Saturday 29 December 2007

Why is New Zealand poorer than Australia?

Tyler Cowen asks this question at Marginal Revolution. His argument is,
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.
I'm not sure New Zealand did lead Australian policy in the 90s, may be we did in the 80s. But one thing Cowen misses is that New Zealand's growth rate has be less than that of Australia for the most part for over 100 years, this is not new. As Greasley and Oxley show in "Growing Apart? Australia and New Zealand Growth Experiences, 1870-1993", New Zealand Economic Papers; 33(2), December 1999, pages 1-13. "New Zealand's growth performance rejects both convergence and catching-up with Australia" and "... the New Zealand data is incompatible with her belonging to a trans-Tasman Convergence Club. A conjunction of smaller size, more insular economic policies, and a less favourable resource endowment distinguishes New Zealand's economic development from Australia's." To answer Cowen's question we must look at a time horizon longer than just the post 1990 period.

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