Let’s continue the 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 Part II, I looked in depth at the productivity paradox. As McCann notes, the debate about New Zealand’s poor productivity performance often focuses on regulation, taxation and institutions. However, McCann argues that it is economic geography, not those factors, that explains the productivity paradox:
The argument to be developed here is that the currently very slow (if at all) catching-up processes exhibited by New Zealand are nowadays largely unrelated to the arena of New Zealand’s past or present domestic policy-making or institutional changes. Neither are they related to the greater-intervention versus the less-intervention debates, or to institutional arguments regarding the past pace of deregulation. Rather, New Zealand’s desperately slow productivity adjustment processes are nowadays primarily related to external, enormous, and fundamental changes in the global marketplace, which began to take place between the 1960s and 1980s, but accelerated rapidly since the 1990s. The outcomes of these changes are that, whereas history dealt New Zealand a very good hand for competing internationally in previous eras, history has dealt New Zealand a very poor hand for competing in the current global marketplace. The reasons for this are primarily related to economic geography.
What is economic geography? It is the study of how economic activity is affected by its location and distribution. As a branch of economics, economic geography was made respectable by economists like Paul Krugman and Jeffrey Sachs in the 1970s and 80s. Paul Krugman won the 2008 Nobel Prize in Economics for his contributions to New Trade Theory, including efforts to understand how trade flows are affected by economies of scale.
New Zealand has an unusual economic geography for an advanced economy. It has a low population density, a very high reliance on land-based exports, the lowest export diversity for any advanced economy (World Trade Indicators 2008: Benchmarking Policy and Performance. Washington, DC: World Bank), and the most extreme geographical isolation of any advanced country in the world.
In some of my early posts, we have seen how New Zealand’s low population density contributes to low rates of patenting. McCann argues that many aspects of our economy are affected by our low population density in a similar way.
Yet many of these geographic factors have been with the New Zealand economy for some time. New Zealand has been where it is since splitting off from Gondwanaland, and surely transport and communication costs have been falling, bringing us ever closer to the rest of the world. Thus to counter McCann, one might argue that the idea that economic geography can explain New Zealand’s productivity paradox is a:
’..view that can quickly be dismissed and that the excuse of isolation and small size is not credible; the record suggests that it is the quality of institutions which societies adopts that matters for long-term growth’.
(Kasper, W. Losing sight of the lodestar of economic freedom: A report card on New Zealand’s economic reforms. New Zealand Business Roundtable, December 2002.)
However, in light of my previous post in this series, it is very difficult to swallow Kasper’s argument that there is something amiss with New Zealand’s institutional settings.
In my next post on this topic, I will look at why McCann thinks our economic geography has recently become a problem rather than an asset. Why was New Zealand one of the richest countries in the world for most of the 20th century, only to plunge down the league tables just as the world was supposedly becoming flat?