Executive Summary
This inter-departmental report provides a broad range of indicators relevant to New Zealand's economic performance. It has been prepared in order to inform economic debate and policy making in general, including the government's ongoing work on economic transformation.
Economic transformation is a key element of the government's economic, social and broader sustainability agenda. The aim of the government's economic transformation agenda is to create a strong, healthy high-income economy that will underpin much of what New Zealanders value and desire in life. Without higher economic growth, the economy will not deliver higher living standards or the quality of life to which New Zealanders aspire. As well as raising incomes, lifting economic growth increases the resources available to finance better-quality public services and to care for and maintain our environment.
Government agencies publish a number of sets of indicators covering a broad range of social, economic and environmental outcomes. The Ministry of Social Development's publication The Social Report (published annually) provides information on the social health and well-being of New Zealand society. The Ministry for the Environment is due to publish its latest "state of the environment" report shortly.
In this report, Economic Development Indicators 2007, the Ministry of Economic Development, The Treasury and Statistics New Zealand report on New Zealand's recent economic development and its contribution to well-being. The report updates and expands on two previous reports, published in 2003 and 2005.
Figure 1 depicts how the indicators covered in this report show New Zealand to be performing across a number of key areas, and the current direction of any change relative to the OECD. New Zealand's performance relative to other OECD countries is low for a number of the indicators presented. However, the direction of change has been positive across many indicators for a number of years now and continues to be so. Importantly, in many cases, improvements have been greater than those experienced in most other OECD countries, leading to an improvement in New Zealand's position on those indicators relative to the OECD average.
The indicators used in this report vary in quality, timeliness and robustness. While individual indicators need to be interpreted with care, we are comfortable that the overall picture presented in this report is robust.
Quality of Life
Measures of quality of life assess a range of social, economic and environmental factors. New Zealand sits in 20th place in the United Nations Human Development Index (UNHDI), with a higher score than the OECD average. This index focuses on life expectancy, education and income. Similarly, the Economist Intelligence Unit's quality of life index gives a high ranking to New Zealand, putting us in 14th place in the OECD. This index is based on a range of factors: material well-being, health, family life, community life, climate and geography, job security, political freedom and gender equality. New Zealand ranks in 9th place in the OECD in the Environmental Sustainability Index (ESI) 2005 but in 1st place in the Environmental Performance Index (EPI) 2006, giving us an overall ranking of 5th when these scores are averaged. The ESI is constructed around the concept of sustainability, tracking the environmental past, present and future. In contrast, the EPI focuses on current outcomes across a core set of environmental issues. These indicators suggest that, while New Zealand faces long-term sustainability challenges, it is managing its present circumstances well.
Material Standards of Living
The New Zealand economy has performed well over the past decade, and in many areas, there is now a more solid platform for future growth. On the basis of GDP per capita, New Zealand is currently 22nd in the OECD (out of the 30 member countries). While this ranking is two places lower than in the 2005 indicators report, New Zealand's GDP per capita levels have continued to improve slowly relative to the OECD average. Our drop in the OECD rankings appears to reflect a combination of particularly strong growth in the two countries that have overtaken us and, in one instance, a revision to statistical methods.
Figure 1 – New Zealand's Performance Relative to the OECD Against Key Indicators1
→ Full size version of Figure 1 [303 kB JPG]
The strength of the economy relative to other OECD countries is encouraging in light of the government's objective of raising New Zealand's per capita income levels. However, we have some way to go to achieve per capita incomes similar to those in countries in the top half of the OECD. The income gap between New Zealand and the top half of the OECD is reasonably large, and closing it will require a number of years of performance consistently above the OECD average.
Labour Utilisation
Much of New Zealand's recent strong economic performance reflects high rates of growth in labour utilisation. New Zealand's labour utilisation rate is now one of the highest in the OECD, reflecting a combination of high participation rates, low unemployment and a high average number of hours worked relative to other OECD countries. It will be possible to increase labour utilisation further if the economy maintains its current performance. But there are limits to the gains that can be achieved from labour utilisation, and future growth in income per capita will need to be sourced from labour productivity.
