2. The Growth and Innovation Indicator Approach
The government is in the early stages of developing a comprehensive set of indicators for sustainable development to provide improved information for decision-making.
More detailed indicators are in various stages of preparation for each aspect of sustainable development. Following the publication of comprehensive social reports in 2001 and 2002, an initial set of social indicators was published in July 2003. The Ministry for the Environment has launched an environmental indicators website, following on from the publication of The State of New Zealand's Environment in 1997. A framework for cultural statistics has also been developed. The growth and innovation indicators complete this picture.
Sustainable Development Indicators
The Growth and Innovation Indicators
The government has identified an initial set of 17 growth and innovation indicators, which are intended to provide information on New Zealand's progress towards achieving a high value-added economy through higher levels of innovation and productivity.
The choice of indicators reflects the framework's assumptions on the drivers of improved growth and innovation. Labour quality and quantity, investment, technological change (through innovation and entrepreneurship) and other, less tangible, factors all contribute to economic performance.
Well-being
The growth and innovation indicators focus on:
- Material standards of living: Gross Domestic Product (GDP) per capita6 has been used as the principal indicator. In addition, the report discusses Gross National Income (GNI) per capita. Income is likely to have the largest impact on material standards of living although environmental, social and cultural outcomes also have an impact.
- Direct contributors to the level of national income (GDP and GNI): Productivity is a direct contributor to economic growth and higher living standards. Productivity is simply an arithmetic measure of the rate at which outputs (i.e. goods and services) are produced from given amounts of inputs (skills, land, raw materials, machinery, management and so on). An improvement in productivity is synonymous with 'adding value' by improving the efficiency with which inputs are transformed into outputs and getting more value for those outputs. Productivity growth cannot be directly observed and measured. Rather, it is calculated as a residual - that is, it is assumed to be the amount of output growth that remains after allowance is made for the contribution of input growth. Total or multi-factor productivity provides the best measure of productivity, because it allows for growth in more than one input (i.e. capital and labour). However, reliability and availability reasons led to selecting labour productivity as the productivity indicator. Labour productivity is a partial productivity measure. It nevertheless provides useful information about our productivity performance.
- Changes in the supply of talent and skills: Labour is a critical input for the production of goods and services. When effectively matched to labour demand, improvements in labour skills can have a significant impact on productivity. The indicators selected are:
- educational attainment of the population
- upskilling of the workforce
- net inflow of skilled people, this also influences New Zealand's global connectedness.
- Changes in investment: Investment funds the purchase of physical capital whether from domestic or offshore sources. The investment indicators selected are:
- foreign direct investment (FDI), which also influences New Zealand's global connectedness
- investment in plant and equipment.
- Innovation, entrepreneurship and technological change: Productivity growth requires increases in value from the sale of goods and services and/or lower production costs. This requires generating and applying new ideas/technology in ways that meet demand for goods and services, most notably in new niche markets. The indicators selected reflect this. They are:
- breakdown of R&D investment by sector and by type
- intangible investment as a percentage of GDP
- innovativeness of New Zealand firms
- proportion of firms using the latest technology in value-added high-tech manufactures
- value-added in high-tech manufactures as a share of total gross value-added.
- Global connectedness: Success in global markets relies on strong relationships and trust. This is the essence of global connectedness. Through such connectedness, New Zealanders can develop awareness of new customer niches, potential product and services innovations, and changes in production processes. The indicators selected are:
- openness to trade
- exports of high and medium-high technology goods
- ranking of New Zealand cities internationally.
- Other indicators:7 Indicators on the economic foundations are generally available, for example through economic and fiscal updates. The discussion in this report focuses on:
- macroeconomic stability
- regulatory transparency, competition and business entry costs
- infrastructure.
- Performance of the focal sectors: There are also indicators for each sector on which the government is currently focused: biotechnology, ICT and the creative industries.
