1. Well-being and Prosperity
Key Points
- A country's well-being is determined by a wide range of factors, from its material living standards to the nature and quality of its social and environmental situation.
- New Zealand ranks more highly in the OECD on quality of life indicators (which depend on a range of factors, including income) than it does on the two narrower economic measures: what New Zealand earns - gross national income (GNI) per capita - and what New Zealand produces - gross domestic product (GDP) per capita.
- The recent growth rate in GDP per capita has been somewhat higher than the OECD average but the level of GDP per capita remains lower.
- The difference between GDP and GNI is greater in New Zealand than in most other economies in the sample. This is because income accruing to foreign investments in New Zealand greatly exceeds that accruing from New Zealanders' overseas investments.
- Household wealth in New Zealand has grown strongly since 1995, the biggest increase being in housing wealth.
- Income inequality among households increased between the 1980s and 1990s, giving us a higher degree of income inequality than the OECD average and countries such as Denmark, Australia and the UK, but has stabilised more recently.
Introduction
There are a number of ways to gauge the overall well-being of New Zealanders, but a key indicator is real income per capita, or material standards of living. Improvement in material standards of living is underpinned by economic development. It increases the resources available to generate better-quality public services and helps sustain our environment. However, measuring our material standards of living, though important, does not give a complete picture of well-being. Assessing well-being calls for a set of indicators that account for both financial and non-financial aspects of quality of life.
This section of the report sets out indicators of material living standards, as well as broader quality of life and environmental indicators to benchmark New Zealand's performance against other OECD economies. It also examines changes in household wealth and the distribution of incomes across households.
1.1 Quality of Life
Measures of quality of life assess both social and economic well-being and look more broadly than just at material standards of living. Clearly, what constitutes good quality of life is subjective and will differ between individuals, but New Zealand ranks highly in both of the indices used in this report. In the United Nations Human Development Index (UNHDI), New Zealand sits in 20th place out of a total of 177 countries and is 20th in the OECD. The UNHDI focuses on three aspects of human development: life expectancy, education (measured by adult literacy and enrolment at the primary, secondary and tertiary levels) and purchasing power parity (PPP) income. The Economist Intelligence Unit's quality of life index also gives a high ranking to New Zealand, putting us in 14th place in the OECD. This index is based on the following factors: material well-being, health, family life, community life, climate and geography, job security, political freedom and gender equality.
The Environmental Sustainability Index (ESI) 2005 and Environmental Performance Index (EPI) 2006, produced by Yale and Columbia universities in the United States, provide a measure of environmental quality and sustainability based on 16 indicators. The two scores are aggregated for our report since each index provides different information for policy makers. The ESI is constructed around the concept of sustainability, tracking the environmental past, present and future.9 In contrast, the EPI focuses on current outcomes across a core set of environmental issues. New Zealand ranks in 9th place in the OECD in the ESI but in 1st place in the EPI, giving it an overall ranking of 5th when these scores are averaged. These indicators suggest that, while New Zealand faces long-term sustainability challenges, it is managing its present circumstances well.
The OECD also reviews New Zealand's environmental performance and has stated that, while New Zealand has implemented improved environmental policies over the past 10 or so years, we still face some major environmental pressures. It recommends strengthening our national policy guidance and further integrating environmental concerns into economic and sectoral decisions.10
1.2 Income and Production
A key component of most quality of life measures is income per head. Income is important because it provides individuals with consumption choices and also because it is necessary to buy services such as health care, education, welfare, environmental protection and security.
Other aspects of well-being are also important, not only in their own right but also because they contribute to sustainable economic development. There are other government agencies that report these other aspects of well-being11 so they are not repeated here. Instead, the remainder of this report focuses on income per head and the factors underpinning this.
New Zealand's ranking based on quality of life indicators differs from New Zealand's position in the OECD based on the two income measures: GNI per capita and GDP per capita.
GNI is a measure of the total income that accrues to New Zealand residents from domestic and foreign sources. In comparison, GDP is a measure of the total income earned from goods and services produced in New Zealand, including that produced by foreign-owned firms operating domestically.
On both measures, New Zealand is ranked 22nd in the OECD. However, New Zealand's GNI per capita is around 7 per cent below our GDP per capita. This difference between GDP and GNI reflects the fact that income accruing to foreign investments in New Zealand exceeds the income accruing from our own overseas investments. New Zealand's investment balance and external position are discussed further in Chapter 3.
Growth Performance
In terms of growth performance, New Zealand's five-year average annual growth in GDP per capita increased between the mid-1990s and 2003.12 This reflects increased labour utilisation during the period (see Chapter 2). In the period to 2003, New Zealand achieved a growth rate in GDP per capita above our benchmark countries. Since then the growth rate has fallen, but it is still a little higher than the OECD average.
While our growth rate has been high relative to other economies, the level of GDP per capita (over time) as a proportion of the OECD average remains relatively low. New Zealand's relative GDP per capita has increased somewhat since 1992 and is about 14 per cent below the OECD average. This suggests that the growth improvements since the mid-1990s will need to be sustained over a long period if New Zealand is to significantly improve its performance relative to the other OECD economies.
Sectoral performance
It is also useful to look at patterns of development in an economy. We can do this by looking at the three broad categories of industry: the primary industry (i.e., agriculture, forestry and fishing), the goods-producing industry and the service industry. In common with other OECD countries, New Zealand has a relatively high percentage of its economy devoted to goods-producing and service industries. The service industry has increased as a percentage of GDP since 1990, with a similar magnitude decline in the goods-producing sector. The primary industry, while forming a smaller percentage of GDP, has been relatively stable during the period and is large in comparison with other OECD economies. In short, the New Zealand economy's broad composition is changing only gradually over time.
