Catching Australia: Really?

Dr Bollard is spot on in saying that it isn’t likely that we will catch up to Australia in incomes (ht Kiwiblog and Rates Blog).

Simply put, I think the majority of economists believe that the ability of government to influence per capita incomes (especially given the relative size and scope of governance in Aussie and NZ) is relatively negligible.  Australians are 30% more wealthy then we are, and the belief is that a lot of this comes down to locational, scale, and endowment type advantages – not “magic policy”.

Furthermore, Australia is running down its natural capital stock here – any production numbers should take the temporary nature of some of this income into account.

And finally, just because production is 30% higher in Australia, what is the actual gap in happiness?

I’ve never liked the aim of catching Australia, it seems pointless (see here).  We should instead “aim” to have a society where citizens are as free from coercion as possible, so that they have the ability to find satisfaction.  I am glad that the RBNZ governor agrees.

  • Andrew Coleman

    Hi Matt

    Are you suffering from too much smoke at the One Love concert?

    Governments have been, and continue to be, the main cause of poverty and underperforming economic performance in the world, rather than having a negligible influence on per capita incomes. If New Zealander’s have nothing else to thank the English for, on this Waitangi weekend, they (along with the rest of the world) should thank a succession of Britons who have stood up against the excessive abuse of power by their monarchs, including King John (long may the Magna Carta persist), Charles 1, and James II (the 1688 Glorious Revolution, the political basis of the Industrial Revolution ) From small beginnings in an obscure island off the coast of Eurasia did wealth begin to flourish once the evils of government were first constrained…..

    Australians have done pretty well in the last 30 years by not suffering from too many poor Government decisions. An absence of damage can be a good thing.

    By the way, the Secretary of the Treasury, Ken Henry, shares your aim – and has put it in writing that the primary goal of the Australian Treasury is to adopt policies that best enable individuals to “choose a life they have reason to value” and allow them to fully function in society. The Treasury’s framework, based on the work of Amartya Sen, reflects a philosophical approach that should make Australian’s proud of their grey-haired pointy-heads.

    Andrew

  • “Are you suffering from too much smoke at the One Love concert?”

    Hehehe. I didn’t go to One Love this year, but otherwise no comment.

    “If New Zealander’s have nothing else to thank the English for, on this Waitangi weekend, they (along with the rest of the world) should thank a succession of Britons who have stood up against the excessive abuse of power by their monarchs”

    Here I agree with you, definitely. That is where my priviso “given the relative size and scope of governance in Aussie and NZ” comes in. I was trying to say that the relative policies followed by Aussie and NZ probably aren’t a major factor behind the gap in per capita incomes – I must have worded it poorly, my apologies.

    “Australians have done pretty well in the last 30 years by not suffering from too many poor Government decisions. An absence of damage can be a good thing’

    Agreed. However, I am not sure our own politicians have done that much more damage than there Australia counterparts either.

    “The Treasury’s framework, based on the work of Amartya Sen, reflects a philosophical approach that should make Australian’s proud of their grey-haired pointy-heads.”

    Agreed. Where is that primary goal written – it would be a useful link for the future 🙂

  • Andrew Coleman
  • @Andrew: Don’t be hating on Charles I! Parliament hated him because he tolerated the Catholics instead of burning them. Because Parliament hated him for insufficiently hating Catholics, they wouldn’t grant him supply. Because he couldn’t get supply, he had to resort to worse expedients for raising funds, like reinstituting letters patent and extracting ship money. But Parliament’s main complaint against Charles remained religious innovation, not taxes. And his innovations were generally anti-Puritan, pro-toleration. Could do much worse.

  • steve

    “the belief is that a lot of this comes down to locational, scale, and endowment type advantages”

    Does that mean we can’t do anything about it? I think we can, but we have to consider those factors, “location”, “scale” and “endowment” and what we can do about them. At first glance this is rather limited.

    Firstly we can build scale. While there might not be a convergence of incomes for the whole country, a bigger Auckland could lead to a convergence in incomes for Auckland and Sydney.

    We probably can’t do a lot about endowment, we have what we have. But the review of what we have is a step in the right direction. look at the whole portfolio of our endowment and see if we are making the most of it.

