Alan Bollard Doesn’t Understand Economics

Alan Bollard repeats the common claim that the difference in economic performance between Australia and New Zealand is due to Australia’s abundance of natural resources:

Speaking on TVNZ’s Q+A programme yesterday, Alan Bollard said Australia had been “blessed by God sprinkling minerals” and had handled its economy well. He said New Zealand would do better to make the most of the “crumbs that come off the Australian table”.

He said it was up to the Government what its own goals were, but he did not believe catching up with Australia was possible.

I haven’t watched the show, but I’m assuming Bollard is arguing that changes in commodity prices favourable to Australia explains the fact that living standards across the ditch are around a third higher. This is just not true. The 2025 Taskforce (led by Don Brash, who does understand economics) does a good job of summarizing the evidence.

While movements in terms of trade have made Australians richer in recent years, most of its improved performance came well before any significant and sustained changes in commodity prices. Further, New Zealand has fallen in income relative to other OECD countries which should have been hurt by changing commodity prices.

Bollard seems to be stuck in a materialist mindset when it comes to economic performance. While resource endowments do matter, assuming that New Zealand’s relative lack of minerals destines those living here to a permanently lower level of income than Australians is absurd. As the Taksforce points out, many high performing countries such as Taiwan and Ireland are extremely resource-poor. Many extremely poor African countries are also very rich in minerals. People become richer when the institutional environment allows them to cooperate for mutual advantage, not when there are lots of shiny things to take out of the ground.

New Zealand’s economic stagnation has nothing to do with resource endowments or commodity prices and everything to do with poor institutions. Australia’s economic reforms since the 1980s have been much more constant and thoroughgoing than ours, and have not produced the same destructive regime uncertainty.

4 Responses

  1. I agree. I thought it was an extremely odd comment from Bollard. There are any number of counter examples that can be cited. It is to Australia’s great credit that they seem to have avoided the resource curse. I would be less confident those rents could be smoothly allocated in this country because, as you say, institutions here are weak.

    I almost think it is a point to obvious to make, but the wealth of a nation’s citizenry ultimately depends on specialisation and division of labour. New Zealand is poor in part because I suspect it doesn’t do that very well. It has a large government and governments don’t do division of labour very well, and dampen if not eliminate competition for decisionmaking. We have weak protections against government intervention and failure, discouraging investment and accountability, accordingly, performance – again anathema to division of labour and competition for decisionmaking. And we are small, which is costly in a world of fixed costs, made worse by the (nearly unbelievable) persistence of tariffs. I believe Adam Smith first recognised the costs of tariffs, yet here we are 230 years later, a small country openly dependent on global economies to get things otherwise far out of our reach, and still putting tariffs.

    The more I think about it, Bollard’s statement is strikingly odd.

    Remember Bollard’s recent call for prospective home buyers to think about the economy before buying? What lessons of economics does that idea NOT cut across?

    I do wonder if Bollard has lost touch with the foundations of economics. Perhaps this is what happens when one thinks about economies at a macro level only.

  2. Even if we had perfect institutions, we’d still have a hard time matching Australia. It isn’t just the resources thing but rather ultimate resources: people. We’re tiny compared Aussie and we haven’t any cities big enough for decent agglomeration effects to kick in (Auckland maybe comes close, that’s it). Not to say we shouldn’t try to do as well as we can with resources at hand; rather that we may be setting ourselves up for disappointment if we think that implementing even perfect institutions would quickly have us passing the Australians.

  3. Eric: Good point on agglomeration. I’d still say most of the difference has to be institutions, though. The magnitude of the difference just seems too much to be explained by population when we see so many rich, small countries and big, poor countries.

    The idea of “catching up” with Australia is a stupid one, though, and probably results from zero-sum thinking. Global competitiveness, and all that.

  4. The small rich ones (Singapore) are city-states that can easily achieve agglomeration or have lots of big close neighbours with whom they’re substantially integrated (Luxembourg) or both (Hong Kong)…..

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