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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of New Zealand published on 16 April 2009.
The moment should be seized to confront the need to boost productivity
New Zealand is paradoxically at the forefront of the OECD in adopting policies in many areas that have been shown to lead to high per capita income, and yet it still ranks toward the bottom end of the OECD’s productivity league. This performance has many natural and hence unavoidable causes, such as the economy’s small size and geographical isolation. But the root of the problem is a structural deficiency in the capacity to produce tradable goods and services. Raising productivity growth therefore remains the greatest medium term challenge. The new government has recognised this issue and pledged to catch up with Australian living standards by 2025. This would imply raising average annual per capita income growth to 3.3% from only 2.1% over the past decade, which in turn would require a much higher rate of productivity growth, given that labour input is already at very impressive levels by OECD standards. The crisis should thus be seized as an opportunity to push forward the nation’s productivity agenda.
A large, imperfectly understood prosperity gap remains, due in part to geography and to policy deficiencies
Whereas New Zealand had a higher living standard than the average OECD country in the early 1970s, relatively low labour productivity growth since then has opened up a large income gap relative to the OECD average and an even greater one with leading countries such as the United States. The poor productivity performance is explained to some extent by New Zealand’s special geographic situation, which hinders the transfer of human, physical and technological capital from abroad, but also to sub optimal policies in a number of areas. The country appeared to be on the right policy track with its earlier market oriented reforms. But the policy focus on productivity and growth eroded during the years of economic buoyancy, while other countries advanced. Notably, a large amount of new regulation, at times poorly designed, coordinated and focused, was introduced. Such measures have increased the costs of doing business and sent bad signals to foreign investors. The incoming government has taken some steps to reverse this trend. First, it established a new ministerial portfolio of regulatory reform. Second, it is reviewing key regulations thought to have adverse effects on productivity. Third, it has set up a task force to develop the principles for future regulatory management.
Real GDP per person(1)
OECD(2) = 100, at constant 2000 Purchasing Power Parities and constant prices
1. GDP per capita has been calculated in USD at constant prices and constant PPPs.
2. 26 countries, Czech Republic, Hungary, Poland and Slovak Republic excluded.
Source: OECD National Accounts database.
Pursue greater international economic integration
Greater international economic integration can reduce the “effective distance” between New Zealand and its economic partners. To this end, the government should strive to create the region’s most attractive business environment. This requires structural policy changes in many areas, from lowering the costs of moving people, goods, capital and ideas between New Zealand and the rest of the world to ensuring domestic policy settings make it attractive to innovate, locate in or do business with New Zealand. Given that so much of New Zealand’s prosperity is due to its comparative advantage in commodity exports, it should facilitate maritime trade to the greatest possible extent with the goal of reducing inbound and outbound shipping costs to meet the standards set by the OECD’s most efficient members, whose costs are some 25% lower. Although the ports are corporatised, many have strong local authority shareholding, with mixed agendas. Ownership changes and consolidation around fewer port companies are likely to be integral to enhancing efficiency in this sector. As well, capital investments can be encouraged by creating a welcoming environment for foreign direct investment. To do so New Zealand should eliminate FDI screening requirements, or, at a minimum, shift the burden to the government to demonstrate harm to the economy before turning down an investment proposal. Since taxes on capital income are comparatively high, it should focus its tax reform agenda, as fiscal conditions permit, on cutting its corporate tax rate at least enough to match the OECD average. It should also shrink gaps between the company, personal, trust and portfolio investment entity rates to reduce investment distortions and shift the tax base away from income and towards consumption and immobile factors, including housing.
Improve public sector efficiency and remove infrastructure bottlenecks
There should be a focus on raising public sector efficiency by curbing growth in public expenditures and subjecting existing and new programmes to a rigorous cost benefit test that takes into account the economic costs of raising tax revenue. Raising public sector efficiency also means limiting government ownership and spending to core sectors and divesting assets in non core sectors such as electricity generation and transport. Infrastructure bottlenecks, particularly in roads, electricity, and telecommunications may have discouraged investment and constrained productivity growth. In recent years, however, plenty of resources have been committed to infrastructure projects, many of which are now in the works, though it will take some time for the economic benefits to be apparent. A secure and reliable electricity generation and delivery system is crucial to today’s developed economy. Incentives for private investments in electricity generation and transmission could be sharpened by removing soft price caps, encouraging the creation of financial markets for hedging risks, and providing a clear and stable regulatory framework that takes into account dynamic competition effects. The demand side response to market conditions could also be made more flexible through greater use of metering and time of day electricity charges. Besides expanding the infrastructure base to keep pace with the economy, it is also important to make good use of existing infrastructure. For instance, toll and congestion charges could help reduce road congestion and provide a market signal for the expansion of capacity.
Ensure environmental policies do not put the brakes on growth
New Zealand is to be commended for taking its Kyoto Protocol commitment seriously, including by being the first country to introduce an all gas, all sector emissions trading scheme. However, because of the importance of export oriented, emissions intensive industries, firms and citizens at large are unlikely to accept and continue to support environmental policies that are perceived to unfairly hurt their prosperity, unless similar efforts are made in other countries. To reduce the impact of pricing greenhouse gas emissions, the trading scheme gives temporary free allocations to the most affected industries. However, it still creates uncertainty because investment is long lived and the price of emissions when these free allocations expire is impossible to predict. The new government has announced a full review of climate change policy, which is expected to be followed by amendments to the emissions trading scheme and other relevant policies. To increase certainty for potential investors, the scheme could make greenhouse gas reduction targets explicitly contingent on other countries adopting similar policies and targets, or it could include a cap on the price of emission permits, as a safety valve. Care would have to be taken to avoid setting the cap too low, which could entail a significant budgetary risk. Also, once a carbon pricing system is fully in place, the cost of achieving a given emissions target can be minimised by eliminating emissions reduction programmes that are not justified by an externality other than climate change.
Change in greenhouse gas emissions from 1990 to 2006(1)
1. Figures exclude the emissions and removals from the land use, land use change and forestry (LULUCF) sector.
2. Includes sulfur hexafluoride, hydrofluorocarbons and perfluorocarbons.
Source: Ministry of Environment, New Zealand's Greenhouse Gas Inventory 1990 2006.
Improve processes around the Resource Management Act
The Resource Management Act (RMA) was an innovative piece of legislation whose basic principles – pulling together all planning/regulatory issues related to environmental authorisation for new projects while eliminating jurisdictional overlap – remain uncontested. However, its management and application need to evolve along with the problems New Zealand is facing in some areas, notably the scarcity of water and its deteriorating quality. First, the consenting process, which appears to be mainly driven by the courts, should be streamlined, and the scope for commercial interests to use objections under the Act as an anti competitive tool should be narrowed. The ability for competitors to disguise trade competition objections as environmental objections should be curtailed, and “security of costs” required before proceeding with appeals of regional council decisions. Limiting such appeals to points of law would also reduce the number of spurious objections. Second, the lack of mechanisms to determine water use or pollution rights among competing users gives rise to an inefficient allocation of this crucial resource. Because water management is under their authority, regional councils must take the lead in establishing local provisions for water trading and for measuring and consenting nutrient flows so that trading can be established. However, because such councils do not have all the knowledge and expertise required to set limits on such flows or to design markets, the national government should provide guidance and resources to regional councils as needed. A bill has been introduced in parliament to amend the Act to deal with a number of these issues.
How to obtain this publication
The complete edition of the Economic survey of New Zealand is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the New Zealand Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Alexandra Bibbee and Yvan Guillemette under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.