Political ructions and a better economic performance

Years ago we in New Zealand sometimes had the gruesome spectacle of governing party coups (and the like).  There was the failed (“Colonels’ coup”) attempt to oust Muldoon in 1980, the ructions that led to Lange’s departure in 1988 and then (unelected) Palmer’s a year later, and the ousting of Jim Bolger in late 1997, and then the break-up of the governing coalition a year later.  But you have to be a certain age to remember any, let alone all, of those.

In Australia, by contrast they’ve been two a penny in the last decade.   It isn’t exactly the rate at which Italian governments used to turn over until relatively recently, or French governments in the ill-fated Fourth Republic (22 prime ministerships in 12 years) but it is quite extraordinary by Anglo country standards.  Has there ever been a time previously –  in New Zealand, the UK, Ireland, Canada, Australia – when four people in a row who successfully led their party to an election victory –  limping home in Turnbull’s and Gillard’s cases –  didn’t complete the subsequent (three years) term?  Perhaps Turnbull will, in fact, limp on, but even if he does it is hard to see to what end.

A mere three years ago, when Turnbull ousted Abbott I wrote a post about the strange phenomenon then gripping the Australian centre-right: New Zealand envy.  Here was Turnbull speaking just after his coup.

“John Key has been able to achieve very significant economic reforms in New Zealand by doing just that, by taking on and explaining complex issues and then making the case for them. And I, that is certainly something that I believe we should do and Julie and I are very keen to do that again.”

As I noted, it was very hard to think of such “very significant economic reforms”.  Moreover, as I illustrated in that post, New Zealand seemed to have drifted a bit further behind Australia economically over the previous few years.

I noticed Julia Gillard yesterday engaging in a bit of New Zealand envy, suggesting (probably tongue in cheek) that Australians might well consider moving to New Zealand.  Only, surely, if they wanted to be colder as well as poorer.  Recall that Australian incomes are far higher than those in New Zealand, the main reason why for the last 40 years so many New Zealanders (net) have gone to Australia, and so few Australians have come to New Zealand.   Even just since 1991, a net 470.000 New Zealanders have gone to Australia, and only 49000 (net) other passport holders have come to New Zealand from Australia.

And, like it or not, political instability (including ructions in successive ruling parties) doesn’t seem to have been a material factor impairing economic performance.  That was so for France and Italy after the war, and if –  as I illustrated last week –  if Australia’s economic performance hasn’t been great, given its resource bounty, it has still been better than New Zealand’s.

Here I’m going to focus on the period since the end of 2007, for two reasons.  First, it was about the time the Rudd government took office which –  although it wasn’t apparent at the time –  was the beginning of the era of Australian political instability.  And, second, because it is just prior to the recession of 2008/09.  In New Zealand, Labour was still in office for most of 2008, but comparisons from troughs of recessions are rarely very meaningful (and if Australia didn’t have a recession in the sense of a couple of negative quarters of GDP, it still had a big fall in income measures –  as commodity prices fell –  and a material rise in the unemployment rate).

First, there is an important background feature that governments don’t have any material influence over; the terms of trade.

aus nz tot

Australia’s terms of trade have been much more volatile than those of New Zealand over the last decade or so, but taken over the whole period there hasn’t been that much difference.  Both countries have benefited from the movement in world prices to about the same extent (Australia had also had a substantial lift from about 2002, not mirrored in the New Zealand numbers).

Then there are the headline national accounts comparisons: real GDP per capita.

real gdp pc aus nz

On that measure, at the end of the period there has been no change in the relative position of the two economies  (although the gap between the two lines for much of the period is lost output that is never likely to be got back).  No sign of any catch-up, although also no falling further behind either.

The terms of trade can make a material difference to economic wellbeing, and terms of trade gains are not directly reflected in the real GDP numbers (although the indirect effects – any increases in consumption or investment etc in response –  are there).   But on this occasion we don’t need to worry too much about that point because, as the first chart illustrates, over the full period both countries’ terms of trade have risen by about the same amount.

