Explaining the income gap:
are Aussies and Kiwis that different?
Phil Rennie
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New Zealand is Australia’s poor cousin. Is the Kiwis’ national culture holding them back? asks Phil Rennie

New Zealand and Australia are remarkably similar countries. Isolated, sparsely populated former British colonies with a shared history and culture, the structure of their economies is also similar. Since 1983, both have introduced free-market reforms, and there has been free trade and migration between them.

Yet for all these similarities, there is one major difference: the level of wealth. Australians enjoy a per capita GDP of NZ$48,000, which is 32% higher than New Zealand’s NZ$36,400.(1) Put simply, Australians are nearly a third richer than their New Zealand cousins.

In a report recently published by The Centre for Independent Studies—Why is Australia so much richer than New Zealand?—I looked at this issue in detail, focusing on natural factors (size, distance, and resources) and policy differences (tax and regulation).(2) A significant issue that paper leaves unexplored is the role cultural differences play. Is there something different in the nature of New Zealanders that handicaps economic growth?

For example, is it true that Australians are more brash, confident, and competitive? Are New Zealanders just not that interested in economic growth, preferring leisure time and a clean, green environment? Or is the difference something to do with New Zealand’s ethnic make-up, and the underachievement amongst Maori and Pacific Islander communities? Biologist Richard Dawkins coined the term ‘meme’ in the 1970s to describe cultural trends and features that can be passed on and mutated like genes. Examples include tunes, catchphrases, fashion, and beliefs, and there are plenty of specific New Zealand examples worth investigating.

Many economists hate this kind of conjecture. They argue that everyone around the world reacts the same ways to incentives, and that different policy settings can explain everything. Plenty of others, though, believe that culture plays an important role. Wolfgang Kasper believes that in New Zealand ‘fundamental social attitudes matter, and these tend to be sluggish variables.’(3) Tyler Cowen is also concerned that social values may undermine growth in New Zealand. ‘Freedom and good policy,’ he writes, ‘are no doubt beneficial, but there are fewer guarantees in this world than we might like to think.’(4)

To some extent, we can rely upon international surveys of values to compare those of Australia and New Zealand, but otherwise this is a difficult topic to discuss quantitatively. It is still an interesting exercise, though, to consider some of the most popular theories about how values might be affecting New Zealand’s economic performance.

Attitudes to success
The ‘tall poppy syndrome’ is well known on both sides of the Tasman as a levelling social attitude. To some extent, it comes from our history as classless, egalitarian societies with social mobility and relatively low wealth inequality.(5)

Kiwis tend to like modesty and self-deprecation, but this attitude can extend into hostility towards ambition, achievement, and the celebration of success. Historian James Belich calls it a ‘nasty little Kiwi curse,’(6) and economist Bryce Wilkinson agrees that New Zealand ‘is a society which is absolutely savage on top-performing people.’(7)

A recent study by Otago University’s Department of Management interviewed forty entrepreneurs, of whom over half said they had experienced tall poppy syndrome. They admitted changing their behaviour by ‘flying under the radar,’ not telling people they owned a business, and avoiding ‘flaunting’ their wealth.(8)

Is Australia any different, though, with its similar history and its strong belief in a ‘fair go’ for everyone? Former Australian prime minister John Howard recently protested that he wasn’t overly ‘clever,’ as if this would be a bad quality in someone leading the country.(9)

The policies of political parties are good indicators of a country’s social attitudes. When it comes to tax on high earners, the difference between the Australian Labor and New Zealand Labour parties is striking. Kevin Rudd says he is an ‘economic conservative’ who is ‘committed to keeping taxes as low as possible to make sure there is incentive for those that work hard to keep the economy strong.’(10)

In comparison, Helen Clark’s Labour government raised the top rate of income tax in 2000, declaring that ‘tax cuts are a path to inequality … They are the promises of visionless and intellectually bankrupt people.’(11) Her government has recently announced there will be a limited tax cut next year, but not on the scale of the Australian Liberal and Labor packages, which New Zealand’s finance minister, Michael Cullen, dismissed as ‘not the kind of programme you would expect to see from a Labour-led government.’(12)

Assertiveness and ambition
Common wisdom holds that Australians are more brash, forthright, and confident than New Zealanders. Former All Blacks captain David Kirk, now CEO of Fairfax Media, says Australians ‘are assertive, more confident, possibly more optimistic, and probably more demanding, and tend to get what they want out of a deal.’(13)

Perhaps history plays a role here. A Massey University study of values in 1998 suggested that years of a sheltered economy may have hindered a business culture of competitiveness from fully developing.(14) Wolfgang Kasper argues that ‘social attitudes to competing are more pronounced in Australia … Australia’s social policies have stressed self-reliance and welfare reform more than has been the case in New Zealand.’(15)

Another common criticism of New Zealand entrepreneurs is a lack of expansionary ambition. This may be linked to its small size, which makes it difficult for firms to grow above a certain level without moving into foreign markets. Allan Bollard, the governor of New Zealand’s reserve bank, has noted ‘the much discussed cultural tendency of some New Zealand entrepreneurs to grow their business to sales levels of some tens of millions, then exit for the “Bach, boat and BMW” semi-retirement subculture, leaving overseas investors to expand the business further and develop its full value internationally.’(16)

