Appendix 2 of TRANSFORMING NEW ZEALAND. This is a draft. Comments welcome. (Some of this may be too technical to publish)
Keywords: Growth & Innovation;
Appendix I: The Maddison-OCD Data Base
Angus Maddison has provided a annual data base for production and population of the world economy between 1950 and 1998 (with some data going back to the beginning of the Common Era, but not continuously). [A. Maddison (2001) The World Economy: A Millennial Perspective (Development Centre Studies, OECD]
This date base differs from that used in In Stormy Seas as follows:
* the OECD has now expanded to include the Czech Republic, Hungary, Mexico, Poland and South Korea. In addition the German economy includes that which was East Germany before 1991. A further problem is that the data for the Eastern European Countries is provided annually from 1990 only, although it is possible to interpolate the data back to 1950.
* Individual estimates are not provided for OECD members Iceland and Luxembourg, but they are included in an aggregate of 13 smaller Western European Countries (most of which are minuscule). All 29 countries are included in the aggregate series described here as OECD.
* the data is available only to 1998, and was updated to the end of 2002 using the estimates and forecasts in OECD Outlook (a procedure similar to that used in In Stormy Seas).
Maddison provides two primary series: population in the middle of the year and GDP for the calendar year for the period from 1950 to 1998. The GDP is measured for all countries in the same common prices (purchasing power parity) based on the 1990 year, so the volume GDP series of different countries comparable. This is similar to using the same prices for GDP from different years, which enables in the volume of production (real GDP) to be compared through time without being obscured by changes in prices and inflation.
The database also gives the ratio of the two series as GDP per capita. This ratio is often used as a measure for economic performance. A high figure indicates more output per person (but not necessarily per worker, since the employment to population ratio varies [B.H. Easton (2002, forthcoming) New Zealand’s Growth Post-war Performance: Adjusting for Employment. Also In Stormy Seas, p.189-193]. As a general rule the ratio rises most years, indicating that output per person is growing.
The Maddison GDP series does not correspond exactly to the official New Zealand GDP series, although the fit from 1977 to 1996 may be as close as rounding errors. Before then the error appears erratic rather than systematic. After, they are the consequence of recent revisions. The official series was used here instead, with the following changes.
* Maddison follows the OECD convention of treating GDP for March year X+1 as the GDP for calendar year X, a misalignment of three months arising from New Zealand using a different standard year from the OECD. This study, like In Stormy Seas, estimates the OECD data for the March year as a weighted average of calendar years X and X+1.
* there are no New Zealand volume GDP official data earlier than 1954/5, although there is a Treasury series, and also an alternative. [B. H. Easton (1990) A GDP Deflator Series for New Zealand: 1913/4-1976/7 (Massey Economic Papers, B9004) p.83-103.] Both are problematic. This study uses the Treasury series, but cautiously interprets the early 1950s.
* In Stormy Seas adjusted the official New Zealand series for some data problems. Only the adjustment for the inventory mismeasurement in 1977/8 is made here.
Given this enhanced Maddison data base, it is possible to calculate the GDP per capita for New Zealand and the OECD (as it was in 2002). The ratio of the two series gives a measure of production per capita in New Zealand relative to that for the OECD as a whole. The ratio is shown in the graph below. (Its table at the end of this article.)
Appendix II: A Periodisation of the Post-war New Zealand Economy
The graph shows six separate periods as trends. They are identified with the problem of the coincidence of business cycles in mind. Where they are out of phase (as in the case of the New Zealand upswing in 1993 preceding the worlds boom) the ratio may experience a temporary blip. Fitting a trend requires some assessment of the cycle. It is a common rhetorical devise to chose the end points of a period to give the story that suits the teller’s predictions. The following are my best assessments, but the tabulation of all the data allows the reader to check my assessment and tell a different story if they wish. After the description of the period I give a brief account in italics of what I think was happening during it.
Over this nine year period the ratio fell from about 147 percent of the OECD to 130 percent, a 12 percent fall, or 1.1 percent p.a..
Although hostilities formally ended in 1945, the next years were a period of rapid economic growth in the war devastated OECD economies. The handful which were not invaded did not experience the same recovery. The war recovery so dominates the comparisons that it is common for economists to see the war period ending in 1959/60. [In In Stormy Seas I concluded that the New Zealand economy had not really recovered from the war before 1954/5.]
1959/60 to 1966/7
Over the next seven years the ratio fell from about 130 percent of the OECD to 122 percent, a 6 percent fall.[The 1950/1 figure is the trend estimate not the actual, because of the problems of the pre-1954/5 data.] This means the New Zealand economy was growing a fraction over .9 percent a year slower than the OECD average.
There can be little dispute that the rate of decline slowed down. In my view the ratio is near stable, the measure being depressed by the aforementioned measurement error. The remainder of the decline might be explained by New Zealand’s population was growing faster than the OECD’s (see below). Another depressant is the convergence issue, again discussed below.
