at 17:35 | #9

    Factors

    In 1980 (ass I recall it) nz boasted 66 million sheep. By the early 90’s this had fallen to a third.

    NZ introduced a GST at 12.5%. There was no tax free threshhold and the minimum tax rate was about 15% so a person earning their first dollar was paying 27.5% tax when they spent that dollar.

    NZ turned to forrestry to replace the loss from European food demand in the late 80’s. These trees would take over 20 years to reach a harvestable size.

    Manufactured exports suffered from a difficult exchange rate that varied up to 10% through the year due to season demand.

    In 1992 there was a statistic that over 60% of NZ taxpayers had a taxable income of $20,000 or less.

  10. John Quiggin
    July 28th, 2013 at 17:50 | #10

    Just noting for future reference, the EU butter mountain reached a maximum magnitude of 1.2 million tonnes in 1986. It was eliminated in 2007, though there was a temporary and small-scale return (30kt) in 2009.
    http://www.independent.ie/business/world/europe-to-buy-new-butter-mountain-26508571.html

    Some observations
    1. The 1986 mountain was of the order of 10kg for every household in the EU at the time. A lot!
    2. The butter mountain was declining in magnitude for nearly all of the period of radical free-market reform, which should have made that period look better in comparison to the Muldoon era.

    Wine is another story, but it’s noteworthy that the NZ wine industry didn’t exist in 1973, when Britain joined the EU (then EEC).

  11. John Quiggin
    July 28th, 2013 at 17:56 | #11

    Also, it appears that NZ currently has a quota of 227 000 tonnes for tariff-free exports to the EU. That’s close to the peak level of exports to the UK (I assume exports to the rest of Europe were minimal then) of 300 000 tonnes in 1970. And there are now big markets in Asia.

  12. John Quiggin
    July 28th, 2013 at 17:58 | #12

    @Ikonoklast, I think bad macroeconomic policy played a major role. Since 1975, NZ has had six recessions (mostly policy induced) while Australia has had two. That’s fed into migration of skilled workers, loss of firm-specific knowledge and so on, helping, I think to explain the miserable TFP performance noted by Jim Rose.

  13. Ernestine Gross
    July 28th, 2013 at 18:13 | #13

    When the UK joined the EC (forerunner of the EU) in 1973, NZ did lose a very important export market for its agricultural products. Its terms of trade changed significantly and, contrary to introductory textbook international trade theory, import substitution was very limited. The short term policy reaction was to borrow. And then, if my memory is not totally unreliable, we are at the point where Prof Quiggin’s radical policy change in NZ comes in (ie adoption of naive market economics).

    The current Australian mining boom did not start for a long time after 1973. However, Australia did have a significant mining industry in 1973 and a more diversified industrial base than NZ – how much more is a question that requires a lot of detailed work to answer somewhat satisfactorily.

    Obviously, ‘standard’ Keynesian macro-economic fiscal and monetary policy is of extremely limited use in situations of significant externally generated structural changes (eg UK entering the EC in 1973)

    So, the question arises, what less radical policy options did NZ have between 1973 and the start of the current Australian mining boom?

    Furthermore, how did NZ manage its income distribution since 1973, relative to Australia?

  14. Jim Rose
    July 28th, 2013 at 18:24 | #14

    John, if I may, the 30% TFP drop was from 1973 to 1980 which was under Muldoonism.

    Muldoon was not a double secret neoliberal who regulated everything in sight as a ruse just to prompt David Lange to remark:

    “We ended up being run very similarly to a Polish shipyard … by 1984 the New Zealand economy was the most regulated economy outside the Soviet bloc. We were the Poland of the South Pacific”.

    The Lange government was elected in 1984 when the NZ depression was already a decade long. At that time:

    Buying margarine required a prescription from a doctor.

    It was against the law to truck goods commercially for more than 40 miles without permission from the railways.

    A reserve bank permit was needed to order an overseas journal. (how would that work today under amazon one-click? Just imagine!)

    To invest abroad, a New Zealander had to renounce his citizenship.

