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Why is New Zealand poorer than Australia?
Via Craig Newmark, here is one short article. the conclusion:
"Prosperity does not come by accident,'' Mr Rennie said. "Australia has a stronger political consensus around policies for growth, which contributes to investor confidence.''
Sorry but I can't buy it. Throughout the 1990s New Zealand economic policy probably "led" Australian policy, yet Australia has gained on New Zealand since that time. I'll instead cite booming resource prices (there is more gain in selling minerals to China than agricultural products), economies of scale from having a larger country, and most of all the Kiwi brain drain. In percentage terms, many more of the smartest New Zealanders leave their home country -- often for Australia I might add -- than vice versa.
Posted by Tyler Cowen on December 28, 2007 at 06:00 AM in Economics | Permalink
Comments
I recall seeing some graphs suggesting that immigration restriction slows economic growth. It is my understanding that New Zealand vigorously restricts immigration and that Australia doesn't restrict it anywhere near as much.
Posted by: Rimfax at Dec 28, 2007 8:10:24 AM
I co-wrote a paper on this a few years ago: http://treasury.gov.au/contentitem.asp?NavId=&ContentID=949
The short version: while there are some things related to education, R&D and participation rates, the most significant factors are geography and population. New Zealand is, once the size of other country's GDP is taken into account, the most remote country in the world. It would be surprising if this didn't have at least some economic impact.
Posted by: Robert at Dec 28, 2007 8:57:21 AM
Why don't more rich people live in Alabama? The tax rates on the rich there are lower than on the poor, so any rational rich person should move there, right? It's not that remote from Atlanta or New York.
There's a recent article on people leaving Denmark, supposedly due to their high taxes (see Megan McArdle's post.)
Why do people flee the free-market oriented New Zealand and the high-tax oriented Denmark and the low-tax oriented Alabama for the metropolis?
Posted by: Bill Harshaw at Dec 28, 2007 9:21:18 AM
I believe the people at Fark likes to call New Zealand, "Australia's Canada".
Posted by: Xmas at Dec 28, 2007 9:25:47 AM
Full paper (as PDF) available from http://www.apo.org.au/linkboard/results.chtml?filename_num=186322
Posted by: Dave Barnes at Dec 28, 2007 9:38:17 AM
It's relative. For an individual, Alabama is not that much more favorable than New York because of federal taxes, especially income taxes. If Alabama had a total tax rate closer to Hong Kong, it probably could overcome some of what makes NY more attractive. On the other hand, anecdotally it seems the Japanese and other foreign automakers prefer Alabama to New York when building factories, but that includes factors such as regulations and labor costs.
Posted by: 8 at Dec 28, 2007 10:00:50 AM
As a New Zealander, I agree with you. The big question for me is what causes the brain drain.
Posted by: aaron schiff at Dec 28, 2007 10:18:23 AM
As an NZer who 'drained' I agree with the remoteness arguement. Although New Zealand is slowly developing a culture all its own, its main influences are European and American. Grow up in a place where most of the books you read, movies you see, TV you watch, scientific advances you wonder at, music you listen to are European or American. Then factor in a culture of travel, where most people can look to an immigrant grandparent or great grand-parent, and there is a recipe for curiousity at least.
I live in London, and am very unlikely to move back to NZ because:
I can (British citizenship due to an English father)
I love travelling, and 3 hours to the nearest country which is only similar Australia doesn't satisfy that
I love the interest and excitement of the metropolis
There is more commerce and work opportunity within an hour's walk of where I live than in my entire country
Its the pull of the metropolis, pure and simple.
Posted by: Cathryn at Dec 28, 2007 10:30:39 AM
NZ did indeed suffer much needed reform throughout the 1990s, but i don't see that it led Australian policy, but see it more as an parallel movement (about as qualified as TCs claim). Economies of scale does not go far enough. People are attracted here (Australia) by more than net income alone. PPP has a lot to do with it (thought that is changing rapidly). Climate is NOT insignificant either.
Cathryn, your comment tells us virtually nothing, interesting as it is. I've not looked at the numbers, but dare to venture that just as many Aussies make the UK their home for some time as do Kiwi's.
Scale does count for some of the difference no doubt. Educational and travel opportunities are greater, as well as the fact that some large companies have their Asia/Pacific bases (or at least major quarters) here.
The kiwi brain drain, though important, has little to do with the difference IMO. The fact that Australia is one of the most natural-resource-rich countries on the planet is far more important and will remain so for many years to come.
