Note: This is the first of a series of papers. The next two planned have secondary titles of ‘Comparison with Australia’ and ‘Productivity and Employment’
Keywords: Growth & Innovation
In Stormy Seas: The Post-War New Zealand Economy still contains the most extensive account of New Zealand’s post-war economic performance, despite being published some five years ago.(1) Since then the OECD has published a new data base. This note updates In Stormy Seas using that data base. It does not identify any new insights, confirming that the book’s analysis is reasonably robust to the data base, although it suggests the possibility of a slightly different account of the early 1970s. The paper concludes with some assessment of New Zealand’s economic prospects.
The Maddison-OECD 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).(2) 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 miniscule). 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 (3)). As a general rule the ratio rises most years, indicating that output per person is growing.
(While GDP per capita is often used as a measure of national welfare, there are a number of caveats.(4) An important one is that GDP is a measure of total production within a nation’s boundaries. It does not measure the national income because some domestic production will be owned by foreigners (such as corporations who have invested in the country) and some nationals will receive income from overseas sources.)
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. (5) 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. (6)
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.)
Click on Graph for Fullscreen Image
New Zealand versus the OECD
The overwhelming message is that the ratio of New Zealand to OECD per capita has been decreasing throughout the post-war era. However the decline is not the same over the whole period. The graph shows five separate periods as trends.
1950/1-1966/7 Over this sixteen year period the ratio fell from about 147 percent of the OECD to 122 percent, an 18 percent fall.(8) This means the New Zealand economy was growing a fraction under 1.2 percent a year slower than the OECD average.
1966/7-1968/9 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.(8) 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 relative fall was 8.5 percent in the two years.
1968/9-1986/7 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.
1986/7-1992/3 This is the second rapid decline. 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 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.
After 1992/3 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 was slightly up. Whichever, the effect was very small compared to past trends.
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 cap 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 part of the 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. (There is more discussion in the next section.)
The reworked data is completely consistent with this account, despite the revised data base and the addition of more countries to the OECD list.
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 the original 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.
The 1980s and 1990s
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). (10)
In Stormy Seas placed considerable stress on the weak export performance of the New Zealand economy as the reason for the poor overall performace of the New Zealand economy. Regrettably Maddison (2001) does not provide as detailed a data base for (merchandise) exports, providing broad statistics for only 1870, 1913, 1929, 1950, 1973, 1990, 1998, and in little country detail.
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.
This is consistent with the general theme of In Stormy Seas. Once a more comprehensive data base becomes available, more work can be done.
Prospects for the New Zealand Economy
That the relativity does not seem to have deteriorated in the last decade suggests that the New Zealand economy now grows 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).
5. External shocks of the magnitude of the wool price collapse peculiar to New Zealand are not 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.
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).
One could also argue that add a number of other recent policy changes should contribute to a faster economic growth rate. However it is too early to see a new upward trend.
As discussed in In Stormy Seas rankings are problematic, not only because of accuracy but because they are misleading about progress. It is like being in a running race so that a runner slower than the pack may remain ahead of it for long periods, and then suddenly get passed by a bunch.(11) Even so some were reluctantly published in the book. For similar reasons, that is there is a public demand for the figures, and it is better to publish the best available, rather than have them rely on inferior listings.
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 early1950s.
So New Zealand was ranked fifth.(12) New Zealand was then about 48 percent above the OECD average.(13)
No additional OECD country’s GDP per capita was 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, additional to the earlier four.
New Zealand was now 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.
Germany (West & East combined)
New Zealand was now 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.
1. B.H. Easton (1997) In Stormy Seas: The Post-War New Zealand Economy (University of Otago) especially Chapter 1.
2. A. Maddison (2001) The World Economy: A Millennial Perspective (Development Centre Studies, OECD)
3. B.H. Easton (2002, forthcoming) New Zealand’s Growth Post-war Performance: Adjusting for Employment’. Also In Stormy Seas, p.189-193.
4. In Stormy Seas, p.15-17.
5. B. H. Easton (1990) A GDP Deflator Series for New Zealand: 1913/4-1976/7 (Massey Economic Papers, B9004) p.83-103.
6. B.H. Easton (1989) How Accurate are the GDP Statistics in the Long Run? (Hodge Fellowship Report; 9, mimeo, Wellington). Also In Stormy Seas p.281-283.
7. The adjustment for systematic measurement bias would not affect the interpretation given below, other than to raise the growth rate a little. That depress the ratio level earlier in the period, because 1990 is the calibration year for comparisons. .
8. The 1950/1 figure is the trend estimate not the actual, because of the problems of the pre-1954/5 data.
9. See the 1970s for an earlier case in which the cycle temporarily obscured the trend.
10. 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.
11. In Stormy Seas p.73-88, 139-168.
12. 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.
13. The trend rather than actual ratio is used here.
14. However the Spanish GDP per capita came close to the New Zealand level.
|March year||NZ/OECD||NZ place/28|