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Sustaining Growth: Briefing to the Incoming Government 2005

Chapter 2: Raising labour productivity and growth

Countries that perform well in terms of economic growth tend to be those that do well at increasing both employment and productivity. While there is still some scope to increase participation and employment rates for some groups, we see the main policy challenge now as being to enhance productivity.

No single policy leads to productivity growth. Rather, it is a matter of getting a lot of interconnecting things right and providing opportunities and incentives for firms. Many of these policies exist. It is important that these be maintained and strengthened over time.

There are some significant policy areas where a greater focus is needed in order to improve productivity. We see these more specific policy areas as being related to external linkages, the business environment and skill formation.

External linkages

Access to global markets is essential for New Zealand’s economic growth. Links with other countries are critical to flows of exports and imports, financial and physical capital and workers. They also allow access to growth-enhancing ideas, technology and skills. This is particularly important given that New Zealand’s supplies of finance, labour, technology and innovation are only a very small fraction of world stocks. Access to global markets enables New Zealand and international resources to be combined, helping to sustain the competitiveness of New Zealand business in global markets.

In addition to the relocation of economic resources, flows of capital and people can serve to build stronger networks between New Zealand and the source and destination countries for migration and investment. These networks vary greatly in character – from corporate ownership and reporting structures and the use of parent-company networks to access contacts in other countries through to soft linkages with family and friends.

Current external policy settings help New Zealand businesses and workers access the resources and information they need to compete effectively in export markets. Tariffs are relatively low and falling, inward investment policy is fairly open, and immigration policy is focused on business and skilled migrants.

Ministers can have direct involvement with building international connections, and through determining the domestic policy settings that support international relationships. Given the importance of external linkages for New Zealand’s future, there are five areas we think need continued focus over the term of the new government.

  • Some externally focused policies can be improved further. The government should consider how externally focused policies could be changed to better support flows of people, goods and services, and investment. Specific policies Ministers might want to consider include: moving to eliminate all remaining tariffs over the shortest practicable time, given any requirements to provide a transition path for people and businesses, and further liberalising inward investment policy, particularly for business investment.
  • The World Trade Organisation’s (WTO) Doha Round remains the top trade priority. The WTO is the only available mechanism for the negotiated removal or reduction of the significant distortions that depress world prices for many agricultural products. Agriculture accounts for over 50% of our total merchandise export income.
  • We should focus on the Asia-Pacific region. The countries of the Asia-Pacific region (including the Pacific Americas) have become increasingly important economic partners for New Zealand. We support continued participation in APEC and the ongoing efforts to secure comprehensive free trade agreements (FTAs) in the region. We consider that the main aim of negotiations should continue to be securing free trade in goods and services to the fullest extent possible.
  • We should also focus on Australia. The development of a single economic market (SEM) between New Zealand and Australia, our most important economic partner, is an important element of New Zealand’s efforts to develop our external linkages. Maintaining momentum on the SEM will require an ongoing commitment from both Australia and New Zealand to take account of implications for trans-Tasman markets as part of policy development processes. Completing current initiatives is a crucial factor in maintaining momentum and identifying new actions will help keep the agenda fresh and ambitious.
  • Sound domestic policies are essential. A competitive domestic policy environment is particularly important for New Zealand given its small market size and distance from major markets. The stronger the domestic policy environment, the better we are able to leverage off international opportunities.

Recommendations

  • Remove remaining tariffs over the shortest practicable time and liberalise the inward investment regime over time
  • Continue to pursue ambitious outcomes from the World Trade Organisation Doha Round, and from bilateral free trade agreement negotiations
  • Complete the current single economic market-related initiatives and routinely incorporate consideration of trans-Tasman market implications in policy development processes
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