Brian Fallow: Torrent of punditry can't make economy flow much faster

We have entered the rainy season for advice and exhortation.

From the business lobby groups and such gatherings of the great and the good as the Investment Regatta and next week's Knowledge Wave leaders' forum, policymakers are being showered with calls to do this or undo that to achieve economic transformation and lift us from the relegation end of the OECD league table.

On Monday Roundtable chairman Rob McLeod called for a debate on whether Government policies will raise the trend rate of GDP growth from recent levels of around 3 per cent to the much higher levels it is targeting. He thinks not.

But his question begs a prior one: how much can policy do to lift the growth rate?

It may be that the policy levers within reach, so to speak, determine our economic fortunes less than the basic geographical and historical factors that we can do nothing about.

The most obvious such factors are that we are small and far away from deep and affluent markets.

This has implications for raising productivity growth rates, which is key to lifting New Zealand to the upper half of the OECD. Economies of scale are hard to achieve in a market of only four million.

Equally, the sort of efficiency gains that come from a fine degree of specialisation are also harder to achieve when the upstream and downstream firms with which you have to do business are thousands of kilometres away. Not impossible, but harder.

Because of the small domestic market, firms often face a difficult choice: either to settle for arrested growth or venture into exporting at a tender age.

It would seem more of them are having a go. Opening the new parliamentary year on Tuesday, Prime Minister Helen Clark said that Trade New Zealand helped more than 7000 new clients last year.

"In terms of results, Trade New Zealand's customers estimate that its assistance to them resulted in an additional $2.4 billion of foreign exchange earnings," she said.

But the fact that New Zealand's exports remain highly concentrated, with a few companies generating most export receipts, suggests the barriers remain formidable. (In 2001 just 151 firms accounted for 78 per cent of New Zealand's exports.)

Among the barriers, of course, is that it is a wicked protectionist world for the industries in which New Zealand has a comparative advantage, such as farming and forestry.

A forbidding array of tariffs, quotas, non-tariff barriers and trade-distorting subsidies still beset the sectors that earn New Zealand most of its living as a trading nation.

The World Trade Organisation's Doha Round may yield progress in these areas, but it will depend on how much vision and statesmanship are forthcoming from the big players.

We are often told New Zealand punches above its weight in this arena but it is a featherweight, nonetheless.

In this crucial area we are not the masters of our destiny.

We have even less ability to change the past.

One legacy of past economic underperformance is the income gap that has opened up between New Zealand and its erstwhile peers, leaving us with a chronic skills drain. The net population outflow over the past three years has averaged 29,000 a year.

Thirty years ago New Zealand and Australia were level pegging in per capita GDP. Now Australia's is one-third higher and about 400,000 Kiwis live there.

Robert Muldoon's quip that every time a New Zealander migrated to Australia the average IQ increased on both sides of the Tasman has a hollow ring these days. In a global labour market, emigrants are likely to be more skilled, better educated and more enterprising than the average of those they leave behind.

This is not a good starting position if the goal is to close the income gap with Australia, which would require outperforming it for decades on end.

Another legacy of the past is the country's level of external debt.

Decades of current account deficits, which have to be funded by running up debts or selling assets, have left us up to our collective chin in debt.

Net claims by foreigners on the New Zealand economy at the end of last September were just under $100 billion, or 80 per cent of GDP, almost certainly the highest in the OECD.

Financial markets feel better about this because it is almost all private sector debt. The Government has been running budget surpluses for a decade and its debt to GDP ratios, historic and projected, are a model of fiscal prudence.

They probably have to be. A double deficit would not be a good look. To slip back into the red, with operating deficits, mounting public debt and a deteriorating Crown balance sheet when the external accounts are so bad would run the risk of a hostile reaction from the markets. Or so the ratings agencies warn.

This limits the scope for fiscally costly initiatives, whether tax cuts or spending increases, to what can be funded out of organic growth in the revenue.

With the economy growing at a trend rate of around 3 per cent in real terms, and revenue at 33 per cent of GDP, the amount of new money a Government will have to play with each year on average and after inflation is 1 per cent of GDP or around $1.25 billion. Right now the transition to the Cullen super fund pre-empts about half of that.

Such then are the facts of life. New Zealand is small, remote and on the wrong side of viciously unfair international trade rules.

It is leaking people and so deep in debt to the rest of the world that it is hobbled fiscally.

None of that is an excuse for fatalism or inertia in economic policy.

But it means there are no quick and easy answers.