Cullen confident of 4pc annual growth

By BRIAN FALLOW

Lifting New Zealand's sustainable annual growth rate to 4 per cent is a realistic target, Finance Minister Michael Cullen said yesterday.

"I would hope to get there within five years."

But to achieve the target of getting back into the top half of the OECD - the rich nations club - in terms of incomes would require achieving an average growth rate of 4 per cent for about 20 years, depending on how well other countries do.

It would be a growth performance about half as good again as New Zealand has managed since the period of radical reforms ended in the early 1990s.

In particular it would require a serious improvement in productivity, the efficiency with which labour and capital are used.

New Zealand's record in this respect is not impressive. Productivity is a slippery thing to measure, but work done for the Treasury by Erwin Diewert and Dennis Lawrence found that, by their preferred measure, productivity in New Zealand in 1998 was only 20 per cent higher than it had been in 1972, an annual increase of only 0.8 per cent a year.

The result was equally modest growth in real incomes and a widening gap between living standards in New Zealand and Australia and other countries with which we like to compare ourselves.

After stalling completely during the reform period, 1984 to 1992, productivity growth rose to average 1.5 per cent between 1993 and 1998.

To achieve the target economic growth rate the Government is talking about now would require another steep increase in productivity growth, and not just for a few years but sustained for two decades.

In recent years farmers have achieved the sort of productivity gains required, but few others have.

Work by Treasury economists suggests that, apart from the primary sector, firms struggle to achieve the scale or the specialisation required for serious productivity gains, because they are hampered by the fact that the local market is too small and because big markets are too far away.

The innovation strategy's focus on information and communications technology is about boosting productivity in enterprises generally. The experience of the United States in the 1990s suggests that there are real gains to be had there, but also that there is a risk of hype and over-investment too.

But it is not immediately apparent how the Government's "strategic focus" will deliver gains beyond what would have occurred anyway.

Any practical initiatives would have to be done on the cheap.

The dismal reality is that the present trend growth rate will give the Government only about $1 billion a year after inflation for initiatives in any area, including social spending and tax relief.

Read the full reports:

Government of New Zealand

Growing an innovative New Zealand

Part 2

Herald features

Catching the knowledge wave

Global Kiwis

Proud to be a Kiwi

Our turn

The jobs challenge