Friday, 17 June 2011

NZ/Australia comparisons: useful?

One of the often stated economic aims for New Zealand is to “catch up with Australia.” That is, we want to increase New Zealand’s economic growth, income and welfare to a level equal to that of Australia. One of the most important ways of achieving this aim is to increase our productivity growth to the point where it is higher than that of Australia. But what if comparisons between New Zealand and Australia are not meaningful? Are we trying to achieve a meaningless goal?

A paper from the International Review of Applied Economics (Vol. 21, No. 1, 55–73, January 2007), “Convergence in Productivity Across Industries: Some Results for New Zealand and Australia” by Troy D. Matheson and Les Oxley, looks at the issue of Australia/New Zealand comparisons and suggests that they may not be meaningful. The paper’s abstract reads:
New Zealand shares a wealth of common interests and experiences with Australia. This has tempted some to assume that these economies form an ‘Economic Club’, in which one would expect to identify common aggregate trends and growth experiences. In this paper we present results that test, and generally reject, convergence in labour productivity across Australia and New Zealand, using both aggregate and disaggregate, industry-level data. We find that only two industries satisfy our definition of Conditional Convergence (Agriculture, Forestry and Fishing and Cultural and Recreational Services), and that the Mining and Wholesale Trade industries have particularly important roles to play in explaining the measured divergence. Cointegration-based tests reveal more stochastic trends governing Australian productivity than in New Zealand. The evidence suggests, therefore, that the underlying growth processes of the two economies are fundamentally different, thereby questioning the relevance of aggregate comparisons between them. New evidence using industry-level data does not, therefore, resolve the aggregate-level ‘nonconvergence puzzle’ identified here, and elsewhere. (Emphasis added)
And the conclusion of the paper reads:
New Zealand’s aggregate real GDP per capita growth performance seems to have improved following the reforms of the late 1980s and early 1990s, but not when compared to other OECD countries, particularly Australia (see, e.g. Dalziel, 1999; Greasely & Oxley, 1999). In this paper we attempt to explain this recent performance by considering market sector and industry level measures of labour productivity in New Zealand and Australia over the 1990s, and consider whether there exists any form of ‘Trans-Tasman convergence in productivity club’. We presented cross-country (New Zealand and Australia) comparisons both at the aggregate, market sector level and the disaggregate, 11-industry level. In particular, in Section 4 we gauged the persistence of the discrepancy between Australian and New Zealand market sector productivity using time-series tests of the convergence hypothesis where convergence in terms of long-term forecasts was rejected. The Australian market sector was found to have more stochastic trends than that of New Zealand, questioning the comparability of the two economies at the market sector level; we found evidence of eight stochastic trends in Australia and three stochastic trends in New Zealand.

At the disaggregate level we found that only two of the 11 industries in the market sector were classified as being (conditionally) converged (Agriculture, Forestry and Fishing and Cultural and Recreational Services). With the exception of the Wholesale Trade industry, whose productivity is independent across the two countries, relative productivity levels of the remainder of the industries display evidence of transition to new steady states and of structural change. The diversity of productivity level and growth differences across the industries calls into question whether the fundamentals of growth in the respective economies are comparable. This was perhaps most apparent in the Mining industry, where we found that Australian Mining productivity was more than 80% higher than New Zealand’s at the end of the
sample period.

The empirical conclusion to be drawn here is that disaggregating to the level of the industry does not resolve the puzzle, identified at the aggregate market level, that New Zealand and Australian labour productivity do not exhibit a tendency to converge over time. In fact, the results based upon industry rather than market level data indicate a much more complicated picture and little if any support for a traditional neoclassical growth model paradigm. (Emphasis added)
All of this does not make good reading if you want to play catchup.

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