Labour Productivity
Estimates of New Zealand's economy-wide labour productivity levels are low by OECD standards. Recent OECD estimates of New Zealand's economy-wide rates of growth in labour productivity have also been moderate relative to OECD comparator countries, while Australia has been close to the OECD average. However, questions remain about the accuracy of economy-wide labour productivity measures. New Zealand and Australian statistical agencies report labour productivity across a narrower set of "measured sectors" of the economy. Under this narrower but more accurate measure, New Zealand's labour productivity growth has been stronger, and close to that of Australia.
New Zealand's labour productivity reflects our levels of capital per hour worked and multi-factor productivity (MFP). MFP captures a range of factors that can raise output over and above any increase in "inputs" of capital and hours worked. New Zealand's capital-labour ratio is low by OECD standards, but its growth has been strong over the past 10 to 15 years, close to that of Australia. MFP growth has been low relative to the OECD over the last 10 years.
Investment, Saving and Financial Market Development
New Zealand's total fixed investment as a percentage of GDP is around the OECD average and has been growing in recent years. Business investment, a key component of total investment, has been close to the OECD median (as a percentage of GDP) over the last ten years. In particular, plant and machinery investment has been above the OECD median in most years since 1970. This is important to New Zealand's growth prospects, since private sector investment in capital equipment is associated with improved firm productivity and profitability. Government investment spending has increased over the past decade following a sharp decline in the mid-1980s, but still falls short of the high rates seen in the 1970s and 1980s.
New Zealand's net national saving (gross national saving minus depreciation of fixed capital) as a percentage of GDP currently lies below that of Australia, the UK and Denmark, as well as falling short of the OECD average. This is reflected in household saving data, with New Zealand's households saving a particularly low proportion of their disposable income. From the early 1990s, households have been spending more than they earn on average, or "dis-saving". In general, however, household dis-saving has been offset by higher government and business saving.
In addition to retained earnings or profits, firms can access investment capital from a number of other sources: banks, the sharemarket, the venture capital market or informal capital markets. Improving financial development in these markets can stimulate economic growth. The Milken Institute's Capital Access Index evaluates the ability of business to access capital across all sources. New Zealand ranks 12th place in the OECD on this index, above the OECD average but below countries such as the UK, the US, Denmark and Australia.
New Zealand's sharemarket capitalisation relative to GDP is smaller than for most comparator countries, and has remained broadly static for a number of years. Similarly, the size of the venture capital market in New Zealand - a relatively small but important source of finance for smaller companies - sits at the lower end of the OECD range.
Good availability of bank credit and informal capital can partially substitute for underdeveloped equity markets. New Zealand's banking sector has been growing since 1990 and is larger relative to GDP than that of the US and Australia. Informal capital markets are also larger than in most OECD countries.
Innovation and Entrepreneurship
Innovation underpins aggregate productivity growth, and entrepreneurship drives innovation. Indicators in this report present a mixed but improving picture for entrepreneurship and innovation in New Zealand.
New Zealand firms appear to be introducing new products and marketing methods at a faster rate than firms in European Union (EU) countries. However, they exhibit a lower rate of managerial and organisational process innovation. Expenditure on R&D is low by OECD standards - particularly in the private sector. International patenting rates are also well below the OECD average. However, both measures are growing fast. Growth in both overall and private sector R&D has been particularly strong over the past 10 years, substantially greater than that in the OECD as a whole and in comparator countries such as Australia, the UK and the US. Low rates of R&D and patenting are associated with our distance from major world centres, the lack of very large firms, and an industrial structure weighted more heavily towards primary production than in other OECD countries.
Data on publication rates suggests the science base in New Zealand is delivering relatively good levels of research output. The high proportion of Crown Research Institute (CRI) research funded by the private sector suggests that linkages between these public research providers and private business are also strong.
Data on the technology content of goods exports suggests that New Zealand's industrial production remains concentrated in what the OECD classifies as "low-technology" sectors (for example, primary), but the technology intensity in these sectors is higher in New Zealand than in other countries.
