Why does GDP matter?

The Little Mermaid: Luiechev, 2009, Wiki Commons

On the previous page we saw graphical evidence of our increasing relative poverty. What are the consequences of this fall? Let’s make a couple of comparisons.

Hagar the Horrible can retire in comfort

Most Scandinavians pay taxes that would make Kiwis’ eyes water. Here, it would invite bloody revolution. I watched a TV program some time in 2010 in which the sorely taxed Danes were asked about this sorry situation.

There wasn’t a complaint to be heard.

Why is that, I hear you cry?

Denmark isn’t in the top ranks of wealthy nations, nevertheless their per capita GDP is 50% higher than ours. Which is another way of saying that the average Dane in employment produces 50% more wealth than we in New Zealand do. (Norway’s is more than double ours, Liechtenstein cleans us out by 450%)

So the people they’re employed by make higher profits, those employers can therefore pay higher wages, and even though the Danish workers pay those very high taxes, come payday they still have more money in their hot little hands than we do.

On top of that, with the higher tax income received by the Danish treasury, the government has more to spend on health, welfare, pensions, R&D, defence, policing and all the other goodies that we’re struggling to provide. The Danes therefore have no complaints about public services and long term security and they’re very happy with their lot.

Could we in New Zealand cope with a 50% pay rise? A minimum wage of $25 an hour? That’s what it would mean if we caught up with the Danes.

I’ve worked with many Norwegians and Swedes at sea, they tell me that other Scandinavians say of Denmark:

If you stand on a box you can see the whole damn country.

That’s not far from the truth. It’s a tiny country with few resources other than North Sea winds and oil. Nevertheless, they’re showing resource-rich New Zealand the way to prosperity. We export much less oil than they do, but we’re not far behind in natural gas, we have mountains of coal (OK, no future there) and enviable hydro, wind, geo-thermal and tidal resources. We have 6 times as much land, a vast and rich oceanic economic zone and we have a smaller population. Two of the keys to their prosperity are the low company tax of 25% and the ease of doing business. It’s easy to hire and fire, so firms are very willing to take people on. Because of that, despite what union activists here will tell you, it’s also easy to get a job.

It gets better

Or worse. Depends which way you look at it.

The people of Liechtenstein produce more than four times as much as we do per person. They’re doing quite nicely. Liechtenstein is a quarter the size of Lake Taupo and has 35,000 people—a smaller population than Whanganui. How can they earn so much with negligible natural resources? It’s easy; on average, they’re well educated and they’re employed in enterprises which require high skills and which generate high-income jobs.

We are not. Our major sources of national income are in agriculture and tourism. Both of which generate lots of low-income jobs.

Very low taxes on businesses in Liechtenstein have spurred outstanding economic growth. High value jobs in high-tech manufacturing,  in banking and in financial services. O.K., it must be said that half the work force commute to neighbouring countries every day and that their infrastructure costs are low in such a small country. But their natural resources are almost zero. No renewable energy to speak of, no oil, no gas, no gold mines, no hydro or geothermal. No ocean, no beaches.

Just people and productivity.  And a government which encourages the exploitation of those resources.

Vaduz, Liechtenstein - Wikipedia author kyselak

Nevertheless, they’re doing very nicely and I suspect that they’d outstrip New Zealand even if their borders were closed to the commuter exodus.

They also have zero debt. No bleeding their life-blood to pay interest to China.

What makes this matter even less palatable is that, until the recession killed overtime, New Zealanders worked longer hours than almost anyone else in the OECD, yet we were, and still are, producing less than they are. In comparison with most, much less.

New Zealand as a financial hub?

One of John Key’s government’s few ideas for priming the pump is to set New Zealand up as a financial services centre. He’s received a lot of flack from folk who say it will generate lots of low income call-centre type jobs.

Tell that to Liechtenstein, Luxembourg, Switzerland and The Cayman Islands. The Cayman Islands! Their per capita GDP is far higher than ours.

What to do?

It’s a worry.

We’ll look at it in detail soon but, in a nutshell, we have too many people who could contribute but don’t and too many of those who do are working in jobs which generate low wages. Farming and tourism are our economic backbone but as I mentioned above, they’re low-wage industries and as long as they dominate our economy we’re destined to remain relatively poor.

