What ails New Zealand’s economy: turning small size from a weakness to a strength

I’ve just finished a bit of a barnstorm tour of New Zealand giving two presentations with a similar title to that above and a talk on Govt 2.0 which funded the visit. I must say I’ve loved it. Having checked out Auckland and Wellington for the first time in forty years, I can report that they are lovely cities beginning life, as all Australia’s glorious capital cities did, as British provincial cities. The French are generally lionised for the beauty of Paris, and it’s got to be admitted it’s got a lot over London, but did anyone plan more glorious modern cities than the British and did anyone get a better deal than us antipodeans.  I’d love to know who.

In the meantime, everyone seemed engaged in the talks I’ve given and it’s generally been a great visit.

My talk on the NZ economy echoes my findings in this essay I posted a while ago, and the numbers that have emerged since I wrote it don’t change anything much. I expected to run into a fair bit of ideological argy bargy, this presentation being rather more recognisably partisan (though not party political) than most of my stuff – I think the right in NZ are much more ideological than the right in Australia.  As the New Zealand Business Roundtable (NZBR) boasts on its website, it’s “A unique and extraordinary business organisation”. I couldn’t agree more.

As I said to the audience, I couldn’t think of another industry association like it. There are lots of right wing think tanks funded by business – like the CIS and the IPA, but the NZBR is an industry association which is an ideological think tank.  I don’t regard the BCA as a paragon of clear thinking, but it mucks away trying to do what industry associations do, which is advantage its members and ‘position’ them in the debate, as we say these days.

I told my audience that in Australia we just don’t have mainstream business lobby groups lecturing the community on the sanctity of property rights or the urgent need to lower the size of government – yet we’ve got slightly smaller govt than NZ and property rights that are at least as sacred. Why? Because we’re at a reasonable political equilibrium. People don’t like paying taxes so they stay roughly where they are. Lectures by the business community on how much better off we’d be if we had a govt of 1-2% of GDP less (a proposition that has scant empirical support) wouldn’t be a good use of the BCA’s political capital.  So they talk about more constructive things – health, education and skills and getting their members mitts on carbon subsidies.  Perhaps the NZBR had ideological decency and consistency to argue against its members being ‘compensated’ for polluting the planet – in which case I will humbly praise this stance to the skies – it would make them truly unique in a worthwhile way.

Anyway what surprised me was the heads nodding in the audience. If this was a result of the audience that had been attracted to the talk in Auckland one of the nodders was a director of the CIS. He was quite complimentary after the talk even though the whole presentation was an attack on this study in tendentiousness that first drew me into this.

In Wellington the audience were mainly Ministry of Economic Development people and a few Treasury folk. There seemed to be a general relief in both venues that I was arguing that NZ should move on from the 1980s style Rogernomics rhetoric – and the class warfare.

Just going over the differences in the two reform periods – say the ten years after 1983, Australia’s reform was focused on solving problems – negotiating a reduction in wage costs, building the social wage, solving under saving (not solved but NZ’s parlous state is the scary counterfactual to not having compusory super, in Australia we solved the tax haemorrhage problem with CGT and FBT and targeted welfare with the mean test.  As a ‘positive’ part of the tariff reform agenda we also handed out big subsidies to R&D.

By contrast the New Zealanders solved any problem they had in the competitiveness of labour with a Darwin comes to the bottom end of town strategy, cutting welfare, radical labour market reforms, and massively cutting the top marginal rate of tax for good measure. Treasurer Paul Keating cut our top rate from 62% to 49.5%.  Treasurer Roger Douglas’s effort cut top rates from 66% to 33% though someone who’d advised him at the time told me he went for 21%. Instead of moving on the hemorrhaging of the personal income system, NZ went for the GST (is it such a great tax with compliance costs equalling 7% of the revenue raised?) when it wasn’t solving a noticeable problem and have yet to introduce CGT or means testing on pensions.  NZ finally caught up to us with tax benefits for R&D in 2007 – no that’s not a misprint. And, just as Howard halved the subsidy when he came into office, in NZ the conservatives knocked it off altogether.

Yes folks its a very different approach.

And unfortunately for the poor New Zealanders, it didn’t work.

I don’t think there are any recordings of my talk, but there are slides of the second presentation on the NZ economy here.

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15 Responses to What ails New Zealand’s economy: turning small size from a weakness to a strength

  1. Corin says:

    Good slides, I’m not sure Ireland is a good comparator and I’m just talking about the GFC crash. Ireland has the European market and the subsidies that EU entry provided as well. NZ is more precarious in terms of market isolation.

    I remember a few years ago, the PC put out a report on Australian productivity and one of the key issues was that the US bench-marking whilst useful was clearly difficult to consider outside of the isolation from key markets (both internal and external) to the Aus economy.

