Closing The Trans-Tasman Gap

It was good to see the New Zealand Herald editorialising today on the need for new policy to close the income gap with Australia.

The editorial made some good points:

Two years on, after a fall resulting from the global financial crisis, the move westward is growing again, up 16 per cent from 2009 to last year according to the statistics department. And National, too, is reduced to waving at the departees, our economy marooned in low growth and higher unemployment than across the Ditch. The number of New Zealanders returning from Australia is relatively static.

And again:

In government its answers have been limited: reducing company tax, shifting some direct income tax to indirect GST, tinkering with labour and planning laws, trying to hold the annual increase in state spending rather than cutting it, but ruling out big ticket changes such as to Working for Families, interest-free student loans and raising the entitlement age for superannuation.

But then it rather lost the plot:

The economic growth and prospects of a small, primary-produce-exporting nation are not directly comparable to those of a big, diverse, less indebted neighbour.

Hang on a bit!  New Zealand was once a wealthier country (in terms of income per capita) than Australia.  Its geographical position hasn’t changed.  Australia has always had those minerals in the ground.  Australia and New Zealand are both relatively small countries but small countries can do just as well as large ones (think Luxembourg, Switzerland, Hong Kong and Singapore) provided their markets are open and competitive.

Now consider this statement:

New Zealand’s options for revival are relatively limited by lower productivity, high private foreign debt and an almost cultural aversion by the state and individuals to cutting spending in favour of saving and productive investment.

Options limited?  But it is institutions (like electoral systems) and policies (spending, tax, regulatory, social) that mainly determine whether countries prosper or not in today’s world.  New Zealand’s productivity growth performance was slightly better than Australia’s in the 1990s but fell sharply in the last decade as economic reform stalled and reversed.  Decisions on institutions and policies are for us to make.  The question to ask is: If New Zealand moved in the direction of the policy settings of countries like Hong Kong or Singapore, why wouldn’t the income gap with Australia close quite rapidly?  (Think Ireland when it had its act together.)

Another argument:

Little is being achieved in catching up with Australia and it is possible that no policy setting, short of changes that would spark far more serious social upheaval than a brain drain will deliver parity in the foreseeable future.

 [The government’s] … 2025 productivity task force, headed by former leader Don Brash, twice predicted that major change was needed, and was given an almost unseemly short shrift. Dr Brash’s prescription suffered from a political tin ear, unaware or unpersuaded by the risks of a voter backlash to wholesale cuts to welfare programmes and taxes and sales of state assets.

This is hyperbole.  There is no need for wrenching economic change (unless we dither and it is forced upon us again).  The Brash prescription was orthodox, not radical.  It was entirely consistent with OECD prescriptions. It wasn’t the Taskforce’s job to play at being politicians; it was to deliver economic advice on how to close the gap.  And the government has on its agenda a number of possible initiatives which, if adopted, could make a difference, as I noted in this article.

Finally, somewhat contradictorily, the editorial concludes:

For its own sake, New Zealand needs bold economic initiatives that will position the country for sustained growth.

Sadly, the Herald put forward no suggestions at all for “bold economic initiatives”.  If it disagrees with the 2025 Taskforce, what is its alternative programme?  How can citizens and voters buy into the idea of “bold economic initiatives” if our leading newspaper does nothing to point the way?  And it doesn’t help if its op-ed pages are littered with articles like those of Bryan Gould (13 last year, two already this year) and Peter ­­­Lyons whose economic prescriptions would see us falling further and faster behind Australia.

What grade for the editorial?  Could do much better.

Can we catch Australia by 2025? Yes we can, but …

There have been the usual mixed bag of reactions to last week’s 2025 Taskforce report.

Some were facile to the point of being cringe-making, focusing not on the substance but on the presumed political acceptability of the report.

There were exceptions in the regular media, including an article by Rob Hosking in the National Business Review and editorials in the Dominion Post and The Listener.

Taskforce chair Don Brash has also written a good response in Muriel Newman’s electronic newsletter.  I liked the title, ‘Can we catch Australia?  Yes we can, but …’

As I understand it, David Farrar has largely given up on the MSM for serious public policy discussion and thinks the blogosphere is the place to be.

He may be right if this post by Winton Bates is any guide.

Bates is a highly respected Australian economist, formerly a First Assistant Commissioner in the Industries Assistance Commission (now the Productivity Commission), and author of several Business Roundtable research studies and a background paper for the Taskforce.

