NZ needs to lift its game to catch up

By BRIAN FALLOW

If New Zealand is to catch up with its former peers in the upper half of the OECD league table it will have to lengthen its stride.

In recent years what economists call the potential growth rate, that is the rate of economic growth that is sustainable without major imbalances like inflation emerging, has been a comparatively shuffling 2.5 per cent or so.

To return to the top half of the OECD, even as a 20-year goal, would require lifting it to around 4 per cent per annum and keeping it there.

That would require a productivity revolution.

Right now the potential growth rate has expanded because of a turnaround in net migration. The brain drain which was running at around a net 10,000 people a year has been replaced by enough of a net inflow to boost population growth from 0.5 to 1.2 per cent a year.

But migration flows are a cyclical phenomenon. To have continual net immigration on a scale to lift the potential growth rate in a significant and sustained way would require not only much more liberal immigration policy but probably lower personal tax rates.

While it lasts, however, it lifts the "speed limit" in Reserve Bank Governor Don Brash's monetary policy calculations, which are all about achieving some sort of balance between growth in demand on the one hand and growth in the economy's ability to satisfy that demand on the other.

Increasing the work force can only get us part of the way - perhaps a third - towards a 4 per cent potential growth rate. The tough part would be a sustained improvement in productivity growth.

Farmers have achieved it. But it is a wicked protectionist world which denies us the full fruits of that comparative advantage. It follows that pursuing trade liberalisation, doggedly and on any front that presents itself, is a no-brainer.

Other sectors of the economy face some structural impediments to matching the farmers' achievement.

Because the domestic market is small and larger ones are far away it is difficult for firms to capture the efficiency gains that come from economies of scale.

The gains from specialisation are also harder to come by, in the absence of geographical clusters of related upstream and downstream firms.

The internet, telecommunications and air freight all go some way towards overcoming the tyranny of distance, but forging business relationships, as opposed to maintaining them, typically requires face-to-face dealings. In that context if the Government really wanted to facilitate export growth it could do worse than subsidise business travellers on the national airline's longer-haul international flights.

Where should we look then for the sustained productivity gains that 4 per cent trend growth would require?

No single place.

It requires managers, and workers, who are eternally alert to all the small inefficiencies in existing practices, and who have the skills and incentives to address them.

It requires micro-economic policies which encourage investment both by New Zealanders and by foreign investors.

Perhaps above all it requires more diversified and graduated capital markets, capable of matching the changing levels of risk which enterprises represent as they develop.

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