Let NZ savour its World Cup win – Australia is still the economic champion

All Blacks captain Richie McCaw and coach Graham Henry celebrate their Rugby World Cup victory. AAP

Few would begrudge New Zealanders revelling in their rugby World Cup success. After two major disasters in the form of the Christchurch earthquake and the Greymouth coal mine explosion, some morale-raising success has deservedly come their way.

The All Blacks wore the millstone of expectation around their necks since the tournament stated in September. It is only right that they triumphed because New Zealand invests an extraordinary amount of human and physical capital into being the world’s number one at rugby.

Such is the fanaticism of the game there that children are almost indoctrinated into playing the sport. In the Trans-Tasman stakes, New Zealand can now claim to have matched us in having two rugby world cups in the trophy cabinet.

We swallow our pride, but there is one game where Australia reigns supreme: applied economics.

The difference comes through not just in the exchange rate but in the one-way flow of emigration. The relative economic strengths of the two nations have widened, especially with Australia’s galloping resource boom.

Both countries actually started out evenly as pastoral-based economies. At one stage New Zealand was a colony of New South Wales, but distance and self-determination ruled out that as a long-term arrangement.

At the beginning of the 20th century, New Zealand boasted higher living standards, or per capital income, than Australia. Apart from tourism, New Zealand’s primary exports are still those of last century.

The divergence of the two economies began 50 years ago, when Australia discovered massive iron ore deposits in the Pilbara.

In the 1980s New Zealand opened up its economy and turned away from protectionism, regulation and intervention. It rehabilitated their economy, but only in part.

The smallness and distance of New Zealand from main markets has always weighed against it. This, along with its meek resource endowment and Australia’s greater capital investment per worker, explains the disparity between the two countries.

A former governor of the Reserve Bank of New Zealand, Don Brash, was once keen on the idea of a common currency between the two nations.

It was perhaps a central banker’s pipe dream but the Eurozone crisis and the problem with Greece has hit the “Anzac currency” idea for six.

There is, in any case, a free flow of people, services and merchandise between the two countries. Australia and New Zealand’s Closer Economic Agreement has been in operation for nearly 30 years.

Another sign of economic integration is investment. Australia is the largest investor in New Zealand, while New Zealand investments are the third largest received by Australia. Lately, there has been an export of jobs from Australia to New Zealand as multinational corporations engage in outsourcing.

While New Zealand is hardly Greece, its credit rating was recently downgraded by two international credit rating agencies, Fitch and Standard and Poor’s. Moody’s is reportedly also considering a downgrade.

The agencies were concerned that New Zealand’s external position would deteriorate further at a time when the country’s fiscal setting has been weakened by earthquake-related spending pressures and poor growth affecting tax revenues.

New Zealand’s net foreign debt stands at $NZ253 billion ($195 billion), some 130% of GDP. New Zealand Finance Minister Bill English sees it as his country’s “biggest economic vulnerability”.

New Zealand has a very large and worrying current account deficit of 9% of GDP. Australia’s current account deficit is just 3% of GDP.

New Zealand has also an internal public debt to reconcile amounting to 28% of estimated GDP, compared to 7% for Australia. It is apparent that Australia will return to a budget surplus long before New Zealand does.

To rub it all in, Australia has enjoyed better macroeconomic management than New Zealand, which has just emerged from recession caused by the global financial crisis. It was similarly affected by the Asian Economic Crisis of 1998.

Following Treasurer Wayne Swan’s recent accolade as Euromony magazine’s Finance Minster of the Year, Australia can even boast winning the award twice to New Zealand’s solitary effort – Paul Keating took home the award in 1984, and New Zealand’s Roger Douglas the year after.

Until New Zealand overcomes its economic losing streak, Australia will remain number one.