NZ & Oz: why it matters

My previous posts put up various bits and pieces about the sharp economic divergence between NZ and Australia, but I didn’t say much about why this topic is of interest right now. The issue has come up in several different contexts, where the contrast between the two countries, starting from fairly similar positions, seems to me to provide some pretty strong evidence. The questions include

* Do recessions have sustained effects on income levels, or does the economy rapidly return to its previous growth path? The evidence from NZ (six recessions since 1975) and Australia (two) suggests that effects are sustained
* Is market-oriented microeconomic reform a major determinant of economic growth? NZ reformed more, and more vigorously than did Australia and did drastically worse in economic terms.
* Do more flexible labour markets yield better macroeconomic performance? Again, the evidence from NZ and Australia suggests the answer is No.

Obviously, given the points above, I take the view that bad macroeconomic policy in NZ, particularly during the reform era of the 1980s and 1990s, is an important reason for poor economic performance. Important examples include the adoption of a contract-based 0-2 per cent inflation target in the early 1990s, and the misconceived idea of the Monetary Conditions Index at the time of the Asian crisis. I don’t think bad macro policy is a sufficient explanation, but the gap is so large and persistent, it’s hard to explain in terms of standard microeconomic analysis.

I also took the time to look harder at the idea that New Zealand’s problems can be explained by the loss of agricultural markets arising from UK entry into the (then) EEC. Along with the oil shock of 1973, and the immediate macro responses (a failed attempt by Labour to stave off adjustment, followed by a sharp contraction under the Muldoon National government), this helps to explain NZ’s relative decline up to 1984, when the Lange government started the reform process.

But:

* The shock wasn’t nearly big enough to explain a sustained 30 per cent divergence in GDP per person. Agriculture was only about 12 per cent of GDP at the start of the process, and is only about 8 per cent now.
* The loss of market access was temporary, and the restoration of access coincided with the reform period. The EU butter mountain reached its maximum height in 1986 and has now disappeared. NZ is now the main exporter of lamb to the EU as a whole, not just the UK and in addition has an export wine industry that didn’t exist in 1970
* Even the most sclerotic economy shouldn’t take 40 years to adjust to a terms of trade shock, and the whole point of the reforms was to make the economy flexible enough to respond to such shocks.

46 thoughts on “NZ & Oz: why it matters

  1. @iain

    I think those are exchange-rate adjusted, not PPP, which makes for a very misleading picture. For example, the same series shows Australia well above the US in 2011, which was true on exchange rate conversion but not on PPP.

    Not that PPP is perfect, but exchange rate conversions are close to useless

  2. Yeah. Does seem to show 1973 oil crisis, 1987 financial crisis, and 1996 asian crisis, as being key events. Impacted / was managed by NZ worse. Impacted / was managed by Aus significantly better.

  3. Hello John, thanks for the post. It would be great if someone worked through systematically the big reforms of the 70’s, 80’s and 90’s in terms of market economics in Australia and ask what could the alternative have been. EG to lowering tarrifs, floating the dollar, privatising telstra, free trade agreements etc. Of course it would be speculative, but around the world examples could be used. Given that we are constantly told these things were good for Australia and the alternative would have been disastrous, it would be good to have a systematic look at that argument taking each reform etc.

  4. There is big difference in the investment arrangements of the two countries. NZ does not have compulsory superannuation. This and a reluctance for individual investors to invest in local share markets has lead to an over reliance on housing for investment. This causes in mis allocation of assets away from income producing investments. Thus leading to a contributing factor in weak GDP growth.

  5. While I remember, I would like to also note that prevention of periods of negative economic growth is extremely important in calculation of long-run economic welfare. If, I surmise, that the introduction of neoliberalism must lead to more severe adverse economic fluctuations (causative factors in this vein include higher income inequality, lower share of govt spending/GDP, non-use of countercyclical budgets to lessen impact of recessions) then any increased productivity from use of market forces will be more than wiped out by larger frequency and magnitude negative fluctuations. The greater the degree of neoliberal policies = the lower the rate of long-run growth.

    Where’s my Nobel Prize?

  6. @Sean
    Does NZ have a higher rate of Housing Investment than Australia with it’s negative gearing and allowing a self managed super fund to buy a house? It is definitely not a big difference between the two countries.

  7. On the subject of labor, Japan, with it’s most protected unions on earth does appear to have benefited by it. I know that such innovations as KANBAN require workers to strive to lower head counts while raising production. That simply cannot be implemented from the ranks in a different labor system. In Japan, management was forced to take those eliminated workers and find something else for them to produce. And they did – with every ounce of help from the re-positioned workers pulling together.

    In the Western world, that could never happen, because management is lazy. It is so much easier to chuck workers out the door and run off with the booty. (The booty consists of money generated by the company – everything from float and profits to pension fund monies.)

