Section2 - A comprehensive economic growth strategy
The priorities you have outlined form the basis for an economic strategy, with potential for further development over the electoral term. In our view, there are some additional elements that would be beneficial to include in constructing a comprehensive strategy - and we would welcome the opportunity to discuss these ideas.
To provide a framework for thinking about a broad growth agenda, we have found it useful to focus on raising productivity as the primary objective. New Zealand's productivity performance has been low for some time, and we are not yet closing the gap on other OECD countries. This leads us to the view that lifting the rate of productivity growth is arguably New Zealand's biggest economic challenge over the medium term. We would be happy to provide you with an analysis of New Zealand's productivity performance on request.
Drivers of productivity
The ‘medium-term economic challenges' document provided alongside this document sets out some thoughts on priorities that you may wish to further develop over the parliamentary term. As an organising framework for how you may wish to develop your agenda, our review of the international literature points to five inter-related drivers of productivity (innovation, enterprise, investment, skills, and natural resources) that appear to be necessary foundations for strong productivity performance. We have found the five drivers useful for identifying the priorities discussed in the medium-term document.
From a firm's perspective, weakness in the policy framework around any one of these areas can significantly impede productivity growth:
| Innovation | Innovation is the key driver of multi-factor productivity (a proxy for knowledge and technology). Firms must be able to access, adopt and adapt new ideas that innovators generate, whether domestically or internationally. New ideas at the firm level drive investment. New Zealand has a strong public sector science system but a relatively low level of private sector R&D. Our low level of commercialisation of innovation points to weak linkages between firms and research organisations. |
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| Enterprise | Firms and individuals are the driving force in the economy, identifying and taking advantage of market opportunities. Entrepreneurial activity is driven by the incentives at work in the general business environment - primarily through the tax, regulatory and competition frameworks. While New Zealand scores relatively well in these areas internationally by some crude measures, there remains significant scope to sharpen the incentives in each of them. |
| Investment | Investment directly impacts on how much a firm can produce and on the productivity of labour by increasing the amount of capital and technology available to each worker. Currently New Zealand has a relatively low capital stock per worker and a relatively high cost of capital. From a firm perspective, investment also includes the public infrastructure which supports economic activity. |
| Skills | Higher skills increase a firm's ability to adopt new technologies and confidently invest in capital in the expectation of returns. In this sense skills are an essential complement to innovation and capital investment. To lift productivity, we will need to increase the level and utilisation of skills in the workforce, both at the lower and upper ends. While NZ compares well with other countries on skill development, there are pockets of below-average achievement. Areas of particular concern include our "tail" of low achievement, our relatively low participation in education of 15-20 year olds, and our relatively low growth in completions at degree and post-graduate degree levels. |
| Natural resources | New Zealand's economy with its agriculture base is strongly dependent on its natural resources - it is critical that they are used to bring the greatest benefit to society within the limits of sustainability. Pressures are now beginning to impact on several fronts, notably climate change and management of freshwater. There are crucial trade-offs which need to be addressed in ways that minimise disruption to growth. |
Cutting across all five drivers is the performance of the public sector. The broad public sector, and the quality of those institutions, impacts directly on national productivity because of its large contribution to the overall economy. It also impacts directly on the wellbeing of New Zealanders through the quality and value of services it provides, notably in education, health and justice.
In the New Zealand context, all five of the above drivers need to be seen through an international connectedness lens, ie, the international dimensions of skills, innovation and investment. For New Zealand to close its productivity gap with Australia and other OECD countries, it needs to perform well in each of these areas in international terms.
