• Don Brash


In 1950, New Zealand had one of the highest standards of living in the world. But over the ensuing seven decades, growth in per capita incomes in New Zealand has been slower than in virtually all other developed countries. As a result, and despite promises by politicians of both the Left and the Right, we are now well down the international rankings, with countries which were once much poorer than us well ahead. Some of the countries we used to regard with condescension as “Third World” now have living standards which are well above ours. Why?

On the face of it, we have all the ingredients to enable rapid economic growth. We have a stable democracy. We have a long-established rule of law. We are regularly ranked as one of the least corrupt countries in the world. We have abundant natural resources, including more fresh water per capita than all but two other countries in the world. The World Bank has ranked us as one of the easiest countries in the world to do business in. Although a significant minority of our population have low levels of literacy and numeracy, that is also true of countries which have enjoyed more rapid growth, such as Australia and the United States. We have a good basic school system (though it is deteriorating relative to the school systems in some of the fast-growing Asian countries), and in recent decades participation in tertiary education has been high.

Writing in 1990, and reflecting on our poor growth performance over the previous four decades, Reserve Bank economists Arthur Grimes and Richard Smith suggested that part of the problem may have been our relatively rapid population growth over the preceding decades. They noted that, among developed economies, higher than average population growth had been associated with a higher than average absolute growth rate but also with a lower than average per capita growth rate. But they also noted that the core of the problem was that what economists call total factor productivity – the increase in output which is not associated with a simple increase in labour and capital – was “markedly worse” in New Zealand than in other developed countries.

And that has continued over the years – not every year, but persistently over decades. The Key Government boasted about the rapid economic growth achieved during the nine years of National Government rule, with at least one international observer referring to New Zealand in glowing terms as a “rock-star economy”, but the reality was very different: growth in per capita incomes continued to be very modest. The Ardern Government has decided to avoid awkward questions about its pathetic record for per capita income growth by trying to focus attention instead on “well-being”, as if well-being can be improved in a sustainable way while per capita income growth is negligible. The new head of the Productivity Commisson's definition - "Productivity = applying our taonga to deliver wellbeing" - says it all.

Michael Reddell, a former Reserve Bank economist I have cited approvingly in the context of house prices, has suggested that part of the problem may have been our very high rate of immigration over recent decades – indeed, pandemic aside, a higher rate of immigration than any other developed country except Israel. He has suggested that for a country like New Zealand, with a low saving rate typical of Anglo-Saxon countries, a high rate of immigration has required that a large part of the available savings pool must be used for what economists call “capital-widening investment” – investment in more roads, more houses, more schools, more hospitals – not “capital-deepening investment”, providing more capital per worker in a way which might have improved productivity.

He has also suggested that that pressure to fund more investment than our own modest savings rate has provided funds for has tended to mean that, over long periods, our interest rates have tended to be fractionally higher than international rates (to produce comparable inflation outcomes), with the result that our inflation-adjusted exchange rate has had a persistent tendency to be slightly over-valued. That in turn has reinforced the tendency for investment to be in what economists call the non-traded parts of the economy, serving a domestic market rather than competing on the international market. Yet all over the world high productivity growth tends to be in those sectors which have to compete on the international market, not in the sectors which have no such need to compete (building infrastructure, houses, schools, etc.).

That would have been bad enough, but in recent years we’ve also had a tendency to spend vast amounts of limited capital on trophy projects, like the Central Rail Link in Auckland. Hugely expensive and of marginal economic benefit when first conceived, it should have been cancelled when it became glaringly obvious that the cost was going through the roof and the benefits had been greatly exaggerated. The Key Government was right to reject the project when Len Brown first proposed it, but caved in to Auckland opinion when Brown whipped up popular support for it.

We saw the same thing happen with the cycleway across Auckland Harbour – initially to be self-funding and estimated to cost $67 million as recently as 2018, but two years later estimated to cost $240 million, with the current cost estimate well in excess of $300 million and a huge burden, if it does proceed, on rate- and tax-payers.

Recently, the Government has spent some millions of dollars exploring the possibility of high-speed rail between Hamilton and Auckland but the numbers don’t come within a bull’s roar of stacking up. So instead, they’re initiating a twice-daily return train trip between Hamilton and Auckland at a cost of tens of millions of dollars, even though it seems highly unlikely to attract anything remotely like the patronage which might cover its cost. (Getting up at, say, 5.30 a.m. to catch the 6.28 a.m. train out of Frankton would, after changing trains in Papakura and all going to schedule, get you to Britomart by 8.48 a.m., just in time to get you to a 9 a.m. meeting if the meeting is close to the station. Perhaps OK for an occasional meeting in Auckland, but hardly appealing five days a week.)

And now the Government seems to think that an enormously expensive light rail system from downtown Auckland to the airport can both provide a speedy alternative to the already-operating Skybus service to the airport and improve intra-city commuter travelling – the two are mutually inconsistent objectives and, if light rail is to be added to an existing highway like Dominion Road, as likely to increase road congestion as ease it.

Road congestion is of course a very real problem, as tens of thousands of motorists understand only too well almost every day – the result of underinvestment in road networks over decades. But why not adopt a modern form of congestion pricing? Such systems work brilliantly in cities like Stockholm and Singapore and, according to surveys by the Automobile Association, are popular among motorists. To make them even more popular, the revenue from congestion pricing could be used to reduce the excise tax on fuel – cheaper fuel and less congestion – what is there not to like?

Alas, it is not only politicians who are inclined to favour enormously expensive projects of dubious national benefit. Recently, the Finance Editor of the New Zealand Herald suggested that the Government could take a cornerstone stake in the New Zealand operations of Westpac Bank, perhaps through ACC or the Super Fund, merge it with government-owned Kiwibank, and float it on the New Zealand market. He noted that he had long been an advocate of “mixed-model ownership of state assets”, and noted the success of the power company floats. But the power company floats were successful partly because they injected private sector disciplines into what had been, previously, rather sleepy government-owned companies.

It is not at all obvious that injecting Kiwibank skills into Westpac would make for more dynamic performance. And for what gain? Yes, a banking stock on the New Zealand exchange making it fractionally easier for New Zealand investors to invest in the banking sector – which they can easily do now of course by investing in the Australian parent bank directly. But gained at the expense of sending a very large chunk of New Zealand’s available savings to Australia for a very modest return.

What might it cost to buy the New Zealand operations of Westpac? Westpac’s latest profit in New Zealand was somewhat depressed by the pandemic, but let’s assume that the bank’s sustainable after-tax profit is in the order of $1 billion per annum (it was $1.1 billion in the year to September 2019, though less in the latest year). What might it take to buy that stream of after-tax earnings? In Australia, the ratio of share price to earnings per share (the PE ratio) currently varies from a low of 19 for the Commonwealth Bank to 38 for Westpac Bank. If “we” were lucky enough to buy the New Zealand operations of Westpac for $19 billion, we would need to pay that very considerable sum to Westpac’s Australian parent and to what end? Investing huge sums of our limited capital in low-yielding vanity projects is what got us into this hole in the first place.


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