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How New Zealand fell further behind

New Zealand’s economic performance only looks good if the past few years are taken completely out of context, writes John Quiggin

John Quiggin 11 November 2015 1243 words

Small picture: NZ prime minister John Key at the Rugby World Cup final between New Zealand and Australia on 31 October. Alastair Grant/AP Photo

To hear Australia’s economic policy-makers speak, you’d think we were trailing the rest of the English-speaking world and in imminent danger of joining Greece in the unsustainable debt club. Treasury secretary John Fraser points to the allegedly superior performance of Britain, the United States and even Ireland; Malcolm Turnbull has followed his predecessor in comparing Australia unfavourably with New Zealand.

What these countries show, we’re told, is that far-reaching reform and budget austerity is all that will save us from stagnation and declining living standards. The content of this “reform” is rarely specified in detail, but it doesn’t need to be. Australians of all political persuasions understand that “reform” is code for harder work, lower pay and a more unequal distribution of income, and “austerity” means cuts in tax for the rich and cuts in services and benefits for everyone else.

On these criteria, we are indeed trailing most of the English-speaking world. All the advocates of reform and austerity need to do now is convince us that these countries are outperforming us on the measures that count.

This is difficult, to put it mildly. Unlike all the other English-speaking countries, Australia avoided recession during the global financial crisis – and not, as is often claimed, because of the minerals boom. The prices of coal and iron ore, our main mineral exports, plunged with the onset of the GFC; only the Rudd government’s rapid, large-scale fiscal stimulus allowed us to avoid recession.

After the immediate crisis had passed, Australia’s recovery was indeed aided by demand from China. But that is scarcely an argument for Fraser and other advocates of austerity. China’s rapid recovery was due to its own massive fiscal injection.

Having begun with a stronger stimulus, Australia also avoided the swing to extreme austerity that characterised most of the developed world, including English-speaking countries. Even Abbott and Hockey, despite talking up a debt and deficit crisis, shied away from really serious austerity measures.

The results speak for themselves, particularly in the job market. Australia’s employment–population ratio was barely affected by the GFC. Even in the aftermath of the mining boom, it has remained at 61 per cent, only a little below the pre-GFC peak. In Britain, the United States, Ireland and Canada, employment fell sharply during the GFC and has never recovered.

The country most consistently singled out as a comparator is New Zealand. Ever since the reform era began in the 1980s, Australian commentators have looked across the Tasman with envy. The ease with which the reform agenda was pushed through a unicameral national parliament contrasted sharply with the unpredictable senators and refractory state governments that hobble Australian governments.

There was a lull in this kind of commentary when Helen Clark’s Labour government held office, but it resumed with full force after the return of the National Party under John Key. Former treasurer Joe Hockey was unstinting in his praise of New Zealand’s performance; if anything, Malcolm Turnbull has been even more effusive. Most recently, New Zealand’s 15 per cent, limited-exemption GST has been cited as a model for us to follow.

The statistics quoted by the Kiwiphiles are superficially impressive. New Zealand has turned in some strong economic statistics recently, and the long-term net flow of migrants across the Tasman paused in early 2015 and may even go into reverse (assisted by the Australian government’s new hardline policy on deporting Kiwis convicted of crimes). But it doesn’t take a lot of digging to find that the reality is radically different. New Zealand’s living standards, once comparable with Australia’s, now lag significantly.

For most of the twentieth century, the New Zealand and Australian economies performed almost identically. New Zealand took a somewhat larger hit when Britain entered the European Common Market in the 1970s, but that impact has long since washed out. The real divergence came in the 1980s. Since then, New Zealand’s income per person has fallen 35 per cent behind Australia’s.

The recent period of strong growth might suggest that New Zealand is finally doing better. In fact, it mostly reflects what has been called “the advantages of backwardness.” 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 a similar level of income. 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 each year. That means that convergence will typically take around fifty years.

Starting at about 35 per cent below Australia, New Zealand’s growth rate should be about 0.7 percentage points (2 per cent of 35 per cent) higher, according to the standard convergence estimate. If the gap is larger, New Zealand could reasonably be said to be outperforming Australia relative to the standard fifty-year timeframe for convergence. If the gap is smaller, New Zealand is doing worse than par. On this basis, the figures show that, far from catching up with Australia, New Zealand has fallen further behind.

The Reserve Bank of New Zealand’s comparison of GDP growth in three countries

Similar points may be made about migration and the labour market. 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. •

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