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Prepared by Kalpana Kochhar (ext. 38770) and Paul Wade (ext. 38994), who are available to answer questions.
Although it is very difficult to pin down the starting date of reforms for different countries, many researchers have noted that New Zealand began its reform process somewhat later than others in the OECD (Gregory, 1999), but moved quickly to implement the reforms in a shorter period of time. Also, reforms were not as dramatic in Australia, for example, because imbalances were not as large and the impetus for radical reforms was not as obvious (Bray and Walsh, 1998).
The relationship between population growth and economic performance is ambiguous as is the direction of causality. On the one hand, there is evidence of a weak negative relationship between population growth and changes in TFP. However, there is also evidence that the negative effects on per capita growth is partly mitigated through changes in labor force participation rates (discussed below). Overall, the popular belief that population growth is economically harmful is not yet well supported by statistical evidence (Temple, 1999).
See Conway and Orr (1999).
The volatile nature of net migration flows is closely linked with the “brain drain” problem, which suggests that the effect of policies that are seen as unfavorable to growth can be intensified by a pick up in outward migration, especially of the higher skilled segments of the labor force.
It should be noted that these aggregate data mask important differences across ethnic groups in New Zealand. In particular, a much larger proportion of the indigenous Maori and Pacific Islander population—who currently account for some 20 percent of the population—leave school without qualifications, work in low-skilled jobs or are wards of the welfare state.
The data for Ireland in Tables II.9 stand out as being low and appear somewhat inconsistent with priors about the instrumental role that the education system is believed to have played in Ireland’s success. Box (1998) notes that although New Zealand has higher participation rates and a larger proportion of students attaining higher levels of education, there is a larger emphasis on business studies and technical and scientific disciplines in Ireland.
Survey data are necessarily subjective and especially in some areas, may be subject to large measurement errors which could, in turn, lead to a misleading picture of relativities across countries. However, they do provide information on a number of dimensions of human capital and technology accumulation that would be difficult to measure otherwise.
Barro and Lee (2000). In terms of science scores, New Zealand ranked 23rd, behind all the comparator countries (Australia, 12, Canada, 13, and Ireland, 16). Finland was not included in the survey.
There are numerous other studies of TFP in New Zealand—Smith and Grimes (1990), Sarel (1996), Janssen (1997) and Hall (1996)—but it is impossible to cover these in detail in this paper. See Diewert and Lawrence (1999) and Galt (2000) for a good discussion of these studies.
However, when overall TFP is recalculated excluding the financial services and community services sectors (the ones with the most poorly measured inputs and outputs), Diewert and Lawrence are in fact able to find evidence of a statistically significant structural increase in New Zealand’s TFP growth after 1993.
Because of the wide variety of estimates of TFP growth in different countries, and lack of consensus on methodology and the resulting difficulties in cross-country comparisons, this paper does not attempt to go beyond comparison of Australia and New Zealand from the Diewert and Lawrence study.
Some new work in identifying factors contributing to TFP growth points out that there is growing evidence that levels of per capita GDP, which had been converging for many years, may no longer be doing so (OECD, 2000). The main factors behind this slowing of convergence relate to differences in skills, technology and the culture of innovation—the so-called “digital divide,” There is now growing evidence that productivity growth is increasingly being driven by upgrading human capital, especially through enhancing technical and management skills of the work force.
See Scott (1996) for a detailed discussion of government reforms in New Zealand and their economic impact.
Some observers contend that the variability in New Zealand’s exchange rate (see Chapter IV of this volume) may also have had a negative impact on trade. However, there is inconclusive evidence in the literature about the impact of currency volatility on trade, with many studies finding no significant effect (Cote, 1994).
It is interesting to note the conclusions of a McKinsey report on Australia, published in less than 5 years ago in March 1996, entitled “What Ails Australia?”, which states that despite wide-ranging reforms in the financial system, business regulation, industrial relations and trade protection, “the nation’s relative economic prosperity has not altered since 1970. Its gross domestic product is still 30 percent behind that of the United States, the most prosperous country in the world.” Studies of the Australian economy during the past 2–3 years take a distinctly more optimistic tone than this one and show clear evidence of “convergence” with other high performing industrial countries.
There are other areas including reforms of the welfare benefit system and the interaction between active and passive labor market policies—which may have strong links with incentives to work, save and invest, but a discussion of these is beyond the scope of this paper Chapter II of this volume contains some discussion of these issues.
Some observers have recently gained some attention by contending that New Zealand’s reforms have not worked and that it was a “failed experiment” (Hazledine, 1998 and 2000, Kay, 2000). A careful evaluation of this hypothesis would require a discussion of the elusive “counterfactual”. What would have been the outcome if New Zealand had not embarked on these reforms when it did? Wide-ranging experience from countries at all income levels and in all regions of the world suggest that severe macroeconomic imbalances of the type that had developed in New Zealand in the mid-1980s were not sustainable and adjustment would have been needed sooner or later. Another important lesson from these countries’ experiences is that delayed adjustment is costly, because stabilization policies undertaken in the context of a macroeconomic crisis will generally have deeper contractionary effects than otherwise, and because credibility, once lost, is very difficult to regain (Goldsbrough et al., 1996). Finally, even if one were to find evidence that the reforms in New Zealand were “wrong”, the major weakness in the arguments of those who espouse this hypothesis is that no advice is offered on an alternative path that is more likely to guarantee success.
Some observers have questioned whether it makes sense for a country like New Zealand to aspire to become a technology leader, in terms of research and innovation, as in the U.S., or whether the focus should be on technology adoption. Clearly, for most countries, it would make sense to focus efforts on the best and most innovative use of technology that has been developed by the “leaders”. Nevertheless, it is worth noting that “technology adopters” of the past such as Israel, South Korea and Taiwan Province of China are rapidly moving up to the status of innovators and technology “leaders.”