Why settlers just won't settle down

New Zealand is an anomaly among the handful of countries that actively seek new settlers.

Australia, Canada and the United States have all had fairly steady net inflows of migrants over the past decade, normally between 0.4 and 0.7 per cent of their populations each year.

By contrast, migration to New Zealand has gyrated wildly from a net outflow of 0.2-0.3 per cent between 1999 and 2001 to a huge net inflow of 1.1 per cent just two years later. The main driver is the transtasman movement of New Zealanders themselves. In the past two days, the Herald has reported the trend may be settling into a longer-term net outflow to Australia, offset by a net inflow from other countries.

Two questions remain: Does it matter? And if so, what can we do about it?

"Is there a problem? It's not obvious to me," says economist Arthur Grimes, speaking personally rather than as chairman of the Reserve Bank. "It's not surprising that people go to the Big Smoke, as they do from Te Kuiti to Auckland."

This series has shown that he is right for people like film editor Antje Kulpe, who is going to soak up Melbourne's cultural richness but will return. Others will stay away to contribute in specialised fields or big organisations which simply don't exist in a small place like New Zealand.

But others again, on low incomes like electrician Grahame Boyd and factory worker Eileen Ruka, are going unhappily. They would rather stay here if New Zealand could just pay them enough to live on.

So at the lower end, at least, there is a low income problem. The challenge is to close a 24 per cent income gap that has opened up since 1967, when the average New Zealander last earned more than the average Australian.

Our relative incomes have taken three big slides. When wool prices dropped in 1967, and again when oil prices jumped in 1979, we were hit worse than Australia because our exports were more narrowly based. We had farmers, but few miners.

But we diversified, and by 1984 we had clawed our way back to only 8 per cent below Australia.

Then in the 15 years from 1984-99, our incomes slid from 92 per cent to 73 per cent of Australia's. This time the pain was self-induced as we closed a third of our industry and laid off a fifth of all Maori workers to become more efficient. We have still not recovered.

In the fight against inflation, we pushed up interest rates and let the kiwi dollar soar as overseas lenders piled in.

Today our companies are still paying 4.1 per cent more than the current inflation rate to borrow money for six months, compared with only 2.8 per cent more than inflation in Australia.

Our Reserve Bank has raised its cash interest rate from 6.5 per cent to 7.25 per cent in the past year while Australia has kept its rate steady at 5.5 per cent.

And after adjusting for inflation, our real exchange rate against the Australian dollar has averaged 23 per cent higher in the 21 years since the kiwi was floated in March 1985 than it did in the 21 years before that.

With such costly capital, investment has been flat. A recent NZ Institute report says the International Monetary Fund "attributes almost all of the substantial per capita income gap between NZ and Australia to New Zealand's lower levels of labour productivity, and estimates that 75 per cent of the labour productivity gap is due to lower levels of capital accumulation in NZ".

And with the high kiwi dollar pricing NZ-made goods off world markets, what investment there has been has gone mostly into domestic sectors such as housing and shopping malls, which have lower productivity than the sectors exposed to the world market.

"The problem is low investment and the poor quality of investment. High interest rates and tax rates do not help," says Auckland University economist Debasis Bandyopadhyay.

His solution is obvious: Cut interest rates. He believes Reserve Bank Governor Alan Bollard is wrong to try to dampen house price inflation, because house prices will always rise as people's incomes rise.

"To kill the house market he is keeping interest rates high and that is killing the business sector," he says.

But a Lincoln University economist, Paul Dalziel, says high interest and exchange rates are just a symptom of our failure to make each sector more productive. "Something that Australia does and we don't is that their Productivity Commission is concerned with looking at industry sector by sector with a view to identifying barriers to productivity growth," he says.

"In Australia the 2005 Budget devoted A$143 million [$165 million] to career and transition support initiatives," Professor Dalziel says. "If those new industries are going to get the skills they need to generate productivity growth, then young people have to be given the new skills and career development options as early as 14 or 15, as much as 17 or 18."