New Zealand's Economic Performance
Growth in New Zealand's income per capita has been slightly above the OECD average over the last decade, but we remain in the lower half of the OECD rankings.
New Zealand's income per capita has increased by 2.5 per cent per year since 1995, slightly above the OECD average. This arrested a long period of decline relative to most other OECD countries.
But New Zealand still ranks only 21st in terms of income per capita in the OECD,1 10 places below Australia. New Zealand's income per capita is more than 30 per cent below Australia's.
GDP Per Capita as a Percentage of the OECD Average
Source: OECD Annual National Accounts. Figures are expressed in 2000 prices and 2000 purchasing power parities. The calculation of the OECD mean excludes the Czech Republic, Hungary, Poland and the Slovak Republic due to time series difficulties.
As their incomes rise, other OECD countries will become increasingly strong magnets for the talented people that New Zealand needs to drive its own growth. If New Zealand falls too far behind its OECD counterparts in the growth stakes, it risks losing the ability to retain and attract talented people and hence the ability to catch up. Unless it can generate the innovation that will help quicken the pace of growth, New Zealand risks permanently trailing the field.
New Zealand's employment rate increased strongly over the decade from 1993, accounting for most of the growth in per capita income. Higher productivity is now the key to sustained international competitiveness and growth in incomes because:
- New Zealand already has relatively high rates of labour utilisation, and the scope for further increases is small
- New Zealand's population is aging, so a smaller proportion is likely to be working in the future than at present
- with the rapid integration of large, fast-developing countries into the global economy, New Zealand firms cannot compete on the basis of low cost labour.
Labour productivity in New Zealand is low among OECD countries, and growing more slowly than the OECD median. Understanding the reasons for this and moving to address them is crucial if New Zealand is to keep pace and reduce the gap with the leading OECD economies.
Labour Productivity 2003
Source: OECD National Accounts and Labour Force Statistics.
The short-term outlook for the business operating environment contains a number of downside risks. It is tough for exporters at the moment, it is going to get tougher for other businesses in the next year or two and there are significant challenges in the medium term:
- The continuing rapid growth of China, India and other Asian economies with abundant reserves of low-cost labour will force New Zealand firms to shift toward the more skilled end of the value chain. This will require more integrated organisation of production across national borders, a trend that has dominated growth in world trade over the last decade or so.
- The rapid growth and integration of China into the world economy will continue to exert upward pressure on the prices of fuel and raw materials, as well as on transport. At the same time, as incomes rise, China will grow in importance as a potential market.
- While New Zealand has much to gain from successful completion of the WTO Doha round, it needs to keep options open in bilateral negotiations, should the round fail to liberalise agricultural trade. But a nexus of bilateral Free Trade Agreements (FTAs) carries with it risks of complexity, litigiousness and trade diversion - especially if we fail to keep pace in negotiations with competitors.
- We are experiencing considerable volatility in the price of oil, driven by both concerns around future production (the peak oil debate) and geopolitical instability.
- Global distribution networks are increasingly dominated by a few companies. Access to these networks will be vital for continuing export success.
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