New Zealand’s zombie miracle

Twice in the last couple of days, I’ve bumped into the seemingly unkillable zombie idea that the New Zealand economy is doing well and ought to be a model for Australia. Checking Wikipedia to make sure I hadn’t missed anything, I found that, as of 2015, NZ income per person was 30-35 per cent below that in Australia, as it has been ever since the miraculous reforms of the 1980s and 1990s. NZ is down with Italy and Spain on most rankings, while Australia is comparable to Germany (above on some rankings, below on others).

This wasn’t always the case. Before the reform era, New Zealand and Australia had almost identical income levels, among the richest in the world. NZ took a bigger hit from British entry into the EU in the early 1970s but after 50 years, that can scarcely serve as an excuse (and of course, no one is predicted that Brexit will be a gigantic benefit to NZ; rather the reverse)

Then there’s migration. I dealt with this here, but I’ll repost crucial points over the fold.

The current period of approximately zero net migration doesn’t mean New Zealand’s labour market is outperforming Australia’s in any absolute sense. As a result of migration flows over the past thirty years, there are around 650,000 New Zealand citizens living in Australia, equal to around 15 per cent of the citizen population of New Zealand. The number of Australian citizens living in New Zealand is far smaller, at around 65,000.

It may reasonably be assumed that a substantial proportion of expatriates, given comparable economic opportunities, would prefer to live in their home country. So, if the New Zealand labour market offered prospects comparable to those in Australia, we would expect to see a substantial net flow from Australia to New Zealand.

Importantly, New Zealand citizens are not eligible for Australian unemployment benefits. Thus, at any time when the Australian labour market is in a cyclical slowdown, as it is at the moment, the option of moving to Australia is unattractive except for those who have strong employment prospects. Conversely, the option of returning to New Zealand makes sense for unemployed New Zealanders, regardless of their prospects at home.

This cyclical pattern of variation has been observed ever since the opening up of migration in the 1970s. Initially, it was quite common for the long-term net flow from New Zealand to Australia to reverse in response to cyclical conditions. But as the gap between the two economies has widened, the long-term trend has dominated. Even as New Zealand has recorded one of its best performances in years, and Australia one of its worst, the flow has merely paused, with no clear evidence of a reversal.

For much of the twentieth century, Australian political discussion was dominated by the “colonial cringe,” the belief that only ideas from Britain, and later the United States, were worth talking about. Apparently, all that has changed, and now New Zealand is on the list too. In reality, though, Australia has done a far better job of economic management than any of these countries. •

39 thoughts on “New Zealand’s zombie miracle

  1. @John Quiggin
    Life expectancy at 25, 1905 – 42 (41/43) more years, to 67; 2005 – 57 (55/59) more years, to 82; increase – 15 years. It’s not just infant mortality.
    And, fine, we have a smallish advantage over NZ that could well be due to their economic mistakes. But remember, we have an advantage over practically everybody, whatever their economic bias; we’re second only to Japan for (combined both-sexes) life expectancy.
    Sorry to nag, but I always think that the takeaway given those stats is that anybody proposing major changes to our welfare system should have the onus on them to explain why they’re not going to f**k up a world-beating model.

  2. The example of New Zealand, with its heavy reliance on dairy for its economy, has made me wonder more generally whether my impression that small countries with aggressively free market, “business friendly” taxes or policies seem to end up as economic mono-cultures, putting all their eggs in one basket, is correct.
    With other countries it may be financial services, or corporate support of one form or another, with other sectors allowed to die. But this seems obviously risky – just look at NZ and the sudden dairy glut that one recent report says is causing 85% of farmers to be operating at a loss(!)
    I assume that there may have been economic work done on this apparent tendency – or not. Or maybe my impression is wrong. Would be interested to know.

  3. @Ikonoclast
    Your #22

    Sure it played a part – for all of 2 – 3 years. Not for 25 years which is the period of time for which Australia has not had two successive quarters of decreasing nominal GDP. But even so, the fiscal perfidy of the Howard government ensured that the Aussie mining boom was – just like the North Sea Oil boom in Britain under Thatcher – completely wasted. Australia isn’t Norway.

    How has Australia been different ? Well, it did actually have a manufacturing industry for a while – which has finally been essentially extinguished by Abbott. But mainly, Australia has had a very high net immigration – and, surprise, surprise, when you have that, you have an ongoing growth industry providing all kinds of ‘people services’ – housing, transport, shops, schools etc etc. Not to mention the GDP increase based on providing a significant percentage of immigrants with employment – which we mostly do, and hence our overall unemployment rate doesn’t climb markedly.

    You see, despite the desire of economists to mystify their subject, an economy is simply people spending money. And thus we soldier on, all making a precarious living taking in each other’s washing.

    But then, we still have to address ProfQ’s key point: how exactly did NZ’s “deforms” screw its economy so that it fell so far behind Australia in GDP per capita in such a short period of time. And why, when this is clearly the case, do the Right Wingnuts and Left Right Outs want us to punish ourselves by copying the NZ failure ? And why are we so eager to do just that ?

  4. @Jim Rose

    This is false, at least if you’re referring to the 1991 Act. New Zealand had a severe recession in 1997-98 thanks to Don Brash and the Monetary Conditions Index. Australia, equally exposed to the Asian crisis, avoided recession thanks to better monetary policy (and maybe other factors).

  5. Sorry to nag, but I always think that the takeaway given those stats is that anybody proposing major changes to our welfare system should have the onus on them to explain why they’re not going to f**k up a world-beating model

    We’re in furious agreement on that one

  6. @John Quiggin

    My source is Low Wage Economy | New Zealand Council of Trade Unions – Te Kauae Kaimahi, see slide 3 headed high unemployment.

    The union data shows resumption of real wages growth after 20-years of stagnation soon after the ECA was passed.

    no hyperlink because of spam filter.

  7. The example of New Zealand, with its heavy reliance on dairy for its economy, has made me wonder more generally whether my impression that small countries with aggressively free market, “business friendly” taxes or policies seem to end up as economic mono-cultures, putting all their eggs in one basket, is correct.

    Redundancy is inefficiency, and [to a certain extent] vice-versa.

    [royal navy ships in the age of sail were what we might call grossly over-manned in normal conditions: but they weren’t designed for normal conditions, they were designed to be operable with half the crew incapacitated. “Conditions might change” is something that some people aren’t properly cognisant of.]

  8. I tried to look up the comparative GDP per capita growth but could only get to 2014 easily.

    But it certainly supports your argument John. Hopefully this code will show the graph.

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