But if real GDP per capita in the two countries has grown by about the same percentage in each country over the last decade, there has been a really big difference in the composition of that growth, and not one that is positive for New Zealand in the longer term.   I have shown the labour productivity chart previously, but here it is again anyway.

aus nz rgdp phw

Some years we match Australian productivity growth, and occasionally even exceed it, but over the period since the end of 2007, labour productivity growth in Australia has exceeded that in New Zealand by about 8 percentage points.  That is a lot, especially when New Zealand was starting from so far behind.

And here is a large component of the difference.  I’ve set hours worked per head of population equal to 100 in both countries in 2007q4, and shown how that measure has changed in each country since then.

hours worked per head

It looks a lot like that old story: New Zealand (in orange) more or less manages to “keep up” (not see real GDP per capita drop further behind) simply by working more hours.  That is no sustainable route to greater national prosperity, especially when hours worked per capita are already quite high by advanced country standards.

Of course, some will probably want to claim this as some sort of New Zealand success story –  “look at all those people we have in work etc etc”.   But working more hours isn’t some “good thing” for its own sake, and the unemployment rate is the best summary measure of whether there is slack in the labour market.   If Australia’s unemployment rate had increased materially more than New Zealand’s then one probably could tell a (cyclical) New Zealand success story.  But here are the two unemployment rates.

nz aus U rates

Most people reckon Australia’s NAIRU is higher than New Zealand’s (and that is a long-term negative for Australia, and the wellbeing of Australians), but that was so before the crisis too. In fact, the gap between New Zealand and Australian unemployment rates now (around 1 per cent) is exactly the same as the gap at the end of 2007.   Just as is the case in New Zealand, most Australian residents who actually want jobs have them.  So I don’t count the increase in hours worked here as any sort of mark of success.

None of this –  higher productivity growth in Australia in particular –  should be any great surprise.  If one looks across the OECD’s Going for Growth structural indicators (for example) the two countries score about as well, or poorly (on some indicators), as each other.  But Australia has seen come on stream huge new mineral production –  a new endowment they could tap –  and we’ve had nothing comparable (to what extent that is because similar resources aren’t there, or because policy choices prevent them being utilised is a topic for another day).  But with no other new opportunities apparent to match the new minerals –  and see the shrinkage in our foreign trade shares – our structural position relative to Australia has weakened further.

I’m not going to illustrate housing markets –  in any case mostly a state matter in Australia as I understand it –  but in both countries the best that can be said is that the outcomes, for ordinary people, have been lamentable, and disgraceful.

There is an argument sometimes mounted that the earthquakes were a significant drag that Australia didn’t have to face.  In terms of the existing stock of wealth, there is some truth in that (even recognising that much of the loss was reinsured abroad).  And the rebuild process –  which peaked several years ago now –  did take resources that couldn’t be used for other things.   But (a) on official estimates we had utilised capacity (output gap and unemployment gap) for most of the time, and (b) if there really were abundant international opportunities for firms here, bidding for capital and labour resources, we might have expected to see persistent upward pressure on our interest rates relative to those in the rest of the world, and associated inflation pressures.  We’ve not seen the inflation pressures at all (any more than in Australia) and the upward pressure on our interest rates relative to the rest of world occurred only while our Reserve Bank was messing up –  driving up the OCR before having to about-face and more than fully reverse themselves.

There isn’t a choice between chronic political infighting (of the Australian sort) and improved prosperity, but if there were I reckon I’d take the prosperity.  As it is, at least relative to New Zealand, Australia looks to have had both.  If there is an understandable tendency to rather look down on the political machinations, we should at least pause to ponder (again) our own long – and continuing – relative economic decline.

And now back to watching the gruesome spectacle across the Tasman.


9 thoughts on “Political ructions and a better economic performance

  1. So, Abbott rolled Turnbull, who rolled Abbott who supported Dutton who is rolling Turnbull. Now, if you understand all that, you’ve just passed Politics 101: The Australian Liberal Party. FX market is now in the process of pricing in a snap election and the possibility of a Shorten Government.



  2. You get the sense that the ALP isn’t necessarily that much more stable, but one of Rudd’s legacies to the party was to change the leadership selection rules so that MPs alone can’t choose, or dump, the leader. I’ve always thought MPs should have the choice – they directly work with the leader – but at times like these one can see the appeal of the alternative.


