Castalia’s blog

Both Australia and New Zealand have initiated unprecedented social and economic restrictions in response to COVID-19, and both appear to be about equally successful at bringing the epidemic under control. However, while the lockdowns in the two countries may look similar, they are in reality quite distinct in terms of their restrictions on economic activity and lifestyles. What can both countries learn from the differences in their approaches and what does it mean for a possible gradual removal of restrictions?

The New Zealand Government commenced self-isolation policies on 25 March 2020 with restrictions that focussed on confining people to the household unit (or “bubble”). Australia progressively escalated its restrictions, with a key lockdown announcement on 29 March 2020 directed at limiting activities where congregation of people occurs.

The Australian State and Federal governments, as well as New Zealand’s government will face choices about whether, for how long and to what extent to continue with lockdown policies. The wellbeing impacts of the lockdown are large, even if difficult to measure right now. On one hand the policies appear to be limiting the spread of the disease. On the other hand, there are a range of other impacts on welfare.

From this comparative analysis, Australian policies appear, on the limited evidence, to be effective with fewer negative impacts on wider wellbeing. Australia also appears better placed to rebound when restrictions are lifted. New Zealand’s policies have contained people to household “bubbles” with consequential impacts on activity such as work and education. New Zealand may have more difficulty rebounding.

The States and New Zealand are good comparators because all have similar urbanisation rates (between 86 and 90 percent), demographic profiles, cultures and legal systems.

Different Approaches to Lockdown in Australian States and New Zealand

New Zealand has a unitary government. Each Australian State is responsible for implementing its own set of rules. However, the public health directives implementing the restrictions are all very similar.  There are differences between the States’ policies (for example, golf is permitted in New South Wales, but not Victoria), however, the general approach to workplaces and activities is the same.

With this in mind, while the headlines sound the same—Australia and New Zealand in lockdown—there are important differences between the two countries.

In summary, while borders are generally closed:

  • Australia’s restrictions are activity based. Activities are limited where people can randomly encounter one another, but most workplaces are able to continue operating subject to compliance with social distancing rules
  • New Zealand’s restrictions confine each household to their own “bubble”. Leaving home is only permitted for acquiring essential items and for exercise. A limited set of essential services and businesses may continue.

The table below draws out the differences in more detail.

Table 1: Lock-down Policies in New Zealand and Australian States

Source: Castalia

Australian “activity-based” approach allows a wider range of activity to continue

Australia’s lockdown approach substantially reduced activities which involve large number of random interactions between individuals (in bars, restaurants, entertainment and sports venues) but largely left the economy free to operate subject to compliance with guidance about workers keeping social distance.

This means businesses can still function, even if in a low-level holding pattern. For example, even if a business is closed (for example, a pub) business owners can visit the premises to maintain equipment or catch up on paperwork. Employees can go to work, unless they are able to work from home.

Australia has allowed continued interactions between people in workplaces and education facilities. However, these are largely controlled settings: factories, construction sites, schools, tertiary education institutions. This means that employers (and if need be public health officials in case of an outbreak) know who is interacting with whom. Workers sign in and attendance rolls are usually kept. Interactions between people can be structured and rule bound.

New Zealand’s “bubble” approach constrains more activity

New Zealand’s household “bubble” approach limits all economic activity to essential services and work that could be done from home. All non-essential business that cannot be carried out from home has stopped. Essential businesses are those essential to the provision of life and the businesses that support them. For non-essential workers, this means that leaving the home is forbidden except for attending to essential business (buying food, seeking medical help or supplies, outdoor exercise near the home).

The effect has been to shut most customer facing SMEs. All retail except supermarkets and convenience stores are closed. Limited exceptions have been progressively made as the lockdown goes on (for example, modestly expanding the definition of essential goods, permitting groundskeepers to maintain turf).

