Economic progress and puzzles: Long-term structural change in the New Zealand economy, 1953-2006

Ralph Lattimore, Trinh Le, Iris Claus, Adolf Stroombergen.
NZIER working paper 2009/6

As we emerge from a deep and long recession, the debate must shift again to how New Zealand can lift its productivity growth rate.

New Zealand has already done much work in getting the economic environment right for business growth. The reforms of the 1980s and early 1990s removed many of the structural barriers to the efficient allocation of resources across the economy.

Even so, New Zealands growth rate has been disappointing. Growth in the last decade has exceeded the average of the OECD. But it has lagged that of Australia. Furthermore, growth has come off the back of working more hours, not more output per hour. This way of growing the economy has its limits.

There is no single explanation for New Zealands disappointing growth performance, but reasons identified in an earlier NZIER public good research paper were: (1) geographical distance and small scale although there is conflicting data on the true role and relevance of the former as an issue; (2) relatively low capital per worker possibly linked to the shallow domestic capital market and low savings out of income, and so a hefty current account deficit, which raise the cost of capital; (3) low export growth seemingly due to the dominance of the primary sector where expansion is much constrained by available land. The problem definition is still being debated, and a consensus on the best way to address the issues is further away.

However, one argument that seems to be readily accepted by most is that there is a need to get our export sector humming by producing and selling more goods and services to our key offshore markets. Lifting export revenue comes about through higher volumes or higher prices, or a combination of both. So we either need to boost productivity and lift volumes, or create price premia. This can be done by moving up the value chain and focusing our efforts on selling differentiated products, rather than sticking with the tried and tested, homogenous commodity exports for which we are famous.

Reciting these platitudes is easy. Making it happen is much more difficult. There are some encouraging and oft-cited examples of dynamic New Zealand firms who are out there selling innovative goods and services to overseas markets. But effecting policy changes to incentivise some degree of structural change is a challenge.