    And I will cut off at the pass the (completely absurd) refrain that Japanese culture is different, with management descended from feudal lords who cared for their people. Bunk. Prior to WWII, the bushido culture still held sway. Commoners could be killed outright for perceived insolence. This is not conducive to nice-guy management, and there are records of workers dying in factories in Japan – just like in the USA. It was the allied powers administration that installed those labor laws – most likely the thinking was that by doing so it would destroy Japan’s ability to compete forever, and eliminate the possibility of Japan rising again like Germany did. But, the results of that experiment are in, and it didn’t work out that way. Instead, the strongest union laws on earth were hugely stabilizing, and led directly to the company union.

    Thus, the idea that more flexible labor markets (that drive down wages and increase income and job insecurity) is beneficial to the economy is, I think, proven false.

  8. I’m going to suggest some other economic dimensions – there’s no reason to think that there’s any one simple cause over historical time – even the hearty throw-yourself-off-a-cliff neoliberal ideology and its economic shibboleths have more than one dimension. A characteristic of the world economy has been the ascent of finance since 1967/8 – Minsky’s pointing to the credit crunch that broke the post-1930 depression careful calm. So, economic demand framed by financial rents extracted by the finance sector, and similarly, the love by NZ government of a budget surplus (in the belief that a surplus was money you could spend). We know that small open economies are particularly affected by world economic movements – New Zealand is smaller and geographically in a different location than Australia, and its different endowment will interact with world economic changes in its own way.

  9. @@economicsnz
    I suppose this latter is meant to suggest that the start date for marking the comparative decline of New Zealand may have little meaning. We’re making comparisons between the two economies to look for causality as to why they’re different. But are they comparable? Are they on the same timeline? Particularly given the domination of the world economy.

  10. A further thought. What would the comparison look like if we discounted the two big export areas of GDP (mining and dairy) from the Australia-New Zealand comparison of GDP/head of population? Bill Mitchell has often looked at the Australian economy from the perspective of what’re the non-mining sectors doing when say examining Australia’s #austerity inclinations and the impact on demand.

  11. @B
    I read an interesting comment recently – a suggestion that Japan’s small(er?) working age population helped maintain the bargaining power of its unionised work force. Abe wants to liberalise. That could damage demand in a country dominated by private debt.

  12. @Will

    I reward thee with the Ikono-Nobel Prize. I think you have hit on a key point.

    Also, New Zealand apparently has had a brain drain since the 1970s. (Source Wikipedia). The conclusion to be drawn from this is that as the average intelligence of a country goes down the implementation of neoliberal policies goes up.

    In other words, the stupider you are the more you support neoliberal market policies, This is true for the 95% whose position is worsened by neoliberal policies. Of course, in the top 5% of wealth earners, the smarter you are the more you support neoliberal policies which of course haeavily favour the wealthy.

  13. Mmmmm. Some very funny (sort of) comments up-thread – that are at heart ungenerous about New Zealanders.

    There was a time when Australia and New Zealand were viewed differently:

    ‘As Barry Gustafson noted in his biography on [Michael Joseph] Savage, New Zealand ‘had
    always been portrayed prominently in the [Australian] newspapers and journals read by Savage over the years as a country politically advanced, generously endowed by nature, industrially peaceful, economically prosperous and socially harmonious – at least in relation to Australia’’ (Marsh & Miller, 2012: 218).

    The “economic factors” sought for in the preceding comments, may have no relevance for the changes/reforms undertaken in the 80s or current performance. There are just as many other factors of importance: historical migration patterns, class distinctions, Maori-pakeha conflict/warm (Land Wars), Waterside Strike ’51, land-rights and Springbok Tour ’81, a shift to MMP, lack of upper house in the NZ parliament (and the consequent concentration of executive power) to name a few.

    There is, briefly put, a history of resistance in NZ which has deep impacts in a small population; for some parts of NZ society is “just not good enough”. The requirement for “respect of authority” in a so-called “classless society” has historical roots:

    ‘Together with some sympathetic business leaders, they [wealthy landholders] created a network of Reform Associations, whose task it was to promote a political agenda that included low taxes, free trade and reduced government spending … .
    The actions of these wealthy landholders coincided with the formation of the first craft unions, lending substance to the claim by Raewyn Dalziel that the 1880s were marked by the first manifestation of class identity in any structured form (1981, p. 109). Two major events, a maritime strike (1890) and the extension of the franchise to all men (1889) and women (1893) sparked fears of a working-class uprising and challenged the widely held vision of a society of ‘small landholders, situated in a state of tranquillity, prosperity, and independence’’ (Marsh & Miller, 2012: 216).

