Oz & NZ

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

35 thoughts on “Oz & NZ

  1. @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.

  2. @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.

  3. 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.

  4. 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.

  5. 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.

  6. @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.

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

  8. @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.

  9. @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.

  10. 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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