Rank and Relativity: Where Are We – and Were We – Among the OECD Economies?

Listener 21 September 2002.

Keywords: Growth & Innovation;

People keep going on about our low relative performance in the OECD. How bad is it?
We are 20th of the 28 countries in the OECD measure of output per capita. About 86 percent of the OECD average.

Is output per capita a good measure?
Statisticians value all the production in different countries’ GDP (Gross Domestic Product) in the same prices, and divide by the population. But GDP is not a perfect measure of overall national performance. It’s the best we have.

Have we always been so low?
In 1962 we were 5th in the OECD. Our GDP per capita was 129 percent of the OECD average. So we have fallen 15 places, and our relativity has fallen by a third (from 129 percent to 86 percent) in the forty years. .

What about before then?
The OECD data only goes back to 1950. We were fifth then too.

So after 1962 it has been one long retreat as countries have steadily passed us.?
Not quite. Most of the OECD countries passed us between 1962 and 1980 when we were 19th. The only country to have passed us since was Ireland, in 1996.

Isnt that because it is a sort of race , in which we were plodding along slowly, and the bunch passed us?
The record shows that sometimes we plodded very slowly, sometimes we went as fast as the OECD, for quite a while.

How come? Everyone seems to say that we have been in a steady decline?
Rather than look at the data, they advocate policies which dont have much to do with why the relative decline happened.

What actually happened?
There was a mild tendency for the New Zealand economy to grow slower than the rest of the OECD in the early post-war period (after adjusting for war recovery). It was probably due to our population growing faster than average, and the ‘convergence effect’ where above-average countries tend to grow slower than below-average ones. There is also some evidence that we may be under-estimating our growth rate. But these effects were small. The first big decline happened from 1967.

So it was Muldoon!
That is what the rhetoric want you to believe. But the fall began slightly before he became Minister of Finance. It was a consequence of the collapse in the price of wool. In those days wool made up 40 percent of our exports, and their price fell by about 40 percent. That is a big external blow, and of course the economy’s growth rate slowed down – for about ten years while the economy diversified. By 1977 we were 15th, and the GDP per capita was now at the OECD average.

Are you sure it was not Muldoon?
It is not rocket science that a major collapse in export revenue impacts on an economy. I’ve traced the effect in my book In Stormy Seas .

And after that the relative decline continued?
Actually no. From about 1978 to 1986 the economy grew at about the same rate as the OECD.

That is not what the 1984 Treasury Post-Election Briefing told us?
They had a policy agenda which had little to do with the actualities, didn’t they?

Just a moment. We were growing as fast as the OECD to 1986, and we were average then. How come we are now 14 percent lower?
There was another major decline between 1986 and 1993. For seven years we grew 2 percent p.a. slower than the OECD.

During the period from Roger Douglas to Ruth Richardson? I dont recall the price of wool collapsing then.
It didn’t. The main reason for the poor economic performance was the overvalued exchange rate, so the export sector was inhibited, while imports flooded in. If the external sector is screwed up, the economy stagnates and the rest of the OECD grows faster.

So for the second major decline was caused by wrong policies.

What happened after 1993 when we were down to 86 percent of the OECD’s per capita GDP?
A couple of strong business cycles in the 1990s obscure the trend, but the cautious interpretation is that we have been growing the same as the OECD.

A less cautious one?
We screwed up the external sector again during the Asian crisis, but the New Zealand economy has been growing fractionally faster than the OECD over the last few years.

So we can attribute half the fall in the post-war relativity to the wool price collapse, a third to the policies of the late 1980s and early 1990s, and the residual to some miscellaneous effects.
Very broadly, yes.

Your story is very different from the rhetoric the business pages bombard us with.
It is not my story. It is the story that in the data.

Why dont the business pages tell that story, instead of advocating policies which return to the polices of the late 1980s and early 1990s?
They have a policy agenda which has little to do with the actualities, dont they?