Climbing out of the third division

National is often portrayed as a party that cares only about business; a party that would be prepared to trade the environment for the economy, and which would look at social issues such as education, crime or healthcare solely through a financial lens.

The reality is that nothing could be further from the truth.

Being the finance spokesman teaches you pretty quickly that having quality, long-term approaches to issues in the environmental and social areas has a lot to do with how much money you have to spend. And how much money you have to spend depends on how well the economy is performing.

Labour, too, thinks that a strong economy flows through into more Government spending. But the traditional Labour approach is to treat the economy with great suspicion, and entirely as a cash cow - a mechanism for generating tax revenue with which to indulge ministers' spending projects. That's about as far as they think.

But having enough cash to foot the bill for taxpayer-funded expenditure is only one reason National thinks a strong economy matters. Here are three more.

The first is simple - that National wants people to be better off. Having more money in the hand is not all that matters in this regard, but it is an important part of the story.

Rather than being play money for Government ministers, we hold the view that more of the dividend from increased economic performance should go to individual New Zealanders and their families.

Now, I don't mean this in the sense of the greedy acquisition of material goods. Rather, we want people to have a decent enough wage packet to have choices in their lives and a sense of opportunity. We want people to do better for themselves and their families than just getting by, and we want people to have enough money to retire with a degree of comfort and security.

In the end, increasing people's incomes comes down to improving our economic performance: Indeed, it is the definition of improved economic performance.

The second reason I'm concerned about growing the economy is to improve the relative standing of New Zealand among the world's economies.

Relative differences matter. Skilled people will move to countries which can pay them more; businesses will locate where conditions are favourable to them; investors will put their money where it can get a good return.

National doesn't want all our best and brightest kids going off to the United States or, more likely, to Australia. On the contrary, we want New Zealand to be a place where good doctors want to practise, and where large companies want to be.

As Don Brash has pointed out many times, the average Australian worker now earns 33 per cent more in the hand than the average New Zealand worker, and this wage gap is growing.

The third reason for being concerned about our economic performance is a bit more nebulous, but no less important to us. I think we should be ambitious for New Zealand. We shouldn't settle for small-island mediocrity. We should have a vision and aspirations for this country.

I've previously worked in Ireland, so I have first-hand experience of being in a small country that grew from being one of the poorest economic performers in the OECD to one of the very best. It wasn't just that public services were better funded, or that people had more money in their pockets, or that young Irish people came back home to live. It was more than that. The whole mood and climate and enthusiasm of the country changed with increased economic fortunes.

There's no reason why we can't have some of that in New Zealand. After all, we already enjoy many of the characteristics which international experience suggests are conducive to a strong economy.

We have, for example, an independent central bank and a floating exchange rate. We are open to the international market. We have a judicial system, a bureaucracy, and a political system which are among the least corrupt in the world. Above all, New Zealanders are a resourceful, innovative and skilled bunch of people.

We need to build on this solid base. We have had a good record of growth in recent years but there is still a long way to go before we are a high-income country.

We are used to thinking of ourselves as a small country punching above its weight - in the first division of the world's economies, if you like. But if truth be told, we are not in the first division of developed countries. We aren't even in the second division. Within the OECD, our economy is a third-division economy, and our nearest rivals are countries like Spain, Greece, Portugal and the Czech Republic. If I can use a rugby sevens analogy, we are playing for the Bowl, not for the Cup.

This isn't because we are a lazy country. In fact, we have high rates of employment compared with other developed countries and we work long hours. The average person aged 15-64 years spends more time working each year than in any other OECD country except Iceland.

Where we fall down, though, is in the value of what we produce at work. This is what economists refer to as productivity. Productivity in New Zealand is low compared with most other OECD countries and is growing slower than in most other countries.

Improving our productivity is one of the biggest challenges facing the New Zealand economy. The good growth we have enjoyed in recent years has been driven largely by increased numbers of people joining the workforce, and people working longer hours. But that trend has come to an end, and our future growth must therefore be driven by improvements in our productivity.

Apart from our low productivity, there are some distinct features of New Zealand that set us apart from other countries, and which face us as challenges.

Perhaps most obviously, we are a small country and a long way from the world's major markets. A circle centred on London with a 2000km radius takes in most of Europe and even part of North Africa. The same circle centred on Wellington takes in Norfolk Island, a few hundred fishing boats and about four million seagulls.

Being a small country, international trade is particularly important to us. However, we import and export less as a percentage of GDP than many other small OECD countries like Ireland and the Scandinavian countries. New Zealand's share of exports has also been falling since the 1980s.

The bulk of New Zealand's exports come from the primary sector, which is not surprising given this sector's prominence in the economy. It is estimated that the primary sector in the widest sense constitutes 17 per cent of New Zealand's GDP, and in only a handful of other countries in the OECD is the size of the primary sector comparable.

We are also connected to the world in another way, in that we are reliant on foreign savers to fund much of the investment in New Zealand.

New Zealand households are not good savers. Taken as a whole, New Zealand households actually consume more than they earn each year, making them "dis-savers", with one of the lowest savings rates in the OECD. New Zealand households also tend to have their wealth tied up in housing, rather than in productive assets, and have among the lowest holdings of financial assets in the OECD.

The result of decades of relying on foreign savers is that we are in debt to foreigners to the tune of $135 billion, a level that amounts to around 90 per cent of our GDP. This level of foreign investment is the highest in the OECD. And of course this means that a significant proportion of the goods and services produced within New Zealand's borders then belongs to those foreign investors, in the form of interest on debt and profits on shares.

Because we don't enjoy the advantages of some other countries we cannot afford to have economic policies that are only average, or "good enough". We need first-rate policies, and we need constant reflection and self-examination. We need to be continually looking at our economy, our regulatory environment and the best role of the Government.

Otherwise we are doomed to repeat the failures of the past.

* John Key is National's finance spokesman. This is an abridged version of a speech he plans to give to the West Harbour Rotary Club today.