Economics: Elections help the economy

Finance Minister Bill English some weeks ago said he saw signs the economy had turned corner. It had grown in seven of the past eight quarters and this year was likely to grow faster than Australia.
He and his National-led Government are keen to persuade voters the country will keep growing under their stewardship, bringing higher incomes and more jobs.
They seek support (the opinion polls suggest they have it) for policies that include large long-term infrastructure investment programme to help lift efficiency and productivity, better economic incentives through tax reforms, the cutting of red tape and improvement of public sector efficiencies, and investment in science and innovation.
National also seeks mandate for plans to partially privatise some key state-owned enterprises.
But hey – Labour will tell you it wants growth too and is rolling out fully-costed economic policy that will put in place what it regards as the right elements to encourage growth and job creation. New rules to protect New Zealand land and vital assets have been announced (to ensure those who buy into New Zealand are helping to grow our economy).
Labour will boost research and development with 12.5 percent tax credit, to encourage businesses to research and innovate.
“An innovative economy and highly skilled workforce are essential for economic growth,” Labour’s website says. “New Zealand cannot – and should not – compete on the basis of cheap labour.”
Neither party promised to shrink the economy at the 2008 election, but it shrunk anyway when measured in production terms, down 0.67 percent in the three years to March 2011.
Fair to say, the recession had much to do with the decline, but National might prefer to highlight the expenditure measure of GDP. In theory it should give the same result as the production series, but it doesn’t: it shows an increase of 2.4 percent.
But the population has grown, and dividing country’s GDP by its population gives measure of the ability of those people and the country to afford the goods and services they consume, including spending on public systems such as education, health, welfare, security, and environmental protection.
Until the 1960s New Zealand had one of the highest levels of GDP per capita in the world, but from 1970 to 1990 we steadily went down hill. By the early 1990s we were around 20 percent below the OECD average. Despite improvements, in 2009 we ranked 21st on the OECD list.
Over the past three years our GDP per capita has declined 1.7 percent.
As rough rule of thumb, according to American economist Dani Rodik, merely by conducting elections to decide who should govern us (and deliver their special recipe for making GDP grow), we are better off than countries where they don’t hold elections.
Rodik’s observations on the relationship between democracy and wealth are noted in post on his blog in August titled “Can you get rich without democracy?”
His answer: “Yes if you are an individual, but it’s tougher if you are an entire country.”
Using 2005 purchasing power parity figures, Rodik showed very few countries have developed beyond US$5000 per capita without becoming democracies somewhere along the way unless they are an oil economy. An accompanying scatter plot covers all countries with populations above one million and fuel exports less than 50 percent of export revenues.
Singapore shows up as one of the richest countries in the world, but it has an authoritarian regime on the democracy measure applied by Rodik.
He doesn’t mention India, relatively democratic, which has significantly underperformed autocratically run China for decades.
New Zealand is not mentioned either, but an International Monetary Fund table of countries ranked for GDP per capita shows we sit in 32nd place, far below Singapore (third) and some of the wealthier oil producers, such as Brunei (fifth), United Arab Emirates (sixth) and Kuwait (15th).
Maybe we should be drilling instead of voting. M

Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.

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