    I also wonder if Aus policy makers are becoming not that dissimilar to those who got carried away about the Irish Tiger. It would only take a mild recessionary bump in China to smash the cozy living standards of the housing boom generation here.

  2. conrad says:

    No mention of the number of people NZ lose each year? It seems to me that when many of your smartest people decide to live in Australia (and elsewhere), this must surely impact on R&D and categories like that. That’s not surprisingly a big issue in NZ.

  3. Nicholas Gruen says:

    Corin,

    You’re right and the point was made in the verbal presentation. NZ wouldn’t do as well as Ireland by adopting (some of) its policies, but it would do a lot better than it’s doing right now.

    And Conrad, I agree that the haemorrhaging of people from NZ is clearly an issue, though the emigrants turn out to be relatively representative of the population as a whole and not particularly the ones doing best.

  4. conrad says:

    “though the emigrants turn out to be relatively representative of the population as a whole and not particularly the ones doing best”

    I don’t think I’m entirely convinced of that (especially the last half of the sentence). I don’t doubt that the population that leaves is broadly similar to those that stay behind, but if you mean best-of-the-best, I doubt that it is true — although it is very hard to quantify. I hear the same complaints about Australian scientists, for example, even though they are a tiny percentage of the people that leave Australia. In some areas, some people can even name who the best are that left (the obvious recent example is Elizabeth Blackburn, who got a Nobel prize). The problem with this is that if people’s impact is exponentially large depending on how good they are (that’s true of many areas of science and presumably many areas of R&D), then small numbers still equate to a big loss. Of course, it’s not clear to me whether those that left became great because they left and would not have in Australia, or whether it was a real loss, and that is probably even more true of Kiwis leaving NZ than Australians leaving Australia.

    A second problem NZ has is when small but particularly important groups leave, like doctors. I imagine if that becomes too bad, it really must cause serious problems.

  5. Yes, I agree. And it was also something that was underdone in my presentation. Didn’t have anything of any originality to offer on the subject and so didn’t say anything.

  6. Corin says:

    When I went to NZ I thought why don’t Aussies retire in droves out there. Great place, cheap, lovely people, mountains, seas, sailing, fishing, cool but temperate climate etc etc. I hate humidity and don’t love league so why do so many Melbourne/Adelaide people etc go and retire in Qld. Surely NZ should be a better long term bet, and it’s as far from family and friends (assuming they stay in Melbourne).

    I suppose my point is that NZ whilst poorer is just a fabulous place, especially those with good fixed incomes (like Aussie super). It is like a massive version of Adelaide, it will never keep up, but should it?

    Having said all that, I still completely agree it should do far better.

  7. And sorry for all the typos and bad editing in the original. I was in a hotel in Wellington and didn’t do what I usually do and go through and edit my first draft.

  8. Mr Denmore says:

    As an expat Kiwi, I greatly enjoyed your presentation.

    You are right about the purist ideological strain in the Business Roundtable in NZ. But remember also that NZ was probably the world’s most pure social democracy in an earlier, simpler time when Britain bought all its butter. (That’s Australian born, NZ PM Michael Joseph Savage in my avatar BTW).

    The fact that NZ swings so easily from one extreme to another, with little consideration of practicalities or the need to build political consensus, has been its undoing in my opinion. And the Dr Strangelove economic experimentation, with the population as the guinea pigs, was an outcome of a unitary system with no house of review and a two-party first-past-the-post electoral system.

    Mixed member proportional representation was introduced to throw some sand into the wheels and restrain the undiluted power of the executive. But then you get the opposite problem – hence your reference to stop-start reform.

    What NZ needs to learn from Australia is the virtue of consensus building and sensible, pragmatic reform free of the ideological wingnuttery of the Roger Kerrs of the world. For too long it has been a kind of wild west, cowboy economy where a lack of effective regulation – in financial services in particularly – has left savers at the mercy of crooks. So I applaud your slides about how proper regulation, by enhancing reputation, can actually attract capital.

    In terms of retirement incomes, KiwiSaver has been a sensible, if inadequate, initiative – particularly in comparison to Australia’s system of compulsory super. But I also think that the NZX has bungled it by resisting a merger with the ASX. An Australasian Securities Exchange – assuming the complex tax and regulatory issues can be overcome – might lower the cost of capital for emerging NZ companies.

    A common currency also comes up frequently as a possible reform. I argued for this strongly in the mid-1990s when Don Brash was conducting his monetary conditions index experiment (the legacy of which was a totally unnecessary recession), but the RBNZ’s embrace of more pragmatic inflation targetting that allows the currency to play its role as shock absorber has lessened that need now, in my view.

    NZ can never overcome its small size and distance from world markets. But there are things it can do. And you have touched on many of them – embracing sensible, pragmatic reform, improving regulation around financial services, continuing to pursue greater integration with Australia and attracting some of its better brains and creative talents back home.

