Bernard Hickey: Beautiful but costly

Peter Bills caused outrage when he criticised NZ as '100% rip-off'.

NZ should not be so expensive

I love welcoming people to our beautiful, friendly country, but I'm becoming increasingly uncomfortable about our prices. New Zealand is an expensive destination and it's getting worse. We all remember the uproar when British rugby commentator Peter Bills described New Zealand as 100 per cent rip-off rather than 100 per cent Pure.

It felt like harsh criticism at the time, but it rightly forced us to look at just how expensive we are relative to the rest of the world.

This week the Productivity Commission published a paper by Victoria University Professor Norman Gemmell, which looked in depth at our prices relative to the rest of the OECD.

It turns out we punch above our weight in all the wrong ways. We may be relatively poor in terms of spending per capita, but the prices we charge and are charged are much higher than our wealth suggests.

Gemmell looked first at tradable goods and services, which are those where the price is set on international markets, which means things we export or import, or things that have to compete with those traded goods. He found our tradable prices were the ninth highest in the OECD, even though our spending per capita was the 22nd highest.

Second, he looked at non-tradable prices, which includes things such as electricity, government services, real estate and construction, where there is no international competition. Our prices in 2005 were the 19th highest in the world, which was also higher than where we should have been relative to our spending power.

Gemmell used the deepest data available that could be compared with other countries, which was for 2005. More recent data from the World Bank for 2011 shows we're the 11th most expensive in the world, up from 22nd in 2005.

So, if anything, the prices Bills paid for car hire, wine, restaurants and clothes when he wrote his 2011 article in the New Zealand Herald were worse than in 2005.

The detail was the most surprising. The perception I had before reading the research was that our non-tradable sector, which is the least competitive and most prone to government and private monopolies, was not as expensive as for our tradable goods, where competition is more intense.

It turns out some of our least-competitive sectors, such as government-run health and education were relatively cheap, partly because they are larger-scale operations with higher skilled staff able to generate economies of scale.

Some non-tradable sectors such as real estate, construction, electricity and gas tended to be more expensive because they were capital intensive and had to cope with our relatively high cost of capital, or full of one-man bands unable to obtain the economies of scale.

Our tradable sectors were also more expensive than I expected. Again, the cost of capital for our farmers and other exporters was a major factor.

The combination of expensive non-tradable goods and services with expensive tradable goods and services compounds the problem. High costs for electricity and real estate further inflate the cost of our milk powder, meat and electronics on the global stage, but that doesn't explain it all. Gemmell suggested our particular types of exports may be expensive because of high tariffs and subsidies in their major markets of Europe, the US and parts of Asia. That offers some hope they might fall as those tariff barriers are dismantled and subsidies removed.

New Zealand has natural disadvantages that are always going to make it difficult to get prices down. We have only 4.5 million people and we're about as far away from at least two of our major markets as it's possible to get.

But that shouldn't stop us from trying to ramp up competition, clamp down on monopolies, increase workers' skill levels and find some economies of scale in our businesses. We should also do everything we can to lower the cost of capital, which means interest rates.

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