New Zealand v Australia – ideology to the rescue: Part One

http://www.tribuneindia.com/2004/20040718/sp9.jpgLike the Wallabies and the All Blacks, Australians and New Zealanders argue about who’s economy is doing better and why. Well we’re not arguing about the first of those questions any more.

Coming from a very similar standard of living in the 1970s, both countries embarked on what was for the time radical restructuring plans after the disappointments of Fraser and the greater disappointments of Muldoon. But after Labor Treasurer Roger Douglas came into Labor PM’s David Lange’s office a couple of years into (I think it was) their first term leaving Lange wondering whether he had completely flipped his lid, New Zealand’s reform trajectory became famous for its speed and ideological purity. At the time New Zealand was held up as the model, the more so when the Labor Party fell and the National Party deregulated the labour market and (I think continuing something Labor had started) reduced welfare payments as well.comparative-wages.gif

Well we’re not getting lectures from the New Zealanders any more. The difference in economic performance is just too embarrassing in Australia’s favour. It is now is huge – at least by the standards of developed countries – as illustrated by the attached chart.

But for some of those people who were lecturing us then, the hankering to lecture dies hard. So who to lecture? Well the New Zealanders of course. New Zealand has engaged in ‘stop start’ reform while, in the words of Roger Kerr Australia’s reform approach has reflected a “remarkably consistent, coherent and credible strategy”. Makes you wonder whether the ‘stop start’ nature of the reform might have had something to do with the excesses of the early reform efforts in NZ and the excesses of its champions. Anyway, I’d be glad if someone can set me straight with evidence to the contrary, but it doesn’t seem to have brought forth much soul searching from those champions about their own possible role in the ecology of ‘stop-start’ reform.

Before proceeding, I should stress that I don’t know the answer to why Australia has performed so much better than New Zealand. I think it’s a real mystery. But the recently published CIS publication entitled Why is Australia So Much Richer than New Zealand? (pdf) by Phil Rennie didn’t help me work it out much. It is an interesting read. That having been said, perhaps I’m just congenitally naive, but I must admit that, having an interest in the subject which I’ve expressed a few times on this blog, I’m disappointed with the paper. It constantly ‘cherry picks’ to make favoured points in line with the author’s priors rather than focuses carefully on the explanatory question at hand. For instance points made about events in the last five years are strictly speaking pretty irrelevant to the diagnostic effort of trying to figure out why Australia has outperformed New Zealand.

And the paper seems unimaginative in the things it doesn’t look at, blinkered in the things it does look at only to look away and wilful in some of the lessons it draws from the contrast between Australian and New Zealand policy. One of its strongest policy conclusions is that we adopt one of the CIS’s favoured policies despite the fact that the policy is to revert to New Zealand style reform – by jettisoning Australian style reform.

The paper rules out a bunch of explanations for the differential economic performance as valid in any strong way. Thus for instance the mineral boom here is roughly mirrored in the price rises that NZ commodities have enjoyed. The paper points out that NZ is actually more trade exposed so that means that terms of trade improvement have higher leverage there. Still, I wonder if NZ’s terms of trade gains have given rise to as much investment and as big a surge in government revenue as they have here. I’ve not looked and in a way it’s all pretty irrelevant to the long run story in any event for reasons I mentioned above – the phenomenon is only about half a decade old.

The paper quotes reputable sources (like IMF research) claiming that as much as 50% of the gap between NZ and other OECD countries is due to its distance from major markets. Perhaps the research addresses this, but since where explaining the change over the last 35 odd years it seems unlikely that it’s that relevant – though there is some evidence (I didn’t see it cited) that the relative tyranny of distance has got worse (as the absolute tyranny of distance has got much milder). As the paper says “Over the last thirty years, New Zealand hasnt moved further away from the world, and Australia hasnt moved any closer.”

capital-per-worker.gif

The major explanation the paper offers is that us Aussies have been investing in capital for our workforce while the Kiwis have not. This is true enough but seems implausible to me as the only explanation – the deviation seems much too big – but the relationship seems pretty clear. Still, on my reading, that’s what the study hangs its hat on.