International Linkages
While New Zealand's economy has low barriers to trade, our share of external trade (relative to GDP) is below that of similar-sized, high-performing OECD countries. Our share of world trade has remained broadly constant over the past 15 years.
The stock of foreign investment in New Zealand is high (as it is for most small developed countries), and recent inflows have also been strong. In contrast, foreign direct investment (FDI) outflows have been low by world standards over a number of years.
New Zealand has been successful in attracting migrants. While outflows have also been high, New Zealand's net inflows remain higher than the OECD average. As a result, New Zealand has a high proportion of foreign-born residents. The skill levels of migrants leaving and entering New Zealand have been broadly similar. As a result, New Zealand appears to have experienced a "brain exchange" rather than a "brain drain". However, questions remain about the speed and success with which new immigrants are integrated into the workforce.
Skills and Talent
High skill and talent levels are crucial for economic success. The skill levels of both the current overall workforce and people entering the workforce from the education system are important.
Management and leadership skills impact substantially on organisational performance. The International Institute for Management Development (IMD) assesses availability of management skills to be lower in New Zealand than in Australia, the UK and many other OECD countries. However, these results are based on surveys of perceptions of managerial quality so must be interpreted with caution.
A skilled and educated workforce more generally is also important. The proportion of adults with a bachelor's degree in New Zealand is slightly above the OECD average. Further, the proportion of the population with a bachelor's degree or higher and the proportion of the population with a tertiary qualification or higher have both grown since 1997, while the proportion of the population with no qualification has declined. Looking at more basic skill levels, the International Adult Literacy Survey (IALS) ranked New Zealand in 1996 above the OECD median on prose literacy, but below the OECD on document and quantitative literacy. The IALS also assessed New Zealand as having the highest number of hours of continuing education and training per adult in the OECD. However, the IMD survey ranks New Zealand below many OECD countries in the emphasis given to employee training.
New Zealand's university graduation rates are high by OECD standards and increasing. Surveys suggest that our best university is similar in quality to the median leading universities in OECD countries, suggesting that the quality of our university education is likely to be comparable with the OECD average. At the secondary school level, the picture is mixed. While 15-year-olds perform above average on reading, scientific and mathematics literacy according to the Programme for International Student Assessment (PISA) measure, 13- to 14-year-olds score below average on the United States' Trends in International Mathematics and Science Studies (TIMSS) measure. The proportion of students leaving secondary school qualified to enter university is increasing, but the participation rate in education for 15- to 19-year-olds is well below the OECD average.
Infrastructure
An appropriate level and quality of infrastructure is an important contributor to economic growth. Robust, internationally consistent data on infrastructure quality is difficult to obtain. This section, therefore, relies heavily on international surveys of business perceptions of infrastructure quality, which need to be interpreted with caution. Overall, New Zealand is perceived as having lower-quality infrastructure than most high-income countries: we ranked 34th out of the 125 countries included in the latest Global Competitiveness Report prepared by the World Economic Forum. Respondents rated an inadequate supply of infrastructure as the second most problematic factor for doing business in New Zealand.
The perception-based data suggests that the quality of New Zealand's information and communication technology (ICT) infrastructure is below that of most high-income countries. However, the harder data presents a mixed, but more positive, picture. Overall levels of current investment in ICT are above the OECD average, but not substantially so. And, while the broadband subscription rate remains below the OECD average, recent growth rates are higher than average.
The available data on transport infrastructure is more limited. Where data does exist, New Zealand's performance appears broadly in line with the OECD average. Further, we compare more favourably with developed nations that have a similarly dispersed population profile. However, the quality of energy infrastructure is perceived to be lower than in most other OECD nations.