The policies have had major implications for supply chains. Since essential items may only be sold, logistics has become more complicated. The food supply chain had to rapidly change since now almost all food is distributed through two supermarket chains, rather than wholesalers, specialist shops and cafes or restaurants.

2              Similar Epidemiological Results

On raw data, most Australian States have had a lower rate of COVID-19 spread than New Zealand.  New South Wales has had the highest rate of COVID-19 spread of the six jurisdictions, followed by New Zealand and South Australia. Queensland, Victoria and Western Australia have had a similar rate of disease spread. Policymakers should be pleased that the spread of the virus is being contained, as the number of new cases decreases. Allowing for uncertainties around testing and the small numbers involved, we could generally conclude that all Australian States and New Zealand have achieved broadly similar COVID-19 outcomes.

In Figure 1 below shows the rate of infections from the point in time that 5 cases per 1 million population were recorded in each jurisdiction. The disease appears to have arrived around two weeks later in New Zealand, so starting all jurisdictions from the same point is useful for comparison purposes. The chart shows a more rapid increase in cases in New Zealand, despite the earlier and more restrictive rules.

Figure 1: COVID-19 Cases per 1 Million Population Since 5 Cases per 1 Million

Source: New Zealand and State government announcements

Note: Current to 14 April 2020

All the States and New Zealand have seen a flattening of the epidemiological curve. Figure 2 shows the rate of increase of confirmed cases since lockdown policies were implemented. It is likely that lockdown policies have played an important role, in addition to other factors (for example demographics, climate, other behavioural responses).

Figure 2: COVID-19 Cases per 1 Million Population Since Lockdown Policies Implemented

Source: New Zealand and State government announcements

Note: Current to 14 April 2020

Australia has high rates of COVID-19 testing but New Zealand is catching up

The rate of tests for COVID-19 has been high in Australia compared to other countries (for example, higher than South Korea, United Kingdom and United States). New Zealand has now increased its testing rate, but lags behind South Australia and New South Wales. New Zealand had conducted fewer tests per 1,000 population than all of the States until early April (when it matched Western Australia and then Victoria). Figure 3 illustrates this.

Figure 3: Testing Rates for COVID-19 per 1,000 Population

Source: Our World in Data 2020, www.covid19data.com.au

3               Policy Implications from Australia/New Zealand Comparison

Governments on both sides of the Tasman will face choices about the next steps to manage COVID-19. The choices are about whether, for how long and to what extent to continue with lockdown policies. There are trade-offs to make between the epidemiological and health outcomes and impacts on other aspects of wellbeing.

The impacts of the lockdown on wellbeing are intuitively obvious, even if it is difficult to measure some impacts right now. There are the positive impacts of containing the virus (reductions in spread, preventing serious illness and deaths). However, there are also serious negative impacts on other aspects of wellbeing. Shutting down large parts of the economy completely will also make the recovery more difficult.

Australian approach leaves the economy better placed to rebound when restrictions are relaxed

Most Australian States are managing to contain the spread of the disease even with continued controlled operation of businesses and other institutions. It appears from the data in Figure 1, above, that transmission has been slowed. If outbreaks do occur, public health officials can probably more easily track the spread (so-called contact tracing). Workplaces and educational institutions are controlled and structured places, where entry and attendance can be recorded.

Australia seems better placed to recover from the lockdown period. While many businesses have been closed to the public, some ongoing ‘holding pattern’ activity continued. Many other businesses, including SMEs, have remained operational.

This means that when lockdown restrictions can be lifted, Australian businesses will be better placed to rapidly respond to consumer demand. Employees are more likely to have been retained. Trade will have continued for some businesses.

New Zealand will have more challenges in the post-lockdown phase

Most businesses in New Zealand will currently have no or very limited revenues, but will have continuing costs such as rents, wages and other bills. This will have consequences for ongoing viability and employees’ prospects. New Zealand’s firms are mostly small or medium sized enterprises (SMEs) without large balance sheets to absorb major shocks. Young people are not in education or are being supervised by parents at home, which creates its own pressures. There will be mental illness ramifications because of continued confinement, job losses and uncertainty about the future. Police are reporting higher instances of domestic violence due to people being at home with each other more than usual.[1]

When the lockdown policies are lifted, the businesses that are still in operation will face a double challenge. Consumer demand be suppressed, and many New Zealand businesses will have the additional challenge of restarting from zero activity.