The paper then asks if the problem is a lack of capital or a lack of opportunities to invest.

Lack of capital seems to turn up in the country’s accounts. Look at that current account deficit below (in bold) stretching as far as the eye can see.

Key indicators 2007 2008 2009 2010 2011 2012
Real GDP growth (%) 3.1 2.8 2.9 2.7 2.9 3.0
Consumer price inflation (av; %) 2.5 2.6 2.5 2.3 2.3 2.3
Budget balance (% of GDP) 4.8 4.5 4.6 4.7 4.8 4.9
Current-account balance (% of GDP) -8.1 -7.5 -7.1 -6.8 -7.0 -7.2
Short-term interest rate (av; %) 12.7 12.7 12.2 11.8 11.6 11.6
Exchange rate NZ$:US$ (av) 1.37 1.41 1.50 1.60 1.67 1.77
Exchange rate NZ$:¥100 (av) 1.17 1.34 1.56 1.71 1.82 1.9

Source: The Economist

However it turns out that author is not too interested in the ‘lack of available capital’ explanation. Although he cites the persistent correlation between the level of investment and savings across countries – relationship that has survived the globalisation of capital markets – he doesn’t accept that there’s a problem, citing long term interest rates.

It’s true that the long term bond rate between the two countries has been similar between the two countries though there’s been a small but significant gap with Australia having lower long rates for a while (though I’ve not checked this carefully). The author certainly wouldn’t want to cite short term rates – and he doesn’t. Short term interest rates are the highest of any developed country as they’ve been for a fair while and as they’re expected to remain for a fair while. Short rates have been substantially higher in NZ for many years. Have a run through real interest rates for the recent past for yourself on this page. The cost of equity capital is harder to measure, but one big difference between the two countries is the extent to which Australia’s equity capital market has boomed compared with New Zealand. This doesn’t rate much of a mention – and I’m not sure of its significance, but it seems suggestive to me. Looks like the capital washing around our equity markets isn’t doing us much harm. market-capitalisation.gif

So what’s the explanation for the lower level of capital per worker – produced by a lower level of investment per worker? Well the paper doesn’t really offer one. The paper offers what I call the ‘body language’ of an explanation, but it isn’t really an explanation at all. It says that the alternative to the ‘lack of funds’ explanation is the ‘lack of investment opportunities’ explanation. It doesn’t take that idea far, because it then doubles back to what seems in effect to be a cost of capital argument (which seems to me to be an availability of capital argument, not an availability of investments argument but I guess it depends on how you define terms).

It argues that investment has been scared off by NZ’s ‘stop-start’ approach to reform. But if that’s the case you’d expect to see some corroborating evidence – like investment and perhaps equity premiums changing at important times when reform stopped and or started. And the things that the paper cites as things that scared off capital are pretty tame. Issuing instructions to Telecom. Air New Zealand, and Personal Injury insurance have been re-nationalised. Well we’ve not renationalised anything much – but this is small beer. The kind of thing that constitutes background noise. And remember, this is a comparative study. We’ve been screwing around with Telstra since Kim Beazley first moved from defence.

A stronger part of the paper is where it cites the possibility that one reason for the increased capital labour ratio might be Australia’s “more rigid, unionised system of industrial relations than New Zealand, with a high minimum wage and national awards that set pay levels.” That’s where we’ll take up in part two.

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17 Responses to New Zealand v Australia – ideology to the rescue: Part One

  1. I heard a NZ speaker once say that he has to accept the fact that many people migrate from NZ to Australia but that, every time it happens, the average IQ in both countries increases.

    I wonder how much a difference a greater land mass of which to mine resources might contribute!

  2. Patrick says:

    I think that was a kiwi foreign minister – of course, he probably now lives in Australia :)

  3. smokey says:

    I got here in ’85 after fleeing Rogernomics (doubling my wage at the time doing a less skilled job). The unions in NZ “just laid down and died” my father told me back then. Here, Labor built the Accords and a co-operation with workers that lead to greater productivity and greater overall wealth. In the light of the union bashing by the Libs this last election, it’s interesting that unions have played a key role in in wealth creation for Australia.

