14 November 2005

The New Zealand Institute Says We Need to Take the New Zealand Economy to the World

A report released today identifies the importance of taking the New Zealand economy to the world, through exporting and international investment by New Zealand firms, in order to secure New Zealand’s economic future.

This is the first report in a series that will be released by the New Zealand Institute over the next several months on ‘Creating a global New Zealand economy’. This project is focused on identifying concrete actions to improve the level of New Zealand’s international economic activity.

The New Zealand Institute report released today, called ‘No country is an island: Moving the New Zealand economy forward by taking it to the world’, describes New Zealand’s economic performance over the past 15 years and evaluates the prospects of the New Zealand economy for the next 15 years through to 2020.

New Zealand has enjoyed strong economic growth over the past 15 years. New Zealand’s average economic growth rate of 3.2% since 1990 compares well to most other OECD countries, and also represents a substantial step-up in economic growth relative to previous decades.

However, this report finds that New Zealand’s growth has been driven to a large extent by growth in the labour force with labour productivity growth playing a much less significant role. This matters because labour force growth will slow considerably over the next 15 years, which makes raising labour productivity a priority. New Zealand’s current course and speed will not deliver the type of economic outcomes that we want.

Dr David Skilling, chief executive of the New Zealand Institute, notes that “simply for New Zealand to sustain its growth rates will require a substantial and sustained lift in labour productivity. And to converge to the income levels of the top half of the OECD will require an even larger increase in labour productivity growth.”

This is a significant challenge. But the good news is that this type of productivity growth has been generated by other small developed countries, such as Finland and Ireland, over the past decade or so.

The question considered in this report is how best to secure such increased growth, particularly given that many of New Zealand’s economic policy settings already compare well to most other developed countries.

The one area in which New Zealand is obviously different from other developed countries is in terms of its combination of small size and remoteness from other markets. For a variety of reasons, the relatively small size of the available market constrains New Zealand’s productivity growth.

This means that international expansion is particularly important for New Zealand’s future economic performance. Dr Skilling observes that “for a small economy like New Zealand, the extent to which we engage with the rest of the world is of critical importance to New Zealand’s future economic prosperity.”

This report describes the strong evidence that shows that international economic activity is directly linked to productivity growth for firms and for countries. It is hard to find a case of strong and sustained growth by a small country that did not involve a substantial increase in exporting and international investment.

In light of these factors, this report identifies the importance of taking the New Zealand economy global – through much greater levels of exporting and international investment – to generate improved economic outcomes for New Zealand.

Dr Skilling argues that “New Zealand will not be able to achieve substantially increased rates of productivity growth without significantly increased levels of exporting and international investment by New Zealand firms.”

The focus of the rest of the New Zealand Institute’s research project is to identify the actions that will help to create a global New Zealand economy. The next report, to be released on December 7, will describe New Zealand’s performance in terms of the level of exporting and international investment.

Subsequent reports, to be released from early next year, will describe some of the actions that business, government, and others need to take to improve New Zealand’s international outcomes. As part of this process, we are talking with a wide range of people in both business and government about the best way forward.

ENDS

Note to editors:
The New Zealand Institute also launches its revamped website today. Additional material available on our website at www.nzinstitute.org includes copies of New Zealand Institute reports, an interview on the rise of China, and a presentation on the New Zealand economy.

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