Economics not only a matter of size

As painful as it is to admit, everyone knows that Australians are richer than New Zealanders. Wages are a third higher on average across the ditch, and almost everyone knows a friend or relative who has made the move.

So why does this gap exist? Many of the popular explanations don’t stack up. The mining boom, for example, is a recent occurrence that can’t explain the last 30 years. And while size is important, it’s worth remembering that Australia has always been around five times our size. Up until the 1970s this clearly wasn’t a disadvantage for New Zealand.

A more troubling theory is that it could be something in our national culture which holds us back. Are Australians naturally more aggressive, competitive, and receptive to winners? These kinds of values are impossible to quantify, but it’s worth considering how they might affect economic performance.

Many economists hate this kind of speculation. They like to think that everyone reacts the same to incentives, no matter where they come from. But in reality, anyone who’s travelled to a different country knows that people are different – even Australians.

Culture is often influenced by politics and governments, and in New Zealand’s case perhaps years of protectionism had an impact. Before 1984 many entrepreneurs survived by fitting in with government rules and regulations, rather than providing what consumers (via the market) actually wanted.

Australian policies by contrast have tended more towards self reliance and competition, and perhaps their sporting success reflects this. The idea of not keeping score in a netball game, as some New Zealand schools do, would be laughable across the Tasman.

With this history behind us, some commentators speculate whether New Zealanders are actually interested in economic growth. Do we even care about the income gap with Australia, or are we happy to trade it off for more leisure time and a clean green environment?

This is one theory we can quash, thanks to international surveys. The World Values Survey in 2002 showed that New Zealanders actually rate economic growth, a good income and the importance of money higher than Australians. The fact that New Zealanders work long hours also suggests we are an ambitious lot, hoping to improve our lives.

Another common criticism of New Zealanders is our supposed spendthrift nature. Critics point to our declining level of household savings and massive credit card debt as evidence of irresponsibility, but again the case is not clear-cut. Our national savings level (which includes government and business saving) is steady, and increased spending is understandable given that rising property values have made many people better off (on paper at least).

Concerns over the financial literacy of New Zealanders are understandable, given the recent finance company collapses. By comparison, Australians tend to have more diversified portfolios and a high level of direct share ownership. But again, a grain of salt is necessary here. Good returns and the lack of a comprehensive capital gains tax have made property a sensible investment for many New Zealanders. Remember too that improvements in financial literacy could well be a result of Australia’s prosperity rather than a cause.

Other critics complain New Zealand entrepreneurs lack the ambition to expand overseas, preferring to sell up rather than build an international mega-company. But selling a business is not necessarily a bad thing, because it can provide capital to start growing even more new businesses.

Finally, does the tall poppy syndrome hold us back? New Zealanders like modesty and self-deprecation, but this can extend into hostility towards ambition, achievement and the celebration of success. This phenomenon is well known in Australia too, but is it as prevalent?

The language used by politicians is a good indicator of these social values, particularly on tax for high income earners. Australia’s new prime minister Kevin Rudd has promised large tax cuts and a reduction in the top rate, saying he 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.” This is a big contrast to New Zealand, where calls for tax cuts are often dismissed as being solely for the ‘rich’.

These quirks of New Zealand culture paint a mixed picture. It is difficult and slippery trying to prove these factors, and many are exaggerated. Even if our attitudes to success and competition do lag the Australians, can this alone explain such a huge income gap? And why has this gap only opened up in the last 30 years? The case for blaming culture is not compelling.

It’s also fatalistic, because even if we could prove these attributes exist there would be little we could do about them. To close the gap with Australia we should focus on things we can fix.

Therefore we shouldn’t be afraid to look at the policies pursued by the respective governments, especially over the last 15 years. While the Australians have cut taxes and opened up their economy, New Zealand has largely put the handbrake on economic reform. This is the real difference between the countries that we should be blaming for our underperformance.

Phil Rennie is a policy analyst with the Centre for Independent Studies.