    Now location. A modern economy is dependent on cities and innovation. Both of these are affected by location and scale. But if we can make New Zealand a location which facilitates business in Asia, the pacific and South America, then knowledge and innovation would spill-over here. Auckland would become a business/knowledge hub. Auckland already has a specialisation in Professional Services firms which serve NZ, why not have those firmstserve the wider region? The way to do this is to make our location important to international business. This is the success of London, New York, Hong Kong, Singapore and to a lesser extent Sydney. Make Auckland (and Air New Zealand) a hub between Asia and South America. It is virtually the only city which could do it (if you look at a globe the only real alternatives are Hawaii, LAX a handfull of pacific islands and South Africa). We are right in the centre of 3 out of 4 BRICs countries, add indonesia and it is 4 out of 5. NZ could be a very important location for international business as China, India, Indonesia and the South America countries continue to develop. if we have the right policies for trade, foreign affairs, immigration and infrastructure in Auckland we can catch Australia

    In particular, we would become an innovation rich economy, as opposed to a resource rich economy. This would allow us to catch up with Australia, and potentially pass them.

    The problem with focussing on Australia is exactly that, we focus on what they have got and/or done that is different from us, instead of focusing on a solution specifically for New Zealand.

  • Andrew Coleman

    Hi Steve

    Phil McCann, the eminent former Professor of Economics at Waikato, has been saying this for a while, with the added comment that the take-over bid for Auckland Airport was partially aimed at making Auckland a connection hub between Asia and South America.

    As is well known, enlightened Government policy ruled that this takeover would be against the national interest.

    Mind you, Phil wan’t convinced that our geographical disadvantages could be overcome in a world where face-to-face meetings are increasingly important- and voted with his feet, leaving to the Netherlands.

  • steve

    @Andrew Coleman
    Philip is my PhD supervisor at Waikato – Thanks.

    Since it was decided foreigners shouldn’t own it, maybe it would be in the government interest to do it themselves. They already have a large interest in Air NZ, and local government in Auckland Airport.

    Possibly the new super city could do a joint venture with Air NZ.

    My point was a dig at the 2025 taskforce who should really be doing something about those factors of location, scale and endowment; if we want to even think about catching up with Australia that is.

  • I love newzealand, The country is real great . I like the post aswell, keep sharing good posts.

  • @Andrew Coleman

    Hi Andrew,

    Thanks for the links.

    @Eric Crampton

    Hi Eric,

    My impression from 7th form history was that Charles struggles with parliament came from him trying to do things his wife wanted him to do. Maybe the more important lesson from the English Civil War is not the need to balance the excesses of absolute power – maybe it is to be careful of women.

    However, on a more serious note, I think we can only defend that type of monarchy system through the lens of historical revisionism – in reality the freedoms provided to us through more democratic forms of governance have paid real dividends for sure. That is a point we can all agree on.

    @steve

    Hi Steve,

    Indeed, these sorts of issues do matter – there isn’t a single eqm for the economy, and if we can quantify and analyse these issues then we can see some type of useful interventions.

    Furthermore, I agree that our focus should be specifically on NZ – not on “how can we be like Aussie”, as you say we are fundamentally different from them.

    However, I would always keep in mind that we have to be careful when talking about these spillovers in an open economy sense. When we go to estimate we have to make sure:

    1) The benefit (usually derived in a partial equilibrium sense) is worth the cost of raising the taxes to fund this.
    2) That the benefit is net of any “reaction” from other countries/prices – some interventions could be seen as protectionism, and if we don’t model the reaction then we miss part of the cost.

    @steve

    Hi again Steve,

    “Since it was decided foreigners shouldn’t own it, maybe it would be in the government interest to do it themselves.”

    Or promote the private sector doing it through subsidies and the such. We don’t want to lose the power of revealed preferences and prices which comes through private market discipline – as that is part of the way we figure out whether these schemes are worth doing.

    “My point was a dig at the 2025 taskforce who should really be doing something about those factors of location, scale and endowment”

    The taskforce – that was Brash right? That was a pretty random taskforce to be honest 😛

  • @ Andrew Coleman
    Good links

  • Thank you very much for sharing

  • @Matt: Charles’ wife was indeed a Catholic and she did indeed encourage him towards greater tolerance. I’m all for greater tolerance; Parliament wasn’t. Charles also appeared to take care in many of his speeches to Parliament to try to attribute to his wife measures that Parliament would like, as he knew that they hated her for being Catholic.

    Hume’s History of England is excellent bedtime reading…..