What will Don Brash’s 2025 taskforce say next year and the year after and the year after and the year after?
Most likely it will say that, short-term fluctuations aside, the wage gap between New Zealand and Australia is not getting smaller and that the government is dragging its feet on the taskforce’s recommended reforms.
At some point this will bother John Key and Bill English, unless the gap measurably and sustainably gets smaller quickly, even though over time they are likely to go some way down the Brash track.
Brash’s enterprise is an eerie reprise. For a time he directed economics at the Planning Council, which suggested large policy changes to a resistant Sir Robert Muldoon.
They weren’t radical by today’s standards but there is a direct lineage to ACT’s policy. It was ACT that got Key to set a target of catching Australia in GDP per capita by 2025 and to appoint the taskforce and Brash.
The taskforce knows how to catch up: “The international literature is clear that the biggest difference between rich countries and poor countries is not their natural resources or their terms of trade, or their size or location, but the quality of their institutions.”
By “institutions”, Brash means tax (and government spending) and regulation, including, for example, how schools and welfare are organised. He calls these the “rules of the game” and getting those rules right is “the critical long-term issue for economic success”. “Excellent policies and institutions create a environment in which people find it attractive to make the most of their talents and resources.”
Yes, getting regulatory, tax and government spending policies “right” contributes greatly to economic success. Corruption, absence of the rule of law and respect for property rights, high tax, tight regulation and the like keep many poor countries poor. Insular policies and attitudes and tight regulation were big factors in New Zealand’s stagnation after the mid-1960s.
But why is Australia so much richer when in many respects (apart from government spending) its policies are farther from Brash’s ideal than New Zealand’s (and, incidentally, on some wider measures it is little more “prosperous”). In Australia labour laws are tighter, regulation is more prescriptive, there are payroll, estate, capital gains and other taxes absent here and it protects some industries free of tariffs here.
Moreover, a recent PriceWaterhouseCoopers World Bank study says total business taxes (not just the headline rate) are much lighter here and easier to comply with than in Australia. Australian Ralph Waters, when head of Fletcher Building, said doing business was easier here. On most doing-business indexes (other than the subjective assessment measures, which reflect a hang-dog attitude of many in business here) New Zealand scores well, including against Australia.
And actually the big GDP-per-capita slide against Australia was during our transition to a more open economy — despite the fact that those policies, while driving up inequality and poverty, over time markedly lifted productivity growth and so the material welfare for most New Zealanders.
Moreover, while the taskforce demands a big cut in government spending, many richer countries have higher taxes and spending. Some that have passed us (Singapore, South Korea) are not models of market-liberal government.
That all suggests there may be more factors than the “rules of the game” at work in this economy’s relative GDP-per-capita slide.
Phil McCann thinks so. Professor McCann is a geographical economist at Groningen University in Holland, a leading centre of the discipline. He is also a professor at Waikato University.
In a Motu Research lecture this week, McCann expanded some of American economist Richard Florida’s ideas that what matters is agglomerations of top people — even given the internet. “Global cities” and “super-regions” are generally richer because in the 2000s globalised economy innovative people gather there and investment goes there. They have scale and they are interconnected.
London, for example, is Europe’s financial centre. A firm might nominally be domiciled in another country but have its operative head office in London.
Global cities, McCann says, are markedly richer than the rest of their countries. Countries with such cities are richer than those without.
Sydney just qualifies and maybe Melbourne. Auckland is too small and isolated. Sydney and Melbourne lift Australia’s overall wealth and the federal budget spreads some of the loot. So smaller cities in Australia do better than Auckland, which doesn’t share in the federal loot. The rest of this economy is even less rich.
Result: while New Zealand is as entrepreneurial as Australia, it doesn’t reap the full benefit of that energy.
McCann’s analysis is cool comfort for Key and English. Even if we make our “rules of the game” the world’s best, we might still be well down the wealth table. Go west or north, young woman.