Tax and Regulation
New Zealand's total tax burden, as measured by our tax to GDP ratio (35 per cent), is broadly in line with the OECD median. The share of total taxes collected from labour and corporate income is similar to the OECD average when social security taxes are included. However, New Zealand's tax on income from capital (corporate income, dividends, interest, rents, etc) is relatively high compared with other OECD countries, and our tax on income from labour is relatively low. New Zealand's corporate tax rate is high relative to some small economies, particularly Singapore, Ireland and Chile, but is similar to rates in Australia and the UK. Recent policy announcements to reduce the corporate tax rate may improve our relative position. New Zealand's taxes are relatively easy to comply with.
Across the working population, New Zealand's average tax wedge on personal income is relatively low compared with other OECD countries, even when account is taken of the combined effect of income tax and goods and services tax (GST). However, incentives for individual New Zealanders to work more vary depending on their wage levels and family composition, particularly due to the effects of the Working for Families tax credits.
New Zealand has a high-quality regulatory environment. We are assessed by the World Bank as being second in the world for overall ease of doing business. However, there is still scope for New Zealand to further improve our performance on some of the sub-indicators. New Zealand's product market, competition and employment regulations are also assessed by the OECD as being high quality, with our ranking in the top seven countries on all measures. However, other top-performing countries have substantially improved their position relative to New Zealand in recent years.
Macroeconomic Foundations
New Zealand has solid macroeconomic foundations. Fiscal and price stability are well established, and New Zealand now has relatively lower volatility for both GDP and inflation than in the past, which is conducive to investment and economic growth. Government spending as a percentage of GDP is below the OECD median, and the government has run financial surpluses since the early 1990s. New Zealand, however, still has a relatively high real interest rate and high exchange rate volatility, and has consistently run large current account deficits, which are reflected in a high level of external indebtedness.
A number of factors are likely to limit New Zealand's external vulnerability, including low public debt and a strong risk management culture in New Zealand's financial institutions.
New Zealand's Economic Relationship with Australia and its States
There is strong international evidence to suggest that country borders typically reduce levels of economic interaction. Considerable work has been undertaken to reduce the barriers to economic flows between New Zealand and Australia, and we now appear to be more highly integrated with the Australian economy than any other country. However, New Zealand remains less integrated with Australia than the individual Australian states are with each other.
New Zealand's economic performance will, to a degree, determine its ability to compete with the Australian states for key resources, such as highly-skilled workers and investment.
New Zealand's GDP per capita is lower than that of all of the Australian states except Tasmania. Our average rate of growth in GDP per capita has been in the middle of the Australian states since 1995.
Australia is an important destination for emigrating New Zealanders, resulting in a large and growing New Zealand diaspora. However, the magnitude of the net outflows is not much larger than that experienced by some of the states to other parts of Australia.
Australia accounts for a large and growing proportion of foreign investment in New Zealand, which has led to a large negative net investment position from New Zealand's perspective.
Auckland - an Internationally Competitive City
International evidence suggests that large, outward-facing, global cities play an increasingly important role in economic development. While Auckland is a relatively small city by international standards, it is still our largest city. We have compared Auckland's performance with those of the other regions of New Zealand and that of Brisbane, Melbourne, Adelaide, Seattle, Vancouver and Copenhagen.
Auckland's GDP per capita is lower than those of all but one of the international benchmark cities, but only slightly so in most cases. However, the difference in these measures between Auckland and New Zealand as a whole - the Auckland "premium" - is higher than the equivalent figures for all but one of the comparator cities.
Auckland is assessed as offering a high quality of life by international standards, offsetting to some degree its lower GDP per capita. Auckland's productivity levels (GDP per worker) are lower than the average of a sample of 78 metropolitan regions in the OECD and below most of the comparator cities. The difference in productivity between Auckland and New Zealand as a whole - the Auckland premium - is in the middle of the comparator cities, suggesting that in the New Zealand context, Auckland is contributing normally to economic growth. Its population growth rate is also very high by international standards.
With regard to the underlying factors that influence productivity growth, Auckland performance is more mixed. Patent applications per capita are relatively low by international standards, as is the proportion of the working age population with a tertiary education. Auckland City's share of employment in high-tech manufacturing goods and services sits broadly in the middle of the comparator cities.
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