    Union membership was compulsory for almost everyone

    GDP per working age New Zealander resumed growing at 2% in 1992 after Ruth Richardson’s Ruthanasia budget and the passing of the employment contracts act both in 1991. Ruthanasia is a classic expansionary fiscal contraction? See Figures 5 and 8 at http://www.econ.umn.edu/~tkehoe/papers/NZ-Switzerland2.pdf

    If the 1973 loss of preferential trade access to the UK under imperial preference was such bad thing for NZ, as some seem to suggest, does that not make regional trade agreements a good thing? Can you have it both ways?

    John, for 11 of the 19 years (1973 to 1984) between 1973 to 1992, when the depression ended, NZ was not “governed by radical advocates of the free market”.

    Regime certainty arrived with the 1991 ‘mother of all budgets’ and a continuation of microeconomic reform.

    Regime credibility is central to successful reform. NZ Labor split in the late 1980s over Rogernomics. Douglas was demoted to be police minister when Lange ‘paused for a cup of tea’.

    The National party were elected on a manifesto that repudiated the reforms of Labor. They sought power promising a “decent society”, saying that the reforms under NZ Labor were doing significant damage to the social fabric of the country.

    Jim Bolger defended the switch to continued reform and massive fiscal consolidation in his memoirs saying he had been badly misled in the run-up to the 1990 election as to the actual state of the New Zealand economy.

    The state owned Bank of New Zealand required an immediate injection of capital to avoid insolvency; the outgoing finance minister’s projection of a modest fiscal surplus was inaccurate: the country instead faced a fiscal deficit of NZ$5.2bn if action were not taken immediately.

    The migration to Australia ‘raised the IQ of both countries’. A typical Mudoonist response to any crisis: if you can’t regulate it, belittle it.

  15. Greg vP
    July 28th, 2013 at 20:05 | #15

    While NZ has had a lot of bad policy imposed on it (for example, I think it’s one of only two advanced countries whose central bank is solely focussed on inflation, and the other isn’t doing so well either) I think three policy events stand out from the crowd of mistakes:-

    1) The dismantling of the Kirk-Rowling contributory superannuation scheme by Muldoon.

    2. The overnight deregulation imposed by Douglas and Co. NZ’s larger productive firms were exposed to international competition and mostly driven out of business; small firms are not as productive as large ones. They’re also not as able to innovate in processes. (Syverson, I think, suggests that this innovation is the locus of much TFP growth.) By altering the structure of the economy it has had second-order effects on TFP growth too.

    Having said that, I don’t think that the situation is as clear-cut as Kehoe and Ruhl 2003 makes out: it’s not all TFP.

    3) The Employment Contracts Act 1991. This was designed to drive down wages, and it did; in the long run that drives down labour productivity. Here we are: in the long run.

    And of course there are the second-order effects that JQ notes in #12: young entrepreneurs and skilled professionals are in effect driven away to larger, richer markets, so there’s an ongoing absence of skill transference. (One of the senses in which I mean this: highly productive people lift the productivity of those they work with.) Perhaps most importantly, our national politicians are the calibre of person you’d expect to be running a rural town of 30,000 rather than a nation.

    What specifically is wrong with NZ policy?

    * The Reserve Bank Act and its policy targets agreement.

    * The suite of policies (tax law, company law, employment law, etc.) that make it too easy to start and operate a micro-business. (See above on relative productivity of small and large firms.)

    * The absence both of a tax on capital (ideally on unimproved land value) and of a capital gains tax; tax policy that is generally tilted in favour of passive stores of wealth (“investments”) and their accompanying low-productivity industries such as residential construction.

    * The lack of constraints on ad-hoc intervention in individual transactions by politicians. This is policy that should be there, but isn’t. This interference adds to the risk of investment in NZ, and therefore to the hurdle rate of return required by potential investors; politicians usually also directly reduce the productivity of existing capital and new investments.

    * Standards. A cultural distrust of experts (the Reserve Bank possibly excepted) is a big problem. NZ has suffered from evidence-free and theory-free policy invented on the hoof by its politicians, often apparently based on something a business person said to one of them at a cocktail party the previous evening.

