Section One: Economic Development Context

This Document is Archived

The Government's Objective for Economic Development

The Government wants to achieve a step change in sustainable economic growth. Over the next decade it intends "working to progress our economic transformation to a high income, knowledge-based market economy, which is both innovative and creative and provides a unique quality of life to all New Zealanders."

Economic growth is not an end in itself - it contributes to the Government's broader objectives by underpinning the living standards of New Zealanders. Economic growth can also underpin sound environmental management and social cohesion. The latter link is reflected by the recent significant decline in unemployment rates to 3.7 per cent - the fourth lowest rate in the OECD.

How Is New Zealand Performing?

The New Zealand economy has performed well over the past decade, halting the long-term slide in its GDP per capita ranking relative to other developed countries. Growth in income per capita has averaged 2.0 per cent per annum since 1994 - slightly above the average for developed economies.

Despite this good performance, New Zealand still ranks 22nd in income per capita at US$25,950, 13 places behind Australia at US$34,200.¹ If New Zealand is to catch up with other countries, the economy must perform better still, sustaining growth rates at high levels over the next one to two decades (see Graph 1).

New Zealand's economic success depends on the performance of its businesses, workforce and supporting institutions. It will require high and sustained rates of growth in productivity that come from improvements in the returns and availability of capital, the use of technology, and the level of both technical and managerial skill. It is likely to require continuing and significant change in what goods and services are produced, and how they are produced. These changes are likely to be matched by an increase in the number and importance of innovative and globally competitive firms.

Graph 1: Real GDP per Capita (Past and Future Comparison)

• Larger, printable version of Graph 1 [99 kB GIF file]
• Text description of Graph 1

Role of Government in Economic Development

While firms are central to raising the productivity performance of an economy, the government plays an important role by helping firms to identify innovation opportunities and investing in the capabilities an economy needs to innovate. The government is uniquely placed to identify and resolve market and system failures, which can be pervasive in areas such as R&D, new technology, risk finance and the development of skilled people.

Choices made in the government's approach to business assistance, export market development, research and development, education, capital markets, infrastructure, trade policy and migration can significantly influence the pace and direction of economic development.

Government needs to do more than just getting the basics right - such as achieving macroeconomic stability and getting good infrastructure in place. It also needs to succeed at the more risky job of using facilitative policies aimed at encouraging innovation and overcoming constraints to growth within particular sectors.

These kinds of policies involve active engagement and partnership with business and a degree of top-down prioritisation. They require a deeper understanding of the context in which business is operating and a degree of "market-friendly targeting" by government to ensure a concentration of resources in areas where New Zealand's capabilities can best match opportunities for innovation as they emerge. The Government's economic transformation agenda highlights the need to play a greater facilitative role in diversifying the economy through:

• developing more upstream and downstream spin-off industries from our strengths, particularly the primary sector and biologically-based industries; and
• responding quickly and flexibly to the emergence of other sectors such as screen and export education.

The basis for this facilitative role is further expanded below.

Role of the Ministry of Economic Development

The Ministry of Economic Development assists the Government to develop and implement policies and services that promote innovation and growth. This includes leading a whole-of-government approach to the Government's economic transformation agenda. The Ministry also has specific responsibilities relating to energy, ICT, regional development, tourism, industry policy, and an effective regulatory environment for businesses and consumers.

Opportunities and Challenges Facing the New Zealand Economy

In a small, open and distant economy like New Zealand's, the government needs to be selective in identifying the most critical issues for growth.

The following challenges and opportunities have been highlighted here because they are known to be important for growth, productivity and innovation in advanced economies. They also represent areas where New Zealand stands out from other countries in terms of relatively good or poor performance.

Aim Industry Policy at Traditionally Competitive and Rapidly Emerging Sectors

A key issue is the extent to which New Zealand's current industry structure is consistent with its economic growth objectives. This is not a straightforward assessment. Competition from lower-cost countries suggests New Zealand cannot prosper as a simple commodity producer.

