Guest Post — Is New Zealand really Doomed by Distance?

Brian Fal­low is one of New Zealand’s best eco­nomic jour­nal­ists. But his arti­cle on 10 Decem­ber dis­miss­ing the report of the 2025 Task­force as “1980s think­ing”, under the head­line “Old pre­scrip­tion unlikely to fix new ills”, misses the boat com­pletely and demon­strates that he is out of touch with main­stream pro­fes­sional opin­ion. The argu­ments for reduc­ing the tax bur­den caused by low qual­ity and poorly tar­geted gov­ern­ment spend­ing, for pri­vati­sa­tion, and for bet­ter qual­ity reg­u­la­tion are absolutely con­sis­tent, for exam­ple, with the OECD’s 2009 report on New Zealand.

In his arti­cle, he cites at length the work of the eco­nomic geo­g­ra­pher Philip McCann. McCann has argued that since the 1980s the world has changed pro­foundly – China has aban­doned com­mu­nism, India has aban­doned autarky and the Soviet empire has col­lapsed. McCann accepts that over the past cen­tury trans­port costs have fallen by some 95%, while telecom­mu­ni­ca­tion costs have fallen by that much in just three decades. This has pro­vided a huge advan­tage to “the geo­graph­i­cal dis­per­sion of activ­i­ties which are not par­tic­u­larly knowledge-intensive and do not add a lot of value”. By con­trast, what McCann calls “spa­tial trans­ac­tion costs” have, he argues, become more impor­tant for knowledge-intensive high value-added activ­i­ties because of the pre­mium attached to face-to-face con­tact. [quote]

He argues that the increased impor­tance of “spa­tial trans­ac­tion costs” means that eco­nomic growth and glob­al­i­sa­tion over the past 20 years have favoured large urban cen­tres in almost every coun­try (large and small). But he goes on to argue that an impli­ca­tion of this is that, within the Aus­tralasian region, Syd­ney and pos­si­bly Mel­bourne are grow­ing in wealth and size at the expense of the periph­ery – which in this case, he asserts, includes New Zealand. The fur­ther impli­ca­tion is that at this stage in the devel­op­ment of the world econ­omy there are fac­tors which drive us inevitably to have incomes lower than those in Australia.

Pro­fes­sor McCann is a seri­ous researcher, and deserves to be heard respect­fully. It is prob­a­bly true that large urban cen­tres attract a dis­pro­por­tion­ate share of a country’s inno­va­tion and entrepreneurship.

But one impli­ca­tion of his argu­ment is that small coun­tries, and espe­cially those which are dis­tant from world mar­kets, are inevitably doomed to grow more slowly than larger more densely pop­u­lated coun­tries – and that sim­ply does not seem to be borne out by the facts. Over the last 20 years dur­ing which Pro­fes­sor McCann claims the world has changed, small coun­tries tended to per­form a bit bet­ter than large coun­tries – even New Zealand has grown slightly faster than the OECD aver­age over that period.

Com­pared with large coun­tries like France, Italy and Japan – all coun­tries with large conur­ba­tions – New Zealand has also done bet­ter, increas­ing from 82% of the sim­ple aver­age of the incomes of those three coun­tries in 1989 to 87% in 2007.

More­over, if geog­ra­phy were really an impor­tant part of the story, no one would have pre­dicted Australia’s impres­sive per­for­mance rel­a­tive to the rest of the devel­oped world in the last cou­ple of decades.

Pro­fes­sor McCann and Brian Fal­low also sug­gest that in the brave new world after 1989 cap­i­tal is likely to be flow­ing out of New Zealand to places like Aus­tralia. In fact, of course, it is well-established that cap­i­tal is flow­ing into New Zealand, espe­cially from Aus­tralia. Thus, we have one of the largest cur­rent account deficits around – and, by def­i­n­i­tion, one might expect us to be run­ning sur­pluses if cap­i­tal were leav­ing New Zealand for ever bet­ter oppor­tu­ni­ties abroad.

The report of the 2025 Task­force acknowl­edges that small­ness and dis­tance may indeed be imped­i­ments to our growth. But let’s sup­pose for the moment that our size and loca­tion have become a much more impor­tant bar­rier to the devel­op­ment of knowledge-intensive indus­tries in the “periph­ery” than they were prior to 1989. Do we have to wait until the global econ­omy changes, until, as Brian Fal­low sug­gests, we get the ben­e­fit of our “com­bi­na­tion of ample rain­fall, tem­per­ate cli­mate and skilled farm­ers” as the world’s pop­u­la­tion climbs and more and more peo­ple move into income brack­ets which enable them to afford the foods of affluence?

Or are there things we can do to actively lift our liv­ing stan­dards? The 2025 Task­force is in no doubt about the answer to that ques­tion. Dis­tance is what it is. Our pop­u­la­tion is what it is. But we don’t need to have a com­pany tax rate which is now well above the aver­age of other OECD coun­tries. We don’t need to dis­cour­age peo­ple who have depen­dent chil­dren with effec­tive mar­ginal tax rates of well over 50%. We don’t need to hob­ble our busi­nesses with need­less red-tape. We don’t need to inflate the cost of hous­ing by tightly con­strain­ing the sup­ply of res­i­den­tial land. Our gov­ern­ment doesn’t need to squan­der cap­i­tal in low-yielding but politically-popular projects. And we don’t need a size of gov­ern­ment that is mate­ri­ally larger than that in Australia.

Yes, Aus­tralia and other devel­oped coun­tries also do some of these dopey things. But the Gov­ern­ment has set a goal not just of hold­ing our posi­tion on the OECD lad­der – a posi­tion which has us well below the aver­age of other devel­oped coun­tries – but of catch­ing up with Aus­tralia by 2025. We won’t do that with poli­cies which are merely as good as the aver­age of other devel­oped coun­tries; we will only do that with much bet­ter poli­cies. If dis­tance is a sig­nif­i­cant imped­i­ment to our growth, that sim­ply means that our poli­cies have to be of absolutely top qual­ity. Right now, they are not, and in recent years they have gone back­wards in sev­eral impor­tant areas even as other coun­tries have con­tin­ued to reform. This slip­page is totally omit­ted from Brian Fallow’s account.

Do we need 1980s think­ing? Of course, where it is still rel­e­vant; absolutely not where it isn’t. The rec­om­men­da­tions of the 2025 Task­force are absolutely con­sis­tent with ortho­dox eco­nomic think­ing about how to accel­er­ate eco­nomic growth and, as noted, are con­sis­tent in par­tic­u­lar with the rec­om­men­da­tions made by the OECD report on New Zealand a few months ago.

Don Brash

Chair­man of the 2025 Taskforce

Pop­u­lar­ity: unranked [?]

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Tagged as: 2025 Taskforce • Don Brash