The Context for the Ministry's Work
This section summarises the key opportunities and challenges that are likely to impact on our work over the next one to three years.
New Zealand's Economic Growth Has Been Strong – But Is Likely To Slow.
New Zealand ranks highly on quality-of-life indicators but only 22nd in the OECD (out of 30 countries) on GDP per capita. Economic growth over the past decade or so has been above the OECD average. But it will take some years of sustained high performance, consistently above this average, to close the GDP-per-capita income gap with many other OECD countries.
The global economic outlook has worsened in recent months, as oil prices have risen, the US credit crunch has emerged, and risks of a US recession have grown. These global developments, combined with domestic factors such as a tight labour market, strong inflationary pressures, and slowing demand, look likely to limit growth in the near term.
Increased Productivity Will Become More Crucial
Much of New Zealand's recent strong economic performance reflects high rates of growth in labour utilisation. Labour productivity levels, on the other hand, are relatively low.
There are limits to further possible gains from increasing labour utilisation. Future economic growth in New Zealand will therefore need to be generated more by increases in labour productivity.
The conditions needed to support productivity growth span most aspects of an economy and involve entrepreneurs and firms, the government, and the workforce. Many aspects of a country's broader environment, such as its geographical location and natural resources, are also important.
Government Plays A Central Role In Improving Productivity
Productivity growth ultimately depends on the actions of firms. But government also plays an important role. It sets the foundations for growth through a stable macroeconomic environment, regulation to ensure markets encourage competition and innovation, and the development of capabilities such as an educated workforce and a well-functioning infrastructure.
It can also facilitate productivity growth by identifying and implementing interventions that are well-designed and targeted to correct market failures.
Innovative Firms Deliver Higher-Value Goods – And Higher Living Standards
Innovation in all its forms – in processes, services, and management and marketing approaches, as well as product development – is the key mechanism for getting greater value from the goods and services that businesses produce.
However, comparisons with other countries suggest that New Zealand's performance on innovation, while improving, is mixed.
Innovation Relies On Coordination, And Skills And Talent
Collaboration, linkages, and interconnections between the organisations that influence innovation are fundamental to lift overall levels of innovation. Achieving greater coordination of government activity will be critical.
Innovation is also highly dependent on the availability of appropriate skills. But New Zealand has significant numbers of people at the lowest levels of literacy and numeracy and, at least on the basis of subjective perceptions, lower management skills than in many other OECD countries.
Interest In Environmental Issues Is Strengthening...
There is strengthening international and consumer pressure for environmental integrity. Growing regulatory pressure around the world – for instance, to reduce greenhouse gas emissions – will also make sustainability an imperative.
Sustainability is consistent with, and depends on, economic prosperity. Economic frameworks can also be used to improve the management of environmental assets by making the environment part of the economy.
Many international firms and countries are consequently looking at growing environmental awareness as an economic opportunity rather than a threat and are seeking to take advantage of changing consumer preferences by giving more weight to environmental considerations in their goods and services.
...And New Zealand Is Well-Placed To Exploit This Interest
Although much of New Zealand's export base is potentially exposed to these changing consumer preferences, New Zealand is well-placed to face these challenges and capitalise on the related opportunities. Contrary to claims about "food miles", some of its key sectors, including pastoral farming and forestry, are more sustainable than competing sectors overseas. And it has among the world's most abundant resources and use of renewable energy.
New Zealand and New Zealanders are also regarded as trustworthy and its products and services as high-quality. New Zealand can build on this reputation and image overseas to position itself on a justifiable platform of environmental integrity, and so help its businesses to capture value from growing environmental awareness.
Increasing Firm Globalisation Also Offers New Opportunities...
Shrinking economic distance, tighter links between national and international value chains, and widespread policy and trade liberalisation are rapidly altering the global business environment. Competition now arises from practically anywhere in the world, based on an array of new technologies, advanced skills, and sophisticated supply-chain and distribution techniques.
To survive in this new environment, businesses are organising themselves in complex systems spanning many countries, tapping differences in costs, skills, resources, and tastes to optimise the efficiency of the entire system. This is being supported by international brands and networks with the capacity to deliver vast amounts of information at negligible cost. Large parts of value chains also increasingly consist of weightless activities like research, design, and marketing.
...But Seizing These Opportunities Will Require New Ways Of Doing Business
How New Zealand's organisations and individuals respond will be a key driver of future economic performance. It is likely to become more difficult for New Zealand to be internationally-competitive in all areas of production. It will therefore be important for it to be seen as an attractive location for those parts of international supply chains that relate to high-value products, and provide the greatest return.
It will also be important that New Zealand businesses are able to capture the best return from being part of international value chains offshore, and that they develop new business models of operating internationally (such as investing directly in offshore product and distribution chains), rather than just adopting the traditional export model or transferring all high-value activities offshore.
Effective And Efficient Markets Help Create Innovative, Productive Firms
On some aspects of market development, New Zealand compares favourably with other OECD countries. In principle, though, competitive pressures may be less pronounced in a small economy like New Zealand's than in a larger economy. This increases the importance of developing international linkages in the form of international trade, knowledge transfer, and investment, as a means of creating greater competitive pressure.
Investment And Savings Are An Ongoing Challenge
Although New Zealand's total investment has been growing in recent years, the capital available per hour worked in New Zealand remains low by international standards. Its net national saving is also below the OECD average. In addition, New Zealand is investing relatively little offshore, which limits its ability to leverage its competitive advantage in international markets. Some aspects of New Zealand's capital markets also look underdeveloped, particularly parts of equity markets and its corporate bond markets.
New Zealand Continues To Be Seen As A Business-Friendly Destination...
An important part of making New Zealand an attractive location for investors and firms is having an international reputation as a business-friendly destination. New Zealand is currently ranked second in the World Bank Ease of Doing Business Survey, which measures both its regulatory environment, and the quality of business. But there are still opportunities for further minimisation of regulatory compliance costs, and the costs firms face when doing business with government.
...But Its Infrastructure Remains A Critical Focus...
A world-class communications, energy, and transport infrastructure contributes both directly to productivity, and indirectly – by making countries more attractive as a destination for foreign labour and capital.
However, New Zealand is perceived as having lower-quality infrastructure than most high-income countries. Significant issues have also emerged in recent years including challenges to energy security, the need to respond to climate change, increasing traffic congestion in and around Auckland, and the need to ensure that New Zealanders have access to, and are able to use, new telecommunications technologies.
More needs to be done to tackle these challenges, building on recent progress – which has included new regulatory regimes in electricity and gas markets; an Energy Strategy aimed at a sustainable, low-emissions energy future; large planned capital investments in electricity transmission, generation and distribution, and transport infrastructure; and the pro-competitive regulatory changes being implemented following the 2006 Telecommunications Stocktake.
...As Does Auckland's Economic Performance
International evidence highlights the importance of having at least one globally-competitive city – which has a high concentration of activity, and attracts world-class firms and highly-skilled workers, generating significant flow-on effects throughout the economy. Auckland is the only New Zealand city that can realistically be transformed into such a city.
However, Auckland's performance on underlying factors that influence productivity is mixed. This suggests that there is an opportunity for Auckland to contribute more powerfully and more visibly.
Back to Top