Productivity key to closing Tasman performance gap

Without policy changes aimed at aggressively boosting productivity, TONY ALEXANDER foresees no end to New Zealand's economic under-performance

There is a very good chance that New Zealand and Australia will both achieve around 2.5 per cent economic growth this year, compared to just below 4 per cent for Australia last year and just above 4 per cent for ourselves.

Both our economies will be hit by a general weakness in exports. But whereas a large part of the Australian export weakness will be because of drought, our weakness will mainly reflect the greater rise in the New Zealand dollar than the Australian.

Compared with a year ago, the kiwi has gained around 31 per cent against the greenback, while the AUD has risen just 16 per cent. These moves mean our cross rate against the Aussie dollar has jumped around 13 per cent to near 92Ac or some 15 per cent above the post-float average. In contrast, we are right on the post-float average against the greenback. This is good news for Kiwis wanting to cross the Ditch, but bad news for non-commodity manufacturers, who send around 45 per cent of their exports to Australia.

Another key factor in our respective growth slowdowns this year is the housing sector. At this stage, house construction in Australia remains strong. But leading indicators suggest a rapid decline is imminent and this could take around 1 per cent off Australia's overall growth rate this year. In contrast, any easing in the housing sector here is not likely to happen until the end of the year.

But whatever the causes, both our economies look like recording below their average growth rates for the past decade of 4 per cent in Australia and 3.5 per cent in New Zealand.

If we track the same this year after outperforming last year should we start believing that New Zealand is not really in as bad a shape relative to Australia as we have been telling ourselves for the past few years - especially after the 1997-98 Asian Crisis, when we experienced a recession while Australia kept growing by around 4 per cent.

Without even going into factors such as changes in government policies, moves toward greater economic integration, threats to such moves from divergent defence policies, etc, we can gain insight by looking at historical data.

Over the past 10 years Australia has achieved its 4 per cent average economic growth with annual growth in job numbers of 2 per cent from labour force growth of 1.5 per cent. This has taken the unemployment rate from 10 per cent to 6.2 per cent. In New Zealand, jobs growth has averaged a stronger 2.5 per cent, with faster labour force growth of 1.9 per cent, taking the unemployment rate from 10.3 per cent to 4.9 per cent.

These data imply average productivity growth in Australia of around 2 per cent per a year compared with 1 per cent in New Zealand. Higher output per employee in Australia may have come about as a result of greater business capital expenditure, higher human capital input from better education and work skilling, or greater efficiency-boosting changes in distribution networks and the like.

Academics can debate the cause, but the undeniable outcome is that higher output per person employed allows payment of higher remuneration - or in this context, greater growth in remuneration.

Given recent policy developments in New Zealand and the lack of any obvious plan to boost labour productivity at a rate greater than labour cost rises, the clear threat to New Zealand is that household incomes continue to lag behind those in Australia.

In a world where labour is internationally mobile and there is a shortage of English-speakers, the attraction to Kiwis of leaving for Australia is likely to grow (specially when many of us have a relative across the Tasman to help us settle in).

While this may not mean a shrinking New Zealand population, it will certainly mean potentially high "churning" of the population, with Kiwi outflows and foreigner migrant inflows. Unless New Zealand governments take measures to address the productivity growth under-performance, some radical immigrant re-education and settlement policies may be required to ensure maximum efficiency by new migrants to our shores.

Any policies which can generate Australian-style productivity growth rates in New Zealand will be useful. The big problem, however, is agreeing on exactly what those changes need to be. A closer economic relationship with Australia focusing on reduced taxation and investment barriers would appear useful. But most gains from a closer relationship have probably already been captured in the CER agreement signed 20 years ago.

A joint currency might help New Zealand-based manufacturers who, because of the small domestic market they face, must tackle currency issues early on in their growth cycle. But a joint currency seems decades away, with Australia quite sensibly not willing to contemplate creation of a new currency and New Zealand unlikely to embrace the inclusiveness required to adopt the Australian dollar.

Specifically, if New Zealand farmers are willing to call, as they have done, for a separate South Island currency to escape upward pressure from Auckland house price rises, what chance is there of Kiwis accepting interest rate and exchange rate restraint on the local economy to offset inflation pressures in Sydney and Melbourne?

Frankly, the risk is that in the next five years the gap between New Zealand and Australian economic performance will grow even larger if Australia secures a free trade deal from their close military ally the United States, but we do not.

The implied greater return for companies from investing and basing themselves in Australia rather than New Zealand would be particularly damaging at a time when we vitally need increased capital expenditure locally to meet capacity constraints and boost labour productivity.

Finally, to demolish the idea that New Zealand may be catching up with Australia because of our recent economic performance, it is useful to consider why we under-performed during and after the Asian Crisis.

In 1997-98 we had four negative factors in play which Australia did not:

* Migration inflows collapsed.

* The over-valued housing market pulled back.

* The Reserve Bank of NZ kept interest rates much too high.

* Drought.

This time around our outperformance reflects not just a currency decline similar to the one Australia experienced from 1997-2000, but the following:

* A migration boom.

* A cyclical rise in an undervalued housing market.

* Below-average interest rates caused by global tensions.

* Good weather (versus major drought in Australia).


This time we have been the Lucky Country. But unless some major policy changes occur in New Zealand aimed at aggressively boosting productivity, we see no reason for expecting the under-performance of the past decade to end.

Moves aimed at improving our economic relationship and integration with Australia would help, but they would not be the ultimate answer to our ongoing inferiority.

* Tony Alexander is chief economist for Bank of New Zealand.

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