Achieving the Government's Objective
The Importance of Being Productive
In a developed country like New Zealand, businesses are the real drivers of growth, 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 quality 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. On average, successful firms are more productive than those that fail, and their productivity tends to increase over time. As a result, the growth of successful firms 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, so a firm's continued income growth depends more on increasing the value of output produced per hour worked - that is, on 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, or the average wealth of the nation.
The Conditions That Support Growth
The sorts of changes described above involve people making choices: choices about whether or not to work, what education to undertake and what work to do, how to achieve a work-lifestyle balance that suits them, and whether and how to save and invest.
How people make these sorts of choices, and what choices they make, are influenced by conditions in the wider economy. In general, people are likely to make choices that increase productivity and average incomes if the rewards - financial and non-financial - are sufficient. Businesses also need to be assured of reliable access to factors such as skills, technology, finance and infrastructure. Competition, fostered by well-informed and discerning consumers, encourages productive choices as firms strive to make profits by bringing improved products to market before their competitors, and by specialising in the products that consumers want.
Higher productivity occurs most in large, densely-populated urban centres where highly specialised workers are more likely to find a job that matches their skills. Dense networks of firms engaged in related economic activity are also good for productivity, as they encourage rapid dissemination of new ideas and technologies.1
The New Zealand economy is small, relatively dispersed, and very distant from world markets. Our entire population is no bigger than that of a small city by world standards. Perhaps as a result, New Zealand firms tend to be relatively small and unspecialised by international standards.
Forging effective international connections is therefore particularly important for enhancing New Zealand's growth performance. Exports help us achieve productivity gains through scale and specialisation. In addition, for tradable goods and services, openness to international competition in both export and import markets can substitute for domestic competition and provide a spur to domestic innovation.
Given this context, the increasing globalisation of commerce represents a significant opportunity for New Zealand. At the same time, however, it exerts pressure on local firms to build the capability to compete in international markets.
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