Handicapping the Oz-NZ GDP growth race

There has been even more media excitement about the fact that New Zealand is currently experiencing more rapid economic growth than Australia. This is largely due to the fact that the two economies are in different phases of the medium term macroeconomic cycle.

However, there is another important factor that needs to be taken into account in making comparisons of this kind. Given access to the same technology, and with similar levels of education, poor countries will grow faster than rich ones, and will eventually converge to similar level of income. There’s a huge literature on this, to which I contributed a little bit back in the 1990s. The key finding is that, on average and under the conditions just stated, we should expect to see a poorer country make up around 2 per cent of the income gap with a richer country each year. That is, convergence will typically take around 50 years (there’s some tricky Zeno-style paradoxes here, which I don’t have room to discuss)

How does this affect comparisons between Australia and New Zealand. The IMF estimates here give income per person of 45138 for Australian and 33626 for New Zealand. So Australia’s income is about 35 per cent above the New Zealand level. The two countries were roughly on a par until the 1970s.

The standard convergence estimate is that NZ should make up about 2 per cent of that gap (or 0.7 per cent of GDP) each year. If the gap is larger, NZ could reasonably be said to be outperforming Australia for the year in question, relative to the standard 50 year timeframe for convergence. If the gap is smaller, NZ is doing worse than par.