  4. The Doctor says:

    I’m inclined to think that the ‘Rogernomics’ and WorkChoices IR setups create negative feedback loops, which their proponents ignore in their delight at increasing efficiency by decreasing the price of labour. Unfortunately, this ignores Henry Ford’s lesson of at least paying your workers enough to afford the product they produce!

  5. Brendan Halfweeg says:

    Nick,

    Comparisons of income may not be that useful, since New Zealand will starting at a different base. GDP growth rates in New Zealand have steadily increased over the 1990s, but unless we stop growing and/or the Kiwis start growing faster than us, overall the Kiwis will always be behind us.

    I really don’t believe that unionism has had a greater impact in Australia though, especially since union membership has been plummeting since the 1980s, where today less than a quarter of working Australians are members. Sure, there may be some freeriding on collective bargaining, but perhaps the days of industrial strife may be coming to an end in Australia.

    As an institution whose aim is to negotiate on behalf of existing workers, unions are inherently opposed to employment growth since this weakens the negotiating power of members. Unions rent seek to obtain privileges for its members at the expense of new entrants and employers. When private enterprises collude together to fix prices, they are prosecuted to protect both the consumer and promote competition. When unions do the same thing in fixing the price of labour, we turn a blind eye.

  6. Robert says:

    Like the Wallabies and the All Blacks, Australians and New Zealanders argue about whos economy is doing better and why.

    Buggered if I can remember when the Wallabies and the All Blacks argued about the economy, let alone the proposition here – or even mentioned it. Perhaps the article following makes up for it.

    Nevertheless, that far as it is, good time to wish Troppodillians well as the year comes to a festive close.

  7. Robert,

    Thanks for the pedantry – usually (as in this case) welcome here. James Farrell is MUCH more of a pedant than me, but I do get a small thrill from being corrected when the person correcting me is so obviously right. (James gets a big thrill – though normally that’s just from putting me straight.) The Wallabies and All Blacks do not argue about the economy. I should have said “Like arguing about the Wallabies and the All Blacks, Australians and New Zealanders argue about whos economy is doing better and why”

    Brendan,

    My agnosticism in the article is not feigned but genuine. I’m not arguing that the NZ’ers busting their unions was bad for their economy. I don’t know. I am however unabashedly drawing attention to the tendentiousness of the paper – of which more in the next part.

    I think you’re right that in general unions don’t have as much an incentive to generate employment as they do to restrict it and bid the wage up. But there are exceptions brought about by changed institutions and sometimes perhaps different leadership. We had such a period for about a decade after 1983 when the unions cooperated in keeping down real wages with the explicit aim of generating more jobs. The union bosses often got hell from their rank and file and enterprise bargaining was at least in part the union leaders’ way out of their dilemma.

    There is a strain of literature on ‘corporatism’ I referred to in this post which argues that, providing union structures are sufficiently encompassing of wider interests – either because union structures are so small they’re affected by competition between firms, or because they’re so encompassing that they internalise the externality you’re talking about, that they produce good wage outcomes – ie wage outcomes that don’t choke off employment growth and leave a rump of unemployed.

  8. cs says:

    Talking of the Wallabies and the All Blacks – Robbie Deans! Boo! Humbug! Rubbish! Why is Australia comtemplating hiring a reject for All Blacks coach, which team which only went one rung further than the Wallabies in the World Cup? Deans’ team failed in the Super 14 in South Africa last year. Why do we want him? Get the bum outta here; the whole idea offends the tribal mind! How can we have satisfaction in beating the All Blacks when we’ve franchised the brains trust to New Zealand? It’s an outrage. All sport is local. Harrummpphh!!

  9. derrida derider says:

    As others have pointed out, what matters for the comparison is not the level of income but the growth. I reckon there are two major reasons why NZ has not grown as fast:

    1) Their central bank has made repeated mistakes, especially early on when they followed a strict monetarist line. Take out the unnecessary recessions and the NZ growth rate looks much more like the Oz one over most of the period.