Selection of the Indicators and Future Development
This initial set of indicators will provide a baseline against which further progress can be assessed. They are also intended to:
- provide a link between:
- higher-level indicators of material standards of living and productivity
- lower-level goals, where policy changes have a more direct impact
- provide a means to focus efforts by departments and delivery agencies and support alignment and co-ordination between them
- help guide further public and private sector discussion on the need for growth and innovation policies and the policy direction that the government is following. In the process, the indicators will be further developed and refined.
In selecting the indicators, Cabinet considered:
- The number of indicators: A large number of indicators provides a comprehensive picture of growth and innovation, but may also make it difficult to see the overall situation clearly. By contrast, too few indicators will not adequately capture the complexity of the economy.
- The availability of data: To minimise compliance costs within government and ensure the reliability of the information, the indicators reflect information currently collected and reported by departments and delivery agencies.
- The existence of time series data: Using information that has been collected and will continue to be collected on the same basis over time will ensure that trends can be seen in the medium- to long-term.
- The need to focus on outcomes: The indicators are intended to be sufficiently high level to capture the outcome of actions by both the public and private sectors.
- The ability to effectively communicate progress towards the government's growth and innovation objectives: The indicators need to be easily communicated to business and the community generally.
- The extent to which international comparability was possible: Each economy has unique characteristics. However, the government's economic objective of raising per capita income is specified as relating to other OECD countries. This requires, as far as possible, international comparability for each of the indicators.
We intend to develop and refine the indicators as understanding of the factors influencing growth and innovation deepens and as new data sets are developed.
Some Qualifications About the Indicators
The indicators provide a useful picture of the state of growth and innovation in New Zealand. However, as with all statistics and their interpretation, several qualifications are required.
A Comprehensive Approach is Needed
The indicators need to be looked at as a whole. As a set, they provide a comprehensive picture of the factors influencing growth and innovation in New Zealand. When viewed together and over time, they will provide valuable information about trends, New Zealand's future direction and how different parts of the innovation system relate to each other. Individual indicators can, at best, provide only an indication that change is occurring in a particular area.
Visible Change Takes Time
It will be a number of years before the indicators will allow conclusions to be drawn on whether New Zealand's economic performance has unambiguously improved. It will be at least five to eight years before underlying trends in the indicators can be isolated from cyclical and temporary influences. It is also likely that many of the efforts of government and businesses to improve New Zealand's economic performance will deliver results only after a significant time lag. For example, it may be some time before the economy shows the benefits of raising New Zealanders' skill levels in certain areas or encouraging more entrepreneurial behaviour. Similarly, it will take time to realise the rewards from R&D.
Attributing Changes in Indicators to Policies is Difficult
The indicators intentionally measure high-level outcomes. In pulling together this information, we recognise that we cannot establish with certainty the specific cause of a change in outcome. We hope, however, that, over time, these indicators will enable both businesses and the government to achieve a greater understanding of how individual actions impact on New Zealand's growth and innovation performance.
Measurement Difficulties
There are significant measurement issues associated with many of the indicators used in this report. Much of the data used is drawn from surveys, all of which have a margin of error and may be interpreted in different ways by different respondents. We have footnoted or commented on all of the data sources and some caveats around perceived problems with the data.
Comparing New Zealand's performance to that of other OECD countries is important. Where possible, the methodology adopted uses internationally comparable data.8 This has meant that the data may not, in some cases, provide an accurate picture of New Zealand's performance because the methodology used does not reflect the unique characteristics of the New Zealand economy. In these cases, we propose for future reports to investigate methodologies that better reflect New Zealand's unique circumstances.
In addition, international comparisons must be treated with caution, as different countries' data will reflect the unique characteristics of each country. No country matches New Zealand in terms of size, geography and natural resource endowments, which means we need to take such factors into account in any cross-country comparison.
Next Steps
Implementing the framework extends beyond developing the indicators. These simply form a stable basis for ongoing monitoring and reporting on implementation, as begun in the Growth and Innovation Progress Report 2003 that accompanies this report. This draws on weekly reporting on growth and innovation policy development and implementation to the Minister for Economic Development and other Ministers, as well as material produced by other government departments and delivery agencies.
However, as implementation continues there will be an increasing emphasis on evaluation of the framework. The indicators form part of this evaluation effort.
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