However, a reliance on land-based production does not mean New Zealand is destined to a future of low productivity growth. New Zealand's economy shares many structural characteristics with high-productivity countries such as Finland, Sweden, Denmark, the Netherlands, Canada and Australia. These countries generated high incomes off a low/medium technology base. They actively leveraged off their resource base and continually upgraded the technological basis on which these industries rested.

This often involved branching into new knowledge-intensive sectors that were nonetheless related to their original resource advantages. Sweden shifted from iron ore production to iron and steel, to fabricated metal products (most notably cars and trucks), and then to machine tools and electronic systems. Finland went from paper production to chemicals for paper, and then to paper machinery and telecommunications (see Table 1). While some of these countries have succeeded in creating important electronics and telecommunications sectors, their prosperity still mainly depends on continuously upgraded traditional industries. The Netherlands and Denmark remain heavily agricultural economies, with substantial export earnings from food products.

Source: Adapted from K. Smith, Public Policy Framework for the New Zealand Innovation System.

For New Zealand to achieve a comparable economic performance, economic development policy needs to be based around the transformation of the industries that New Zealand actually possesses.

This will require technological upgrading, and innovation, in such sectors as food and beverages, aquaculture, tourism and timber products. Applications of new technology, such as biotechnology and information technology, to these sectors will inevitably be part of the process of upgrading. For example, even quite basic food production requires complex instrumentation (for monitoring bacterial contamination), ICT and telecommunications systems, and processing technology underpinned by microbiology, or even molecular biology.

Obtaining "horizontal" leverage from these kinds of technologies was a key objective of the Government's Growth and Innovation Framework and underpins the Government's current drive for economic transformation.

Improve Incentives for Innovation in Firms

Innovation often rests on inputs such as R&D, purchase of new capital equipment, risk finance and the employment of skilled people.

Raising the level of private sector research and development is critical to New Zealand's future economic development. New Zealand businesses are both under-represented in R&D-intensive industries and invest less in R&D in industries that are usually R&D intensive. New Zealand firms invested $677 million in research and development in 2004 - $2 billion short of the OECD average rate of investment.

Investment in capital has also been lower than the OECD average for most of the years from 1987 to 2004. While there has been some recent improvement, the capital available per hour worked in New Zealand remains low internationally. As investment in capital, including information technology, is an important source of productivity growth and technological advance, this remains a concern for economic development.

One cause of the low level of investment may be a failure of the financial markets to adequately meet the needs of businesses.

Comparisons with other countries show that there is a lack of depth in important parts of New Zealand's financial markets. The stock market is small, and there are low levels of liquidity in many stocks. While the number of new firms coming on to the share market has increased in recent years, the market remains shallow. In addition, the domestic venture capital market, while developing, is still small. Although there is little direct evidence of financing constraints for established firms, it is important that capital markets are able to provide finance for small, fast-growing, knowledge and technology-based firms as well as for more established enterprise. These types of firms are critical for innovation performance. They tend to challenge existing ways of doing business and provide more ground-breaking innovations.

Linked to the small size of local equity markets, there is a thinness in the associated "know-how" available for businesses to invest in, in order to expand from New Zealand. The gap in both funding and expertise has tended to be filled from offshore. This brings many economic development advantages, such as new technology, access to markets and networks, and exposure to management practices of large firms. However, imported capital may not always be a perfect substitute for domestically based providers of capital.

There are a number of underlying challenges that need to be addressed to deepen New Zealand's financial markets. One is that household investors in New Zealand save relatively little, and tend to put any savings into houses rather than a broader range of financial investments. The Government already provides a range of assistance in accessing capital, through such programmes as the New Zealand Venture Investment Fund and the Pre-Seed Accelerator Fund.

New Zealand firms have access to an increasingly skilled workforce, and there is an efficient labour market. Participation in tertiary education and investment in on-the-job training have risen substantially. Between 1995 and 2005, the number of people holding a bachelor's degree or higher increased from 211,000 to 471,000 (or 15 per cent of the working age population). Skilled immigration has, on average, exceeded skilled emigration over the last couple of decades and forms an increasing focus of New Zealand's skilled migrant programme.