    2) They were in a deeper hole than us when they started (it was the evident depth of the hole that motivated the reforms’ radicalism). They’d just lost all their UK market and had pissed away a lot of national resources on Muldoon’s “Thunk Bug” strategy. It took a long time to recover from that.

    IOW I don’t think micro reform had all that much to do with it either way.

    And, yes, that paper by the CIS is just embarrassing in its special pleading.

  10. Anne says:

    I think the reason for NZ’s recessions (relative to Australia) is the liberalisation of European economies through EU policies, which eroded much of its export of meat to UK. Actually, I think an important reason is its reliance on agriculture and the problems related to it – it is a commodity market, it can’t grow in the long run, increased global competition, and subsidies (particularly EU policies) keeping WM prices artificially low.

    For Australia, I think immigration plays an important role in its impressing economic growth rates. Australia is importing heaps of well qualified labour in exactly the fields where it is needed the most, through its frequently updated skilled immigration programme… and even charging the immigrants for it (I would know… just another mouse in the trap). The programmes also encourage wanna-be immigrants abroad to enrol into study programmes matching Australian needs, and promotes Australian education abroad, particularly in Asia. I just finished my master here, and many of my class mates who were international students, were basically here because they want to immigrate to Australia. The constant inflow of qualified labour keeps the wheels of the economy running full speed while keeping union bargaining power and inflation under control.

  11. Patrick says:

    That’s probably particularly apposite given the fact that the most liberal part of our immigration regime concerns the kiwis.

    We should extent that treatment to more countries!

  12. Anne says:

    That would be a bad idea… the benefits for the Australian economy relies on the sorting mechanism (the point system), filtering out everybody but the most needed and the best performers (well, if that is so easy to measure). i am not talking about kiwis but countries where there are great disparities in terms of educational level etc… I think as much immigration as possible of Kiwis to Oz is an advantage for Australia, but not of significant importance for the economy… there are not many of them, anyway

  13. Talisker says:

    dd, wWhat a dumb comment. What specal pleading? From the media and web commentary at least it seems most NZers think the paper is right. So, what’s your gripe?

  14. Bring Back CL's blog says:

    the All Blacks and Wallabies are just trying it on.

  15. Patrick says:

    Not necessarily Anne. If we don’t substantially expand low-skill immigration we are going to have to substantially increase capital expenditure – whilst that is good, I am not entirely convinced of the virtues of the post-low-skilled worker economy.

    Not least because immigrant low-skilled workers tend to be, as I understand it, better off here than there and good at producing high-skilled (Australian) descendants.

  16. Anne says:

    I agree…

    Maybe I am a bit biased regARDING the problems with immigration my own country, Denmark, has experienced. We did not have a “filter” like Australia and Canada. Back in the 60s? (sorry don’t remember the year) we took in a big load of low skilled Muslim immigrants (mainly Turkish) due to a lack of labour in low status jobs. Some years after came the recession, and many of them got unemployed. They were never flexible enough to move to wherever it was necessary due to low education and low cultural capital, because they came mainly from small rural villages. Many of their descendants have problems, too. it is hard to break the “social inheritance”, and to do well in Scandinavian countries requires good qualifications, and cultural compatibility. Later on we took in a stream of Middle eastern refugees, based on an evaluation of the seriousness of their claims – that their lives were in danger back home. Again, many came from villages and did not have particularly high qualifications or suffered illnesses due to torture etc. A result of the policies, or lack of an immigration strategy that addresses the needs of the Danish society (current and future), there is a large marginalised group of Muslim immigrants living in their own parallel societies (or ghettos) in the Danish societies. Today, even well educated Muslim immigrants targeting the needs of Danish companies find it hard to make a career and good life in Denmark because it is extremely difficult to steer free of the stigmatisation. Not to speak of the descendants of the immigrants.

    Australia is much much smarter with its selective policies…

    Everybody knows that the immigrants are here, because they are needed. Well, obviously the foundation is different because Australia is a nation of immigrants. But still, Denmark has taken in an overload of the “wrong” type of immigrants, and today all immigrants in Denmark suffer the long term consequenses.

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