  16. BilB
    July 28th, 2013 at 20:35 | #16

    Another important (obscure) policy came in the early 90’s when NZ began importing 2 year old second hand cars directly from Japan. This enabled Kiwis to upgrade their cars to near new for as little as a tenth the price of new vehicles.

  17. TerjeP
    July 28th, 2013 at 21:46 | #17

    Over most of this period, NZ has been governed by radical advocates of the free market[1]

    Well they did have a finance minister called Roger Douglas who is a radical advocate of free markets. Nice chap, I got to meet him briefly a few years ago. However the free market agenda known as rogernomics was in charge for four years only out of the 43 in question. I certainly wouldn’t regard much of the rest of this time as entailing radical free market governments. Helen Clarke certainly wouldn’t fit the bill.

    More to the point Australia also undertook a lot of pro market reform in this time. So it isn’t really fair to suggest that the two countries took different paths. Both privatised a lot of former government owned enterprises. Both took down tariffs. Both implemented governance frameworks that made central banks focused on low inflation. If one has done better than the other is it really due to a difference in free market enthusiasm?

    Oh and income tax for most people is higher in New Zealand. Maybe that’s only a small piece of the puzzle but I just wanted to have it said:-

    http://blog.libertarian.org.au/2013/04/17/new-zealanders-should-migrate-to-australia/

  18. jrkrideau
    July 29th, 2013 at 01:47 | #18

    Greg vP :
    * Standards. A cultural distrust of experts (the Reserve Bank possibly excepted) is a big problem. NZ has suffered from evidence-free and theory-free policy invented on the hoof by its politicians, often apparently based on something a business person said to one of them at a cocktail party the previous evening.

    Beautiful. Substitute Canada for NZ and you have our current government to a tee.

  19. The Gormless Fool formerly known as Oleolebiscuitbarrell
    July 29th, 2013 at 07:25 | #19

    The NZ economy was a fortress between 1970 and 1984. We had wage and price controls at the end of that period.

    So, if your suspicion is that the liberalisation of the NZ economy has made NZ poorer, you may want to look somewhere else.

    Was there anything that happened in the early 1970s that might reasonably account for it? Something like, I dunno, the UK joining the EU?

  20. July 29th, 2013 at 08:00 | #20

    I’m a policy wonk in NZ, so these is a topic of frequent discussion.
    Certainly, from 1900-1960, NZ was one of the richest nations in the world, with standards of living matching the UK, Australia, and Canada. Post-war, we benefitted from a lack of destruction, huge immigration, and high demand for lamb, beef, and wool. In 1960, we were the third richest nation. And then it all turned to custard with the loss of UK markets, oil shocks, And wool prices have dropped since 1950 in real terms by 95%, which doesn’t help.

    The market reforms of the 1980s stopped the decline, but thirty years of world-class economic policy have not improved our relative performance at all. We’ve gone from third in the world and matching Australia to twenty-fifth and far behind the neighbours. We’re not catching up, despite following the required prescription. So wtf?

    The economic policy debate here tends to focus on economic geography, labour productivity, and the role of innovation in an economy still focused on primary production. And then there’s a debate we’re not having, which is about whether the OECD-best practice policy prescription is actually the right idea.

    The key reference for the economic geography discussion is:
    Philip McCann “Econoic geography, globalisation and New Zealand’s productivity paradox”, NZ Economic Papers, Vol 43, No 3

    This paper is summarised in New Zealand’s productivity paradox by Shaun Hendy, one of our better thinkers on innovation from an econophysics perspective. Basically, we’re small, far away, and widely spread within our own country. However, this debate sees the best practice OECD economic policy prescription, notices it not working, and then tries to find reasons why that prescription is still correct, but insufficient here.

    I think that’s a mistake. Australia has more rigid labour markets, more protectist trade, and more government intervention in industry sectors and their economy is doing better than ours. It has done since the 1970s, well before their mining boom. There is little substantive debate about these factors as reasons why Australia is doing better than NZ, nor about these factors (and no doubt others) as examples of where the OECD prescription is just plain wrong.

