Home > Economics - General > Voting with their feet, and following the business cycle

Voting with their feet, and following the business cycle

March 28th, 2015

Among the regular themes in the Australian business press is the claim that we are being outperformed, in economic terms, by New Zealand. I collected a bunch of such claims here, and they were even more prevalent (but hard to find now, being pre-Internet) in the late 1980s. I’m seeing the same theme recurring today (too many repetitions to link).

This is a recurring rather than a continuous theme: there are long periods during which Oz-NZ comparisons are absent from the press. So, if you took the Australian press at face value, it would be reasonable to suppose that Australia was becoming relatively poorer than NZ, not continuously, but in a series of downward steps.

In fact to a close approximation, the reverse is the case. But because market economies are cyclical, there are inevitably brief periods when the NZ economy is on an upswing and Australia in a slowdown or recession. It is only at such times that the business press notices New Zealand’s existence.

A point often made at such times is that net migration from NZ to Australia has slowed to a trickle, usually with the implication that this marks the end of the long term movement. In reality, the cyclical nature of net migration has been a marked feature of movement patterns, ever since the beginning of mass migration westward across the Tasman. The starting point was 1973 Closer Economic Relations Trans-Tasman Travel agreement, which coincided with the beginning of New Zealand’s relative decline. The authority here is Jacques Poot, and this 2009 paper sums up the story.

Interestingly, the flow has continued, unabated though still cyclical, despite the Howard government’s move to exclude Kiwis from welfare payments (arising, IIRC, from a dispute over concerns that NZ’s more liberal immigration policy would provide a ‘backdoor’ path to Australia).

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  1. Jim Rose
    March 28th, 2015 at 10:56 | #1

    John, The Australia and New Zealand Closer Economic Relations Trade Agreement entered into force on 1 January 1983, not in 1973 as you suggest. You mix up with

    The right of New Zealanders and Australians to live and work in each other’s
    country has been formally in place since the 1973 Trans-Tasman Travel Agreement (TTTA), but has been effectively operating since colonial times (Carmichael, 1993).

    New Zealand lost two decades of growth between 1973 and 1992.

    There was then a long economic boom after the Ruth Richardson horror budget of 1991.

  2. John Quiggin
    March 28th, 2015 at 11:04 | #2

    I’ll fix the TTTA. As to the other claim, it’s just plain wrong, as you must surely be aware. NZ had another deep recession in the late 1990s, courtesy of Don Brash and the Monetary Conditions Index.

    http://www.dol.govt.nz/publications/discussion-papers/current-recession/

    The reality was two good years in which NZ briefly outgrew Australia before falling back again

    http://www.uq.edu.au/economics/johnquiggin/news98/NZ9805.html

  3. m0nty
    March 28th, 2015 at 11:10 | #3

    It’s a shame, seemingly, that it’s not particularly easy to construct a graph of NZ-to-Aus migration compared with the difference between median incomes per capita since 1973.

    If that is actually easy to produce, I’d love to see it.

  4. Ikonoclast
    March 28th, 2015 at 13:48 | #4

    I was last in NZ about 6 or 7 years ago. Applying a crude economic yardstick, my impession was that NZ was about 20 years behind Australia economically. This crude yardstick was simply that on average NZ cars, buildings and infrastructure looked about 20 years older than comparable items in Australia. I felt I had gone back in time. New cars were an absolute rarity, as were new buildings and new bridges. Beautiful scenery, invincible rugby team. Shame about the nonconomy.

    On the other hand, when the bulk of the world turns to crap through climate change and resource depletion, NZ might be one of the most liveable places on earth… oh except for the earthquakes and volcanoes. 😉

  5. Moz in Oz
    March 28th, 2015 at 14:59 | #5

    Ikonoclast :
    when the bulk of the world turns to crap through climate change and resource depletion, NZ might be one of the most liveable places on earth

    Or not, depending on whether the current NZ National government continues to make the Australian Nationals look like tree-hugging hippies. Their goal seems to be to convert the whole of NZ to a mix of urban sprawl and subsidised dairying. And their behaviour wrt Kyoto makes me question why the Coalition bothered to renounce its obligations, as NZ seems to have done very well by simply ignoring them. Probably a symbolic gesture, the raised middle finger to younger Australians. It’s almost as though there’s a contest between the two Prime Munsters to see who can do the most damage to their grandchildren.

    I don’t recall a time when NZ was better off economically than Australia (I’m only in my 40’s). And now that NZ corporations are largely Australian owned I don’t think there’s any chance that that will happen.

    As far as the dole and so on, isn’t NZ still paying a significant amount every year to cover expenses imposed by kiwis living in Oz? But not, of course, receiving any return for the taxes likewise paid (and again, the “ethnic group” with the highest employment rate and average in come Australia is usually New Zealanders).

  6. Moz in Oz
    March 28th, 2015 at 15:04 | #6

    Also JQ, this looks deeply regressive to me, why does it stop at $250k? Is it based on Labour’s “only the first $100k is covered” scamscheme? I hope you’ll be doing an article on this if it goes any further.

  7. March 29th, 2015 at 05:21 | #7

    Does this mean Australia will (again) beat New Zealand to take the World Cup today?

  8. Jim Rose
    March 29th, 2015 at 21:39 | #8

    @John Quiggin The mild recession in New Zealand in 1998 was a result of the combination of two severe droughts.

    Drought is a major factor in the New Zealand business cycle because of the large size of the farming sector. Indeed, the ups and downs of a monopoly dairy exporter that accounts for 7% of GDP, Fonterra, are so central that a single dirty pipe at a milk factory that put the quality of its milk exports in question lead the Treasury to revise its economic forecasts for that year.

    The 1998 recession was preceded by a severe drought that may have knocked a half percentage point off GDP or more. As the Treasury explained in 2008:

    Given the importance of the primary sector in New Zealand, climatic conditions have always been a significant driver of GDP volatility in New Zealand. There is strong evidence that the 1998 drought triggered or precipitated the onset of the last recession in the late-90s.

    In 2008, the dry conditions in New Zealand led the Treasury to revise its forecasts as follows:

    current dry conditions are likely to trim GDP growth by around 0.5% for the 2008 calendar year.

    It is mistaken to blame the 1998 recession in New Zealand as the spawn of Rogernomics. There was a drought, a big one, big enough drought to shake the New Zealand business cycle in a country with a large farming sector.

  9. John Quiggin
    March 30th, 2015 at 08:55 | #9

    @Jim Rose

    A drought might reduce GDP, it shouldn’t cause rising unemployment.

    And Australia’s early C21 drought was far worse, without causing a recession in the broader economy.

  10. Nevil Kingston-Brown
    March 30th, 2015 at 10:05 | #10

    I seem to recall Henry Lawson observing that however bad he had thought Australia was, New Zealand was worse.

  11. derrida derider
    March 30th, 2015 at 14:23 | #11

    That’s plain silly, Jim Rose. Half a percentage point off GDP does not explain a recession – boneheaded monetary policy (for which no one was called to account, BTW – that’s what central bank “independence” means) was much more significant, as it was ten years later. And even if you were correct about 1998 it does absolutely nothing to change the big picture of the last 40 years – NZ having regular recessions where Oz hasn’t.

    As any labour economist will tell you wages and employment take far longer than GDP to properly recover from a recession. And you never really get back the lost output. Of course if you believe reds like Polanyi that’s exactly why capital is not as averse to them as it should be – the rulers take a “the workers need periodic disciplining” view.

    NZ’s macro instability compared to Australia is actually the poster child for giving your central bank a higher inflation target than 2%, plus allowing it to pursue a “dual mandate” (ie tell ’em to use a bit of common sense). There are good reasons why a higher inflation target should result in more output growth over the long run.

    IOW I think all the microeconomic reform on both sides of the ditch has been less important than the two countries’ comparative MACRO management.

  12. John Quiggin
    March 30th, 2015 at 14:38 | #12

    @derrida derider

    I agree: the biggest factor in explaining NZ’s disastrous performance has been bad macro management. OTOH, the same ideology and the same people that drove micro reform were responsible for the macro failures, and the two interacted to produce the disaster we observe.

    Coming back to Jim Rose, I’m amused by the verbal agility that allows him to write “a long economic boom” when he means “a period of modest economic growth interrupted only by a couple of recessions that were really the fault of the weather”.

  13. Jim Rose
    March 31st, 2015 at 10:53 | #13

    New Zealand and Australia grew at similar rates from the 1992 to the eve of the GFC.

    Reserve Bank of New Zealand has these conclusions about the contribution of drought to the business cycle in the late 1990s in New Zealand and in particular the mild 1998 recession:

    a back-of-the-envelope estimate of the impact of the drought-induced fall in supply would suggest a contribution from the agricultural sector to production GDP for the March quarter of 1998 of around -0.4 percentage points out of the total 1 per cent fall in production GDP.

  14. April 4th, 2015 at 11:49 | #14

    Hi John. There is a great graph in the recent Trans-Tasman review by the NZ and Australia productivity commissions; supplement paper D on people movement (http://www.productivity.govt.nz/sites/default/files/13-trans-tasman-supplementaryd.pdf). Figure D3 (page6) highlights exactly what you are talking about, plotting the income gap against the migration flow.

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