Ex-RBNZ official: Australia killed resources bounty with immigration

Former Reserve Bank of New Zealand special adviser, Michael Reddell, has penned an excellent critique of a new paper by the Labor’s Dr Andrew Leigh – Shadow Assistant Minister for Treasury – on “tackling Australia’s productivity crisis”.

Reddell argues that much of Australia’s recent poor productivity performance can be attributed to its mass immigration policy, which Andrew Leigh vigorously supports:

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century…

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch…

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms. Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work. It isn’t a good performance at all – the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process…

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years – all those newly developed iron ore and LNG exports. There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy). I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which – in this context – I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders. Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

Australia – still building up its fresh wave of resource exports – has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years. And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article. There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia. My own story of Australia’s underperformance is much like that for New Zealand. Remoteness and distance are huge issues – perhaps even increasingly important globally – and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation). It isn’t just a matter of simple division – but it is close to it, bearing in mind what else we know about the Australian economy – to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

Exactly.