As I said in the posts, I certainly don’t want to appear to be an expert on NZ. I was offering a critique of your paper largely from within the resources it offers itself, and with a few things I did know about NZ along with some things I looked up. So you’re the expert on the evidence - not me.

That having been said, like I said in the pieces, I felt that the piece itself was tendentious and unconvincing. You rely on the NZ Treasury paper to dismiss the ‘lack of capital’ hypothesis. There are a couple of responses. Firstly it’s not really a lack of capital. It’s a question of what price it’s offered at. Most firms feel they’re starved for capital most of the time, so at a time when there’s a glut of the stuff around, I guess it’s not surprising that - relative to their own past experience they didn’t report a lack of the stuff when asked by Treasury.

More importantly as the paper often does - it moves around from its diagnostic mode to something else, and so, though I’m not arguing it’s deliberate - it seems to cherry pick. During most of the period under study there wasn’t a savings glut, so if the availability of capital hypothesis doesn’t fit the most recent period (during which growth was better in NZ) it seems to fit the earlier period.

Certainly the figures I’ve found suggest a (relative) lack of capital. Long bonds have higher yields of around 50 basis points in NZ over the last four or five years - not trivial when the total yield is around 600 basis points. The difference has fallen to about half that over the last year or so. You have very little investment abroad (around 10% of GDP - which seems very low for such a small country). Australia had around that in the late 80s and has roughly tripled that figure. So that’s a huge difference right there. Our stock market has doubled in relative size compared to yours - from approx 50% to 100% of GDP. So that looks to me like a big difference in the amount of capital washing around. Then there’s NZ’s savings rate and current account deficit - both of which look awful.

As I think you can probably tell, I’m not arguing any of this from a strong set of presuppositions about what conclusions you should have come to. But surely these things are worth mentioning. On a couple of hares you set running in your comment - I don’t think there’s anything necessarily wrong with using foreign savings or capital. But as you do more of it you’re going to start paying above the odds. And some of it won’t be as good capital as it would be from NZ - because of NZ’ers better knowledge of investment opportunities etc. So you want a healthy mix and plenty of foreign and domestic capital and it looks like NZ doesn’t have it.

But if you want to make the ‘lack of investment opportunities’ case, it seems to me that you’ve got to demonstrate it. All you’ve got it seems to me is the allegation of ’stop start’ reform - as demonstrated by what look to my untrained eye as some fairly normal hiccups - like directing Telecom around, and rescuing the odd company that’s fallen over. The latter is perhaps more than we’ve done but it’s hardly much of a big deal in the scheme of an economy. However sill it was (and I’m assuming, but don’t know, that it was) I can’t imagine some NZ company holding back from investment because Air NZ was rescued by the Govt.

And if one can demonstrate a substantially greater ’stop start’ approach to reform, then one has to demonstrate some causation doesn’t one? If ’stop start’ reform is the critical problem wouldn’t one expect to find the footprints of this explanation in financial stats - investment and/or other cost of capital measures? I don’t think you’ve provided any evidence of this kind.

On wages, like you say it seems to me you’re afraid of the left wing interpretation of the finding that Australian labour market reform may underpin higher investment. Again, I’m not a fan of the left wing interpretation - for reasons I explained in the post - I give greater weight to the ‘outsiders’ locked out of a job. I don’t know what I’d do and my instincts tell me that regulating wages back up in NZ wouldn’t work too well. But it seems to me that right now NZ is in a real bind - the better, brighter employees with more getup and go just . . . . get up and go . . . to Australia where they get much better pay. This creates a vicious spiral.

I have really no idea what the NZers should do about that but it’s a real problem and I think it might be worth putting and trying to think about. I suspect it’s a dynamic problem. Perhaps NZ needn’t be in this position but like the Irish joke goes - if I were you I wouldn’t start from here. NZ might have avoided its current fate, but it’s now in a pickle and I don’t think it’s easy to work out how to get out of it.

Further, I’m not so enamoured of policy to think that it can be only policy that explains the performance. When differences of this magnitude occur it’s often something more. Like you I don’t think it’s ‘culture’ - except that to my surprise I’ve found NZ a more ‘ideological’ place and I think that contributes to the ’stop start’ problem.

But I wonder whether NZ is suffering from some geographical problem in which its distance from the rest of the world has started to matter more. An analogy is what’s happening in regional Australia where small towns are dying but regional centres are growing. It may be that something is happening between NZ and Australia a bit like the struggle between Geelong and Melbourne to be the major town/city in Victoria. Both couldn’t win and Melbourne won. Australia may have sufficient scale to attract its share of regional headquarters, retain at least most of its manufacturing, have a capital market that’s growing faster than many . All this adds to its agglomeration economies. Perhaps NZ is just finding it harder and harder in these areas.

Also, I don’t follow you when you say that CGT is ‘hard to implement’. What do you mean?

I’d be very happy to follow up - are you in Sydney or NZ? (If the latter that would make it harder!!)

Believe it or not, I started this study with a completely open mind. I’ve heard arguments before that government policy is the major difference, and I was kind-of hoping I could discover a new, original, ground-breaking answer.

