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.


* 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. Have a comparative look at Australia’s and New Zealand’s performance through an MMT viewing glass. Compare expansionary or contractionary fiscal policy (size of deficits or surpluses) to performance. But you must also consider the private debt “credit accellerator” i.e. the impetus that credit monies (increasing debt) are giving the economy. The combination of fiscal policy settings and the credit accellerator/decellerator, when considered in conjunction with trade surpluses or deficits might well give the answer at the macroeconomic level.

    It is clear that a credit crunch and/or austerity policies (pro-cyclical surpluses) constrict the economy. Why should it be a surprise that the opposite policies (deficits and easy credit) boost the economy (within structural limits). Fiscal policy should always be set to get real effects not to get an arbitrary “balanced budget” or mealy-mouthed “fiscal responsibility”. The logical thing to do is to drive the economy as hard as possible via deficits (preferably this rather than too easy credit) until capacity constraints are reached or until the inflation target is exceeded. The inflation target could probably be relaxed to say 5%. The unemployment target should be set 2% (frictional). A job guarantee should be implement.

    Frankly, I don’t understand why Keynesians (of any variety) should;

    (1) Be afraid of this policy.
    (2) Not understand it.

    Neoclassicals, Classicals, Austrians and Monetarists don’t understand political economy at all so their ignorant opposition is no surprise and should be ignored.

  2. “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.”

    Without necessarily disagreeing can I ask:

    1. Did your analysis of the oil shock include the second one of 1979 which seems to have been just as bad as the first and actually led to rationing?

    2. About the Wool Boom – I was told by NZ friends in the late 70s that much of the profit from those good times had been horded away allowing NZ to live off the capital for a while (how long, how much? – maybe there is a monograph).

    3. Related to the latter while the lamb industry has recovered my understanding is wool never did. As a result they are now pushing dairy most heavily via Fonterra.

    4. NZ export income appears still utterly dependent on primary production while imports are dominated by machinery and energy.

    whose value hasn’t risen much.

    compared to energy in the same period

    and maybe machinery

    So to what extent is a small nation’s ability to grow dependent on its import/export balance even if the latter is a small proportion of GDP. I always understood in these things you had to consider value adding effects – so $1 export = $3 GDP generated.

    Much more so than Australia they seem open to international swings and roundabouts.

    5. A separate issue is to what extent Australia’s GDP is overvalued. I’m thinking here the cost of housing which I understand is much less in NZ than Australia. Maybe the 30% divergence is aided by us having a bigger property bubble?

  3. Good questions. Some responses:

    1. The analysis applies to both oil shocks, since both occurred well before the start of the reforms
    2. I doubt that there was much hoarded from the wool boom in NZ
    3. Australia was also a big wool exporter – it was our largest single export for many years
    4. The divergence was well established before the recent boom in energy prices
    5. House prices don’t affect measures of GDP

  4. Would NZ be better off using the Australian dollar? A fifth of what they export goes to Australia. And whilst they import more from China than Australia it is a very close race. Both trade in goods and labour between NZ and Australia is very open. I can’t see them needing their own currency any more than WA or Tasmania. And WA and Tasmania don’t have their own currencies.

  5. Would NZ be better off using the Australian dollar?

    No. No, no. Nononononono.

    Surely the lesson of the Euro Zone is fiscal union before currency union!

    (Apparently there is a standing offer from Oz to NZ to become a state, dating from somewhere around 1900… It’d be the sensible thing, so it’ll never happen.)

  6. John.

    As a NZ-born economist (sort of) living in Australia, I would imagine that the respective policies of the two governments only explain a fraction of the divergence in growth.

    I suspect the greatest determinants of Australia’s better fortunes have been Australia’s: larger and more diverse natural resource endowment to exploit and drive growth; larger domestic market underpinning economies of scale (dairy manufacturing is possibly the exception); and possibly the net benefit of many of NZ’s best and brightest moving to Australia over the past 30 years (only now starting to reverse).

    In short, Australia’s better (measured) performance is probably had more to do with the lucky country than the performance of either government.

  7. To me, the lesson of NZ’s experience is that government policy is effective. (Apparently there are people who doubt this.)

    Up till about 1990, we could expect effects from the oil, market access, and deregulation shocks. After that, the Employment Contracts Act 1991 was implemented in order to depress the market power of employees and therefore wages, and it has done that. Productivity follows wages.

  8. @Jim
    As I pointed out in earlier comments, Tasmania has all NZ’s disadvantages and more, but still does somewhat better in terms of GDP per person.

    I think migration is a big part of the story, but it’s an endogenous response to high unemployment, which is caused, largely by bad macro policy. As Jacques Poot observed decades ago, and as you note for today, whenever the NZ labour market recovers, the flow across the Tasman ebbs or even reverses.