In the two years the relativity fell 8.5 percent. This was not due to a reaction to an earlier cyclical upswing
In late 1966 the New Zealand economy experienced a major (and ultimately permanent) external shock when wool prices fell sharply (by around 40 percent). The consequences of this shock is a central theme of In Stormy Seas. The shock appears, in this series, to have impacted on the growth rate for only two years, with the New Zealand economy contracting while the world economy boomed. The next period discusses this change of intepretation.
The slower decline resumed, with the relativity falling 12.6 percent, from 111 percent to 97 percent. The rate of decline was a fraction more than .7 percent a year (about two-thirds of the rate of decline of the first period). There is a cycle peaking in 1975 and troughing in 1979. By the end of the period New Zealand had moved from being above the OECD average to just below it.
The reworked Maddison data is largely consistent with the account in In Stormy Seas, despite the revised data base and the addition of more countries to the OECD list (and more recent years). One apparent inconsistency between the two accounts might be that the 1966 wool price shock seems to have had a shorter impact (of two years) in the reworked data compared with the In Stormy Seas account which argued it took at least ten years for the price downturn to work through the economy. However any inconsistency is resolved by noting the In Stormy Seas account is based not only on this series but on the structural changes evident in the 1970s, and that divergences between the New Zealand and World economic cycles which have to be taken into consideration when short term comparisons are being considered.
Even so, this author of In Stormy Seas is not uncomfortable if the preferred explanation is a short sharp fall after 1966 followed by a slow decline, in contrast to the book’s account of a longer fall and then a flattening of the relativity from the mid-1970s to the mid-1980s. Either option discounts the conventional wisdom’s belief that the entry of Britain into the European Union in 1973 was the key element in the path of the post-war economy. It was one of a myriad of changes.
This is the second rapid decline – and a longer one. The New Zealand GDP per capita relativity to the OECD fell from 97 percent to 84 percent, a 14.3 percent fall in six years. This is an annual fall of 2.5 percent p.a. which means that the relativity fell more in the six years than in the 18 years from 1968/9 to 1986/7 and almost as much as it did in the 15 years from 1952/3.
The decade from the mid 1980s merits some comment, as the pattern becomes clearer. The introduction of new members to the OECD in the 1990s lowered the average GDP per capita, When all the new members are included New Zealand was close to the OECD average in the early 1980s. In the 1984/5 year it was about 100 percent of the average, although there is a margin of error.
By 1992/3 the level was about 85.5 percent, a fall of about 14.5 percent in seven years. As the level is still about 85.5 percent in 2002, the arithmetic says that as New Zealand being below the OECD average is entirely due to the fall which occurred in the seven (or slightly fewer) years.
Why this fall? In Stormy Seas details the poor export performance of the period, attributing that to the overvalued real exchange rate (a conclusion bolstered by the high rate of importing during the period). [In Stormy Seas p.231-250. Also B.H. Easton (1999) The Whimpering of the State: Policy After MMP (Auckland University Press) p. 49-62.]
It is too early to identify the trend of the 1990s. The graph shows a flat trend, with a strong cycle. (9) But it could be argued that the trend has been slightly up. Whichever, the effect was very small compared to past trends.
Appendix III: The Ranking Race
The figures here based on Maddison with some interpolations for countries he does not report, using the official New Zealand series. The details are in the table.
The following (OECD) economies (in probable rank order) already had a higher GDP per capita than New Zealand in the early 1950s.
United States; Switzerland; Luxembourg(?); Canada;
So New Zealand was ranked fifth. [Because the NZ series has not been adjusted for the secular measurement error, this ranking places New Zealand above Australia, rather than marginally below it as occurs in In Stormy Seas p.27.] New Zealand was then about 148 percent of the OECD average. [The trend rather than actual ratio is used here.]
No additional OECD country’s GDP per capita rose above New Zealand by 1961. So New Zealand was still fifth, but it was now only about 31 percent above the average.
In turn, the following six OECD countries’ GDP per capita became higher than New Zealand’s between 1961 and 1970 (in addition to the earlier four).
Denmark; Sweden; Australia; Netherlands; France; Iceland (?)
By 1970 New Zealand was 11th , and its GDP per capita was about 111 percent of the OECD average.
In turn, the following eight OECD countries’ GDP per capita became higher than New Zealand’s between 1975 and 1980, additional to the earlier eleven.
Belgium; Germany (West & East combined); Norway; Austria; United Kingdom; Japan; Italy; Finland
By 1980 New Zealand was 19th , and its GDP per capita was about 96 percent of the OECD average.
In 1997 Ireland’s per capita GDP passed New Zealand’s. So New Zealand became 20th , when its GDP per capita was about 86 percent of the OECD average.
The following OECD countries had per capita GDP figures less than New Zealand.
Spain, South Korea, Portugal, Greece, Czech Republic, Hungary, Poland, Mexico, Turkey,.
Notes: In the late 1990s the Spanish GDP per capita has come close to the New Zealand level. In the early 2000s New Zealand drew slightly away from the Spain.)
Slovakia (with a per capita GDP between the Czech Republic and Hungary) has recently joined the OECD.