Twenty to Ten: the Emptiness Of the Latest Economic Slogan.

Listener 7 July, 2001.

Keywords Growth & Innovation

Chatham House rules applied, so I can only tell you there was considerable derision in a meeting of top economists when the slogan of New Zealand aiming to be tenth in the OECD was mentioned. Many such slogans float around our public debate, driven by dogma and lobbying interests. But this one has a quantifiable meaning so it can be assessed. The point of the following is not to overwhelm you with statistics – ignore them if you like – but to try to persuade you that economics can be about analysis rather than meaningless ideological slogans.

On the latest OECD statistics, New Zealand is ranked 20th of the 30 members of the OECD according to the criterion of ‘per capita GDP measured at purchasing power parities’. This is a measure of output per member of the population valued in a common set of prices, and is not the same thing as per capita national income since some of the income from the production will be received by foreigners. Moreover it only covers material output, and does not include non-material circumstances like the environment, public safety, culture and so on. For the record, our per capita output level was 83 percent of the average in 1999.

Tenth on this list was Ireland at 113 percent of the average. To catch up to Ireland – that is what the slogan is about – we would have to increase production by about 36 percent, without any increase in population. Suppose we caught up over a decade. That would mean we would have to grow annually about 3 percentage points faster than the OECD average or more than double our current growth rate. (I have slipped some assumptions in here, but the order of magnitude is correct.)

Now economists – or perhaps I should say some economists – are competent to answer a question like what would happen if the economic growth rate were to double? Our doyen was Bryan Philpott, and while he is no longer with us, his colleagues such as Ganesh Nana, Denis Rose and Adolph Stroombergen would dearly love to have an opportunity to tackle the question.

The point is that if the economy grows at 6 percent p.a. then some sectors will have to grow even faster. Which? And what are the implications? Good questions for which nobody is providing the resources to find an answer. The lobbyists’ overblown rhetoric is pie in the sky.

Key elements in the growth path are the sectors which contribute to exporting. There is an internationally well established theory called the ‘balance-of-payments constrained growth model’. The basic idea is that in order for a country to grow it has to pay for its imports. In the long run that means generating enough export revenue, so total growth and export growth are closely related. If this is true for New Zealand then exports will have to grow at least 7 percent p.a. That means our share of world exports will have to increase, rather than fall as they have in recent decades.

Moreover, since some of our key exports are physically constrained – agriculture, forestry, fishing aluminium – to growth rates well below 7 percent p.a., others such as added value primary processing, general manufacturing and tourism, will have to rip along at a much higher rate. Can they? Will they? These are questions which economists can tackle, and indeed did in the past before the repression against dissent stopped such systematic thinking about growth. The last big exercise was in 1991, which not only had a cry of ‘Ten in 2010′ (yes the current slogan), but backed it with a careful feasibility analysis of the economic implications of attaining a higher output. It soon became evident it was not feasible.

That is the difference between serious economics and those who sloganise. Recall Prime Minister Geoffrey Palmer’s announcement in 1990 that his government was going to halve unemployment. (They lost office before they had a chance. The succeeding National government did manage the goal, by doubling unemployment and then getting it back to where they started.) However there was not a single paper that indicated how the government had done it. (In fact economic officials were as puzzled by the promise as those outside.) It turned out that some spin doctor had invented it.

Today the use of the Official Information Act helps keep the government honest, and the spin doctors stay away from those areas amenable to economic analysis. Outside the government, things are murkier because the Act does not apply to them. Try asking you favourite bete noir – party or lobby group – to justify some economic claim they make. They will be as bereft of a decent analysis as was Palmer’s government. The difference is that they dont have to admit it.