Keywords: Growth & Innovation;
As far as I know the only government reference to getting back into the top half of the OECD on a GDP per capita basis is in the Growing and Innovative Economy document. The government quickly dropped the target – I believe on Treasury advice.
The target seems to have come from the Auckland business community in about 2000, and was taken up by Jenny Shipley in opposition as a stick to beat the government. There does not seem to have been any systematic analysis of the implications of the target. Had there been it would have soon become evident that it was ‘aspirational’ rather than realistic.
To get back to the OECD average we need to add about 26 percent to GDP per capita more than the OECD average growth rate, over some period. Let’s say ten years so we would have to grow at about 2.4 percent a year faster. Our actual GDP per capita growth rate over the last ten years has been about 1.7 percent p.a. So what we are talking about is boosting the rate from 1.7 percent p.a. to 4.1 percent p.a, that is more than doubling it.
In practical terms this means that, say, any farm or business has to more than double its planned productivity growth. That is quite a challenge. One would hope the workplace reforms being pursued by Business NZ and the NZCTU are doing together would boost productivity growth but I doubt that they, in their wildest dreams, imagine that they can more than double it across the whole economy.
This is arithmetic. Economists like to look below the numbers to what is actually going on. Ideally, we would like to explain the gap, rather than just measure it. In recent years there have been a number of attempts and we have identified the following sources:
1. We appear to have less capital per worker than Australia;
2. We appear to have a slightly inferior industry mix (that is we have more a balance towards low productivity industries);
3. The international measurement regime discriminates against economies whose exports suffers from trade barriers like our agriculture (so a successful Doha Round outcome will lift our measured GDP per capita without us doing anything – there are gains from our doing things as well).
As far as we can calculate, these three explanations do not explain all the gap. Perhaps they explain less than half. So we have to fall back on things we cannot measure such as workplace productivity, labour force skills and technology/innovation. Of course we should do something about them, but we do not have much feel about how big a difference they my make.
Another way of thinking about the problem is to ask when the New Zealand was last in the top half of the OECD (on this measure). The answer is 1985, just before the reforms were implemented. It is not widely mentioned but the consequences of the reforms were the longest measured recession (falling per capita GDP) experienced by the New Zealand economy – some six years. (It is possible there were longer recessions before 1940 but our measures are not precise enough to capture them. There were deeper ones of course, notably in the early 1930s.)
Let me avoid the obvious political conclusion, but make the following technical one. If it took 15 years (from 1985 to 2000) to get well below the OECD it seems likely it will take at least 15 years to get back. Much more actually, because as an important paper by David Mayes, my successor at the NZIER, pointed out, it is easier to destroy than rebuild. (The paper is called Changes, published by the NZIER in 1986, but is not on the web.)
I imagine this was the sort of technical advice the Treasury and the MED gave, but I suspect the politicians abandoned the target for a quite different reason. It is politically unwise to set a target over which they have so little influence but can be held to account by opposition rhetoric.
As well as the problems with the arithmetic, and the lack of measurable knowledge, and the embarrassing failure of the reforms, there is another reason why economists are uneasy about such targets. It is nicely illustrated by the last time one was seriously pursued. (I have a list of less serious pursuits if anyone is interested.)
Coming out of the 1968 National Development Conference there was a planning exercise aimed at raising the growth rate of the economy. It happens that I think they misunderstood what was happening to the economy, but that need not detain us here. What was important was that, insofar the government took the policy recommendations seriously, they probably damaged the economy by stretching it faster than was feasible in the long run. (We all know of promising young athletes who have had their career ruined by trying too hard.)
Leaving aside the political downside, that is the danger of the GDP target approach: that some business will take the targets too seriously and bankrupt themselves (and demand government assistance because it was not their fault).
That does not mean we should not have targets, but they need to be at a lower level and be realistic in the sense that the government can do something effective to attain them. So I support a nationwide broadband roll-out within ten years. I’d also like to see waymarks in the interim.
And I would support other similar targets. I’ve suggested we should have a four lane roading network between the seven main urban centres within twenty years. (There are some supplementary targets with it, including the standard of the railway network.) I observe the government is beginning to set itself targets for global warming emissions, electric cars, and so on. Good. Let’s make sure they are feasible, and hold (subsequent) governments to account.
But let’s not set targets that we have not the foggiest idea of how they may be attained.
Often we are going about it the right way. Its called the ‘bottleneck’ approach to government policy. Identify a bottleneck and see what you can do about relieving it. We have a very honourable record – a list of areas where we have identified as crucial and either given the government a hurry on, or done something myself. For that approach targets do have a role.
Sorry if this has gone on too long. These are things I have been thinking about for many years.
Footnote.
I cant resist dealing with another arithmetic target proposed without analysis. There is the claim that we must catch up with Australia.
Now, it is quite correct that the gap is a threat to New Zealand, in that New Zealanders may migrate to Australia for higher wages. But when did the gap begin to open out? Which year?
As it happens it began in 1966. (Politicians who are only thirty years behind events strike me as the norm for NZ.)
More important, why?
My conjecture – supported by the evidence – is that when New Zealand was hit by a collapse in the price of coarse wool in 1966, Australia was protected by being into fine wools. Moreover, and probably even more important, the Australian mining boom started in the late 1960s. This has lifted the Australian economy, while we have had no such lift.
The policy implications of this are not obvious. Better to ignore the analysis and get on with the rhetoric. J