    NZ lacks diversity in economic debate simply because we are tiny. The only prominent and credible non-orthodox economist is Brian Easton and his 1997 book “The Commercialisation of New Zealand” is a well-grounded look at the market reforms from one of the few people to question the prescription.

    Publisher’s blurb for the book: “Well-known economist and commentator Brian Easton describes the origins, theory, history and politics of the dramatic change in economic policy in New Zealand from Robert Muldoon’s interventionism to Roger Douglas’s commercialisation and beyond. It is graphically illustrated with case studies including health, education, broadcasting, environment and heritage, government administration, the labour market, cultural policy and science. Lively broad ranging and controversial, this is a valuable commentary on the ‘more-market’ prevalent in New Zealand from the mid 1980s.”
    http://www.eastonbh.ac.nz/1997/07/ithe_commercialisation_of_new_zealandi/

    And finally, current thinking from within NZ Treasury can be summarised as taking on board the economic geography argument, admitting that institutions matter, but that overseas circumstances matter more and are out of our control, and while we’d like to be catching up with overseas nations, there is no simple policy prescription to deliver that, so we’ll just keep trundling along. That thinking, at least, allows for exploration of what economic policy might look like if we could break out of the market fundamentalist lock that dominates economic thinking in NZ.

  21. Newtownian
    July 29th, 2013 at 11:05 | #21

    Some random comments/thoughts from my memory of this issue and discussions with NZ friends since the 1970s:

    – NZ did wonderfully from the wool boom of around 1950s. I understand a lot was put away in a piggy bank. Did this hide NZ’s overall economic trend/situation for a long time up to when the bubble burst – all agree around 1976.

    – I remember the problem being not so much framed in terms of EU competition but loss of protected Commonwealth markets with entry into the Common Market with Heath around 1973/74. Maybe this indicates a double wammy.

    – A third factor I remember from then was the 73 and 78(79?) oil crises. These hit their balance of payments badly. On the good side NZ went in for much more energy conservation than we did (I think Bass St oil was a partial saviour here). One more problematic effect was to virtually shut down the importation of new cars (and presumably other more efficient new plant) – a real issue in country with long distances to travel internally as well as export wise. Restoring the never terrible reliable BMC cars seemed to become a national obsession – reminiscent of Cuba and its old 1950s antique chevrolets.

    – In respect to the viability of a national economy whose main exports no one wants (to pay that much for) and who is dependent on oil imports to be balanced their mainly commodity exports – I keep thinking of Cuba who suffered badly also after their Commonwealth (the Warsaw Pact) withdrew. Another familiar and possible comparison is Ireland. Around 1983 it had many trappings of an advanced economy but in reality it was much more run down even than the UK. A good indicator was the unaffordability of Guiness. Part of the reason seemed to be that the small scale of things allowed vested interests like the farming lobby and the church to keep Ireland in a cul-de-sac. There was also extensive migration to the neighbouring UK. Finally examples locally – are arguably Tasmania and perhaps South Australia. Tasmania seems another example of an island paradise which seems to lack something and despite massive federal propping up still lags behind the mainland.

    All in all I cant help but feel its not only about economic systems but also small scale and NZ being – well – ‘insular’.

  22. aidan
    July 29th, 2013 at 12:02 | #22

    Shaun Hendy has just released, and is promoting, his book (co-authored by the late Sir Paul Callaghan) about this: Get Off The Grass.

    You can find him on twitter (@hendysh).

  23. Newtownian
    July 29th, 2013 at 13:21 | #23

    Wiki also seems to indicate the Wool boom which lasted from 1951 to 1966 is part of the story http://en.wikipedia.org/wiki/New_Zealand_wool_boom .

    Similarly regarding the 1970s oil crisis http://en.wikipedia.org/wiki/1970s_energy_crisis

    Oil appears another gorilla. Post 1980 NZ appears to have become a bit more self sufficient.

    http://en.wikipedia.org/wiki/Energy_in_New_Zealand

    But 1980 period was a big kick in the guts and since oil has remained high in cost they are arguably still suffering.

