Listener: 22 March, 2003.

Keywords: Growth & Innovation; Macroeconomics & Money;

The salutary America Cup image was the sleek black yacht limping back to port. Twice they tried to sail it faster than conditions allowed, the boat shipped tonnes of water, bits broke, and they gave up the race.

Economies can also be like that. In the early 1970s, the National Development Conference projected a growth rate of 4.5 percent p.a. for the economy. Impractical in the circumstances, the economy averaged nearer half the target over the next few years. Today’s calls for an economic growth rate of 6 percent p.a. are probably even more irresponsible, and the demand that New Zealand should return to the top half of the OECD in GDP per capita terms by 2011 is totally unrealistic.

It is so typical of New Zealand commentators to grab numbers from the air, without any understanding of their meaning. The same thing happened in the early 1980s, when New Zealand’s per capita GDP was then at the OECD average (as it had been for almost a decade). Calls to accelerate the economic growth rate, led to policies that reduced our relativity to 85 percent of the OECD average. It is broadly the same ideologies and pressure groups making the higher growth demands today, even to the extent of advocating similar policies. (The big exception is that today’s Treasury is far more realistic.) If they repeat their performance, we could be behind Spain, South Korea, Portugal and, possibly, Greece by 2011.

How fast can the New Zealand economy grow? No one knows, but it is possible to think about the question systematically. The last major attempt was a ‘National-Sectoral’ projection published by the Trade Development Board in 1991. Here is a simplified account of what was done.

The economists asked each sector of the economy (such as manufacturing) what was its sustainable growth rate. Typically, the domestically oriented sectors said they could grow at virtually any rate if the domestic economy did. Some asked for subsidies – they always do. Some drew attention to government policies which were practically inhibiting their growth. (For instance, today the biotechnology sector might say that the regulatory framework had high compliance costs compared with key overseas competitors).

The export sector responses were more restrained. Some might said their sustainable growth depends upon the growth of world markets. (If one is exporting to saturated markets in Australia, then the exports are likely to grow at about 4 percent p.a. at most.) Others – most notably farming, fisheries, forestry – mention the practical biological limitations on their supply-side. Some sectors cite supply restraints from other sectors – energy supply may prove to be a bit of a problem, while the tourist sector worries about the availability of hotels and the capacity of airports.

And of course there may be specific labour shortages – not all skill deficits can be quickly resolved – in addition to a total labour constraint. Similarly there may not be sufficient investment to meet all the requirements. (Can we build the power stations, hotels and airport extensions in time?)

The economists then took all these various sectoral projections and used a quantitative model to assess to what extent they were consistent with each other and an economy as a whole. (Would there be enough labour, enough investment, enough savings? Would the assumed prices ensure that sectors would be profitable?) After some iterations – going back to sectors where they seemed over-optimistic – the study ended up with an overall economic growth rate.

I do not place great emphasis on the precise quantitative growth rate of the projections. If targets worked, the Soviet Union would have been an economic success. But the exercise does assist thinking systematically about economic growth, rather than depending on fantasy.

The 1991 study concluded that it would take almost twenty years to return to the top half of the OECD (The 1991 slogan was ‘10 in 2010′). The stretch growth rate was about 4 percent p.a. In the 1990s the New Zealand economy grew about as fast as the OECD (3 percent p.a.) so there was no significant movement up the OECD relativities. Perhaps the growth targets were over-optimistic, perhaps the government’s policies inhibited their attainment.

Meanwhile, the capacity to carry out such national-sectoral projections was run down. Thinking systematically about the growth of the economy was not popular in the dominant economic ideology of those times.

I do not know what the conclusions of a National-Sectoral projection exercise would come to today. But we are unlikely to be able to turn the ship around much faster than in 1991. Certainly the sorts of demands being made by the strident but uninformed commentators look quite unrealistic. They need to remember that trying to sail a boat – or an economy – too fast, can turn a boom into a bust.