Chapter 2 of TRANSFORMING NEW ZEALAND. This is a draft. Comments welcome.
Keywords: Growth & Innovation;
This chapter looks at New Zealand’s post-war economic performance via the measure of GDP per capita. It does not consider the relevance of the measure – the topic of the next Chapter – but we note here that Gross Domestic Product (GDP) is the standard international measure of output, in which the net value production of each market sector of the economy is aggregated together and (for international comparative purposes) valued at a standard set of international prices (a phenomenon which is indicated by the expression ‘purchasing power parity’ (PPP) prices). The effect of using the same prices for every year is that year to year changes measure the volume of production (or real output) independently of inflation.
Useful comparative international data became available in the 1980s. Previously the focus has been on relative economic growth rates which gave no level of relative output. Insofar as such comparisons were made, the nominal GDPs of the various countries were converted by using the exchange rate – a procedure which was obviously faulty because when a country devalued (as New Zealand did by 19.45 percent in 1967) adjusting by the new exchange rate suggested a major fall in output overnight (that is by19.45 percent in 1967) whereas common sense suggests there was no such fall (in fact real GDP rose by 3 percent in the two years across the devaluation from 1966/7 to 1978/9).
I brought together my findings in In Stormy Seas: The Post-War New Zealand Economy .Since then the OECD has published a new data base. This chapter updates the relevant parts of the book, using that data base. Despite the changes, the new data series confirms that the book’s analysis is reasonably robust to the choice of data base.
The OECD is the ‘rich man’s club’. When I wrote In Stormy Seas it consisted of 24 economies – virtually all the richest in the world excluding those Middle Eastern states based on oil. Recently another six have joined – Mexico, South Korea, and the three East-central European ones of the Czech Republic, Hungary, Poland and the Slovak Republic. Additionally, West Germany has since absorbed East Germany. The main reason I used the OECD data is because it has the best internationally comparable data base.
The basic series used here is the ratio of the New Zealand per-capita GDP to the OECD per-capita GDP, shown in Table 1.1 and Figure 1.1. Thus if New Zealand GDP was $1200 per person, and OECD GDP per person was $1000 in the same prices, the ratio would be 1.2. The figure only shows the data after 1960, because economists treat the period before as the special case of post-war recovery. 
New Zealand versus the OECD
Table 2.1 Ratio of NZ GDP per capita divided by OECD GDP per capita*
|March year||NZ/OECD||NZ place/28|
* excludes the Slovak Republic.
The overwhelming message of Table 1.1 and Figure 1.1 is that the ratio of New Zealand to OECD per capita has been falling.  That means that NZ output per person has been growing slower than the OECD as a whole. The decline is substantial: following the post-war recovery, New Zealand started in 1960 at an average of 31 percent above the OECD average and it finished in 2002 at about 14 percent below, a relative decline of 34 percent over the 42 years. That means that New Zealand per capita GDP typically grew 1.0 percent p.a. slower than the OECD average.
However, while there was an overall decline, it was not a steady one. Allowing for the difference between the New Zealand and OECD business cycle, the relativity remains broadly flat from 1960 to 1966, from 1969 to 1975, from 1977 to 1986, and after 1992. The total decline in those periods amounted to 7 percent , or an average decline of .24 percent p.a., smaller than the likely bias from measurement problems in the service sector. 
The significant declines occur only in the 1966 to 1969 period, a fall in the relativity of 10.5 percent, 1976 to 1978, a decline of 10.0 percent, and 1986 to 1992, a decline of 14.3 percent. In Stormy Seas shows the first decline was due to the collapse of the world price of crossbred wools in late 1966. It attributes the second decline to this source too, for the original data base showed a different pattern. If so the total decline from the wool price shock was about 20 percent, and was largely over by the mid 1970s. An alternative view is the second fall was the result of the oil price shock of late 1974. Whichever explanation is correct, the first two falls can be unequivocally attributed to external shocks over which New Zealand had little influence. (That the falls were the result of external shocks, makes the arguments of the early 1980s that New Zealand’s relative decline could be corrected by the reforms of the late 1980s all the more absurd, especially as the advocates were paying so little attention the actuality of the New Zealand economy they failed to notice the external shocks.)
The other big fall occurred in the late 1980s and early 1990s. There was no significant external shock. Rather, the decline seems to have been caused by the poor performance of the export and importing sectors due to an overvalued exchange rate, especially while public support for this ‘tradeable sector’ was stripped out. This is not to argue all the reforms were wrong (although some were extremist and unnecessary.) Rather, a faulty macroeconomic policy (rather than the microeconomic reforms) ignored the health of the tradable sector which is at the centre of the growth process, as later chapters explain.
This fall poses a major problem for those who want to ignore the reforms and yet advocate returning New Zealand to the top half of the OECD. New Zealand’s relativity was at the OECD average just before the reforms were implemented. It seems likely that had there been no reforms – or to be more precise, had the reforms been akin to those implemented in Australia: more practical and less ideological – New Zealand would still be at the OECD average.