    Oil use in 1980 was probably around 240 petajoules / annum. This equates to 40 million barrels. http://www.teara.govt.nz/en/energy-supply-and-use/page-3 (though its % contribution has probably dropped off with more gas coming on line). Assuming their yearly consumption in 1980 had suffered a the near $30/ barrel price hike compared to 1970 this would have added $1.2 billion to their costs when their pp income was $8000 pp http://www.indexmundi.com/facts/new-zealand/gdp-per-capita and their exports $6.6 billion http://www.indexmundi.com/facts/new-zealand/exports-of-goods-and-services (I think I have the $ comparisons right here). NZ were on petrol rationing for 18 months around this time so I suggest you cant discount this as an early example of the effect of peak oil.

    Of possible interest separately here in NZ reported recent changes in accounts http://www.rbnz.govt.nz/statistics/key_graphs/real_gdp/

  24. Peterm
    July 29th, 2013 at 14:25 | #24

    Adrian,

    This book looks interesting.

    I recall the John Kay singled out New Zealand for special mention in a book written in response to the stupidity of the market liberalisation programs being followed in Eastern Europe in the early 1990s. (The programs that are credited with dropping the average life of a Russian male to 54 years!) I believe it was titled ‘The Truth about Markets’.

    His thesis from what I remember, is that there is a list of rich countries who have established the necessary institutions to support mixed mixed economy where market are used for those things that cost cannot be externalized. All these nations have approximately the same average income per person. (Although the distribution varies from country to country.) What is more, once a nation joins this list such as Singapore and South Korea have done recently, they stay on the list.

    Except for NZ and Argentina. These are the only countries which have dropped off the list. He placed the blame for NZ’s woes on sustained stupidity over a fifty year period. First with developing a narrowing based economy based on selling to UK which was devastated by UK joining the European Common market. Then by Mouldon’s ‘think big’ projects that failed to pay off. (Mainly around cheap hydo power.) And finally Rogernomics which sponsored all the crony capitalists and rent seekers in the country at the expense of the what every entrepreneurial spirit was left in small town NZ.

    Kay’s stuff is twenty years old now so it would be great to get a more up to date analysis of the on going train wreck that is NZ economy. My initial impression is that book, (but not have read it), seems to be pushing yet another magic potion for their economy and that this will end in tears in the same manner as the ‘Think Big/Rogernomics’ fiascoes.

    Is that your impression?

  25. Moz of Oz
    July 29th, 2013 at 14:51 | #25

    @Newtownian Cuba and Ireland both also have the out-migration problem that I think is understated by many. If you’ve got a growing business or even a new idea, there’s a much bigger market for it just over the sea. Especially with the relatively open border between NZ and Oz – when I moved to Oz I did need a passport, but that was all.

    NZ also suffers from the “hide your profits” game played by multinationals, made worse because so many NZ businesses are little branch offices of their Australian owners. So the profits go to Oz and the tax is paid there. Which is great in that the banks didn’t fail during the GFC and were to some extent propped up at second hand by the Oz government guarantee (see South Canterbury Finance failure for counterpoint). But it has to hurt when every year the banking sector alone sucks a billion dollars out of the NZ economy and into the Australian one.

  26. Newtownian
    July 29th, 2013 at 15:30 | #26

    @Moz of Oz
    Very interesting . I wasn’t aware of Cuba’s migration issue.

    A couple of other examples that might be discussed – I forgot about Iceland. And I believe Latvia is also struggling and migrating. And then there is Cyprus and maybe Malta and all the central American states. And the Caribbean states.

    I can think of small countries which are exceptions – and they make interesting reading too – Norway and Qatar have energy treasure chests so import/export picture is different. Finally there are perhaps Singapore and Switzerland which seem the main exceptions – and different from NZ geographically. Whereas NZ is at the ends of the earth these last two are natural trading hubs proficient in the local linga France literally and figuratively.

  27. Greg vP
    July 29th, 2013 at 17:13 | #27

    @Jez Weston
    Thanks for making these points, Jez. I wanted to talk about economic geography, F-K-V agglomeration theory, and the Treasury papers, but my comment, I thought, was already too long. I took that stuff out.

