• Closing the Gap

    Successive governments have repeatedly expressed their concern at our slide down the OECD economic tables and their ambition to see us climb back up again. But over the last few years, they have focused that concern more precisely; it is the growing gap with Australia that they now target. The present government has committed us to catching up with Australian living standards by 2025.

    Identifying a target is commendable but that is the easy bit. Things get harder when we ask ourselves just how we are going to do it.

    The starting point is to measure accurately just how wide the gap is. On the basis of comparative GDP figures, it is said that we would have to raise our incomes by over 30% in order to match Australian levels, or – in other words – the average New Zealand family would have to be $50,000 a year better off.

    This is daunting enough, but the worse news is that these figures understate the problem. GDP figures include that sizeable proportion of our national output that is actually exported overseas to foreign owners whose stake in our economy is now proportionately greater than in any other comparable economy. If we exclude those repatriated profits and other payments to overseas owners, and count only that domestically produced output that we ourselves enjoy (as is done with the Gross National Product figures), we find that we would have to increase our output by nearly 50% to match Australian levels and that an average New Zealand family is actually $80,000 a year worse off than their Australian counterparts.

    If we are to close and eliminate that gap, the frightening challenge is that we will have to make up ground while the Australians will actually be growing – by world standards – pretty fast. We will be chasing a train that is leaving the station at a rapid clip. So, how well are we placed to do so?

    The early signs are not promising. The first thing we must recognise is that – as both economies look to emerge out of recession – the Australians have had a flyer. They have already moved smartly into growth mode, while we bump along on the bottom, still not sure whether recovery is really around the corner. The gap, in other words, is already widening as we speak.

    The Australian recovery is a function, of course, of the greater economic stimulus provided by their government by comparison with ours – and that reflects not only the stronger starting point they enjoyed but also a different approach to economic management. We, on the other hand, have been largely content to let events take their course and to wait for the recovery of others to restore export markets to us.

    Even more depressing is the fact that – even when recovery arrives – we seem determined to return doggedly to the self-same policies (and policy mistakes) which have seen us fall so sadly behind over the past 25 years. It is perfectly clear where we are heading – back to an obsession with inflation above all else, a total reliance on interest rates to regulate the macro-economy, and the destructive impact of an overvalued exchange rate on our productive economy.

    We seem to be sleep-walking towards a complete re-run of all our mistakes and failures. The authorities shrug their shoulders; there is, we are told, nothing they can do. Those who – against all the odds – continue to produce our national wealth complain bitterly and warn of dire consequences, but their pleas fall on deaf ears. We are trying to catch the train while running on the spot.

    The target set for us of closing the gap with Australia is laughable, and no self-respecting commentator should be heard to lend it respectability, unless we are prepared to take a hard look at what we must do to achieve it. Even then, even if we get everything right, it must be very doubtful that we can do much more than prevent the gap from widening further. Ministerial exhortations, endlessly worked over plans and strategies, constantly repeated targets, will not do the trick. What is needed is a fundamental re-think of macro-economic policy.

    Everything we do should be focused on improving the competitiveness and profitability of our productive economy. That means that policy targets should be set in terms of competitiveness rather than inflation, and that interest and exchange rates should be allowed to do their proper job of striking a balance between the interests of lenders and borrowers (in the case of interest rates) and clearing our current account while achieving a satisfactory rate of growth (in the case of exchange rates). Inflation should be constrained by specific measures designed to address inflationary pressures – excessive bank lending on housing and the favourable tax treatment of housing amongst others.

    A better economic performance is by no means unobtainable, provided we make the most of our advantages – political stability, a corruption-free and business-friendly environment, an educated and responsible work-force, huge natural advantages and great experience in producing the goods that the world’s fastest-growing markets will increasingly want. All we have to do is to avoid heading back to the dark ages.

    Bryan Gould

    17 November 2009

    This article was published in the NZ Herald on 27 November.