We can also compare the gross value added by agriculture, manufacturing and service industries with our benchmark economies. Gross value added provides very similar information to GDP, but differs in that it excludes value added tax (VAT) and similar product taxes. New Zealand has a larger share of value added from agriculture than other comparator countries and is the only economy in the sample with an increasing percentage of value added from this sector. All countries in the sample show an increase in gross value added from the service sector and a decrease in gross value added from manufacturing. The change in services share has been relatively small for New Zealand.
1.3 Household Wealth and Income Distribution
New Zealanders' material standards of living are affected by our overall wealth as well as our income. Wealth not only delivers a stream of future income, but also provides a nest egg for future use and insurance against unforeseen events. Household wealth in New Zealand has grown in real terms since 1995, the biggest increase being in housing wealth (home equity). This reflects increasing house prices over the period and also a significant increase in housing investment. This is discussed in Chapter 3 in the context of broader measures of investment and New Zealanders' levels of saving.
The distribution of wealth and income is also an important factor in overall well-being. Although wealth has been on the increase, and GDP per capita growth has been above the OECD average, the data suggests that this has not been spread equally among households. New Zealand's income inequality increased between the mid-1980s and mid-1990s, and although this increase has since reversed a little, in 2000 we had a higher degree of income inequality than the OECD average, and countries such as Denmark, Australia and the UK.
Figure 1.1 Score in the UN's Human Development Index, 2004
Source United Nations Human Development Report 2006
→ Full size version of Figure 1.1 [130 kB JPG]
1.1 Quality of Life. New Zealand's quality of life, as measured by the UNHDI, has been improving steadily in recent decades and is higher than the OECD average. New Zealand lies in 20th place out of 177 countries and is 20th in the OECD.
Figure 1.2 Economist Intelligence Unit's quality of life index, 2005 (score on a scale from 1 to 10) and GDP per capita, 2005
Source The Economist Intelligence Unit, 2005; OECD Factbook 2007
→ Full size version of Figure 1.2 [205 kB JPG]
New Zealand's quality of life also ranks highly under the Economist Intelligence Unit's quality of life index, where we are 14th in the OECD.
Figure 1.3 Environmental Performance Index, 2006 and Environmental Sustainability Index, 2005
Source Yale Center for Environmental Law & Policy, Yale University, and Center for International Earth Science Information Network (CIESIN), Columbia University
→ Full size version of Figure 1.3 [174 kB JPG]
New Zealand ranks 9th in the OECD in an index based on our past environmental performance and future challenges, but 1st in an index based around current outcomes. This gives us an overall ranking of 5th when these scores are averaged. These indicators suggest that while New Zealand faces long-term sustainability challenges, it is managing its present circumstances well.
Figure 1.4 Real GDP and real GNI per capita, 2005
Source OECD Factbook 2007
→ Full size version of Figure 1.4 [169 kB JPG]
1.2 Income and Production. New Zealand occupies the same position in the OECD rankings (22nd) in terms of both GNI per capita and GDP per capita. New Zealand's GNI per capita is around 7 per cent below our GDP per capita, reflecting that income accruing to foreign investments in New Zealand substantially exceeds that of our own overseas investment.
Figure 1.5 Real GDP per capita growth
Source OECD Factbook 2007
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New Zealand's five-year average annual growth in GDP per capita was mostly lower, and more volatile, than the OECD average in the 1970s and 1980s. However, it has mostly been higher than the OECD since around 2003 and now broadly matches the rates of the benchmark economies.
Figure 1.6 Real GDP per capita as a proportion of the OECD average13
Source OECD Factbook 2007
→ Full size version of Figure 1.6 [144 kB JPG]
New Zealand's GDP per capita expressed as a proportion of the OECD average fell steadily until the early 1990s. It has improved somewhat since then, but remains lower than that of the benchmark economies.
Figure 1.7 Sectoral decomposition of New Zealand GDP
Source Statistics New Zealand
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There has been little change in the broad sectoral composition of the New Zealand economy. New Zealand has a high share of its economy devoted to the service industry. Primary sector output is only a small proportion of GDP.
Figure 1.8 Sectoral contributions to gross value added - New Zealand and comparator countries
Source OECD
→ Full size version of Figure 1.8 [101 kB JPG]
New Zealand has a larger percentage of gross value added from agriculture than other comparator countries, and is the only economy in the sample with an increasing percentage from this sector. For all countries, there has been an increase in gross value added from the service sector and a decrease in gross value added from industry.
Figure 1.9 A decomposition of household wealth
Source Statistics New Zealand
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Real household wealth has increased strongly, especially over the past six years. The biggest rise has been in the housing (home equity) sector, reflecting both increasing house prices and a rise in housing investment. Total real household financial assets have increased slowly and steadily over the decade.
Figure 1.10 Disposable income inequality
Source OECD Factbook 2007
→ Full size version of Figure 1.10 [106 kB JPG]
New Zealand's levels of income inequality, as measured by the Gini coefficient, increased from the mid 1980s to the mid 1990s. Since then it has been relatively stable, but in 2000 it was still higher than the OECD average. The 2004 Gini coefficient for New Zealand has shown a slight decrease since 2000.14 Comparable 2004 figures for other countries are not available. The Gini coefficient is a common measure of income inequality, with a score of zero indicating perfect equality, and a score of 100 indicating perfect inequality.15
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