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Dr. Don Brash

Are we really beating the Aussies?

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There’s been a bit of crowing over the last week or so about the fact that New Zealand has beaten Australia in the Global Competitive Index issued by the World Economic Forum.  We were ranked 18th in the world in terms of competitiveness – out of the 148 countries ranked – whereas Australia ranked only 21st.  Last year we ranked 23rd, and the previous year 25th.   So not only have we beaten Australia in that index but we’ve also seen an improvement in our own ranking in doing so.

The overall index ranking is based on a large number of component measures, some of them based on objective data (the size of government debt relative to the size of the economy, the total size of the domestic market, etc.) but most of them based on the replies to a very detailed questionnaire sent to many hundreds of business executives in the 148 countries surveyed.

Thus, for example, executives were asked “in your country, how strong is the protection of intellectual property, including anti-counterfeiting measures?”   If respondents felt that protection of intellectual property was extremely strong, they would give the top rating of 7; if extremely weak, the lowest rating of 1.  On that basis, New Zealand respondents gave an average rating of 6.0, placing New Zealand third in the world.  Australian respondents gave an average rating of 5.3, placing Australia 21st in the world on that issue.   Those perceptions are important of course, but they are not in any meaningful way an objective assessment of the relative strength of the protection of intellectual property in the two countries.

Based on those subjective assessments, New Zealand clearly out-ranked Australia in two important areas – what the survey called “institutions” and “labour market efficiency”.

Under the heading of “institutions”, respondents were asked about things like public trust in politicians, irregular payments and bribes, judicial independence, the burden of government regulation, transparency of government policy-making, intellectual property protection, and ethical behaviour of firms – and in all those categories we substantially out-ranked Australia.  Indeed, on irregular payments and bribes, judicial independence, and ethical behaviour of firms, we ranked first in the world.  And under the heading “strength of investor protection”, the only ranking under this heading based on objective data rather than the opinion of survey respondents, we ranked first in the world, well ahead of Australia at 57th – which would no doubt come as a surprise to the many people who invested in finance company debentures in recent years.  Almost equally surprising, New Zealand ranked 13th in the world in the view of respondents commenting on the burden of government regulation, whereas Australia ranked 128th in the world.

Under the heading “labour market efficiency”, the results were less surprising, at least to me.  Under this heading were issues like flexibility of wage determination, hiring and firing practices, redundancy costs, effect of taxation on incentives to work, and cooperation in labour-employer relations.  In all these areas, New Zealand respondents to the survey gave very much more positive answers than did Australian respondents.  On flexibility of wage determination, for example, New Zealand respondents gave an average 5.8 rating on the same 1 to 7 scale, placing New Zealand at 10th in the world; by contrast, Australian respondents gave a rating of 3.7, placing Australia 135th in the world.

In many areas, the two countries rated quite similarly.

In two areas, we ranked well behind Australia.  First, and not surprisingly, we clearly rated well behind Australia in terms of the size of our domestic market.  More surprising, we also ranked well behind Australia on macroeconomic environment, and this was a category entirely based not on the opinion of survey respondents but on objective data.  Under this heading Australia ranked 25th in the world, whereas we ranked 43rd.  This seemed astonishing to me, but when I looked at what made up those rankings it was clear that Australia outperformed us – lower government debt and appreciably higher national savings (under this savings sub-heading, Australia ranked 45th in the world, and we ranked 101st!).   I’m not sure whether I was reassured to find that the US ranked 117th in the world for its macroeconomic environment.

So a somewhat encouraging report card.  But before we get too happy about it, the report gave GDP per capita in 2012 as US$67,723 in Australia, just US$38,222 in New Zealand.  In other words, at market exchange rates, Australians were on average 77% better off than New Zealanders.  If a so-called purchasing power parity exchange rate were used instead, to take account of cost of living differences, the gap between Australians and New Zealanders would have been less than 77%, but at this stage there is not the slightest sign that the gap will be closed by 2025, or by any other date for that matter.  Little wonder therefore that Australia significantly out-ranked us in “the capacity to retain talent”.