EDIT: An earlier version of this blog did not make clear that some public transport in New Zealand continues to operate.

Update: On April 21, this blog post was referenced by The New York Times in their article about New Zealand’s economic recovery post COVID-19.


[1]    https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=12324065

Image by Fernando Zhiminaicela


About the Authors: Andreas Heuser is a Manager in Castalia’s New Zealand office and Alex Sundakov is Castalia’s Executive Director in Australia.

Disclaimer: The views expressed are those of the authors alone. This work has not received funding from any other organisation or interest.

Many governments are concerned about how to stimulate economic activity once the COVID-19 health crisis is in a manageable state.

This blog examines New Zealand’s unique stimulus approach, which focuses on “shovel-ready” infrastructure. This approach promises to stimulate economic activity while minimizing risks of wasteful spending. The New Zealand approach could inform how governments and multilateral development banks (MDB) approach financial stimulus support in developing countries.

Infrastructure spending is a safe stimulus option to overcome the unprecedented demand shock.

The world will be able to get back to work once the pandemic spread slows, probably later this year. It will be essential to get people back to work quickly and stimulate economic activity. Furthermore, the infrastructure spending could make the post-crisis world more resilient.

Sound infrastructure underpins all economic activity and, in most countries, infrastructure constraints are usually well-understood by both the government and the private sector. Therefore, with appropriate controls in place, the chances that a government-supported infrastructure project will fail to stimulate economic activity, or be wasteful in the long term, are lower than for a non-infrastructure project.  

New Zealand’s “shovel-ready” approach is interesting.

New Zealand has an interesting and potentially replicable idea for fiscal stimulus. The government has announced a plan to increase infrastructure spending quickly once the pandemic restrictions end. What is special about the New Zealand approach is that the government has announced the plan now, even though it may be months before it can be implemented.

The government has called for information about “shovel-ready” projects. These are infrastructure projects that can commence in the next six to 12 months. The deadline for submitting information is 14 April 2020.

By announcing and kicking off this plan now, in the midst of the pandemic restrictions, the government is providing a clear signal of its intentions, and some certainty to the infrastructure sector about which projects might be under consideration for fiscal support.

The New Zealand plan rapidly identifies potential infrastructure projects that can be commenced soon. This increases the likelihood that the positive economic impact of infrastructure project development occurs during the period that demand is suppressed and people are out of work. The plan also provides government support at a time when economic activity in the private sector is likely to be low, thus reducing potential “crowding out” of private spending.

New Zealand’s criteria and process for “shovel-ready” infrastructure projects.

New Zealand has appointed a reference group of infrastructure experts and senior officials to receive information about potential projects. The group will further develop criteria to evaluate projects for the Government to consider.

At this initial stage, in addition to the time-driven “shovel-ready” requirement, the following high-level criteria will apply:

  • Demonstrated positive direct and indirect employment effects
  • Demonstrated social, environmental and economic benefits, with emphasis on the New Zealand Treasury’s Living Standards Framework and the UN’s Sustainable Development Goals.

Project developers must also outline how COVID-19 has affected the project and how COVID-19 presents risks to on-time construction and completion to specifications. Project developers are also asked to outline specifically how Government could support their project. This can include:

  • Financial support
  • Expedited regulatory approvals (for example, environmental permits or planning permissions)
  • Regulatory or law changes to enable infrastructure (for example, fast-tracking foreign investor rules)
  • Other government support (for example, commitments by government to use the infrastructure or purchase services).

