Listener: 4 June, 2004.
Keywords: Growth & Innovation;
Earlier this year, the Ministry of Economic Development and the Treasury jointly published Economic Development Indicators 2005, with the intention to provide a basis for a public conversation about economic performance. It is part of the process by which the government is monitoring its performance closely, and reporting its findings to the public.
The report identifies six areas that contribute to economic growth. In two – enterprise and economic foundations (including regulation) – it concludes that New Zealand performs above the OECD average. In three – investment, international connections, and skills and talents – it thinks we are in the middle. In only one, innovation, does the assessment consider that we are low in the OECD. And yet New Zealand per capita GDP is below the OECD average. One might have thought that, given the overall excellence of these contributing areas, the economy should be doing better. Admittedly, there is a widespread view that the economy is now growing faster than the OECD average, but only slightly faster.
That we are doing well on the conditions for economic growth and poorly on the outcomes suggests there is something wrong with the implicit theory. One possibility is that there are measurement difficulties. Certainly, per capita GDP is subject to measurement error, while world protection against our agricultural, and other resource-based, exports biases the New Zealand production figure down.
A second possibility is that some important area has been omitted. The report does not discuss taxation, although it does discuss the closely related notion of the size of the government sector. The evidence that high levels of tax damage economic growth is spotty and unconvincing. In any case, properly measured, it is not evident that our tax levels are above average. Given the simplicity of our tax system, we must be one of the better taxed OECD countries. Perhaps the next report will address this area more directly.
The third possible explanation as to why we have good conditions for economic performance but poor outcomes is that we have the wrong theory. The compilers of the report would argue that they are using the standard theory of economic growth used overseas. Can we do better? I have already mentioned that the approach is not rigorous enough about the quality of the data.
We need to look at the performance of individual sectors, rather than the entire economy as in the current approach. Productivity (output per worker) may be about a sixth (16 percent) below the OECD average.
Which sectors are below average in performance? Some – such as farming and farm processing – we expect to be above the OECD productivity average. (We know the government sector is average, but this is an artefact of the measurement pro-cedure, because it assumes all public sectors are equally efficient for the resources provided to them.) Some sectors must be below the OECD average – well below, apparently. Which? International comparisons at the sectoral level are difficult, but unless we can answer this question, we cannot progress our understanding of what is happening or what to do about it.
We also need to pay more attention to the legacy of the past. In 1984, New Zealand per capita GDP was at about the OECD average. In the following decade, we grew markedly slower: for seven years the economy stagnated, the longest such period on record. We never discuss this, for too many people associated with the stagnation remain publicly active. But whatever happened then, it may be very hard to catch up any deficit.
Suppose there was a magic Recipe X, which enabled New Zealand to grow faster than the rest of the OECD. Recipe X would work for other countries, too. Soon all of them would also adopt it, and grow faster, with the result that the OECD average would rise, and we would all be growing at the average rate again.
There are always quacks promising Recipe X, but of course they never deliver what they promise. We don’t need their “reforms”, we need steadily improved and implemented policies. Unsurprisingly then, the report raises more questions than it answers, but this need not be a bad thing if it generates a thoughtful public conversation.