In summary in periods encompassing only eleven of the last 42 years, could it be said that New Zealand was growing significantly slower than the OECD. More encouragingly, in almost three quarters of the period after the post-war recovery, New Zealand grew as fast as the rest of the OECD (despite the handicaps of measurement error, population growth and convergence discussed below). The message that the New Zealand has been in long term economic decline in the post-war period is a dangerously misleading one.
The Irrelevance of Rankings
Nowadays, the conventional wisdom prefers to use rankings rather than relative levels. As discussed in In Stormy Seas rankings are problematic, not only because of instability but because they are misleading about progress. Rankings make sense in a tournament in which each countries plays the other in a zero sum game. Economic growth is more like a running race, where a runner slower than the pack may remain ahead of it for long periods, and then suddenly get passed by a bunch., 
Even so, some rankings were reluctantly published in In Stormy Seas As there is a public demand for the figures, it is better to publish the best available, rather than have them rely on inferior listings. A new set based on the new data base are also shown in Table 2.1.
A comparison between Tables 2.1 and 2.2 shows how misleading the rankings can be. During the post-war recovery period of the 1950s, New Zealand holds its high rankings, even though it is growing markedly slower than the OECD average. Later, there is no indication in the rankings of the much slower growth in the late 1980s and early 1990s (they remain constant at 19th). But in the late 1990s, when New Zealand is growing as fast (or perhaps faster) than the OECD average, the ranking falls one place, because Ireland was growing even faster. In a race one’s place is not only a matter of how fast one runs but how near are those in front and behind you.
There is a grudging acceptance of the wool price explanation of the first major decline. However there is a reluctance to address the decline of the 1980s and 1990s, perhaps because the writer, or the writer’s institution, was involved in advocating policies which are associated with the period of the second relative fall. A consequence of focussing the rankings is that it avoids facing up the relative decline in the late 1980s and early 1990s, when New Zealand had got behind the front bunch and while the back bunch were catching up – but only Ireland was to overtake it in 1997.
Why the Poor Post-War GDP Performance?
In Stormy Seas identified a set of explanations for the long term decline of the New Zealand economy:
1. Post-war recovery in the 1950s, when the war devastated European continent rapidly recovered its productive capacity, catching up to those which had not been invaded – like New Zealand.
2. Higher population growth than the OECD average, since population growth tends to slow down per capita economic growth.
3. ‘Convergence’, the effect that high GDP per capita countries grow more slowly than low ones, because the latter can adopt cheaply the technologies and methods that the former pioneered. (Note that this effect is now favourable to New Zealand, now that it is on a relatively low income, which may explain the slowing down of the rate of decline.)
4. The secular deterioration in the terms of trade for pastoral products which dominated New Zealand exports in the first half of the post-war period, and remain important in the second.
In addition In Stormy Seas identified two shocks which sharply lowered the relativity.
5. The (permanent) collapse of the price of wool in late 1966; and
6. The overvaluation of the real exchange rate from the mid-1980s, which slowed down the growth of exports, the engine of growth of a small open economy, while encouraging imports to wipe out much domestic production.
A decade’s further research gives no reason to change the conclusions. Indeed events since then support the account. We turn now to some other international comparisons from the Maddison data, which fill in some of the story.
In Stormy Seas placed considerable stress on the weak export performance of the New Zealand economy as the reason for the poor overall performance of the New Zealand economy. Regrettably the Maddison (merchandise) exports data base is not very detailed.
New Zealand’s merchandise exports made up 1.33 percent of the OECD total by value in 1950, falling to .61 percent in 1973, .36 percent in 1990, and .30 percent in 1998. This is a far more dramatic fall than the GDP per capita decline, but consistent with the general theme of In Stormy Seas. It is the tradeable sector which has mattered.
At the simplest, productivity may be measured by output (GDP) per worker, or by output per hour worked. In brief, the conclusions were:
– New Zealand employment as proportion of the population in New Zealand was slightly higher than the OECD average in 2000. That means its relative level of output per worker was a fraction lower than output per person.
– However it appears that New Zealanders work slightly more hours a year than the OECD average. Hence the relativity for output per work hour is lower than GDP per capita. In 2000 output per hour worked was 74.1 percent of the 27 OECD countries for which there was data, in comparison to percent for 77.1 output per person (and 75.4 percent for output per person employed).
So New Zealand productivity is certainly worse than the OECD average.
The most obvious country to compare New Zealand with is Australia. How did they compare in the relative GDP per capita stakes?
Australia too, began above the OECD average, and declined – on the whole more slowly than New Zealand through to late 1980s or early 1990s. Since then, it has expanded faster than the OECD, and is back at the level of the early 1970s. The impression is that, other than this acceleration in the 1990s, there are not the abrupt changes in its trend that New Zealand experience, nor is the cycle around the trend as strong. In 2002 Australia was in its 11th successive year of perceptibly faster growth than the OECD average, which suggests that there has been a significant turn around (which may be halted by the drought of 2003).
