Cut red tape to compete with Australia

If New Zealand is to have any chance of narrowing the income gap with Australia it needs an easily understood regulatory regime investors can have confidence in, says the New Zealand Institute of Economic Research.

"If you are as insignificant as we are, on a global scale, you can't afford to make yourself difficult to understand," institute director Brent Layton said.

Relative incomes reflect the fact that an Australian produces almost a third more than a New Zealander. New Zealand's per capita GDP was $36,400 in 2004, while Australia's was $48,000.

The two countries were level-pegging 30 years ago but the gap in per capita gross domestic product has been widening ever since, despite an improvement in New Zealand's growth rate since 1993.

In a paper just released, the institute has pulled together the results of several studies looking at reasons for this relative underperformance.

The three likeliest candidates are:

* Low export growth, due to the dominance of the primary sector;

* Lower labour productivity, largely due to less capital investment per worker;

* Smaller scale and greater geographic isolation.

The volume of New Zealand's exports has grown more slowly since 1960 than Australia's or the OECD average. Demand for land-based products typically increases less as countries get richer.

But a 2001 institute study concluded that the make-up of Australia's exports did not give it much of an advantage over New Zealand's and could not account for its stronger growth.

Australia does have an advantage, however, in labour productivity, or output per hour worked. In 2004 it was 37 per cent higher than in New Zealand.

While New Zealand's had improved recently, both the level and the growth rate remained low by international standards, the institute said.

It cited Treasury research last year which concluded that 70 per cent of the difference in labour productivity between the two countries could be put down to more capital invested per worker across the Tasman - 40 per cent more by 2002.

But the reasons for that were not clear, the institute said, citing studies which found the return on capital in New Zealand either similar to or higher than Australia.

Other studies have suggested the explanation might lie in a lower cost of labour, relative to capital, especially after the Employment Contracts Act of 1991.

"Whilst the cost of labour relative to capital has been rising in Australia, in New Zealand it declined by 20 per cent between 1987 and 2002."

That might be changing as New Zealand employers came to grips with the lowest unemployment in a generation - in part because of increased competition for workers from Australia whose unemployment rate has also fallen.

"We had a real splurge on plant and machinery when the currency was high," Layton said.

Growth is also hampered by being small and remote from large markets.

The International Monetary Fund two years ago estimated that half of the country's underperformance relative to the OECD average since 1970 could be attributed to distance from the world's main economic centres.

"But distance alone did not explain why New Zealand's performance worsened over this period," the institute said. "We did not move further away from the rest of of the world."

And transport and communications technologies have improved.

"There is little we can do to change New Zealand's size and we can do nothing about its location."

New Zealand could, however, remove impediments to interacting with the rest of the word through investment and trade, it said.

Investors would invest only if they were confident later political decisions would not deprive them of a return on their capital, or the return of their capital. "The regulatory regime must be simple, stable and free from political opportunism."

Environmental policy and the regulation of monopolies presented difficulties for investors in many countries, including Australia.

"As a small country, however, New Zealand has to go further than other countries in minimising such difficulties if investors are to consider it worth taking the time to even investigate investing here," the institute said.