Bold policies needed to close the gap with Australia
It’s great to have a goal. And closing the GDP per capita gap versus Australia by 2025 would be a great outcome. But goals without strategies inevitably lead to disappointment.
Wednesday, March 03 2010 || Comment || BY Rick Boven, New Zealand Institute
Our initial estimates indicate that a substantial portion, around 40%, of the GDP per capita gap can be explained by two factors: differences in the capital intensity of the productive economy, and differences in innovation and business sophistication. Australia has more productive capital per worker and is more innovative.
We know enough about the economic development of advanced economies to understand that capital and innovation matter a lot. We also know that Australia has vigorous policies to promote savings and so their capital formation is strong while ours is much weaker. Innovation has been systematically encouraged in Australia for around 30 years; here for only about 10 years.
Surely the most promising way to close the gap is to go after opportunities like these. We know that New Zealand’s tax settings have encouraged investment in residential housing but our productive economy has been starved of capital. We know New Zealand is unusual in not having either compulsory savings or strong tax breaks to encourage savings. We know our businesses are not well-equipped to convert our inventiveness to international business success. And almost all countries provide strong incentives and assistance for innovation but New Zealand’s are weaker.
Specific policies need to be carefully crafted but there are obvious changes that would make a large difference. New Zealanders need to save more so there is more capital available, and the tax system needs to encourage investment in productive assets and innovative new ventures. The current emphasis on improving the production of scientific results with commercial potential is helpful but it will not make a huge difference because the most important innovation deficit is in the ability to convert inventiveness into international business success.
The New Zealand Institute’s work on economic strategy remains a work in progress. However, these early findings point to two opportunities that should be aggressively pursued. Alan Bollard will be proved correct if we do not take the right bold steps soon. If the government is serious about closing the gap it needs to identify the policy changes that will make a big difference and tell a compelling story so they will be supported and adopted. Incremental change may be easier to sell and implement but it will not be enough.
Yes, Ireland is having it rough, but they have taken action to address it, and have a plan in place. And I'd rather have had a good run and hit a hard spot than continue to spiral downwards.
So you don't like that idea, what's your suggestion?
Why do Australia low-end workers know about the Irish situation - are they shipping between the countries?
Maybe we can take positive lessons AND warnings from Ireland. So, what are you going to do with them?
Posted by Debs at 08:45 on March 4, 2010
I worked in a call centre in Melbourne a few months after the financial crisis. In a team of 25, I was the only New Zealander and 19 or 20 were Irish. They were all under 30, some of them had masters degrees and none of them wanted to go home because they'd just have to join the dole queue. It made New Zealand's brain drain look like a trickle.
My point is, the Irish economy is down the gurgler because they opted for short-term gain rather than investing in the future. We know slashing taxes and deregulating like mad doesn't work - we've already tried that and our economy is still recovering. How about we figure out where we want to go and come up with a plan to get there - rather than just rehashing the same ideological crap Don Brash has been talking about since the 1980s.
Posted by Nicola at 09:09 on March 4, 2010
fair enough, I concur with the idea of building for the long term. I interpreted the example as evidence of commitment to the plan to build for the long term, had not thought about it as slash and burn for short term gain, as they enjoyed more than a decade out of it.
But happy to move the discussion on to where we want to go. I'm on board with that ubiquitous high speed internet access, I think it is worth more than new highways, that's where I want to go!
Posted by Debs at 20:30 on March 5, 2010
What those who cite Ireland's massive growth as a template for New Zealand's future fail to mention is that since the financial crisis it has completely gone to crap. Unemployment is over 13%, and anyone who has worked in a low-end job in Australia recently would know that the Irish have a similar problem keeping their young people around. Rather than an example of how to improve our economy, we should be looking to Ireland as a warning.
Posted by Nicola at 09:43 on March 3, 2010
Im a proud Kiwi but have opted to live in OZ with my family, all for a better life...yes, sorry, its true....
The article is correct in that the Aussies think bigger & better and have the size, capital and willingness to grow and expand GDP.
In my area of work in the housing game it is self evident...here in Oz they plan a community of 50,000 people and then just do it...they get government, $$$, business and industry all working together and invest heavily in infrastructure (ie "build it...and they will come") which creates jobs, income, tax, wealth, etc...where in NZ you would spend 10 years getting resource consent and then figure out to fund it without any government support (ok maybe im being a bit negative) but something simple like Transmission Gully in Wellington has been talked about for 25 years and we are no further ahead...where in OZ, I work in an area where they plan growth of the local area will rise from currently 160,000 people to 350,000 over the next 25 years and everyone is behind it and working hard toward that common goal...again...jobs, income, tax, wealth, growth = Increase GDP
NZ is a great place, but unfortunately too small to capitalize on potential growth, and its only through growth will the GDP increase.
My suggestion...NZ to keep its sovereignty, but a bit like the EU, adopt a single australasian currency, get real cosy with CER and ride the coat tails of OZ...because NZ will never catch up and can only hope to ride the wave and will probably only ever grow at 50-70% of the aussie rate of growth...no matter what policies the government puts in place.
A sad fact, but true
at least the All Blacks can still beat the Aussies!
Posted by Mark J at 07:47 on March 7, 2010
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