Influencing the Business Environment to Achieve Productivity Improvement - The Government's Role
The Government's policies and actions affect the conditions that support growth. They shape the environment in which decisions and processes occur, and create incentives and disincentives for entrepreneurial behaviour. The Government also influences whether firms move into exporting, and the overall development of specialisation and concentration in economic activity. It can facilitate trade by creating an environment in which consumers and business transact with confidence. The Government also influences the social context within which firms operate, for example by helping to create a culture that celebrates enterprise and success.
All these interactions leading to productivity growth are summarised in the stylised model depicted in Figure 1. The theory and principles underlying this model have been used to help clarify the outcomes that we seek to achieve, as well as the focus of our strategic priorities.
The rest of this section considers in more detail how the Government might best select and prioritise among the range of policy instruments that it has available to influence productivity by improving the business environment. Some of these are well founded empirically and in practice, and others are more uncertain in their design and effect. Prioritising among these, and getting alignment across a broad set of policies, are both crucial to meeting the Government's growth objectives.
Figure 1: The Ministry's Productivity Model2, 3
Established Policies for a Business Environment That Is Positive for Growth
There is now a broad consensus among national governments and international agencies on the range of policies which promote a business environment positive for economic growth. Governments in developed economies have well-established systems and institutions to implement these policies. They cover:
- efficient specification and protection of property rights - such as the intellectual property rights needed to encourage innovation - without unduly discouraging the spread of new ideas and technology;
- maintaining an open economy that facilitates the movement of ideas, people and capital as well as goods and services; and that encourages firms to specialise in areas where they have a competitive advantage;
- regulating business activity and employment relations to encourage innovation and reduce the costs of enterprise and risk taking;
- regulating business behaviour to encourage competition while allowing businesses to enjoy the rewards from innovation;
- encouraging the efficient supply of well-educated and skilled workers, "public good" research, and research and development in industry;
- ensuring the efficient provision of a physical infrastructure for transport, telecommunications, gas, electricity and water;
- encouraging a well-functioning financial system; and
- macroeconomic policies to promote stability and increase confidence in investment decisions.
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 and 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.
Facilitative Policies to Increase Economic Growth
In addition to getting these economic foundations right, most countries that have shown exceptional rates of growth in recent history have 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 emphasises the need to get the "economic foundations" right. It also shows that facilitative policies are generally more complex to implement, depend more than the established policies on particular contexts, and require considerable judgement about where to apply resources. This, in turn, makes it less easy for governments to be confident that particular facilitative policies are, on balance, significantly positive for growth. While potentially valuable, such policies need to be carefully selected, their costs and benefits evaluated, and any necessary adjustments made accordingly.
Facilitative policies may include:
- assisting with the development of export markets, and reducing the fixed costs to firms associated with entry to markets;
- promoting the concentration of economic activity, through facilitating denser inter-firm linkages such as those that can be found in industry clusters and large cities (for instance through infrastructure provision);
- aligning public investments in skills development and research and development with chosen national priorities; and
- facilitating foreign direct investment, particularly "greenfields" investments.
In addition, the Government can play an important role in focusing national effort on the higher economic growth target. In particular it can:
- exercise high level leadership in co-ordinating private and public effort and initiative (for instance through the Growth and Innovation Framework); and
- promote positive attitudes towards, and higher valuation of, innovative and entrepreneurial behaviour.
Interaction with Other Policy Goals
Economic growth is not an end in itself. It is important because it is a key means of increasing the general well-being of New Zealanders. It plays a pivotal role in the Government's sustainable development programme that takes an integrated approach to social, cultural, economic and environmental objectives.
Social cohesion, high incomes and sound environmental management support each other. All are important to overall well-being. Over the long term, therefore, the objectives of sustainable development are complementary. Thus policies that encourage social cohesion (for example) can improve well-being directly, but also protect against the social conflicts that can have adverse affects on economic growth.
This complementary interaction can also be identified in the shorter term. For instance, policies that encourage businesses to adopt energy efficiency initiatives can help improve the environment while reducing firm operating costs. On the other hand, the short-term interaction between policies can often involve trade-offs between objectives. For example, regulations to limit economic activity degrading the environment may reduce the rate of economic growth in the short term, but over the longer time horizons may lead to greater levels of overall well-being. In considering potential policy interaction, therefore, it is important to identify the time horizon involved.
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. In order to achieve this, we must develop policies that raise economic growth while over the longer term complementing - rather than conflicting with - those policies that seek to improve other aspects of well-being. This emphasises the need for the Ministry to co-ordinate with other agencies influencing economic development to ensure that there is a clear focus on the Government's economic objective, as well as consistent implementation of policy to achieve it.
Back to Top