You can learn a lot about economics by going around the world with your eyes open.

The American writer, P J O'Rourke, has made a specialty of this technique. One of his books opens with the question: "Why do some places prosper and thrive while others just suck?"

One of his conclusions: "It's not a matter of brains. No part of the earth … is dumber than Beverly Hills , and the residents are wading in gravy. In Russia , meanwhile, where chess is a spectator sport, they're boiling stones for soup."

I've learned a lot the same way. Start with hotels. New Zealand 's best hotels are good, but they don't compare with the top of the range hotels in, say, Hong Kong or major US cities.

Or taxis. In many large German cities, most of the taxis are Mercedes. Not the case here.

And you can notice the difference over time. Only a generation or so ago, Singapore and Hong Kong were slums. Today their average incomes per head (adjusted for purchasing power) are over 30 percent higher than New Zealand 's.

Some countries go in the opposite direction. A hundred years ago Argentina was one of the world's richest countries. Today the situation of many of its people is desperate.

For most people, hotels and taxis don't matter that much; what matters in the first instance is food, clothing, decent housing and something left over for leisure.

These things depend on income levels. In 1950, New Zealand 's average income per head was over 10 percent higher than Australia 's. Today, Australia leads New Zealand by a margin of around 30 percent.

Recently, finance minister Michael Cullen was asked in the House whether he was aware that New Zealand spent less on roads than many other Organisation for Economic Cooperation and Development countries.

He replied correctly: " New Zealand spends less on roading, on health, on education, on law and order, and on a large number of things, than do a number of other OECD countries. Unfortunately, that is what being in the bottom half of the OECD means."

High material living standards aren't everything, but they make a lot of things easier.

Take health. With higher incomes, people can take more care of their own health needs. Personal health spending in wealthy Switzerland in 1999 was US$1024 per household, compared with US$243 in New Zealand .

New Zealanders also want the government to spend more on health. But already total health expenditure is relatively high by OECD standards as a share of GDP. We spend 8.1% of our GDP on health, the 12th highest ranking in the OECD, yet we rank 20th for GDP per head.

The same is true of education. As the graph shows, New Zealand 's total education spending (public and private) relative to GDP is amongst the highest in the OECD. Most of it goes on teacher salaries. Many people want to see teachers paid more, but already the average teacher is in the top 15% of New Zealand taxpayers and above the OECD mean teacher salary level.

The conclusion is obvious. The only way to substantially increase health and education spending in New Zealand (whether publicly or privately funded) is to raise average incomes. Quite simply, New Zealand must grow faster.

Here the picture is not all bleak. New Zealand was one of the better performing OECD economies in the 1990s, following a period of major economic reforms. The continuing resilience of the economy today owes more to the hard work back then than to the recent 'tailwind' of favourable conditions.

As the December 2002 Economic and Fiscal Update noted, since December 1998 – when trading partner growth was at its lowest point following the Asian crisis – output has expanded by 15.1% in New Zealand. This compares with 12% in Australia , 10.2% in the Euro area, 9.4% in the United States and 2.4% in Japan .

There's no reason why New Zealand cannot get back to the top half of the OECD – indeed the government's goal is relatively modest, given that New Zealand once occupied one of the highest rankings.

The most relevant indicator to track for the purposes of assessing progress against that goal is growth in real GDP per head.

In 2002, the economy may have grown by around 4% but population growth was around 1.5%, making growth in real GDP per head only around 2.5%. This figure is expected to fall to around 2% over the next few years. Such a rate is not sufficient to meet the government's goals.

It follows that we need to make the boat go faster. Redistributing even more income won't solve social problems – already social security transfers in New Zealand amount to 16.1% of GDP compared with only 9.1% in Australia and 8.2% in Ireland . What's needed is greater wealth creation.

Just as Team New Zealand must keep on striving to do better than its competitors, so must the government. The Treasury has pointed out that "smaller government is likely to be better for growth" but the recent trend in New Zealand has been for larger, more interventionist government.

This can only slow the boat down. Successful OECD countries are continuing to pursue liberal, market-oriented policies involving lower taxes, less regulation and a greater role for the private sector, including in areas like health and education.

New Zealand 's earlier reforms were in line with the OECD prescription, but we haven't built on them. As P J O'Rourke concluded: "We know what to do, and we know how to do it." The only thing stopping us is "a heartfelt and near-universal refusal to understand the basic economic principles behind the creation of wealth."

For more information, contact:

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz