Source: Ministry of Economic Development, Economic Development Indicators 2007, Figure 2.1, http://www.med.govt.nz/upload/53549/Indicators-Report-2007.pdf
I think I’m relatively well-versed in economic theory, but a lot of it is self-taught, or at least learnt outside of formal economic programmes.
I studied economics at high school and took 1st year Macro. But then I came back to it via politics: Jack Vowles taught me an appreciation of Keynes, David Neilson the insights that can be taken from Marxian economics, and Alan Simpson supervised my dissertation (and conference paper) on the international dissemination of economic ideas (Where do they get their ideas? Treasury, the Reserve Bank and the International Economics Community). I kept on reading from there, starting with Keynes’ General Theory and then Marx’s Capital (I only made it through Volume 1); economic books and papers have been part of my professional reading ever since.
But, even so, I’ve never really had economics textbooks drilled into me. So when I encounter a particular economic finding or phenomenon, my initial reactions tend to be those of a layperson. The standard economic explanation doesn’t necessarily spring straight to the forefront of my mind.
I’d want to argue that that can be an advantage. It doesn’t immediately ‘lock in’ an answer, and allows scope for different interpretations.
Which brings us back to the dreaded OECD ranking. As we saw last week, New Zealand’s per capita GDP has been declining compared to other OECD countries for at least the past sixty years, and is now 84% of the OECD average. We were once one of the richest, yet now rank 22nd out of 30 countries (between Greece and Korea).
Like many New Zealanders of my generation, I grew up hearing this sort of stuff. And yet when I thought about it, and particularly once I started travelling overseas, a couple of what I call “naïve questions” came to mind:
- Are we really that unproductive?
- And are we really that poor?
I’ll unpack each of these in turn. (Warning: the reasoning below has been deliberately simplified.)
Are we really that unproductive?
If our GDP per capita is lower than other countries, then in most cases that means that our workers are less productive. There are other possible reasons – we might have lower rates of labour force participation, or work shorter hours – but, as the Ministry of Economic Development graph at the top of this post shows, that’s not the case; quite the reverse, in fact.
So why are we unproductive? We have by all accounts a pretty good education system and our rate of participation in it is quite high. And anecdotally we know that Kiwi workers are well-regarded when they go to work in other countries like Australia and the UK. So I doubt our workforce is deficient.
Maybe it’s something to do with commodity prices. I realise I we are ‘price-takers’ when it comes to prices on commodities such as dairy, meat and wool, and that the cost of production is fundamentally set by Third World wages. But if we were able to earn First World prices through other goods and services but only Third World ones through commodities, wouldn’t the latter become pretty unprofitable and unattractive compared to the former?
Is it something to do with the exchange rate, then? Does it somehow set our wages and price levels in general based the prices of our commodities, since they are our main export earners? I can see how that might happen with the non-tradeable sector, i.e. those goods and services that aren’t (and often can’t be) traded internationally. So a New Zealand hairdresser might earn much less (in buying power terms) than one with the same skills, experience and talent in the UK, because the customer base they were trying to sell to has less money to spend.
But if this were the case, wouldn’t it make our other export industries very competitive, because they were producing their products more cheaply than other First World countries? And aren’t our manufacturers complaining about precisely the opposite?
Another possible explanation is underinvestment in productive capital. After all, labour productivity is often more a reflection of how well-equipped a worker is than anything about her personal skills or aptitudes (a fact that is often overlooked when this issue comes up in political discussion). Maybe with our small firms and low domestic savings rates, we just haven’t invested in our capital stock the way other countries have, and our workers are less productive (and therefore poorer) as a result?
Are we really that poor?
My second naïve question is about how our low per capita GDP manifests itself in our material standard of living.
In comments on my previous post, Achela, Nicholas and James have made the point that there’s a lot more to standard of living than just GDP per capita, such as life expectancy for instance. And, in another context, Rob has drawn our attention to the insights of happiness economics.
But even just in terms of our ability to afford market goods and services, how meaningful is what these GDP per capita figures are telling us?
Take two countries that most New Zealand are pretty familiar with: the United Kingdom and Australia. According to these figures, the British are 30% better off than we are and the Australians are 37% better off.
Does that feel right to you? I spent a couple of months in the UK last year, and I know people who live in Australia who I visit pretty often. The standard of living over there doesn’t seem particularly different to here. Can you think of things that people in those countries regularly afford that we can’t, for instance?
At the same time, the figures suggest that the difference between the Australians and us is the same as the difference between us and the Slovak Republic. Now, I don’t know much about the Slovak Republic but I imagine that if I went there I’d pretty quickly see signs of a rather more restricted lifestyle – somewhat more different from us than we are to the Australians. How can we explain that?
I’ve raised these questions with economists on occasion and been kindly assured that there is absolutely nothing interesting or insightful in them, and that these seeming paradoxes are easily explained.
And I’m not so rash as to hijack the entire Progressive Path to Prosperity topic — or even just the Identifying the Problem workstream — and make it about that.
Nevertheless I do hope to present my work in this area in a way that does offering a satisfying account of New Zealand’s situation to people who puzzle about the same sort of naïve questions as I do.
If you have had similar questions to me, or can offer some compelling answers, or even if you think this whole line of enquiry is misguided, I’m keen to hear from you – leave a comment below!
Tags: Alan Simpson, commodity prices, David Neilson, GDP per capita, Jack Vowles, OECD rankings
Been awhile since I looked at the stats; in fact I don’t think I ever actually did a comparative study with the UK and Aust; but I have always been under the impression that our standard of living in terms of material goods was being sustained by our poor balance of payments and the exploitation of natural capital. In other words we are Esau selling his birth rights for stew; we are trading our future for immediate pleasure.
yeah, the world is a more interesting and unpredictable place than most economists and purveyors of gdp and productivity rankings would have you believe.
More annecdotal stuff. Last week we had a family member stay with us who recently shifted to Australia where she manages a business (She had management roles in NZ also). She says NZers leave Australians in the dust for work ethic and attitude.
I’ve worked in the UK and found the Brits to be a pretty unproductive lot at work as well.
I’m just jealous about your ‘advantage’ and that you studied macro by reading Keynes and Marx in the original.
Anecdotally, I have certainly found the English to be a people “under stress”: pale, sickly, cramped living conditions, poor health service and public services, high level of social strife (knife crime for example). So yes, these GDP numbers do seem strange. However, it seems to me that most European countries, probably even the Slovak Republik, have a high investment in gleaming new factories which litter the countryside, in a way you don’t ever see here (and how much of that investment is EU-facilitated or subsidised?). We do work with pretty basic facilities here, to be sure.
Just to demonstrate that some of us, (particularly me) are lazy and unproductive, I won’t check on the exact numbers but a few years ago a UNIDO study showed that in terms of “technological intensity” NZ was 34th (I think) in the OECD. In other words due to small scale firms and low profitability, leading to lower levels of reinvestment, we keep on fixing up and working our old gear to death. These factors probably relate to another of the reasons our productivity performance is poor: we don’t add a lot of value to most of our exports therefore we don’t generate the returns for re-investment in technology. At least part of the reason for this, and our poor productivity levels, is that we don’t produce or value good “process” managers who can work with staff to reduce waste and frustration and streamline production processes that deliver what customers want, that in turn frees up managers to think about how they might move up the value chain. So we work our butts off using dumb ways of working and old technology to produce low value stuff that ensures we remain trapped exactly where we are.
Part of this at least will be due to the lack of agglomeration affects that the economic geographer guy explained so clearly in David’s recommended reading for the week. Policy to unwind these conundrums would be useful.