New Zealanders may not be as badly off as thought versus Australians because of difference in the way the two nations measure their economies, says Reserve Bank of New Zealand Governor Alan Bollard.
“It is almost certain that consistent measurement conventions used in New Zealand and Australia would narrow the reported gap with Australia,” Bollard said in a speech to a lunch meeting of the Trans-Tasman Business Circle in Auckland today.
Difference in the way gross domestic product is measured could add 10 percent to New Zealand’s official GDP relative to Australia, he said in a speech titled ‘Could we be better off than we think?’
Kiwis are migrating to Australia in record numbers, with a net outflow of 36,900 migrants in 2011, drawn by the promise of higher wages and better living conditions. The comparisons provoke endless claim and counter-claim among New Zealand politicians, especially as Prime Minister John Key has pledged to ‘narrow the gap’ between the two countries.
Among the measures worth revisiting, Bollard identifies the “unobserved economy,” which includes illegal activities, cash jobs and households growing their own vegetables. Typically referred to as the black economy, the impact on GDP is measured by Australia (which doesn’t include anything illegal in its assumption) but not in New Zealand.
In fact, New Zealand and Japan are the only two nations among 45 surveyed, where “no explicit estimates of unobserved activities” are included in GDP, Bollard says. Relative to Australia, New Zealand’s GDP could be under-estimated by 2 percent based on “the underground economy and backyard production.”
Bollard notes that New Zealand’s underground economy, which would include production and trading in illegal drugs, is estimated to be “somewhat small.”
A further 2 percent of GDP could be added by changing the way banking and financial services are recognised and allocated to end users, Bollard said.
He also highlights differences in the way value is ascribed to residential buildings in New Zealand compared with Australia, where improvements in the quality of buildings over time is recognised. New Zealand doesn’t quality-adjust its measurement and the difference could add 1.5 percent to GDP, he says.
A further 3 percent could be added to GDP once New Zealand adopts a new international statistical framework, known as SNA 2008, in 2013-2014.
Australia adopted the amended measure in 2009 and on that basis 4.4 percent, or A$50 billion, was added to Australia’s GDP in the June 2008 year, he said.
“New Zealand and Australia, while still producing GDP estimates, are now producing these statistics on a different conceptual basis,” Bollard said. “They are no longer directly comparable.”