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.