Spendthrifts
A common perception of New Zealanders is that they are irresponsibly big spenders. Critics point to poor household savings, which have declined to the point where New Zealanders spend 114.8% of their household disposable income. This negative savings rate is the worst in the OECD.(17) Consumer spending and credit card debt has greatly increased, with many finance companies targeting customers with poor credit histories.(18)

To some extent, concern about consumer spending is overstated. Rising property values have made many New Zealanders wealthier and able to support more debt. The country’s overall national level of saving (which includes business and government saving) has remained largely unchanged over the last ten years.(19)

Housing versus shares
New Zealand’s high rate of investment in housing is well-known. Non-financial assets (which are mostly housing) make up 76% of the total assets of New Zealand households, compared to 60% in Australia.(20) Allan Bollard describes it as ‘a very kiwi phenomenon’ and suggests it ‘may reflect some psychological traits, particularly the desire to hold and control a physical asset over a financial one.’(21)

This is reflected in the fact that only 23% of New Zealanders own shares directly, compared to 50% of Australians.(22) Many analysts, such as Macquarie New Zealand investment director Arthur Lim, believe the 1987 crash left investors permanently scarred: ‘New Zealand is the only country in the world where people still say that. Everyone else has moved on … We need to exorcise the ghost.’(23) The IMF says of New Zealand that ‘the difference with the structure of households’ portfolios in Australia is remarkable.’(24) It is worth considering, though, that this difference may be a result of economic growth rather than a cause.

Additionally, tax policy in New Zealand helps explain its population’s investment behaviour. New Zealand doesn’t have a comprehensive capital gains tax on property, and the property market continues to boom. To a large extent, the high rate of investment in property is simply a rational response to institutional conditions.

Financial literacy
Even if government policy can explain New Zealanders’ housing bias, there are still concerns about their poor investment decisions. In particular, New Zealanders seem to have a dislike of paying fees to advisers, and a preference for ‘DIY’ investing. Kiwis invest twice as much in equities as they do in managed funds, which is an unusual ratio when compared to other countries.(25)

DIY investing doesn’t guarantee the best investment decisions, as evidenced by a recent spate of finance company collapses. Bruce Sheppard, the chairman of New Zealand’s Shareholders Association, is exasperated at what he calls ‘a basic lack of financial literacy within the population … Investors and finance companies alike behaved like uninformed irrational lemmings.’(26)

Mr Sheppard’s organisation is now planning a comprehensive financial literacy program for next year, as is the Securities Commission, which is launching a new website and advertising campaign to ‘help people make better investment decisions.’(27) The OECD has even encouraged the New Zealand government to integrate financial education into the school curriculum.(28)

Research from the Reserve Bank also raises concerns:
It is arguable that New Zealand’s economic growth may have been hindered to some extent as a result of a lack of financial awareness by investors. Specifically, the choices investors have made in allocating their investments and the effect this has had in reducing the size of the domestic savings pool and the operations of a capital market within the country could have had an impact on growth.(29)

In contrast, there are far more positive views amongst Australian commentators. Michael Chaney, the former president of the Business Council of Australia, has spoken about focus group research into the views of ordinary Australians. His views are worth quoting at length.

For some time, we’ve been asking Australians about their opinions, concerns, and aspirations for Australia and its place in the world through focus group work across the spectrum of the community. Recently, we’ve detected attitudes and beliefs that point to a mindset among Australians that is becoming more aspirational, more confident and more capable.

Twenty years ago, when the Australian economy was really struggling, it would have been hard to believe that in 2006 more Australians would own shares directly and indirectly than in any other country except the United States … It all reflects a growing understanding and appreciation of what it actually takes to achieve success and prosperity.(30)

Of course, this change in attitude and literacy may well be a result of economic growth rather than the cause.

Money isn’t everything
Some argue that New Zealanders are not as driven to accumulate money as people from other societies—that they place higher value on things like leisure time and the environment. Do Kiwis actually care about the income gap with Australia?

Research by the New Zealand government’s Growth and Innovation Advisory Board (GIAB) in 2003 found that economic growth was one of the lowest priorities for New Zealanders, behind categories such as quality of life, quality of the natural environment, education, health, and race relations. Of course, these values are not mutually exclusive with a desire for economic growth. In fact, they are largely dependent on growth to pay for them. The key question though, is how New Zealanders’ priorities compare with those of Australians. To answer this, we can look at the 1999–2002 World Values Survey (WVS).

Perhaps surprisingly, nearly 70% of Australians favour ‘less emphasis on money’ compared with just over 50% in New Zealand. In a similar vein, Australians have a much higher score for the importance of ‘post-materialist values’ (such as democracy and free speech), ahead of economic values. (See figures 1 and 2).