  3. Agreed. Bill Shorten appears to be quite a divisive character too. Given the structure of Government over there I’m not confident they will find a stable solution even if there’s a snap election. Also, it wouldn’t likely be a double dissolution so whoever wins the House will have to deal with a divided Senate.


  4. A surprising amount of the Australian technocratic structure is still effective and manages to insulate itself from political interference. However other parts are starting to be degraded. For example, it is very hard to plan and execute big projects (say $10bn and up) without placing crazy political constraints. However, the rate of immigration increases the demand for big projects. For example, the rate of population increase in Sydney and Melbourne is 2%. If we assume that translates to an increase in the required capital stock of 7% (2×3.5%) each, that’s about $30bn per annum of new investment needed in each of Sydney and Melbourne. That’s a huge amount and way in excess of the current state capacity to deliver.


  5. Do you have any thoughts on how much longer Australia might be willing to remain open to free movement for nz citizens? Reading some of the debate in Aus about the need to reduce immigration given infrastructure pressures, I wonder if the arrangement will survive the next time the outflow becomes large (which it no doubt will given the ever growing productivity gap, and ever growing number of nz citizens courtesy of our own immigration policy). Its hard to judge, but Nz and Aus don’t strike me as being as close diplomatically and culturally as they used to. One way for Aus to cut immigration without facing concentrated industry lobbying would be to require future kiwi migrants get the same visas as other nationalities. Nzers seem to think they have the right to live in work in Aus and I think we could be in for a rude awakening in the next decade or two. And NZ has no substantial recourse that I can think of to Aus choosing to drop free entry for Kiwis. The number of Austrians coming here is trivial, and taking action on investment or trade arrangements would be risky.


    • Hard to tell, as the next big surge of NZers to Aus will probably be at a time when the Aus economy is doing quite well. But I assume in time the move-to-Aus option will be further wound back. It isn’t obvious that Aus gets anything of benefit from taking lowly-skilled NZers (and more highly skilled ones would presumably meet the std Aus criteria) – and of course the risks now of going as a “guest worker” (with no rights or entitlements) are already high.

      Even tho the exit-to-Aus option has been a huge benefit to NZers over the decades, one could mount an argument that the political relationship might be improved if we moved to a model where NZers had no more rights to enter and live in Aus than other people. Then those NZers who get in would do so on their own merits, purely on Aus govt terms, and there might be less case for rather embarrassing pleadings by NZ politicians in defence of people who break Aus laws or standards.

      Against all this, NZ is still (and always will be ) Australia’s exposed eastern flank, and there will be unease about any measures that might accentuate NZ’s relative economic decline (and exposure to unsavoury actors/influences – whether genuinely domestic or, say, PRC sourced).

      At the other extreme, a proper trans-Tasman union – on track towards a single country – would have some appeal (and would probably get my vote). But if there was a time when that might have been possible, I suspect it has passed now.


  6. The current war between the left and right factions of the liberal party began bag in 2007 when Turnbull was elected leader of the Liberals who were then in opposition. He is and was a climate change believer and thus left leaning wing of the party. He lasted 2 years 2008-2009 before the right-wing of the party tipped him out, deposed him and installed Tony Abbot a leader who in turn would go on to lead the Liberals into power. Contrary to popular opinion, Turnbull did not stab Abbot, choosing instead to wait in the wings and be invited lead. Abbot eventually antagonised everybody and they exhorted Turnbull to challenge. Turnbull refused. Eventually a spill by the party room was demanded and Turnbull tossed his hat in the ring and was elected.

    The war is between the left climate-change believers who want to adopt the Paris Accord and reduce carbon emissions and the right-wing hardliners who want to build more and more coal-powered power stations. The defining rift is the NEG (National Energy Guarantee) which Abbot and Dutton and co oppose vehemently

    If anyone thinks Morrison will repair the rift between AU and NZ have another think coming. Morrison was the sitting MP responsible for immigration and refugees and architect of stop-the-boats and closing the borders and the amalgamation of customs and border-patrol into Home security which Dutton took over when Turnbull became PM and elevated Morrison to Treasurer


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