Skills and Labour

Even though there has been significant investment in skills and education, and skill shortages have eased recently, many firms still report this as a major constraint to expansion. Whether this is a short-term or long-term issue is hard to ascertain but it is clear the Government has a significant role in continuing to overcome this constraint. This role relates to government's responsibilities as:

• the major provider and subsidiser of skills and education;
• labour market regulator; and
• immigration policy maker.

Respond Proactively to Climate Change

A significant challenge for New Zealand firms is how to respond to climate change and transition the economy to one less reliant on carbon. New Zealand firms will need to adapt to changes caused by the physical effects of climate change on New Zealand, a range of regulatory and policy measures being considered and implemented by national governments, and changes in global consumer preferences and behaviour. For example, global consumers are becoming more discerning about environmental impact. United Kingdom supermarkets are beginning to label products with distance travelled, and New Zealand sent just over $1 billion worth of food and beverages to the UK in 2006.

Turning this challenge into a series of innovation opportunities for New Zealand firms is critical. These opportunities will include large parts of the economy that are often described as low-tech. New Zealand is unusual among developed countries in having more greenhouse gas emissions from agriculture than from energy sources. Attempting to solve this particular issue, either through technological advance or otherwise, may have significant spin-offs for the wider economy.

In becoming less reliant on carbon, New Zealand also has advantages in the energy sector. As suggested by the New Zealand Energy Strategy, the economy has both the potential to significantly increase the proportion of energy produced from renewable sources and an existing good quality renewable resource.

The economy's small size and distance from major markets, its high international profile in resource-based sectors, the potential for increasing renewable energy supply, and the potential contribution of enhanced technology all suggest that sustainability needs to be tackled proactively.

Continue to Improve Infrastructure

Access to high quality and reliable infrastructure is critical in enabling firms to efficiently produce and take goods and services to market, and enabling New Zealanders to move freely for social interaction and work. Improving the quality and reliability of infrastructure in New Zealand will hence contribute to economic growth and sustainable development.

Significant progress has been made in key infrastructure areas recently.

The establishment of new regulatory regimes in the electricity and gas markets has been designed to address concerns about security of supply and to ensure those markets operate competitively and transparently. A draft New Zealand Energy Strategy was released last year. Once finalised, that strategy is intended to put New Zealand firmly on the path to a sustainable, low emissions energy future. Planned investment in transmission upgrades in electricity over the next six years is in the region of $3.4 billion. Comparable investments are expected in the generation and distribution of electricity. Capital expenditure in oil and gas exploration is expected to be around $2 billion over the next few years.

Last year, the Government announced the outcome of the telecommunications stocktake, with a range of measures designed to improve New Zealand's broadband performance. These measures include local loop unbundling and the operational separation of Telecom New Zealand. The telecommunications sector spends approximately $1 billion per year on capital investment. The Ministry estimates that, at this replacement rate, by 2011 approximately 35 per cent of New Zealanders would have access to high-speed broadband. If an additional $600 million capital investment was made over the same time period, or sooner, approximately 85 per cent of New Zealanders would have access to high-speed broadband.

Large investments are coming on-stream across the board in transport infrastructure. Local and central government are to spend an estimated $35 billion on land transport in the next 10 years. This reflects the significant increases in Crown funding over the period, in addition to that which is collected and has traditionally been applied through the National Land Transport Fund.

Increase the Internationalisation of New Zealand Business

The internationalisation of the New Zealand economy is fundamental to future economic growth and the process of upgrading existing industries. The small size and distance of the New Zealand economy from major markets and technology leaders can create a high hurdle to achieving this international integration.

This is reflected in a number of indicators. Outward investment performance has been relatively weak and is undertaken by only a handful of firms. New Zealand's stock of outward foreign direct investment (FDI) as a share of GDP is 11.9 per cent ($17.8 billion) as at June 2005, and has gradually fallen over the past 15 years. In stark contrast, the developed country average for outward FDI has grown strongly from about 10 per cent of GDP in 1990 to 27 per cent in 2004.

