Make No Mistake.

There’s no quick fix for our differences with Australia. 


Listener: 4 October, 2008. 


Keywords: Growth & Innovation;  


The way we discuss our -relationship with the Australian economy might be a good indication of the shallowness of economic debate in New Zealand. It’s true that on many measures – most notably per capita output (GDP divided by the population) – Australia’s economic performance is better. But before someone promises to reduce the difference, we need to ask a few questions. 


First, when did the Australian economy start growing faster than New Zealand’s? 


The short answer is 40 years ago. Straight after World War II, the GDPs of New Zealand and Australia grew at about the same rate in population terms. But Australia’s economy began growing faster than New Zealand’s after 1966. Those who have only just become aware of the divergence and promise to fix it quickly are out of touch. 


Why did the divergence happen? 


The break at 1966 is abrupt enough to enable us to identify the reasons. The world price of coarse wools fell, undermining our sheep industry, which at that time produced more than half our export revenue. (Australian sheep produce fine wools, the price of which did not fall.) Meanwhile, the Australian mineral boom took off. Our geological record is different. Those who promise a quick fix may have to find a uranium mine. 


After World War II, New Zealand’s GDP per person was higher than Australia’s. Today it is about 20% to 30% lower. The economies were last near parity in 1985, but New Zealand quickly fell away during the long recession caused by Rogernomics and Ruthanasia. 


However, did not the Hawke-Keating -Governments in Australia pursue similar policies? 


Well, yes and no. They also liberalised the economy, increasing the use of markets, but they did not go to New Zealand’s extremes. They couldn’t. The Australian political and constitutional arrangements had too many checks and balances for extremism to dominate. The more careful decision-making process reduced mistakes, which riddle the New Zealand changes. (This was before MMP; now our policies have to be more carefully thought through, too.) 


Since its liberalisation, the Australian economy has been growing faster than the OECD average. But that may be because of the mining boom. What seems certain is that although Australian liberalisation did not harm its economy, it seems likely New Zealand liberalisation did hurt ours. 

Evidence suggests that since 2000 New –Zealand’s economy has been growing faster than Australia’s. Whether this is because of different -business cycles, or because New Zealand is now on a higher long-term growth track arising out of a more sober approach to economic management, is unclear. 


There’s far more detail to this -analysis, but you won’t hear it in public discussion. It’s not because of a shortage of space (my problem here). Rather, almost every pontification on Australia is by someone who is unaware there’s a systematic way of thinking about economic issues, and that it must be underpinned by a comprehensive knowledge of the facts. They are charlatans who propose quack remedies that frequently do more harm than good (remember Rogernomics?). 


Yes, we have a problem in terms of our economic relationship with Australia – it has been better at weeding out the quacks and is lucky to have mineral deposits. But we are ahead of them on one key mineral, water, although we may waste that advantage. And if we don’t get the relationship right, we will lose, particularly, our skilled workers and -sophisticated industries to Australia. 


<>It’s useless focusing only on wages and income taxes. (Most of the accounts I see – offsetting their lack of useful -information with hysteria – would fail as first-year essays.) If we want to retain people, then cultural, physical and social environments matter, too, and so do prospects. We’re not going to succeed by disconnecting our brains and putting our tongues into first gear.