KEY POINTS:
New Zealand and Ireland have a great deal in common. They both have 4.2 million inhabitants, traditional agriculture bases and are two small island countries with large and dominant neighbours.
These characteristics benefited New Zealand in the past but are now perceived as economic disadvantages, whereas the Irish economy has been transformed into the Celtic Tiger.
Why have the two countries moved in completely opposite directions as far as economic performance is concerned and has New Zealand anything to learn from Ireland?
The accompanying table shows the ranking of Organisation for Economic Co-operation and Development countries in terms of per capita gross domestic product (GDP).
These rankings, which are based on purchasing power parity to avoid the distortions of currency fluctuations, are considered to be one of the best ways to assess countries' economic performances.
One of the New Zealand Government's main economic objectives is to return New Zealand to the top half of the OECD rankings on a per capita GDP basis, which means a position of 15th or better.
When the OECD compiled its first ranking in 1970, New Zealand was in ninth position and Ireland 22nd.
In the intervening 35 years, Ireland and New Zealand are the two countries that have made the biggest up-and- down movements.
Ireland has surged 18 places to fourth, while New Zealand has dropped 13 spots to 22nd.
Ireland is tied with Norway for the biggest rise - the Scandinavian country also moved up 18 places from 20th to 2nd - but New Zealand is clearly the poorest performing country as Sweden, the second worst, dropped only 10 spots from fourth to 14th.
Australia's performance has been volatile.
It was in fifth place in 1970, dropped to 17th in 1990 but now holds ninth position.
Its per capita GDP was only 8.1 per cent higher than New Zealand's in 1970 but is now 32 per cent greater.
By contrast, Ireland has surged past Britain, its large and dominant neighbour.
One of the first issues raised in most analyses of Ireland and New Zealand is that the former is a member of the European Union, and this has been the main reason for its amazing economic performance.
This is a simplistic approach, as the accompanying table shows that most EU countries have performed relatively poorly over the past 35 years.
Denmark, Belgium, France, Germany and Italy have all slipped back on the GDP per capita table, while Spain and Portugal, which were more similar to Ireland in economic development in 1970, have remained in the bottom third.
Portugal has received large EU subsidies and a substantial inflow of capital into the holiday property sector, yet it has fallen from 23rd to 25th place since 1970.
EU membership has made an important contribution to Ireland's economic resurgence, but exports have had a bigger impact.
Irish exports have grown by 407 per cent since 1990, the year the country began to take off, and now represent €21,800 ($40,300) per capita.
New Zealand's exports have risen only 132 per cent over the same period and represent just $8400 per capita.
According to the OECD, international trade as a percentage of Irish GDP has risen from 38 per cent to 75 per cent, compared with a much more modest 23 per cent to 29 per cent for New Zealand.
In other words, Ireland has taken full advantage of globalisation whereas New Zealand has not.
Norway, the other country to rise dramatically up the OECD rankings, has also had an upsurge in exports following the discovery of North Sea oil.
Ireland's success in this area arises partly from a government-initiated proactive programme to encourage exports through lower tax rates and aggressively target multinationals to establish greenfield operations in the country.
The corporate tax rate for all companies operating in Ireland is only 12.5 per cent.
By contrast, since New Zealand's highly successful export tax incentives were abolished by Sir Roger Douglas, there have been no effective tax incentives to encourage exports, and minimal effort is made to attract overseas companies willing to establish greenfield operations.
Most of the foreign companies investing in New Zealand have purchased existing and long-established companies, most of which have a domestic focus.
This is Export Year in New Zealand, yet an aggressive monetary policy, which is the main mechanism used to fight a buoyant housing market, is pushing up the dollar and having a draconian impact on the export sector.
The OECD's latest New Zealand survey also identifies underdeveloped financial markets and a low level of savings as factors contributing to the country's poor economic performance. Ireland has performed better in both these areas.
The market capitalisation of domestic companies listed on the Irish Stock Exchange has grown from US$25.8 billion in December 1995 to US$170.9 billion, whereas the NZX's capitalisation has risen from US$32.9 billion to just US$46.5 billion over the same period.
Ireland also has a much bigger savings pool with €482 billion ($891 billion) of investment funds compared with just $64 billion in New Zealand, although some of the Irish figures are overseas funds invested through the tax incentivised Dublin Financial Centre.
Australia's upsurge in recent years arises in part from compulsory superannuation and surging exports, mainly driven by the mining boom.
Strong export growth, a high level of investment funds and deep financial markets have been major contributors to Ireland's economic success, but buoyant confidence has also been a major factor.
New Zealand had a huge amount of economic confidence in the 1980s as our listed companies, including Chase, Equiticorp, Rainbow, Fletcher Challenge, Brierley Investments and Omnicorp, made a large number of overseas acquisitions.
One company chairman, who shall remain nameless, smugly told shareholders at a mid-1980s annual meeting that English companies could be acquired cheaply because executives arrived late to work, had long lunches and went home early.
This confidence was shattered by the 1987 crash and has never fully returned.
This is reflected by the reluctance of most of the country's companies to invest for growth and to make overseas acquisitions.
It is also demonstrated by the willingness of domestic investors to accept takeover offers at below international values and by a strong bias towards residential property investments.
This lack of confidence is unfortunate because it coincides with a rapid growth in globalisation, which has offered wonderful investment opportunities.
The New Zealand economy desperately needs a circuit-breaker to restore economic confidence to a level that encourages productive investment and weans investors away from residential property.
KiwiSaver is a start but it doesn't go far enough. There needs to be a far more proactive and realistic approach towards encouraging exports.
And the tax incentives available to residential property need to be abolished and incentives developed to encourage productive investment.
Ireland has taken bold steps in these areas and benefited hugely as a result.
Is Finance Minister Michael Cullen courageous enough to unveil a circuit-breaker for the New Zealand economy in next week's Budget?
* Disclosure of interest: Brian Gaynor is an investment strategist and analyst at Milford Asset Management.