New Zealand's share of world exports shrank from 0.27 per cent in 1990 to 0.21 per cent in 2005. New Zealand's export growth was slower than the world average and that of comparable OECD countries' average, which is indicative of a loss in New Zealand's competitiveness. New Zealand's exports are less import intensive than other countries' (that is, for every dollar of goods we export, they have more domestic value added than in other countries). On the positive side, New Zealand's exports have become increasingly diversified. The proportion of exports in unprocessed form fell from 27 per cent to 14.5 per cent between 1988 and 2005. In contrast, world trade as a proportion of world GDP has also increased from 20 per cent in the early 1970s to about 55 per cent in 2003.

As globalisation has increased, manufacturing production has become more fragmented. There is greater international competition, lower mark-ups available to firms and a reduction in the home bias of production, with a declining share of domestically produced inputs in many countries.²

The restructuring of global production chains raises new opportunities for New Zealand firms, but also new challenges. Developments in global value chains are moving towards countries specialising in varieties of particular goods rather than industries. New Zealand is not yet succeeding on this dimension. The challenge is often for firms to be niche players, enabled with world-class technology and managerial expertise.

One of the clearest shifts in world trade patterns is the growing importance of emerging Asian countries, which represent an ongoing opportunity for New Zealand. The demands of Asian consumers are rapidly growing more sophisticated, and Asian economies are increasingly competing in high human capital industries. This provides a vast, increasingly sophisticated market for New Zealand goods and services. Just as important, however, is that many global value chains concentrate their production processes in Asia (for example, manufacturing in China and services in India). This presents significant opportunities for innovative New Zealand firms.

In part, the economy's rather disappointing international performance simply reflects New Zealand's isolation from all countries, apart from Australia. Explaining the phenomenon does not lessen the importance of finding ways to counteract it.³ This does not imply that New Zealand should attempt to engineer an economic structure closer to the developed country "average". It is unlikely, for instance, that New Zealand companies will compete successfully in large-scale manufacturing industries that rely on large numbers of low-cost workers.

What it does suggest is a need to tackle New Zealand's integration with the world economy proactively. For example, the Government is currently undertaking a number of measures to improve the availability of broadband internet access at reasonable cost. Without the wider availability of affordable broadband, New Zealand cannot compete with other countries in the establishment and growth of new businesses that use this technology, nor can it realise the productivity gains achievable when businesses outside the ICT sector use broadband to provide value-enhanced services for international markets, for example, enhanced marketing via the web for tourism, video conferencing for business services, and "virtual" integration into parts of the manufacturing value chain such as research, design, branding and marketing.

Auckland's Role in Economic Development

Auckland's continued productivity and growth will exert a significant influence on the performance of the New Zealand economy. Auckland is by far the largest city and economic centre in New Zealand. Since 1996, the Auckland region's population has grown by 16.9 per cent compared with national population growth of 7.9 per cent.

Within successful cities, there has been a shift in industrial base from manufacturing to services. This shift has been observed globally and accelerated over time. This highlights the need for Auckland to maintain and strengthen its prominent services role within the New Zealand economy. A challenge for Auckland is that larger Australian cities (for example, Sydney) may increase their role in servicing firms in the New Zealand economy.

In order to take on this challenge, Auckland must continuously improve its attractiveness to both firms and employees. This includes improving fundamentals such as skills and access to research and development while reducing constraints such as congestion.

Conclusion

To improve living standards, New Zealand needs to enhance the creation of globally competitive firms. There is a need to:

• actively engage with traditionally competitive and rapidly emerging sectors;
• improve incentives for innovation, for example, by deepening capital markets;
• respond proactively to climate change;
• continue to improve the quality and reliability of key infrastructure services;
• improve the international linkages that allow firms to benefit from trade, knowledge transfer and investment; and
• transform Auckland into a world-class city.

The Ministry will lead work across government agencies to meet these challenges and opportunities.

This site uses cookies to track and analyse usage.