Posted by: CM at Dec 28, 2007 12:08:26 PM
NZ did indeed suffer much needed reform throughout the 1990s, but i don't see that it led Australian policy, but see it more as an parallel movement (about as qualified as TCs claim). Economies of scale does not go far enough. People are attracted here (Australia) by more than net income alone. PPP has a lot to do with it (thought that is changing rapidly). Climate is NOT insignificant either.
Cathryn, your comment tells us virtually nothing, interesting as it is. I've not looked at the numbers, but dare to venture that just as many Aussies make the UK their home for some time as do Kiwi's.
Scale does count for some of the difference no doubt. Educational and travel opportunities are greater, as well as the fact that some large companies have their Asia/Pacific bases (or at least major quarters) here.
The kiwi brain drain, though important, has little to do with the difference IMO. The fact that Australia is one of the most natural-resource-rich countries on the planet is far more important and will remain so for many years to come.
Posted by: CM at Dec 28, 2007 12:10:01 PM
Xmas,
If NZ is "Canada" to Australia's "US," does this mean that kiwis
are "cute" and "little" compared to Ozzies?
Posted by: Barkley Rosser at Dec 28, 2007 12:14:56 PM
"For an individual, Alabama is not that much more favorable than New York because of federal taxes, especially income taxes."
Why compare Alabama and New York? Are you implying that some change in Alabama would induce New Yorkers to relocate to Alabama?
Wealthy New Yorkers and Californians have been relocating to Florida and Texas for decades. Texas offers zero income taxes, absurdly low housing costs, and abundant economic opportunity. Florida offers low taxes and an outrageously attractive climate. Alabama competes for the mobile wealthy with Florida and Texas, not with New York.
Posted by: John Dewey at Dec 28, 2007 12:15:44 PM
So, New Zealand is extremely easy to leave as a citizen and extremely hard to go to as an immigrant.
Strangely, Alabama is arguably the same in that it is a very difficult place for foreigners to fit in, but instead of bureaucracy stopping them it's culture. I have a friend whose family just moved to Huntsville from Denver. Both he and his wife have lived in several places around the country over the course of their lives. They have only been there for 6 months or so and they are already ready to leave.
Even though Huntsville is something of a cultural oasis in Alabama, they find the culture to be unbearable. They are white, mainstream, conservative folks, so it's not an issue of politics or intolerance. They are finding that the institutional standardization of poor results (for those without connections) to be overwhelmingly frustrating. His wife has filed paperwork for their kids' school enrollment several times and it keeps getting "lost". His job with a high-tech company reflects the same culture of "don't care" and "not my money/problem".
New York, on the other hand, despite insane taxes and an astronomical cost of living is a bureaucratically and culturally welcoming place for immigrants, especially those with the resources of youth, talent, or wealth. Those are the kinds of resources that generate economic growth. (I wonder if New York's economic unwelcome for those lacking resources plays a part as well, but I would suspect not.)
So, I still suspect that net immigration as affected by bureaucracy and by culture is a big factor in growth.
Posted by: Rimfax at Dec 28, 2007 12:28:23 PM
I read a story a few months ago that a Brit who was taking a job in New Zealand was required, due to a national health law, to lose 30 lbs. before he was allowed into the country. His wife was not allowed to enter with him because she didn't meet the required BMI, and he was unsure whether or not the job (he's a marine cable expert)was worth the hassle.
I guess the Kiwis are VERY particular...
Posted by: Brutus at Dec 28, 2007 12:59:07 PM
Remoteness and resources are important, but I also think that the national character is important.
Compared to Kiwis, Australians like to think of themselves as a bit more rough and ready, aggressive and contentious. These qualities spill over into economic dynamism.
Posted by: SJE at Dec 28, 2007 1:19:58 PM
Remoteness and resources are important, but I also think that the national character is important.
Compared to Kiwis, Australians like to think of themselves as a bit more rough and ready, aggressive and contentious. These qualities spill over into economic dynamism.
Posted by: SJE at Dec 28, 2007 1:20:24 PM
CM
You missed Cathryn's point, I think.
Melbourne, with 4 million people or so, has more cultural opportunities than all of Kiwi-land.
So you would expect Kiwis to move to Australia (they do).
Then you add the fact that they (and Australians) often have British grandparents (more common with Kiwis in my experience) and can move to London which has more cultural and career opportunities than all of Australia (potentially) *and* has Europe on the doorstep...