He begins with a discussion of economic geography explanations of economic under-performance, saying:

Since the Taskforce presented its first report last year, Philip McCann – an economist with expertise in economic geography – has advanced the view that New Zealand’s geographical disadvantages prevent it from becoming a high productivity economy … [T]his is true irrespective of the degree of flexibility in the domestic labour market, the degree of transparency in the local institutional environment, or the levels of cultural aspirations for success.

Bates initially asks, “How does the Taskforce respond?” and observes:

… it judges the evidence in support of the view that New Zealand’s small population limits the potential to obtain agglomeration effects to be weak. In particular, Auckland’s position within the regional hierarchy of Australasian cities is not declining – the population of Auckland has been growing faster than the populations of Sydney and Melbourne. The Taskforce also points out that there is no evidence that New Zealand suffered an adverse shock from globalization during the 1980s; that migration from New Zealand to Australia is disproportionately of highly skilled workers as agglomeration theory implies; or that the relative performance of small countries has declined in the past 20 years.

Then Bates adds his own observations:

Sitting in Australia, current concerns in public policy discussions about the emergence of a two-speed economy in this country make the agglomeration theory of relative decline in New Zealand’s economic performance seem rather odd. Rather than a concern that agglomerations centred on Sydney and Melbourne are leaving the rest of Australia behind, the main concern is that New South Wales and Victoria (along with other states) are being left behind as economic growth steams ahead in Western Australia and Queensland, as a result of rapid expansion of the minerals sector and related industries. There is also reason for concern that, over an extended period, the particularly poor performance of the New South Wales government has detracted from the substantial location advantages that Sydney should enjoy.

The Sydney point – at around 4 million, Sydney’s population is similar to New Zealand’s – is particularly telling.  I find the McCann thesis (also adopted at least in part by the New Zealand Institute) unconvincing.

Bates goes on to discuss the ‘lucky country’ explanations for Australia’s performance:

The Taskforce pours cold water – correctly in my view – on another geographical explanation, namely Australia’s good luck in having plentiful supplies of mineral resources to export to rapidly growing markets in China and India. It is only in the last few years movements in Australia’s terms of trade have been much more favourable than in New Zealand. Moreover, New Zealand also has substantial mineral and hydrocarbon resources.

It could be added that ‘Fortress Australia’ was also an under-performer prior to its mid-1980s economic reforms, despite its mineral endowments.

Finally, Bates gives his own view on why Australia has done better than New Zealand (even though post-reform New Zealand has kept pace with the average growth in per capita incomes in OECD member countries as a whole):

… I think that leaves us with having to explain New Zealand’s relatively poor economic performance in terms of policies that are less favourable to economic growth …  For example, one major problem discussed by the Taskforce is the effect of relatively high levels of government spending in discouraging investment in export industries – via impacts on the real exchange rate as well as tax rates …  It seems to me that those who believe that New Zealand has geographical disadvantages should logically be strong supporters of that view (unless they reject the objective of closing the income gap). The greater the geographical disadvantage, the greater the policy superiority New Zealand will need in order to meet the objective of closing the income gap by 2025.

University of Canterbury economists Paul Walker (Anti-Dismal) and Eric Crampton (Offsetting Behaviour) also blogged on the 2025 Taskforce report

The full report is available here.

Public policy matters

On Thursday and Friday last week the Business Roundtable held its 6th Dunes Public Policy Symposium for Emerging Business Leaders (pictures to come).  It attracted a most impressive group of upcoming senior executives interested in a serious engagement on the principles of good public policy.  A perspective that is often misunderstood but that was fully grasped by the group is that the drivers of successful businesses are quite different from those that underpin sound public policy.

The calibre of this group – and their enthusiasm for the topics and the concept generally – convinced me of its value and that we should continue to run these forums.  It was a shame we had to turn some would-be attendees away.  The speakers also entered into it in the right spirit, including ministers and MPs who weren’t into political grandstanding but wanted instead to shed light on public policy processes. 

There are few business leaders better qualified to speak on public policy than Roderick Deane,  whose presentation The New Zealand Economy: Challenges and Opportunities was one of the symposium’s highlights.   Also well worth highlighting was Don Brash’s Answering the $64,000 Question aka catching Australia by 2025.  If Don could get these facts out to wider New Zealand I’m convinced the public would be clamouring for change.  A good task for public service broadcasting?

For me, and for many of the attendees, a welcome break from public policy and a star turn of the two days was a riveting after-dinner talk by Fletcher Building chairman Ralph Waters exploring risk – its history, mitigation and management, its manifestation in current Australian politics, and its place in his own early career.