The Government’s goal of catching up with Australia has been blown out of the water by recent economic statistics.

The December 2011 quarter gross domestic product (GDP) figures show that our economy grew by 0.3 per cent in the latest three-month period compared with 0.4 per cent across the Tasman.

The latest gap is small, but the problem is that Australia has outgrown us in 15 of the past 16 quarterly periods.

Over this four-year period our economy has shrunk by 0.1 per cent, whereas Australia’s has grown by 8.8 per cent.

The six-year figures are also extremely bleak as far as the New Zealand economy is concerned as our GDP grew by only 4.5 per cent between the December 2005 quarter and December 2011 quarter while the Australian economy expanded by 16.6 per cent over the same period.

We talk a lot about bridging the gap between us and our Tasman neighbours but the gap is getting wider and wider and this has serious implications for our economy.

What has gone wrong? Why are we dropping further and further behind Australia when the stated objective of the New Zealand Government is to bridge the yawning gap between the two countries?

The global financial crisis had a much bigger impact on New Zealand than Australia but it goes much deeper than that.

If we go back to the end of 1987, when New Zealand began compiling quarterly seasonally adjusted GDP data, our economy has grown by 69.6 per cent while Australia’s has gone up by 110.5 per cent.

New Zealand’s main problem areas are manufacturing and construction, particularly since the end of 2005. Construction activity has fallen by 18.2 per cent and manufacturing by 16.7 per cent over this six-year period.

The construction industry has been affected by the downturn in housing – the number of consents issued for dwellings has plunged from 26,000 in 2005 to 13,700 last year.

Rebuilding Christchurch was supposed to give construction a big boost, but the Key Government has not taken a strong leadership role in the southern city.

The decision to sell AMI Insurance to an Australian company was particularly ill-advised. This is because the new owner will be extremely commercial whereas a New Zealand-owned AMI would have had a more sympathetic attitude towards the Christchurch reconstruction.

In 1931, the Government passed the Hawkes Bay Earthquake Act after the Napier earthquake and gave loans to individuals and local businesses to rebuild their properties.

Although this funding was inadequate it did give huge momentum to the reconstruction of Napier, which was completed in remarkably quick time.

Many great cities, including Chicago after its 1871 fire, rebuilt themselves into magnificent cities, but Christchurch will miss this opportunity unless momentum is quickly established.

Construction activity in Australia has expanded rapidly since the end of 2005 and the gap between the New Zealand and Australian economies will continue to grow until there is a quick and dramatic increase in Christchurch’s construction activity.

New Zealand manufacturing is also in the doldrums.

It has shrunk by 16.7 per cent since the end of 2005, while Australia’s manufacturing activity expanded by 5.3 per cent over the same period.

The problem in New Zealand is the small population and the inability of manufacturers to achieve economies of scale.

As manufacturers expand they have to export, but our narrow-minded monetary policies, which focus almost exclusively on inflation, inevitably lead to high interest rates and a strong New Zealand dollar.

Manufacturers cannot thrive in a small domestic market when a high currency makes exporting extremely difficult.

The fastest-growing area of the New Zealand economy over the past six years, in percentage terms, has been government administration and defence, which has expanded by 19.7 per cent.

The Government’s inability to carry out reforms of the Ministry of Foreign Affairs and Trade shows it will be difficult to restrict the growth of the public sector.

But the biggest difference between the two countries is probably in their main industries, agriculture and mining.

Our agriculture sector has grown by 7.6 per cent over the past six years as commodity prices have boomed. But agriculture growth is restricted by grass and plant growth whereas Australia can dig more and more holes in the ground as demand for iron ore, coal and other minerals increases.

As a result, Australian mining output has expanded by 23.6 per cent since the end of 2005.

The higher rate of economic growth across the Tasman has had several consequences, including:

* The Australian economy has created 1,352,400 new jobs since the end of 2005 compared with 116,500 in New Zealand. This is a 13.3 per cent increase in the number of jobs across the Tasman compared with 5.5 per cent in this country.

* Average weekly wages have grown by 27.3 per cent in New Zealand over the six-year period, compared with 30.4 per cent in Australia. The average weekly wage, in NZ dollar terms, is now $750 higher across the Tasman.

* New Zealand’s unemployment rate is 6.3 per cent compared with 5.2 per cent across the Tasman.

* Australia’s population is growing much faster than ours, mainly because the country is attracting a large number of migrants who are lured by job opportunities and high wages. Over the past four years Australia’s population has grown by 7.3 per cent, with net migration contributing 61 per cent of the growth while New Zealand’s population expanded by 4 per cent with net migration contributing 26 per cent

* Over the past six years, New Zealand has had a 160,000 net migration loss to Australia as individuals, particularly the younger generation, have taken advantage of the buoyant Australian job market and higher wages.

No matter which way one looks at it, the gap between New Zealand and Australia is getting wider and wider. We sit and gaze as Australia powers further and further away from us, taking our brightest graduates with it.

New Zealand is beginning to look more and more like an enormous retirement village but who will provide the taxes to support the village residents?

A recently published United States book, Why Nations Fail by MIT economist Daron Acemoglu and Harvard political scientist James A. Robinson, looks at the issues that could explain New Zealand’s poor economic performance.

They believe that an important difference between countries is their institutions – whether these institutions look after the rights of all individuals or only a few.

They also believe that it is important that these institutions encourage investment in the productive sector.

According to the authors: “Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investment in new technologies and skills are more conductive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few.”

New Zealand’s original privatisation programme, in which a few individuals became extraordinarily wealthy, and our failure to regulate the 1980s sharemarket boom and recent finance company debacles are examples of political and institutional failures, particularly by the defunct Securities Commission.

These failures have enabled a few to become extremely wealthy at the expense of the many.

They have also discouraged investment in the productive sector and encouraged individuals to put most of their money into residential housing where property rights are better enforced.

New Zealand hasn’t a hope in hell of catching up with Australia until we develop strong political and economic institutions that are inclusive and adopt strategies that encourage individuals to invest in the productive sector.

Quarterly GDP growth – Australia the clear winner

  Australia New Zealand Highest
4th Qtr 2011 0.40% 0.30% Australia
3rd Qtr 0.80% 0.70% Australia
2nd Qtr 1.40% 0.10% Australia
1st Qtr -0.30% 0.70% NZ
4th Qtr 2010 0.60% 0.30% Australia
3rd Qtr 0.30% -0.10% Australia
2nd Qtr 0.60% 0.30% Australia
1st Qtr 0.70% 0.30% Australia
4th Qtr 2009 0.84% 0.83% Australia
3rd Qtr 0.80% 0.10% Australia
2nd Qtr 0.15% 0.11% Australia
1st Qtr 0.80% -1.10% Australia
4th Qtr 2008 -0.70% -1.20% Australia
3rd Qtr 0.60% -0.50% Australia
2nd Qtr 0.10% -0.60% Australia
1st Qtr 1.20% -0.30% Australia