How to get on Australia's radar

It will take more than CER to jump-start the economy, argues Business Roundtable's ROGER KERR.

Almost exactly a decade ago, the Business Council of Australia published a manifesto called Australia 2010: Creating the Future Australia.

Among other things it said: "A century ago Australians enjoyed the highest standard of living in the world. In 1970, Australia was 10th; we are now 18th.

"There is no feasible alternative to transforming Australia into an outward-looking internationally competitive economy. Change must be executed swiftly."

Today Australia is back up to 12th position in the OECD rankings (New Zealand is 21st). Australia's economy grew by 4 per cent a year on average in the decade to 2003, outstripping New Zealand's improved growth rate of 3.2 per cent, according to International Monetary Fund statistics.

And Australia has not been a stand-out performer. Among advanced economies, Ireland, Luxembourg, Korea, Taiwan and Singapore all grew faster in that period - Ireland grew twice as fast.

Yet our Government is now saying it is unrealistic for New Zealand to get back into the top half of the OECD within a decade. Why?

On his recent visit to New Zealand accompanying Australian Treasurer Peter Costello, the Secretary to the Australian Treasury, Ken Henry, was asked why Australia was doing so well.

His answer was "good policies". When asked "what else?", he replied, "good policies".

Few in Australia doubt that answer. As an editorial in the Australian last month noted, "Many of the best things about our society right now flow from the reform push of the 1980s and 1990s. These benefits have been chronically undersold. They include nearly two million jobs created over the past decade, low inflation and interest rates, and a level of economic growth that has enabled us to sail through a succession of global crises."

New Zealand has had similar benefits from its earlier reforms. They too have been woefully undersold by successive governments which have instead squandered the growth "dividend" with ill-justified spending and regulations.

Ten years ago New Zealand was very much on Australia's radar screen. Its economy was growing faster than Australia's in the mid-1990s. A succession of Australian firms crossed the Tasman to set up operations.

New Zealand was leading Australia in some areas of economic reform. Its successes were closely watched: the Kennett Government's reforms in Victoria were modelled on New Zealand's.

Many Australians were taking notice of a country that they had regarded as a chronic under-achiever.

Since that time a market-oriented reform programme stalled and has now been partially reversed in New Zealand, but it has been continued in Australia. Major changes include Australia's adoption of a goods and services tax, large-scale privatisation, further tariff reductions and partial reform of the labour market.

Australian attitudes to New Zealand have also changed.

In an editorial in October 2000, the Australian Financial Review wrote: "New Zealand's Prime Minister, Ms Helen Clark, simply could not be more wrong when she slams her nation's senior business leaders for 'taking the country down'. Criticism of the Labour Government's 'backward-looking' economic agenda is a timely warning that the Kiwis are retreating from the reality of the global market-place."

Getting back on Australia's radar screen is not primarily about extending the Closer Economic Relations agreement.

Outstanding CER issues are relatively minor. There would be modest benefits from things like further mutual recognition agreements and the abolition of passport controls. It would not make sense for New Zealand to adopt the Australian or US dollar without first achieving a more flexible economy with a smaller government role.

In looking to Australia, New Zealand has a habit of wanting to copy the wrong policies.

There is an endless push from New Zealand bureaucrats to adopt features of Australian business law that are widely criticised in Australia. When discussions were taking place about a possible merger of the New Zealand and Australian stock exchanges, leaders of the ASX were hoping that a merger might facilitate changes in Australia's takeovers regime in the direction of the less restrictive model then in place in New Zealand. Subsequently New Zealand has moved towards Australia's regime, which gives more protection to under-performing companies and no weight to shareholder choice.

Trade practices legislation that might suit Australia does not necessarily suit New Zealand's smaller economy.

Instead, New Zealand should be looking to adopt those Australian policies that help account for that country's superior economic performance.

Among them are a smaller government sector (spending by all levels of government in Australia is equal to about a third of gross domestic product, compared with nearly 40 per cent in New Zealand), more restrictive welfare policies, an income and assets-tested retirement safety net, and much greater private sector involvement in health, education and infrastructure such as electricity, water and roading.

As Ken Henry's comment indicated, and some New Zealand commentators do not understand, better policies and institutions (like sound laws protecting property rights and contracts) are the key to economic success.

New Zealand business performance improved vastly with the earlier policy changes and could be improved much further.

Contrary to urban myths, many New Zealand firms have shown an ability to foot it in Australia. Lion Nathan, Fonterra, Carter Holt Harvey, The Warehouse, Michael Hill Jewellers and Fletcher Building are just some of them. Entrepreneurs Sir Ron Brierley and Graeme Hart have done well.

To be sure, there have been failures, but many Australian firms have also done poorly abroad - K Mart in New Zealand, AMP in Britain, NAB and BHP in the United States, WMC in Canada and more. That's business.

Talk of being a branch economy in both Australia and New Zealand is just silly. In an era of globalisation, any economic area can be called a branch economy.

So too is pessimism emanating from some parts of the Treasury about New Zealand's size and location, and views that lower-income countries are poorly placed to compete with higher-income ones that can attract talented people. The general economic pattern is one of convergence - of countries catching up to the high income leaders.

Australia is ambitious to do better. Prime Minister John Howard constantly reminds Australians of the need for ongoing reform to stay competitive, even if actions don't always match his words.

New Zealand's policy reforms arrested its earlier relative decline. But average Australian incomes in 2003 are roughly 30 per cent higher than here.

If Australia were to achieve average economic growth of 3.5 per cent a year and New Zealand just 2.5 per cent, that disparity would rise to 42 per cent over 10 years and 60 per cent in 20 years. With gaps of that size there would be "a giant sucking sound" as firms and skilled people migrated across the Tasman.

If New Zealand wants to avoid that scenario and get back on Australia's radar screen it needs to take Ken Henry's words to heart.

* Roger Kerr is the executive director of the New Zealand Business Roundtable.

Herald Special Report: