Convergence…and not

I’ve been under the weather with a bad cold and wasn’t going to write anything today.  But pottering around various websites, I discovered that the Conference Board had last week released its annual update of labour productivity estimates, in PPP terms, for a wide range of countries.

Since my involvement with the 2025 Report some years ago I’ve been intrigued by developments in the eastern European countries, which laboured under Communist rule for decades until around 1990.  By 2009  when we wrote that report, the first ex-communist country had almost caught up to New Zealand’s real GDP per capita.

Older readers will recall the line Bob Jones made much of in the 1984 election campaign, in which he compared New Zealand’s economy in 1984 to a Polish shipyard.  The implication, of course, was that it was the heavy burden of protection and controls that were accounting for New Zealand’s disappointing economic performance.

Of course, for all that was wrong with economic policy in New Zealand in the decades from the 1930s to 1980s, our economy was not remotely as distorted as those of the east European countries.    But in a sense the narratives were similar in the two countries: open up the economies to more international competition, and liberalise domestic markets in a context of secure property rights, and stabilize macro policy imbalances, and one should expect to see a lot of convergence, catching-up with the more successful market economies.  Here is an illustration of the sort of thing that was expected in New Zealand –  a 1989 photo (reproduced in the Herald a few years ago) of then Finance Minister David Caygill’s expectations/aspirations.

caygill 1989 expectations

How have the eastern European countries got on?  The Conference Board has GDP per hour worked data for 11 eastern European countries back to 1990.  Here is how each of them has done relative to New Zealand in the 25 years from 1990 to 2015.

east europe convergence to NZ

The median eastern European country had GDP per hour worked 55 per cent of New Zealand’s in 1990, and that had increased to 77 per cent last year.  All except Russia gained material ground on New Zealand.

That might look unsurprising.  After all, these were very  badly distorted economies during the Communist era.

But, in fact, this chart materially flatters the extent of eastern European catch-up.  Here is the same chart showing these eastern European countries and New Zealand relative to US productivity levels.

east europe cf USA

In 25 years since the fall of Communist rule in eastern Europe, the median country of those 11 had increased labour productivity from only 38 per cent to 48 per cent of US levels.  Russia had lost ground relative to the US.  And so –  less dramatically –  has New Zealand.   (And the picture is much the same if one uses France and Germany as a benchmark, rather than the US.)

They were daft and damaging protectionist/statist policies we had in place during those decades – 20 TV factories indeed –  but they don’t look to have been a big part of the story in our relative decline.

 

 

14 thoughts on “Convergence…and not

  1. I can imagine someone at MBIE would add in Ukraine, and Moldova, then weight the whole thing by population and prove that fact NZ’s productivity performance was in fact superior to that of the Eastern Europeans.

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    • Productivity based on GDP per capita totally ignores the spending of millions tourists. Perhaps more rich German tourists spend more in places like Ukraine and Moldova than the chinese tourists that spend in NZ.

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      • That’s just rather silly. If a tourist spend more time holidaying in the Westcoast in a tent but buys a dozen bottles of beer to sit on a beach fishing. The Westcoast holiday tourist becomes more productive because there is no one to do anything, compared to the tourist having dinner in a fancy bar and drinking a dozen bottles of beer served by 3 attentive bar tenders in Auckland. Ridiculous.

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  2. The rabbit hole deepens… where does the productivity paradox start and end?? I can only see it in terms of something that has been lost… but it isn’t obvious what that thing is….

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    • Agreed, GDP productivity per capita is rubbish statistics because it neglects the number of tourists which can amount to millions of people and their spending habits.

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      • well, no. Tourist receipts are just another export industry. We don’t really care whether foreigners buy our stuff here or abroad. What we are interested in is the value that accrues to NZ residents.

        But, in any case, I was more focused on GDP per hour worked than GDP per capita.

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      • Same reply as above. That’s just rather silly. If a tourist spend more time holidaying in the Westcoast in a tent but buys a dozen bottles of beer to sit on a beach fishing. The Westcoast holiday tourist becomes more productive because there is no one to do anything, compared to the tourist having dinner in a fancy bar and drinking a dozen bottles of beer served by 3 attentive bar tenders in Auckland. Ridiculous.

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  3. What do all the Eastern European countries have in common? Very low TFR and low (and often negative) population growth. Maybe low population growth (or declining population) can lead to higher productivity per capita due to necessity?

    Take dairy farming in NZ for example. Many farmers could (and many do) invest in higher levels of mechanisation. However, as long as labour can be supplied relatively cheaply (be it local or imported) such investment, which would lead to higher productivity per capita, is somewhat disincentivised. The same is true for many other industries from fast food joints to tourism. A visit to any developing country with a rapidly growing youthful population and a seemingly endless supply of cheap labour will demonstrate this to the extreme (i.e. Bands of people mowing the the roadside with weedeaters instead of 1 guy in a tractor as seen in NZ). Clearly a lack of capital also contributes to this too.

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