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Capital Shallowness: A Problem for New Zealand? - WP 05/05

3  Rate of Investment and the Growth of Capital: An International Comparison

Over time, the capital stock is built up through the flows of new capital investment. Thus it is useful to examine how much New Zealand has been investing over time compared with other OECD countries. The investment-to-GDP ratio is one way of assessing the various investment levels across countries. Table 1 shows that New Zealand’s investment-to-GDP ratio has been similar to other OECD countries, although below that in Australia. In all three periods New Zealand invested a higher proportion of GDP than the UK and the US, and a similar proportion to the OECD average.

However, the growth of New Zealand’s capital stock has been slower than in these same comparator countries (except for the UK in the first two periods). This can be explained by the initial ratios of capital stock to GDP. In 1990 the ratio of capital stock to GDP was 2.6 compared to the OECD average of 2.3. This initially higher capital to GDP ratio in New Zealand combined with a relatively similar level of investment to GDP resulted in a lower rate of capital growth in New Zealand over the 1990s compared with the OECD average.

Table 1: International comparisons of the investment to output ratio (I/Y), the growth of capital, and the initial capital to
output ratio (K/Y)
  1970-1979 1980-1989 1990-2002
  I/Y Growth of K I/Y Initial K/Y Growth of K I/Y Initial K/Y Growth of K End K/Y
Australia 22% 2.8% 23% 2.50 3.4% 23% 2.6 3.6% 2.6
NZ 19% 1.4% 19% 2.7 1.9% 20% 2.6 2.3% 2.4
UK 17% 0.7% 16% 2.4 1.3% 18% 2.2 2.4% 2.1
USA 16% 4.2% 17% 1.8 3.5% 19% 1.8 4.1% 2.1
OECD Average 21% 2.9% 20% 2.4 2.6% 21% 2.3 3.1% 2.5

The OECD average is an unweighted average, and all series are in constant 1995 prices.

The initial K/Y ratios are the centred average of 3 periods, while the end ratios are the average of the years 2001 and 2002.

While New Zealand’s ratio of total investment to GDP is similar to that in Australia and the OECD, New Zealand’s business investment to GDP is somewhat lower (as shown in the OECD Economic Survey of New Zealand 2003 and the Economic Development Indicators 2005).

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