But…the more I looked at all the possible suspects, the more I kept getting drawn back to policy - as a sum-total over the last 30 years, not just the last 10. The other possible reasons (mining boom, size, compulsory super etc) just do not have enough evidence to back them up, and your posts seem to acknowledge this.

Perhaps I should have expanded further on the incompetence of Rob Muldoon (PM from 1975 to 1984) who really shafted the economy. NZ’s reform/transition period was painful largely because of him – he drove us so far down the wrong way street that it took us a long time to turn the car around and get back on the main road, by which time you Aussies were well ahead of us.

And even then, in some respects we have never caught up. If we look at size of government (measured by tax take) then the NZ and Australia were almost equal in 1975, at 28% and 25% of GDP respectively. By 1990 it was 37% and 28% respectively, most recently it is 37% and 31%. I believe size is important and have argued this in previous papers.

I think it’s a little unfair to say I’ve ‘cherry picked’ arguments. I’ve tried to include different views and theories in the paper, including those from people who are staunchly anti-reform (like Chris Trotter) or have completely different solutions (e.g. the NZ Institute who push savings).

Some of the alternative ideas you’ve raised, I did look at in depth but left out for reasons of brevity. The paper is about 7000 words and I could have written the same again on any of these issues, but here is a quick summary:

*Does the higher cost of labour in Australia encourage more investment, and therefore more capital investment than in New Zealand? This is an increasingly popular view amongst the Left, who therefore argue the way to close the productivity gap is legislate for higher wages.

I’m very sceptical about this, for a number of reasons. Firstly, Australia also went through a period of low wage growth in the early 1990s, mirroring what was happening in NZ at the same time. In this study by John Edwards, he argues that the refusal of the AIRC to give wage increases from 91 to 93, and enterprise bargaining, is one of the biggest reasons for Australia’s subsequent boom. Why? Because wage increases without productivity increases were causing massive inflation.

Secondly, a NZ Treasury study from 2005 considered NZ’s ‘capital shallowness’ and found that NZ firms are slower than Aussies to respond to changes in relative prices, even when all other things are equal. From the summary: “Whether there are impediments or greater uncertainty in New Zealand that limit the ability of firms to respond to economic signals as much as their Australian counterparts remain as possible explanations requiring further investigation.” http://www.treasury.govt.nz/publications/research-policy/wp/2005/05-05

So what are those impediments? The New Zealand Institute for Economic Research has argued that regulation is important here http://www.nzier.org.nz/includes/download.aspx?ID=20248. I’ve argued for tax and the size of government as significant reasons.

*Could there be cultural differences holding back growth and investment?? I consider this in an article to be published in Policy magazine this week, the short answer is ‘not really’.

*Compulsory super: I’ve been unable to find any studies which give this as a major reason for Australia’s long boom, but I’d be very interested if you know of any. The NZ Institute (a centrist think tank) is a fan of this scheme, but I’m sceptical about the economic benefits, as I outline on pg 8. As this paper from the NZIER points out, NZ firms have plenty of access to development finance, and forced savings has a cost. Is relying on overseas finance a bad thing? This Treasury paper is sceptical.

*Better investment in human capital: I couldn’t see any evidence of this from either country, but would be interested in anything you’ve seen.

*Capital gains tax; yep this is a really tricky one and thereotically I have a lot of sympathy for this, but in practice is a bit harder to implement. In any event, the housing market seems to be slowing down now, and it’s unclear what impact a CGT has had on house prices/booms in Australia??

*Innovation and entrepreneurialism; NZ scores highly on these kind of international studies. I don’t have any links or evidence off-hand, but I know that our level of patent registration (for new inventions etc) is about the same as Australia.

*Workforce diversity; interesting point, I don’t have data but NZ has reasonably high migration as well.

*Policy suggestions – yes I was fairly brief on these points, again for brevity, and because I have covered these issues (size of govt, quality of public spending, how to improve it, tax cuts) to death in my previous papers – see here http://www.cis.org.nz/nz_policy/nz_policyunit.html.

*The importance of corporate tax? OK, you got me. I really should have included a quick discussion of that, as I have in previous papers.

Feel free to get in touch with me at the CIS if you want to continue the discussion!

cheers
Phil Rennie

Actually the study got a reasonable run in the kiwi press last week. One of the highlighted items was no compulsory superannuation, so less $$ to invest.

Some might interpret this as meaning that NZ retirees can’t afford to live on their equivalent of the Age Pension.

Similar arguments might also apply to the fact that more people work full-time in NZ - it might be because you need to work full-time in order to survive, whereas for many in Australia this is clearly not the case.

The Per Capita GDP table overlays text. This occours on some of the other postings too.

Douglas

If you’re interested in the evidence there’s a strong correlation between countries’ rates of economic growth and their corporate tax rate. Personal tax rates? Nup.

Our results for personal income taxes are surprising. We find that tax rates do not significantly impact wage rates. (pp. 4-5).

Easy answer - if you are really rich, and not salaried (ie you own companies), you only pay corporate tax. In Australia a discretionary trust receives the dividends from the company and distributes them to another company. That other company might not pay any tax because the dividend is franked, or receives enough cash to pay tax but no more. The trust then loans the unpaid but taxed (except not really) money to you.

That is really simple and I don’t recommend precisely that to anyone - especially in terms of asset protection - but it goes to illustrate the principle.