As to relative wealth, remoteness is a big factor, and so is scale. With the exception of timber and agricultural products, Kiwi-land doesn't have the scale (given the distance) to be competitive on almost any product. Even high value manufacturing is airfreighted these days, and it takes longer and costs more to airfreight from there than almost anywhere else.
SJE
In my experience, Kiwis are harder working and more economically dynamic than Australians. That's a London-centric view, and banking is not the world (fair dues to Macquarie of course).
The Australian economy seems *much* more tied up by trade unions and 'trade union like' practices. There's a real 'let's go to the beach' attitude which North Islanders, at least, don't have.
Posted by: Valuethinker at Dec 28, 2007 2:32:28 PM
A colleague who worked in NZ for a number of years before coming to the US claimed that the Kiwi tax structure was uniquely punishing to human capital accumulation while being favorable to inherited wealth. He argued that the tax rates on labor income made education almost a bad deal.
Posted by: srp at Dec 28, 2007 2:47:58 PM
But, isn't New Zealand the new "Middle Earth"??? :-)
Posted by: Barkley Rosser at Dec 28, 2007 3:42:55 PM
John Dewy,
Regarding Alabama, Florida, and Texas, I would say that indeed the
combo of low taxes and low housing costs are attracting working age
people to Texas from many locations, but is not most of the migration
to Florida simply retirees?
Posted by: Barkley Rosser at Dec 28, 2007 3:45:57 PM
As for lazy unions and a lets go to the beach attitude: there is a lot of that. But there are also those who work very hard to be the best they can be, a skill honed in a very harsh land. Speaking as an (expat) Australian, I think there is certain sort of aggressive, go for the kill, dominate and destroy attitude that makes Aussies a bit nastier and ruder than Kiwis (and certainly than the English). Given that, maybe there is something in it that explains our success. Trevor Chappel's underarm bowling was very bad sportsmanship, and rightly decried, but it did win the Australian's a cricket match against NZ.
Posted by: SJE at Dec 28, 2007 4:05:14 PM
"is not most of the migration to Florida simply retirees?"
Barkley, you are probably correct that retirees make up most of the in-migration. Many of them will have reduced incomes, and may have moved for reasons other than taxation. I was thinking about migration of higher wealth and higher income people. I read recently that Tiger Woods and other high-income athletes have fled California's high tax rates and relocated to Florida.
Posted by: John Dewey at Dec 28, 2007 5:11:08 PM
"Alabama competes for the mobile wealthy with Florida and Texas, not with New York."
Um, no it does not. Though I agree it also does not compete with New York.
Posted by: meter at Dec 28, 2007 6:30:40 PM
Rimfax,
I would think that the resource endowment that New York possesses-- a highly creative and welcoming culture, industries with high network effects like finance and fashion, and so forth, enable New York (and its surroundings) to have high tax rates. Texas has to have lower taxes to compete with New York.
Posted by: Petrarca at Dec 28, 2007 6:55:31 PM
Some immigration statistics:
Aus 3.5 migrants per 1,000 population per year
NZ 9.6 migrants per 1,000 population per year
USA 3.1 migrants per 1,000 population per year
It's not immigration policy that is inhibiting growth.
A major problem is that the NZ business community does not invest enough in R&D - it still expects the goverment to do that for them.
When faced with skill shortages, industry does not take the lead and work with the education sector to train workers, they expect the goverment to step in and solve the problem.
So althought the policies may have changed. Much of the NZ business community is still stuck with pre-reform mentalities.
Another problem - Most exporters are focused on increasing output of low-value commodities which apart from a recent spike have continued a downward real price trend for decades. More NZ business' need to move up the value chain and create new markets and products - this can only happen with increased private R&D (Perhaps NZ needs more venture capitalists?)
But New Zealand must realise that it cannot continue to compete on price with low-value commidities against 2nd world countries with far cheaper land and labour costs.
So in my opinion - the policy is ok: ie. relatively low tax and low regulation - now it's time for NZ business to stop blaming the government and to start innovating products by increasing R&D spend. But industries also need to learn to collaborate to solve issues such as skills shortages.
Greg.
Immigration stats:
http://www.nationmaster.com/country/as-australia/imm-immigration
http://www.nationmaster.com/country/nz-new-zealand/imm-immigration
http://www.nationmaster.com/country/us-united-states/imm-immigration
Posted by: Greg at Dec 28, 2007 8:52:25 PM
