Bank: NZ on track for new prosperity

By BRIAN FALLOW

WELLINGTON - Circumstances are finally offering New Zealand a reasonable chance of a prolonged period of prosperity, says HSBC's chief economist in Australia, John Edwards.

Over the 1990s New Zealand has failed to derive the benefits it should have from economic reform, or to match Australia's long expansion, Mr Edwards says.

He cites two main differences between the two countries: monetary policy has been tighter and less well-timed on this side of the Tasman; and the Employment Contracts Act encouraged higher employment growth at the expense of low productivity growth.

But New Zealand is now well-placed to make up lost ground. The currency is competitive. Interest rates will rise, but not to the point where growth is choked off.

"More importantly New Zealand is likely to see faster gains in productivity and living standards than it has enjoyed during the 90s."

Since the Employment Contracts Act in 1991 the unemployment rate has been lower in New Zealand than Australia, significantly so in the boom years of the mid-1990s.

But growth in productivity (output per hour worked) has been dismally low compared with Australia's.

"Output growth was relatively slow because of monetary policy, while employment growth was relatively high because of cheaper labour. The inevitable result was minimal productivity growth," Mr Edwards said.

"You are starting the new decade with exactly the opposite proposition, which is what happened to Australia in 1991.

"With the repeal of the Employment Contracts Act, any prolonged period of output growth - which I think you will have - will in large part consist of productivity growth rather than just employment growth."

Mr Edwards dismisses the view that New Zealand's poor productivity performance can be laid at the door of structural changes, especially a switch from manufacturing to service sector jobs.

"This extraordinary period of productivity growth in Australia coincided with a decline in the relative size of manufacturing and an increase in the relative size of services.

"The reason is the techonoloigies that are enriching porductivity, such as cheap computers and telecommunciations, are ones which are well adapted to enhancing service sector functions."

Workplace reorganisation was accelerated by producivity bargaining, linking wage increases to producivity gains, he said.

On monetary policy Mr Edwards expects incoming Treasurer Michael Cullen's over-riding goal is to nudge the Reserve Bank more in the direction of the goals and methods of its Australian counterpart, "an objective which may be difficult to achieve without more institutional change than he is presently prepared to contemplate".