We need agriculture and tourism. But to generate the prosperity we once took for granted we also need a Samsung, a Nokia, a Sony, an Apple, and a Google or two. We need dozens more like Weta Workshops, Fisher & Paykel Healthcare, Tait Electronics, Rakon and Proata.

We have too much money—borrowed money—going into unaffordable vote-catching bribery and too many people for whom paying income tax is a voluntary pastime. Scrapping interest on student loans; absence of a capital gains tax; ridiculous legal depreciation rorts on property; Working for Families; refusal to acknowledge the necessity to change the age and entitlement rules for New Zealand Superannuation.

It goes on and on and we can’t afford it.

How do we do turn things around?

Next installment: the connection between innovation and prosperity.

6 thoughts on “Why does GDP matter?

  1. You say that student loans are wasted money but then you, also, say that we should target high value, high skill industries. How can we educate our population to a high enough level without such a scheme?

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    1. Trouble is that most of young New Zealanders leave NZ during there most productive tax paying years and only return, if they do at all (16) years for me so far; to start a family or retire. So their best most productive years are given to other countries.

      I for one will never return, because New Zealand can not offer me the level of income I desire or offer me a choice of interesting/challenging employment opportunities. One of the things I fear is right now, is I have cutting edge skills and if I returned to New Zealand, I would loose that advantage. I come from a large family all Uni Educated and half of us have lived over seas for 16 or more years.

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  2. Fair catch. I wasn’t clear enough. It’s not the existence of student loans I have a gripe about, it’s the cynical and unaffordable vote-catching bribery of scrapping the interest on the loans. Interest-free student loans would be a good thing if we could afford them but we’re borrowing the money to pay the cost. It’s unsustainable.

    I’ll reword the page.

    🙂

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  3. Many of these small countries you mention as financial hubs are tax havens. With the exception of Switzerland I would hesitate to call these places “productive”. Put yourself at the in front of a torrent of cash coming in your direction, take your cut, and you’ll get rich in no time too. They are ticket clippers, just like fund managers and investment bankers. New Zealand’s stock market has been in a bear market since 1987 and has lost nearly 70% of its value in that time and there are very sound reasons for this. Many companies in New Zealand suffer from poor governance, a lack of transparency, arrogant and grasping managements and boards composed of professional directors: seat-warming, back-scratching sycophants and yes-men. There is no effective body to investigate and punish corporate malfeasance. The finance company collapses only reinforce the perception of overseas investors that the immature New Zealand stockmarket is a casino for suckers. Aside from the hopelessness of our stock market, being so so far from big markets, big populations and already established financial hubs such as HK, Singapore and Sydney what chance has a tiny country with inadequate expertise and safeguards to compete with them. Key has made no mention of this financial hub fantasy in the past year which means he wasn’t serious about it. It was a deliberate distraction.

    Tourism? It’s one of the great growth industries, especially with the renaissance of China and India, not to mention the rapidly growing middle classes of SE Asia. High tech Korea and Japan receive very few tourists, but their people sure spend a lot of tourist money in places like France, Thailand and the USA. There is no certainty that tourism related jobs will remain low paid compared with technology, engineering type jobs.

    Agriculture. Also one of the great growth industries and one where many fortunes will be made in coming years as the growing Asian middle class, whose economic and political power is increasingly visible, demands the best food available and will be prepared to pay.

    Instead of churning out mostly unproductive law, commerce and business administration graduates, of whom we have far too many, perhaps we should be steering more people into horticulture and agriculture. This is the backbone of New Zealand’s economy and will be a huge money earner in the decades to come.

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  4. @ jk
    I’m 90% in agreement with you. However, as long as we’re stuck with a world where money manipulators are creaming it at the expense of services and technology, I have no objection to New Zealanders grabbing their share.
    I worry that tourism is unsustainable. Eventually the world economy will probably come right and then the price of oil will take off. That is likely to have a drastic effect on air travel. We’ll be largely reliant on domestic and Australian customers.
    Agriculture does have a bright future, but apart from selling our technological developments, it is not likley to produce high paying jobs. Not only that, by allowing non-residents to enter the market for our productive land we’re driving up the cost of farming to a level which may preclude young Kiwis from participating except as labourers.
    Science, IT, and technology are where our future lies if we are to remain affluent relative to the rest of the world.

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