Figure 1: Emphasis on money



Sources: WVS, Winston Bates (31)

Figure 2: Post-materialist values

Sources: WVS, Winston Bates

In a similar vein, Australians rate ‘protecting the environment’ a higher priority than do New Zealanders. Both countries have similar scores when it comes to the importance of work and leisure, but New Zealanders rate ‘economic growth’ and the ‘importance of good pay’ higher than their neighbours across the Tasman neighbours.

Figure 3: Importance of good pay

Sources: WVS, Winston Bates

Figure 4: Importance of economic growth

Sources: WVS, Winston Bates

These results clearly refute any notion that New Zealanders are a bunch of postmodern hippies; in fact, their high score for the importance of economic growth is almost an outlier.

Importantly, both countries fit the general trend; the wealthier a country is, the more they can afford to worry about things like materialism and the environment. The poorer a country is, the more they want to be richer.

Also worth noting is the high level of participation in the labour force in New Zealand, at 68% compared to 65% in Australia. New Zealanders also work long hours by international standards, and is a reasonable assumption that people who work this hard want to be better off.(32)

Tail of underachievement
One major difference between New Zealand and Australian societies is their respective ethnic makeup. In Australia, the indigenous population (Aborigines and Torres Strait Islanders) suffer serious social and economic disadvantage, but make up only 2.5% of the total Australian population.

New Zealand, by comparison, has a population that is 15% Maori and 7% Pacific Islander.(33) While these groups are not as disadvantaged as indigenous Australians, they still lag behind other New Zealanders, having well-documented problems with higher unemployment, lack of education, welfare dependency, and crime.

Could this tail of underachievement explain New Zealand’s lag behind Australia? What if these groups achieved at the same level as New Zealanders of European descent—would that put New Zealand level with Australia?

We can roughly calculate the answers to these questions using the employment and income figures shown below (tables 1 and 2).

Table 1: New Zealand unemployment rates by ethnic group

Source: Statistics New Zealand (SNZ) (34)

Table 2: New Zealand average annual income by ethnic group (NZ$)

Source: SNZ (35)

According to these figures, if Maori and Pacific Islanders in work earned the same wages as New Zealand Europeans, it would add an extra NZ$2.3 billion to the economy. If these groups had the same level of employment (2.6%), that would add an additional NZ$447 million a year. In total, this would be NZ$2.74 billion a year added to the New Zealand economy.

This might be a slight overestimate, given that a larger proportion of Maori are young and therefore less likely to be earning high wages. But this kind of boost would also mean a big saving for the government through less spending on welfare and social programs.

Would this be enough to close the gap with Australia? Not likely. Adding an extra NZ$3 billion to the economy would be a 1.8% boost to GDP, or an extra NZ$714 per person per year. Remember, though, that the gap in per capita GDP between the two countries is NZ$11,600.

Boosting the achievement of Maori and Pacific Islanders is a massive challenge for New Zealand, particularly as its demographics change—by 2051, it is estimated that over half of all children in New Zealand will be Maori or Pacific Islander.(36) But even if these gaps could be closed, New Zealanders would still lag far behind Australians in terms of wealth and productivity.

Conclusion
So, how much does culture matter in explaining New Zealand’s relative economic underperformance?
Lack of assertiveness, competitiveness, and ambition could well be factors: these are the kind of values that lead to greater success in free market economies. However it is almost impossible to quantify these factors, and even if it was, it would be equally as difficult to do anything about it.

Quirks of New Zealand investment behaviour, such as a decline in household savings and a bias towards investment in housing, can be credibly explained by policy and economic factors. There are genuine concerns about financial literacy and the underachievement of Maori and Pacific Islanders, but on their own these factors can’t explain a 32% income gap between Australia and New Zealand. Finally, the World Values Survey demolishes any idea that New Zealanders are unambitious.

Even if New Zealanders did exhibit quantifiable cultural differences from Australians, the question of cause and effect would remain. One could argue (as Wolfgang Kasper does) that years of welfare and protectionist policy have influenced the culture, rather than vice versa. This would also explain why some policy changes take time to translate into immediate results.

This conclusion is important because supporters of behavioural economics have tried to argue that unique New Zealander quirks (their lack of savings, their spendthrift nature) require ‘hands-on’ government action to correct perceived market failures. Instead, most of these features can be explained (and corrected) by government policy.

All of this reinforces the conclusion of my recent paper: good policy matters. The income gap between the countries is not due to size, distance, or Australia’s mining boom, but is the result of policy differences. Australia is a much lower taxing country than New Zealand (31% of GDP compared to 37%), and has consistently reformed its economy over the last twenty years.(37)

This might come as a shock to those Australian readers who remember hearing about New Zealand as a laissez-faire paradise. The reality is that most major reform in New Zealand was brought to a halt in 1993 and has begun to be unwound since 2000. By comparison, Australian policy has maintained more consistency and a steadier momentum.

The difference was well summarised by former Australian Treasury Secretary Ken Henry, who told a New Zealand audience in 2003 that Australia is prospering because of ‘good policies.’ When asked ‘what else?’ he replied, ‘good policies.’(38)