The full criteria and process for evaluating projects will be developed in the coming weeks. New Zealand has well-developed infrastructure evaluation frameworks for public capital investment (Better Business Case framework, overseen by the Treasury). We expect further information on a robust evaluation process to emerge soon.

Developing countries can develop a “stimulus tool kit” borrowing from New Zealand’s “shovel-ready” approach.

There are some lessons from the New Zealand approach that developing countries and MDBs could apply. Developing countries are likely to be fiscally stretched, and therefore infrastructure stimulus might be financed by MDBs and other donors.

Many countries will want MDB support. MDBs should consider developing a “post-COVID infrastructure stimulus toolkit”, which any interested country could adopt.

The toolkits should be rolled out as soon as possible. This will allow countries to identify projects and get them shovel ready now. An information-gathering exercise, such as the New Zealand “shovel-ready” approach, can be done quickly. The sooner MDBs begin to think about criteria for infrastructure finance, the faster infrastructure developers and investors can respond with projects that can deliver immediate economic and longer-term resilience benefits.

Key features, which can be rapidly developed, include:

  • Ensuring a project evaluation body is appropriately qualified and suitably independent
  • Identification of the key results sought from projects, such as jobs, environmental sustainability, social inclusiveness, and resilient infrastructure
  • Mechanisms to determine project timeframes and risks to meeting timeframes.

Some precedents already exist for rapid disbursement methodologies. These could be applied for post-COVID infrastructure. P4R (Pay for Results) could be incorporated. A P4R loan, for example, could disburse X amount per km of road built to the required standard, which would be much quicker than normal MDB processes.

Even so, provisions to ensure that the projects funded are ones that are needed, would be important—here the New Zealand “shovel-ready” criteria could be considered as a base. Proper construction supervision would need to be ensured also.

Author: Andreas Heuser, Andreas.Heuser@castalia-advisors.com

Disclaimer: The views expressed are those of the author’s alone. This work has not received funding from any other organisation or interest.

As countries around the world are agonizing about how tough the forced closures and lock-downs should be and how long they should last, it may seem premature to think about what the world economy will look like after the end of the pandemic (most likely, after an effective vaccine is generally available in the next year to 18 months).  However, many decisions made by investors and governments in the period before a global all-clear is sounded will involve the creation of institutions, business models and assets that will last well into the future. To ensure that we get best value from the decisions whose effects will last well beyond the pandemic, we have no option but to start forming a view on the structural changes that will stay with us after the pandemic is over. Of course, anyone who tries to do that will get lots of things wrong, but rigorous analysis can help reduce the magnitude of that error and help us figure out what signs we need to watch.

Much is already being written about the likely “hangover” from the current emergency fiscal and monetary measures being implemented by many countries. There is no doubt it will take the world a long time to dig itself out from the mountain of debt that is being created. However, that has been done before, including the recovery from the debt to finance World War II. Some analysts have pointed out that the current economic shock resulting from the health measures to control the pandemic differs from previous economic crises, such as the Great Depression; it is not only a demand shock due to people losing income but also a supply shock due to governments deliberately suppressing some economic activities. However, that again is similar to the experience of major wars, where civilian economy suffers a supply shock both from the diversion of resources to military production and, in some countries, from physical destruction.

In other words, from the macroeconomic
point of view, while the recovery will be hard, the script for such a recovery
is reasonably well understood. Some countries will do better than others, the
speed is hard to predict, but we would argue that the general trajectory of the
macroeconomic recovery is already reasonably well understood.

It is much harder to predict the microeconomic shape of the recovery. How will various individual markets adjust? Will people rush back to social activities—such as restaurants, bars and mass tourism—restrained only by the available incomes? Or will people’s habits fundamentally change as a result of the lock-downs? In other words, is the future of investments, such as airports and airlines and commercial real estate, simply a function of the rate of macroeconomic recovery or will something more fundamental happen?

