In this post, I will continue my discussion of Philip McCann’s paper ’Economic geography, globalisation and New Zealand’s productivity paradox’, New Zealand Economic Papers, 43: 3, 279 – 314 (2009). In a previous post, I briefly introduced the idea of the New Zealand productivity paradox:
The mystery is why a country that seems close to best practice in most of the policies that are regarded as the key drivers of growth is nevertheless just an average performer.
(OECD Economic surveys: New Zealand, 2003).
In this post, I’ll look at the paradox in more detail. In what ways is New Zealand close to ‘best practice’? McCann reels off the following list:
- World rank 1 in terms of investor protection
- World rank 3 in terms of strength of property rights
- Amongst the world’s most transparent and least corrupt business environments
- World rank 9 for overall institutions
- Relatively small public sector: total tax revenue as a percentage of GDP is ranked only 15th in OECD – the second lowest for a small country
- Social expenditure as a % of GDP is ranked only 21st in OECD
- Very light levels of regulation by OECD standards
- Amongst the world’s lowest trade barriers
- World rank 1 for lowest labour firing costs
- World rank 7 for labour market flexibility
- World rank 1 in terms of the lowest number of procedures to start a business
- Consistently ranked as one of the world’s most liberalised economies
- High firm competition and turnover
- Ranked 2nd best country in the world for doing business
- One of the world’s best locations for capital investment
- New Zealand is the world’s most entrepreneurial society.
Yet despite these advantages, and despite enjoying favourable macroeconomic indicators such as low inflation and low unemployment over the last twenty years, New Zealand’s economic growth has lagged behind that of its OECD peers. In 1984, New Zealand’s GDP per capita was close to those of Australia, Canada and other western European economies; from 1985 onward, New Zealand fell behind not just Australia, but all other advanced OECD countries. New Zealand’s GDP per capita is now 73% of Australia’s and 82% of the OECD average. It has been overtaken by Spain and Greece, is being overtaken by Slovenia, and about to be overtaken by Israel, Korea and Taiwan.
New Zealand’s poor performance is probably not news to you. Indeed, Don Brash’s 2025 taskforce (Treasury’s austerity measures clearly extend to its website) was set the task of getting to the bottom of this poor performance. Where McCann and Brash differ, however, is that McCann argues that New Zealand’s performance can be explained primarily by its economic geography, while Brash appears to believe that it is insufficient to be ranked number 2 by the World Bank as the best place for doing business (Doing business 2009. Washington, DC: World Bank) in order to perform as well as the rest of the world.
This is just a restatement of this paradox. Why does New Zealand need to be number 1 plus daylight on deregulation, low taxes, and entrepreneurship, just to keep up with the rest? In the next post, I will start delving into the economic geography that may explain this paradox.