    And if comparisons are necessary for some parts of the economy:

    ‘… the explanation for this lies in the fact that Australian unions were able to exercise much more leverage over the Australian Labor Party than were their New Zealand counterparts over the 1984–90 Labour government. This has something to do with Australian political culture, but it also has much to do with the nature of the Australian economy. Unlike New Zealand, and for that matter, Chile, Australian governments were much more concerned with protecting key national industries and maintaining a domestic manufacturing base, rather than shifting to a purely service and niche-product dependent growth strategy. In order words, militant unions remained in mining, manufacturing, construction and transport sectors which had simply been wiped out by the process of economic reform itself in Chile and New Zealand. In essence, Australia’s larger size and more comfortable location in the world chain of production buffered not only its economy, but also its labour movement.’ (Buchanan and Nicholls, 2003: 192).

    The “economic reforms” in the 80s in NZ had as much, if not more, to do with internal power relationships in NZ as they did about “economic performance” and the broader inclusive notion of “national weal”.

    As mentioned previously the current stoush in NZ about the GCSB legislation is yet another manifestation of that historical project about power and relationships. One wag has summarised this by stating that the Prime Minister is going home, and Ministers are resigning, because “everything is now fixed” in New Zealand (http://www.thecivilian.co.nz/everything-is-fixed-says-key/)

  14. @Royton De’Ath

    I’d put more emphasis on the unitary, unicameral system of government, and the effects of FPP voting in cementing a two-party duopoly. This made it much easier for a small elite, capturing the leadership of both parties, and adopting what Brian Easton called “market Leninism”. Australia’s more fragmented system meant that, even though the consensus of the (relevant) elite was similar, it was that much harder to ram through a radical restructuring. The vote to scrap FPP was a partially successful response to this.

  15. Thankyou for this, John. A deeper piece on an issue that deserves more attention .

    One thought: New Zealand has the highest outward flows of its better qualified than any `country in the OECD – most to Australia. One cannot help thinking that this enormous and sustained loss of youth and talent must contribute to a less than stellar` economic performance in NZ.

    The NZ Govt argues that it makes up for these losses with migration, particularly from well qualified Asians. But most also leave for Australia, once they stay three years in NZ, thus gaining NZ citizenship and the right to reside in Australia.

    Just to be clear, I am not knocking New Zealanders. I was long ago a beneficiary the trans-Tasman travel arrangement and have lived in Australia many years as an expat Kiwi.

    But I do fear, based on frequent observation across the Tasman that New Zealand suffers deeply from these outflows. Skill shortages are common and deep. Much entrepreneurial talent is lost.

    Could the enormous outflows of its best and brightest `contribute to New Zealand’s poor economic performance , relative to Australia’s?

    Best

    Bern Lagan

  16. @Bern Lagan

    Migration is a big part of the story. But migration flows are themselves the result of macroeconomic shocks and long-term poor performance. Before 1970, flows were roughly balanced and even now, they respond strongly to the economic cycle. So, if macro performance were improved enough, the net flow would probably reverse.

  17. Bern Lagan :
    Could the enormous outflows of its best and brightest `contribute to New Zealand’s poor economic performance , relative to Australia’s?

    Just reinforcing what John says above, the migration is as much an effect as a cause of poor economic performance in NZ.

    Wages in NZ are unattractive compared to Oz, so it’s difficult to keep people in NZ, and really difficult to attract people to NZ from the larger pool of potential employees in Oz.

    NZ employers can’t pay more across the board, because there’s an upper limit of GDP per capita.

    NZ shot itself in the foot pursuing policies that deliberately reduced wages. It was a high risk strategy that didn’t work out, and probably can’t now be fixed, other than by becoming a state of Oz.

  18. John

    I’d put more emphasis on the unitary, unicameral system of government, and the effects of FPP voting in cementing a two-party duopoly. This made it much easier for a small elite, capturing the leadership of both parties, and adopting what Brian Easton called “market Leninism”. Australia’s more fragmented system meant that, even though the consensus of the (relevant) elite was similar, it was that much harder to ram through a radical restructuring. The vote to scrap FPP was a partially successful response to this.

    John, are you a born-again federalist?!

    after the fiscal consolidation and employment contracts Act in 1991, NZ had one mild recession between 1992 and 2008. the 1998 recession was mostly drought related; unemployment was 3.5% in December 2007.

  19. NZ employers can’t pay more across the board, because there’s an upper limit of GDP per capita.

    But that’s a chicken-and-egg: high wages drive efficiencies in labour use, should boost potential GDP/capita. Am I missing something?

  20. Collin Street :

    NZ employers can’t pay more across the board, because there’s an upper limit of GDP per capita.

    But that’s a chicken-and-egg: high wages drive efficiencies in labour use, should boost potential GDP/capita. Am I missing something?

    Well, that’s the thing, isn’t it. You try to improve the micro, but it stuffs up the macro.

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