ANNEX I.1: Methodological and Measurement Issues
Productivity level comparisons of the type presented in the chapter require developing comparable measures of output and input levels. As results can be quite sensitive to differences in estimation procedures, extreme care should be devoted to obtaining comparable indicators for the two countries, even if they are not necessarily the best measure for each individual country. This Annex briefly outlines some of the problems encountered in this process and outlines the methodology used to get around them.
ANNEX I.2: Reallocation Factor
The growth rate of market sector’s TFP is:
where VA is the market sector’s value added, L is the market sector’s hours worked and K the market’s sector capital stock.
Aggregate TFP can be obtained also as the weighted average of sector i TFPs (i=l…S), with weights given by the sector i share of value added:
Equation  can be written as:
Using the following equivalencies:
Equation  can be expressed as:
The difference between the aggregate TFP growth rate and the weighted average of sectoral TFPs is positive if labor and capital inputs increase in those sectors with a higher than average return (and, thus, with higher TFP). Denoting the term on the right hand side with RF (which stands for reallocation factor), it is possible to express the rate of growth of aggregate TFP as the sum of two terms, one that reflects the growth of TFP within each sector, and one that reflects the ability of the economy to move resources towards sectors with higher productivity:
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Prepared by Roberto Cardarelli (x38059), who is available to answer questions.
As the main focus of the chapter is on average magnitudes over the period considered, no adjustment is made to filter out business cycles effects. Moreover, the period 1988–1999 almost fully coincides with a peak-to-peak cycle for both countries.
Other alternatives have been used in the productivity literature in the context of a multi country framework, as the one that compares each country with the average of all countries (Cummings, Christensen and Jorgenson, 1981). Studies that have compared these two methods arrived at the conclusion that they produce similar results (see Harrigan, 1997, and Jones and Hall, 1996).
Little (2001) refers to the low share of engineers in graduates in New Zealand (6 percent of total college graduates, against around 20 percent in Finland). From this result, he notes that, while aggregate data could lead to a relatively sanguine view around human capital, at a more disaggregated level there are more worrying questions on whether the structure of the New Zealand education system is sufficiently directed to growth-oriented activities.
It could, of course, be argued that the larger proportion of workers with vocational secondary education in Australia signals a stronger connection between the education system and the specific skill requirements of the production process.
These assets capture around 90 percent of the total productive capital stock for the market sector in Australia (including livestock and inventories). Using the estimates of livestock and inventories as in Diewert and Lawrence, a similar percentage is found for New Zealand.
Over 1988–1998, chain-linked gross capital formation in New Zealand grew on average 0.5 percent less per year than the previously published, fixed weighted figures (see Statistics New Zealand, 1998).
Unit-value ratios are the ratios between values and volumes of different goods as reported in production statistics. However, using these ratios also has its limits, as they do not reflect differences in product quality across countries, and usually allow coverage of only a very limited sample of goods (Van Ark, 1999).
The higher estimated rental price of capital in New Zealand is a consequence of its smaller stock of capital (and, thus, larger marginal productivity). However, the same result holds if adopting market-based measures of the rental price of capital, for example, by estimating the opportunity costs of capital r in Equation  with the return on long-term government bonds (see Annex I.1). Adopting a CAPM approach, Lally (2000) also confirms that the real cost of capital for a typical firm in New Zealand has been modestly larger than in Australia, and considerably higher than in the United States. A critical factor behind this result is the allowance for currency risk, and a relatively higher market risk premium in New Zealand’s market.
Labor market reforms implemented in New Zealand had obvious beneficial effects in terms of inducing higher employment and of enhancing the resilience of New Zealand’s economy in face of adverse shocks. Moreover, the potential negative impact of labor market reforms on capital deepening may be a temporary phenomenon that does not reflect long-run trends.
New Zealand does not have a comprehensive capital gain tax, but the income from any asset held with the purpose of resale is taxable. For example, equities transactions involving managed funds are taxed, while individuals can hold and trade (within certain limits) equities without being taxed.
It is widely perceived that the relative low level of domestic savings has not been a constraint on New Zealand’s economic growth, as New Zealand has been able to access foreign savings to meet investment demand (Claus and others, 2001). It may be argued, though, that the heavy dependence on foreign capital is one of the factors that contributed to a relatively higher capital costs in New Zealand compared to Australia, as mentioned in Footnote 11.
It should be stressed, however, that the sectoral results shown by Table I.4 should be taken with some caution, for at least two reasons. First, as noted above, this study does not consider livestock as a capital assets, as such data do not exist for New Zealand. Because the relatively larger diary sector in New Zealand implies that this country is likely to use relatively more livestock than Australia, the capital deepening gap in the agricultural sector may be overstated. Second, the estimates of TFP at a sectoral level suffers from some potentially important sources of measurement errors, such as the one associated with the use of expenditure PPPs and that arises from the monopsonistic nature of the diary sector in New Zealand. Under the latter, the allocation of total value added in the diary sector across raw milk production (agriculture), processing (manufacturing) and marketing (wholesale trade) is likely to have been distorted relative to outcomes in a competitive market structure.
The fact that equity capital can only be raised by suppliers limits the source of capital for cooperatives relative to traded corporations. As stated by Lewis and Quigley (2001), this is an important issue where profitable opportunities for expansion exists. See also Sinclair (1999).
Buckle and others (2001) show that substantial changes in output sector shares had ceased by the beginning of the 1990s. Clearly, most of the rationalization process induced in New Zealand by the elimination of assistance and protection polices took place at firms levels within each sectors (Savage and Bollard, 1990, as quoted in Skilling, 2001). This suggests that the sectoral level of the analysis above does not capture adequately the static efficiency gains involved in the adjustment process that followed the reform program.
This results from extending to the 1990s the measurement of structural changes in Australia and New Zealand based on a structural change index as in Productivity Commission (1998).
Hall (1996) also finds that New Zealand employment shift in the post reform period (1985–1993) have been into sectors with lower rather than higher output and labor productivity growth. Purdue (1999) finds that during the 1990s the distribution of output by sectors changed so as to produce only a small (but positive) effect on aggregate productivity.
Briggs, Bishop and Fan (2001) find that New Zealand’s relative low export growth in 1985–1998 is due to its comparative advantage in primary sectors, which have shown relatively weaker growth over this period (partly because of still high degree of protectionism).
Mc Lean and Taylor (2001) emphasize another structural advantage of Australia, namely, its larger endowment of mineral resources (that accounts for almost 40 percent of its exports). Absent this advantage, they speculate that the postwar growth trajectory of Australia may have looked similar to that of New Zealand.
According to SNZ, such diversity reflects the fact that New Zealand imports a significant larger amount of second-hand cars (with a shorter mean life) than Australia (where import protections are more stringent).
As a general rule, this chapter ignores the bias arising from the non-additivity of chain volume figures, which is likely to be of a second order magnitude.