    I used to be a real fan of McCann and the economic geography argument, and also Paul Callaghan’s cultural argument (NZers choose an occupation for the lifestyle it affords — how it enables them to use their after-work time).

    Since then I’ve learned to try to be a bit sceptical of things that I want to believe: I’ll need to see more evidence. With the current government’s attitude to social science, though, I’ll be waiting a long time.

    I’m sceptical of Hendy’s proposed “solution” straight off. Niches, by definition, have low growth potential. And in a global economy, they’re likely to be highly transient as well. Assuming you can perpetually out-innovate everyone else is worse than assuming you can strike oil when you want it (as the Key government did).

    On the other hand, Australia has done well over the period that it was (is) a net fossil fuel exporter. The same coincidence is noticeable in the UK. Perhaps there’s something to the Ayres & Warr argument (GDP is a function of energy–or exergy, useful work) after all…

    There’s no denying the terms of trade problem. But the Reserve Bank Act really didn’t help. By making the cost of capital so high, it made it hard for the economy to adapt.

    As for Treasury’s current attitude: any real attack on the problem is going to cause a great deal of medium-run pain to vested interests. They’re just yielding to the politics, I think.

    Finally, inequality is both effect and cause of NZ’s woes. According to Wikipedia (and the OECD and IMF) NZ had a Gini index of 0.36 in 1997–it’s embarrassing that Stats NZ can’t provide them a more recent figure. I expect that by now it’s well into the 0.40 – 0.45 range. Australia’s, by contrast, is somewhere around 0.26, if I remember aright. Joe Stiglitz has quite a lot to say about the effects of inequality. I think we should be listening to the greatest economist since WWII.

  28. derrida derider
    July 29th, 2013 at 18:50 | #28

    Kiwis made a big mistake in voting not to join the Commonwealth at federation when they had the chance. They’d be making a bigger killing than Tasmania out of COAG now.

    Of course its still not too late. The Kiwis could propose monetary union; not only is this a face-saving way of getting around their chronic problem with their singleminded Reserve Bank, once they’re in then they could use the Euro experience to scare Canberra into making sustained big transfers where NZ would make a motza.

  29. TerjeP
    July 29th, 2013 at 21:00 | #29

    They don’t need our permission to adopt the Aussie dollar as their currency. A few places outside Australia already use it. ie Kiribati, Nauru and Tuvalu.

  30. July 30th, 2013 at 00:43 | #30

    What NZ has right now is effectively a patronage economy that practises socialism for the rich and austerity for everyone else. The Key Govt in particular is not above doling out millions to multi-nationals, while lecturing us that the cupboard is bare.

  31. Jim Rose
    July 30th, 2013 at 06:43 | #31

    @Greg vP

    The Employment Contracts Act 1991. This was designed to drive down wages, and it did; in the long run that drives down labour productivity. Here we are: in the long run.

    NZ grew rapidly from 1992 to 2007 with one minor recession in 1997. the unemployment rate was 3.6% in 2007.

  32. TerjeP
    July 30th, 2013 at 08:58 | #32

    Further to the comment above by Jim, labour productivity in New Zealand was not driven down. It increased by 26% from 1992 to 2007.

    http://media.crikey.com.au/wp-content/uploads/2011/09/oecd-table.jpg

  33. July 30th, 2013 at 10:24 | #33

    @TerjeP
    The key point here being that NZ’s labour productivity did indeed grow by 26%, but Australia’s grew by 40% and the G7 by 44%.

    We are being left behind, despite our supposedly competitive policies such as the Employment Contracts Act.

  34. Jim Rose
    July 30th, 2013 at 20:40 | #34

    @Jez Weston nz started to grow again one year after the passing of the emploments contracts act 1991. There was one minor recesion betwen 1992 and 2008.

  35. Joe Gagnon
    July 31st, 2013 at 07:27 | #35

    In my book, Flexible Exchange Rates for a Stable World Economy (pp. 192-95) I discuss how NZ overreacted to the crash of the kiwi dollar during the Asian Financial Crisis of 1997-98. Australia faced similar pressures but followed better macro policies and had a better outcome.

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