    Before the divergence, migration flows were pretty much balanced

  9. To pre-empt the neo-con response to why the market theories didn’t work out in NZ:

    1. They weren’t implemented “in full”. They were only partially done (ie there was still a progressive tax scale not a completely flat tax, there were still regulations distorting the market, the drag of a universal health system was still present etc.). If they had been fully done, then you would have seen NZ soar above Australia.

    2. They didn’t have time to fully set in and transform the entrepreneurial culture. This takes time and the re-regulation process occurred in a way that cut down the green shoots of competition that were probably starting to appear.

    3. There are probably cultural issues that inhibited the requirements for drive, optimism and confidence that are required for a society to be truly competitive and hard working. New Zealanders are renowned for their bleak view of the world that this had a negative impact on the reform process.

    4. Easy escape from the reforms. As noted by others New Zealanders can easily move across to Australia. Particularly for young people that meant that rather being forced to change, adapt and grow rich locally they could avoid the harsh but necessary medicine of reform and go to an easier and more socialist culture such as Australia. This raises the issue of whether outward border controls are a necessary part of market reforms.

  10. Whenever there is a spectacular failure of rightwing policy the five stages of wishful thinking rapidly follow:

    1. It didn’t happen.

    2. It may perhaps just possibly have happened but there were special reasons.

    3. La-la-la

    4. La-la-la

    5. La-la-la

    This happy process can be applied to any number of policy failures from the repeating financial panics in the US, the downward slide of the NZ economy, to the invasion of Iraq. In the age of the Internet sophisticated practitioners can perhaps substitute Step 3 with ‘Drivel, Garbage and Simony (2013) find that New Zealand’s economic decline is entirely explained by the adoption of the metric system.’

  11. @boconnor

    An interesting possible test for theories of why NZ and Oz are different – whether they be JQ’s or your own intriguing list – would be to compare US states. I saw this done once comparing prices where liquor was government controlled v. private. There are sufficient states for generating lots of great hypotheses rather than floundering with case A v. Case B with no statistical power.

    I mention this as a result of some road trips through the US and how markedly the sociology and standard of maintenance/living changes from state to state. In particular I remember going from Iowa to Kansas via Missouri – the Missouri border marked a change as noticeable as going from Germany to the old Yugoslavia.

    The nice thing about the US is that they all use the same currency and are highly integrated via the Eisenhower interstates, so at least some of the statistical noise is managed.

  12. Fascinating question. What is the basis of this marked economic divergence? One major factor is the recently concluded 2000s mining boom which was just a matter of good fortune. I am thinking that it might have something to do with the financial deregulation and boom in that sector in the early eighties. It may have something to do with Australia being a preferred destination for Japanese investment (remember the fears that Japan was going to own Australia en bloc?), or major corporations as a whole choosing to set up on the East Coast rather than in NZ. Just a small superiority in any one of those numbers, compounded over 20 years or so, will show a large economic divergence between Oz and NZ.

  13. @Will

    The divergence was already near 30 per cent before the minerals boom. And 1980s financial deregulation was a disaster in both Oz and NZ

  14. Tasmania may have some disadvantages but it also has some advantages. It is closer to the large nearby market (Australian mainland) and has less barriers to entry. There share a common currency with that market which NZ does not. And if you think a common currency only makes sense within a fiscal union well they have that also.

  15. @TerjeP

    To follow thro on what you say about the advantages of Tasmania being closer to a large nearby market etc. Tasmania may also be doing better than New Zealand because, simply, it like Australia has not made New Zealand’s mistakes.

  16. @TerjeP

    Tasmanian freight costs are hideously high. While there is subsidy for the Melbourne Hobart trip (Freight Equalization), there is no International Freight service. I suspect the cost of freight between NZ and Australia and Tasmania and the Mainland is a similar cost, because the highest part of the cost is the loading and unloading. Given unemployment in Tasmania is rising to near 10%, and falling in New Zealand, it would seem that the disadvantages outweigh the advantages, at least at the moment.

  17. Here’s a link to a tweet showing the sectoral balances for New Zealand – @deficitowl – Stephanie Kelton tweeted the graph first – it’s her work.

  18. Not that GDP is an important measure, but this is how I score it:

    AUS – 1973-1977, 1980-82, 1987-92, 1999-2000
    Neutral – 1977-1980, 1997-1999
    NZ – 1982-87, 1992-97, 2000-2004

    2004+ resources boom, for the win.

    Pretty even, maybe NZ probably slightly ahead, for the period of concern.

  19. @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

  20. 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.

  21. 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.

  22. 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.

  23. 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?

  24. @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.

  25. 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.

  26. 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.

  27. @@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.

  28. 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.

  29. @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.

  30. @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.

  31. 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 (

  32. @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.

  33. 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?


    Bern Lagan

  34. @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.

  35. 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.

  36. 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.

  37. 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?

  38. 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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