In this article, we want to focus on one
likely permanent or at least very long-lasting change in preferences: the increase
in the value governments and businesses place on the resilience and reliability
of their supply chains. The pandemic crisis has sharply focused attention on
the particular way that global markets have evolved in the past 20 or so years:

  • The emphasis on minimizing cost and just-in-time supply means that, in general, stores of goods are low, and the supply chain from producers to consumers is optimized to meet steady demand. When there is a shock, it takes a long time for the supply chain to adapt and respond. Toilet paper ran out in the supermarkets not because the world does not have enough toilet paper, but because it takes time to change production and delivery schedules and to shift equipment and personnel to respond
  • The realization that supply chains pass through multiple borders, both national and regional. While during normal times that is not a problem as long as international treaties and domestic arrangements take care of tax and customs issues, it is striking to see how quickly origin of supply becomes critical when countries and regions respond to crisis conditions by looking after their own first
  • Single source dependence. It has become increasingly obvious that China’s growth as a low-cost supplier has been the story of global concentration of the supply chain on China as a source. It is unlikely that such concentration will be tolerated in the future. For example, The New York Times has reported an effort by the US to limit its reliance on the import of medicines from China. There is no doubt such efforts would have been spurred by the discussion in the Chinese media of possible export bans and the effects of such bans on the US.[1]

The trend to re-shoring and the shift of focus to resilience were already emerging. The COVID-19 crisis will put it on steroids. In addition, it seems likely that we will see the return to the political dimension in trade. In many ways, the last 15 to 20 years have been a historical anomaly: trade relations have become largely divorced from political and security considerations. Countries which could be considered rivals from the perspective of nation state interests nonetheless become increasingly interdependent in the supply of goods and services.

This time was already coming to an end as countries were beginning to recast their national security debates in terms of supply vulnerabilities[2]. COVID-19 will accelerate this trend.

So, can we speculate on what the
post-crisis supply chains may look like, as countries and companies balance
considerations of resilience and cost?

We think a number of trends are likely to
emerge:

  • Companies and countries will seek to diversify their supply sources
    and carry higher stocks to achieve resilience
  • Supply chains will increasingly follow political alliances. That is,
    there will still be an incentive to find the cheapest source of supply, but
    such sources will increasingly need to be within countries that are bound
    together by something other than trade deals. Common security interests and
    cultural affinities will likely play a much greater role in the structure of
    the supply chains
  • Procurement strategies, while not necessarily explicitly moving to
    “buy local” preferences will emphasise capability to provide rapid response and
    security of supply.

Such trends will have important
implications for the infrastructure sector. Careful and detailed analysis would
be required for each infrastructure asset, but here are some initial thoughts
on possible effects:

  • The recent trend towards ever larger container ships has been driven
    by the concentration in the flow of goods along a single “belt and road” from
    China. If supply chains diversify, such super large container ships may go the
    way of A380 aircraft—there will be renewed demand for vessels that can provide
    point to point connections across multiple supply chains. This will have
    implications for port expansion and dredging projects around the word intended
    to accommodate the ever-larger vessels
  • If companies and governments carry larger stocks for reliability and
    security reasons, the premium for timeliness and reliability in the
    transportation parts of the supply chains may reduce. Ports and shipping lines
    may find new ways to manage their costs
  • Larger stocks and more diversified production will have important
    implications for the demand for warehousing and light industrial real estate in
    many countries.

Castalia will be carefully watching the emerging structural effects of the COVID-19 crisis and helping our clients navigate the risks and opportunities.  


[1] https://www.nytimes.com/2020/03/11/business/economy/coronavirus-china-trump-drugs.html

[2] https://www.theaustralian.com.au/inquirer/coronavirus-exposes-the-sum-of-all-threats-as-our-national-security-is-lacking/news-story/a7579224f2a6f74d7441db41babd4fc8

About the Author: Alex Sundakov is Castalia’s Executive Director.

Disclaimer: The views expressed are those of the author’s alone. This work has not received funding from any other organisation or interest.