Section 1: The Economic Objective
This section briefly reviews New Zealand’s economic situation, describes the Government’s economic objective, and outlines a policy approach to help achieve it
Economic Review
For much of the latter half of the last century, New Zealand's economic fortunes were in relatively steady decline. In 1950, we had the third highest level of per capita income in the world. During the next four decades New Zealand gradually slipped behind the majority of other OECD countries. By the turn of the millennium New Zealand ranked twentieth in the OECD in terms of per capita income.
This situation improved over the decade to 2002. During that time New Zealand was one of the faster growing economies in the OECD, with an average annual growth rate of 3.6 per cent. During the same period our average income per person increased by around 2.5 per cent - a little faster than the OECD average. This reflected an increase in employment rates and - more recently - a pick-up in labour productivity growth. The economy has also become more resilient, maintaining a robust pace of expansion during the more recent period of global downturn.
The OECD's 2003 economic survey of New Zealand suggests that this improved performance was underpinned
…by the programme of reforms that began almost 20 years ago. Those reforms have provided the economy with several important strengths: a sound macroeconomic policy framework; low inflation and a fiscal surplus; a flexible labour market; high-quality public administration and regulation; and an education system that delivers top-class overall results for the majority.1
The improvement in per-capita income growth appears to have halted the decline in relative living standards observed since the 1960s. There have also been improving trends in some of the factors underlying income growth. The level of private sector research and development expenditure has been increasing rapidly for example, as has the proportion of our exports comprising high value hi-tech products. While these trends are encouraging, they do start from a very low base and are no faster than that of other OECD nations. As a result, New Zealand's per capita income growth remains in the bottom half of the OECD.
The Economic Objective: Sustainable Growth
In its Growth and Innovation Framework (GIF), the Government has set an economic objective of increasing New Zealand's rate of growth so that our per capita income returns to the top half of the OECD and stays there. This will require our economy to grow at a rate above that of the OECD average for a prolonged period.
Sustained growth in income per capita is not an end in itself: it is important because it underpins the general well-being of New Zealanders. The Government's sustainable development programme takes an integrated approach to social, cultural, economic and environmental objectives. Social cohesion, higher incomes and sound environmental management are all important to overall well-being, and can complement one another. Thus policies that encourage social cohesion (for example) can improve well-being directly, but also protect against the social conflicts that can have adverse effects on economic growth.
Nevertheless, the Government has stated that it sees its most important task as building the conditions for increasing New Zealand's long-term sustainable rate of economic growth. The Ministry must co-ordinate with other departments to seek to ensure that policies aimed at achieving non-economic outcomes support - or at least do not detract from - efforts to improve economic growth. We are working to encourage a clear focus on the Government's economic objective by all agencies, as well as consistent implementation of policy to achieve it.
In parallel, the Ministry will collaborate and consult with other agencies to ensure that our own work on enhancing the environment for business complements the pursuit of other outcomes. For example, MED is currently working with both Te Puni Kōkiri and the Ministry of Pacific Island Affairs to identify how we may best contribute to improving outcomes for Māori and Pacific peoples. The most effective way that such groups can achieve more of their economic potential is through increased educational achievement and labour market participation, and we are exploring how our work can best support this.
Achieving the Government's Economic Objective
Better productivity leads to higher average incomes
The key to sustained improvement in New Zealand's growth performance is improved productivity. Businesses drive growth by seeking out market opportunities and developing new and innovative products. The most successful firms specialise in goods and services that consumers want and that the firms themselves are best at providing. They organise production and marketing to deliver their products at competitive prices.
Those that do so most effectively tend to grow, attracting resources and customers from other firms, competing successfully in international markets, and driving less successful firms out of the market. The growth of successful firms thus helps the economy to find more productive ways of using the nation's resources.
Successful firms can afford to pay the higher wages necessary to attract the workers that they need to grow, so incomes and employment increase. There are, however, limits to how far employment can increase. As the economy approaches full employment, increased income growth arises as more successful firms attract skilled labour away from less successful ones, so increasing the overall value of output produced per hour worked - that is, increasing productivity.
As a result of these processes, the economy benefits from increases in employment, wages, salaries and profits for business owners. The net effect is to increase incomes per capita.
The Impact of Government on Productivity
The most direct causes of growth in income per capita are innovation, increases in the employment of labour (especially skilled labour), accumulation of capital equipment and embodied new technology, and changes to the structure of the economy as more successful firms and sectors replace less successful ones.
Government has little direct impact on these processes. However, it can influence them indirectly by implementing policies that make the business environment more conducive to these processes occurring. Such policies shape the environment in which decisions and processes occur, and create incentives and disincentives for entrepreneurial behaviour. Government can influence whether firms move into exporting, and the overall development of specialisation and concentration of economic activity. It can facilitate trade and innovation by creating an environment in which consumers and businesses transact with confidence. And it also can influence the social context within which firms operate, for example by helping to promote a culture that celebrates enterprise and success.
The interactions leading to productivity growth are summarised in the stylised model depicted in Figure 1.
Implementing Policies that Work
There is a broad consensus among governments and international agencies on the range of policies which promote a business environment that is positive for economic growth. Governments in developed economies have well-established systems and institutions to implement these policies.
Many commentators consider that in these areas - which the Growth and Innovation Framework refers to as the "economic foundations" - New Zealand's policies appear to be generally sound. However, because of the importance of the economic foundations for economic development, ongoing examination and adjustment of policy settings may yield significant gains for growth. Small adjustments to regulation, for example, can have important effects right across the economy. In other areas - skill development or infrastructure, for instance - the detail of policy implementation may have important effects on particular areas of the economy. The challenge for the Government in terms of the economic foundations is therefore to monitor and adapt policy settings over time to ensure that they respond to evolving conditions in New Zealand and the wider global economy.
In addition to getting these economic foundations right, most countries that have shown exceptional rates of growth in recent history have also adopted some combination of facilitative policies to promote economic growth. These often aim to foster the concentration and specialisation of economic activity, to attract foreign investment, and to improve firms' capability to enter and service export markets. However, many countries with poor growth records have also pursued such policies.
This underlines how difficult it is to implement these facilitative policies effectively. They are potentially valuable, but they are generally more complex to implement and more context-dependent than established policies, and they involve considerable judgement about where to apply resources. Facilitative policies therefore have to be carefully selected, evaluated for their effectiveness after implementation, and refined or removed as required.
Figure 1: the Ministry's Productivity Model
The Role of the Ministry of Economic Development
The Ministry of Economic Development leads implementation of the Government's economic development agenda, including coordinating departmental work on the Government's Growth and Innovation Framework. The Ministry incorporates the Ministry of Consumer Affairs and the Ministry of Tourism, and advises Ministers2 on a wide range of policies designed to promote economic growth and development. These policies are largely implemented by crown entities, with the Ministry's role being to monitor delivery and performance. The Ministry also provides some services direct to business through, for example, the Companies Office and Intellectual Property Office.
The Ministry's diverse activities impact on the environment for business in many ways. Our challenge is to identify how this range of activities can make the most effective contribution to improving productivity and growth. This is reflected in the next section which sets out our strategic priorities plus our wider framework of business environment outcomes.
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