  9. Incurious and Unread (aka Dave) says:

    Mr Denmore @8,

    the “lurching from on extreme to another” is also my experience in my own field over there. It seems like there is insufficient institutional inertia (and intertia is not always a bad thing).

    In this respect (again, in my field, which is COAG governed), the federal system has been the saving of Australia. It is really hard to get all States on board. To do it requires negotiation and consensus building which often leads to a better eventual solution.

  10. Nicholas Gruen says:

    Thanks Mr D. And Dave, would you care to say a little more about what you’re talking about?

  11. Judith Sloan says:

    I don’t know what planet you are living on but, Nick, to say “I was arguing that NZ should move on from the 1980s style Rogernomics rhetoric – and the class warfare” is just ludicrous. After all, Roger was a Labour man and then NZ had several years of Helen Clark who reversed pretty much all of Roger Douglas’ reforms and the ECA as well as massively increasing government expenditure, well before there was any need to do so on ‘stimulus’ grounds. It is really an overregulated economy with a large government sector. And the last thing NZ needs is unnecessary spending on government handouts in the form of R&D grants.

    The Business Roundtable is one of the best things going for NZ and makes our business associations look very woppy – they are really conduits for telling businesses about government policy and do not stand up for the principle of free enterprise and minimal regulation.

    The issue of the common labour market is key and, no, those who come to Australia do not look the same as though that stay. And of course if we could observe the characteristics associated with those that do move – the self-selection – the differences would be even greater. It is an interesting point to think about aggregating the per capita incomes of those emigrants with those of New Zealanders who stay to figure out the impact of the common market in workers.

    And, no, Ireland has very little to offer as a lesson apart from low corporate taxes. And the fact that NZ does not have a capital gains tax is actually supported by the literature and is conducive to capital accumulation.

  12. Nicholas Gruen says:

    Thanks Judith,

    Somewhat to my surprise used the expression ‘class war’ in the presentation and expected strong disagreement. I was kind of hoping someone would convince me it was too strong. I can only report that that didn’t happen and I don’t think I was presenting to a bunch of lefties. It was a mix of business people in Auckland and pretty hard headed MED and Treasury policy economists in Wellington. Those I thought would strongly disagree with my diagnosis didn’t.

    Can I ask you a few questions?

    Do you agree with Roger Kerr’s diagnosis that NZ has suffered from ‘stop-start’ reform and what do you think is the (political) cause of it? Whether or not it’s one of the best things going for the country, what responsibility if any do you think the NZBR might have for this state of affairs?

    I suspect you are right that the common labour market is very important – and I also suspect you’re right that the stuff in NZ about there being a ‘brain exchange’ rather than a ‘brain drain’ is a little too cute. I think you’re point about there being (largely invisible) self selection going on (or at least I take it that’s your point) is a good one. So where does that take you as far as policy is concerned?

  13. Mr Denmore says:

    Judith Sloan,

    I’m afraid the reality is that “minimal regulation” is what is wrong with NZ. Lack of proper disclosure, inadequate protection of minority shareholders, the passing off of selling as financial advice and general absence of proper securities regulation has made the country a sort of wild west for white shoe capitalists. This is not good for its brand.

    The Business Roundtable in NZ, like the revolutionary Marxists of the ’60s, is full of people who preach an unattainable free economic purity, who equate a market society with a market economy and who have no understanding that you cannot build a political consensus for greater efficiency without a commitment to fairness.

    The reason NZ has had stop-start reform is because it lacks the institutions that allow for greater dialogue. The round-table got the governments it wanted when it had Douglas and, later, Ruth Richardson calling all the shots. But they went too far, the population tired of being guinea pigs for Ayn Rand groupies and quite sensibly exercised their democratic rights to slow the pace of change.

    It then swung back the other way. And the Business roundtable still lives in its splendid state of ideological purity, stamping its feet and wondering why the country won’t dance to its ideological tune.

    It’s called politics. And until they get how it works, nothing will change.

  14. Tel says:

    How come Fisher and Paykel seems to be expanding their product range quite nicely so why are the Australian whitegood manufacturers (who had a huge head start) struggling?

    Edward Hallstrom sold Sydney-made refrigerators to the US military while they were on duty in Australia during WWII, donated some of his fortune to start Taronga Zoo, went quietly and unnoticed into the “where are they now?” club along with most of Australian industry. OK, the South Australians kept things propped up a little longer with constant government subsidies … but that doesn’t really work for long.

    In contrast, Fisher & Paykel now claims to export to over eighty countries… and yes they do manufacture in various countries too (Mexico, Thailand, China, etc) but find any globally successful company that doesn’t?

  15. Nicholas Gruen says:

    Judith?

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