New Zealand Catching Up with Australia

<>Notes for Seminar 22 September, 2009.

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<>Keywords: Globalisation & Trade; Growth & Innovation;

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<>While there is much talk about New Zealand catching up with Australia in per capita GDP terms there is not a lot of careful economic analysis. The accompanying graph shows the record over the last forty odd years. In 1967 Australian and New Zealand per capita GDP was roughly the same. After that Australia grew faster than New Zealand. Initially the growth difference arose because Australia had a mining boom, while New Zealand had a collapse in the price of its main export of the day – crossbred wools.

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<>The New Zealand diversification from the dependence on wool was largely over by the mid 1970s, and there was some recovery in the Muldoon years. However from the mid 1980s there was a long decline which started with those policies we call Rogernomics. The decline bottomed out at the end of the 1990s, and through most of the last decade New Zealand grew at the same rate as Australia – perhaps a fraction faster. Last year the New Zealand economy contracted while the Australian economy grew. I have not incorporated the 2009 figures but the same thing is happening this year.

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<>Had I time I could detail the various ups and downs but the pattern is clear enough. New Zealand has experienced a long term decline relative to Australia. Note that the peaks and troughs reflect phases of the business cycle. It is the trend which is important.

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<>I’ve added in blue the trend if we are to attain the 2025 goal of per capita GDP parity with Australia. It is a big challenge. Given the likely Australian growth rate, we shall need a volume GDP annual growth rate near 5 percent allowing for population growth. (Instead of declining relatively about 0.85 percent p.a. we need to improve, relative to Australia, by 1.85 percent p.a. That means a per capita growth of about 4 percent p.a., a volume GDP growth rate near 5 percent p.a.)

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<>Attaining the goal is not a matter of arithmetic. It requires a change in real economic behaviour. When proper economists do the calculations we find that the target is probably impossible. One study recalled the aspiration of the magic bus. ‘I want it I want it; but you cant have it’. The fastest 17 years growth New Zealand experienced relative to Australia was to 1906 following the refrigeration boom. That was 2.3 percent p.a. Since then the best we have done was 1.3 percent p.a to 1959.That is about two thirds of the aspirational growth target of being 1.9 percent p.a. faster than Australia.

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<>How can those in the external sector of the public service contribute to accelerating the growth rate? Increases in volume GDP are critical, but your most important contribution could be lifting the price we get for our exports – improving our terms of trade. While I dont want to deny that bilateral and plurilateral free trade agreements have a role, the big one for New Zealand is the multilateral Doha round. On behalf of all New Zealanders I wish you the best in your endeavours.

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