The New Zealand Paradox

Roger Partridge
Insights Newsletter
21 April, 2017

A weighty package from the Cato Institute, the US think tank, landed on my desk shortly before Easter. It contained an impressive 300-page tome called The Human Freedom Index 2016.

Now spanning almost a decade, the HFI is a broad measure of personal, civil and economic freedom. Using data from sources including the OECD, the World Justice Project and the Fraser Institute, it ranks 159 countries, rating each on a scale of 0 to 10.

Analysing areas as diverse as the rule of law, freedom of religion, relationship freedom, and business regulation, the HFI takes account of literally dozens of distinct indicators of personal and economic freedom. And as a sober reminder that freedoms we might take for granted are not universal, there are categories for disappearance, access to the internet, and press killings.

The index paints a rosy picture of New Zealand. Overall we place third, bettered only by Hong Kong and Switzerland, and ahead of Australia and the UK (6th=), the United States (23rd), Japan (32nd) and Singapore (40th). And we are one of only two countries scoring in the top ten on both economic and personal freedom.

But there is a puzzle in the results for us in New Zealand. The findings suggest there is a strong relationship between the level of freedom and levels of income, with the most free countries enjoying significantly greater income-per-person than those that are less free.

Unfortunately, our results prove this is not an invariable rule. Despite our medal-winning position on the freedom leaderboard, we languish in 19th place in the OECD’s rankings of GDP per capita. Freedom may be a pre-requisite for prosperity, but it is not a guarantee.

Quite why our economy underperforms its freedom ranking has perplexed economists since the mid-1990s. Indeed, they have even quantified the problem and given it a name: the New Zealand productivity paradox, and it sees our per-capita incomes 20% below OECD predictions.

Our small size and geographic isolation feature predominantly as explanations of the anomaly. Unfortunately, there is little we can do about either of these.

But there is still plenty we can do to lift the prosperity of ordinary New Zealanders. Restoring education to the world-class status it once enjoyed is the obvious place to start. Fixing our broken housing market must be a close second. While neither may solve our prosperity paradox, they will help us bypass it.

And in the meantime, we should take pride in having created one of the freest nations on earth.

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