New Zealand’s GDP per capita was just ahead of Australia through the 1950s and early 1960s. In effect the output of the two economies were growing at the more or less the same per capita rate. The 1996 wool shock changed the relativity, depressing New Zealand, so that it was now 6 percent below the Australian GDP per capita level. The constant relativity between the two resumed until the mid 1980s. At that point the New Zealand GDP per capita stagnated so its relativity against the OECD fell sharply. Meanwhile Australia’s genteel decline eased back. The result was the New Zealand to Australia relativity deteriorated, through to about 1998, although perhaps New Zealand has grown fractionally faster since. Today, New Zealand’s per capita GDP is about 75 percent of the Australian level, lower than the OECD relativity because Australia is above the OECD average.
The broad conclusion is that New Zealand and Australia grow at the broadly the same trend rate in most periods, except for the impact of the collapse in the price of crossbred wools in the late 1960s, and in the late 1980s and early 1990s when New Zealand was experimenting with its economic reforms. The 1980s must have laid the foundation in Australia, for the perceptible improvement in its relative growth. Why its moderate economic transformation policies worked and New Zealand’s extreme ones did not is yet another important issue unaddressed by the conventional wisdom.
Prospects for the New Zealand Economy
That the GDP relativity does not seem to have deteriorated during the last decade suggests that the New Zealand economy is again growing at about the same rate as the OECD as a whole. Moreover, most of the factors which In Stormy Seas identified as giving poor relative growth of the New Zealand economy do not all apply.
1. The war recovery is long completed.
2. New Zealand population growth is slower, and while still higher than some OECD economies, the ageing effect is not so pronounced.
3. Being below the OECD average means the convergence effect now favours New Zealand. In practice that means there are gains from importing foreign technologies.
4. While the secular deterioration of the terms of trade of pastoral products may continue, they are now a lesser share of total exports. It is not obvious that the terms of trade for the remaining (and largely new) exports are subject to a secular decline (although they will fluctuate with world economic conditions), while the optimist may hope for some gains in pastoral prices from world trade liberalisation.
5. External shocks of the magnitude of the wool price collapse peculiar to New Zealand are not very likely (although one could think of circumstances in which they might occur – such as local outbreak of foot and mouth disease).
6. However, undoubtedly there remains a danger that the exchange rate will remain overvalued, especially as a means of fighting inflation, and that will inhibit economic growth.
In summary, the apparent stability of the relativity is understandable. (Arguably it would have been stable from the late 1970s, if the exchange rate overvaluation from the mid 1980s had not occurred).
Can New Zealand lift its OECD relativity further than implied by the above. Much of the rest of the book addresses the problem, albeit in the context of a better quality growth. It may be argued that there is little New Zealand can do to recover its lost relativity – after all everything it can do, the rest of the OECD can do just as well. Even so the policies are probably necessary for it to retain its place. And perhaps with a little bit of cunning – using the peculiarities of the New Zealand economy – quality growth can be accelerated.
1. B.H. Easton In Stormy Seas: The Post-War New Zealand Economy (University of Otago, 1997).
3. I have adjusted for the 1977/8 year for which, following careful analysis, I conclude overestimated the volume contraction by 1.5 percentage points. In Stormy Seas p.281-283. The adjustment makes little change to the shape of the story being told, but it can affect some quanta.
5. In Stormy Seas discusses a measure bias .3 percent from not allowing for sufficient quality change in the service (including the public sector).
6. In Stormy Seas p.73-88, 139-168.
7. A professional statistician would avoid using rankings, not only because they provide less information than the relativities, but because an ordinal scale is more difficult to work with than a cardinal scale. The popularity of the rankings, given that the relativities are as easy to derive, provides a clue that the users are not professional statisticians. But the same applies for economists. While the Treasury reports New Zealand’s GDP standing in terms of place in the OECD, when it comes to assessing the prospects, ranking gets abandoned and its analysis (rightly) is in terms of the actual GDP and the extent to which its growth can be accelerated.
8. This point escaped Treasury economist, Peter Mawson, who dealt exclusively with rankings, and then wrote ‘Brian Easton states that “The economy lost its placing following two major shocks – in the late 1960s when the when the wool price collapsed, and the late 1980s when there was a grossly overvalued real exchange rate” as already discussed, the first of these explanations is to some extent apparent in the data displayed in [Mawson’s] Figure 1.The latter explanation is not really supported …’ It is clear from the text – indeed all my writing – that I am referring to the relativity not the ranking.
9. A mere quarter of a century since it was first published. (e.g. Easton
10. There may be A caveat to point 6. The addition of the new countries to the OECD data set suggests that the 1973 oil price shock may have been more important – although In Stormy Seas explored the hypothesis and found little evidence for it.
11. Providing broad statistics for only 1870, 1913, 1929, 1950, 1973, 1990, 1998, and in little country detail.
12.Australia was not hammered in the way New Zealand was, partly because wool only half as important in its exports, but mainly because its fine wools for clothing did not suffer the big price drop that New Zealand crossbred wool for carpets experienced.