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Briefing to the Incoming Minister of Finance: Increasing Economic Growth and Resilience [2011]

7 Policy Priorities: A More Internationally-Competitive Business Environment

New Zealand's business environment has become less competitive

New Zealand's business environment ranks relatively well internationally on a variety of measures. However, our advantage has eroded over the last decade as other countries have aggressively implemented business-friendly reforms. The relative increase in New Zealand's unit labour costs, especially since 2000, shows that wages have been advancing ahead of labour productivity (figure 21) and have contributed to a loss in our international competitiveness. This loss partly reflects macro-economic and state sector performance, but it also highlights the need for wider reforms to increase incentives to invest and conduct business in New Zealand, raise the productivity performance of firms operating here, minimise the cost pressures they face, and maintain their ability to adjust to changing circumstances.

Figure 21: Economy-wide labour productivity & real wages; 1990Q1-2011Q1
Figure 21: Economy-wide labour productivity & real wages; 1990Q1-2011Q1.
Source: Statistics New Zealand, OECD, the Treasury

Erratum: A real compensation of employees data series was mistakenly included as the “real wage” series in figure 21. The figure therefore does not illustrate the increase in New Zealand’s unit labour costs.

A Policies to Improve International Connections

Policies to promote international connections are important to overcome the disadvantages of size and remoteness

The acceleration of globalisation adds urgency to this agenda and highlights the need to take a stronger international lens to our policy settings, so they are best aligned to facilitate the flows of trade, people, capital and ideas. These resource flows are vital for New Zealand as a small and distant economy for achieving economies of scale, stimulating competition, and for accessing international knowledge, technology and resources. There are three main policy dimensions to improving New Zealand's international connections: building external relationships, reducing “at-the-border” barriers in New Zealand and abroad, and improving domestic “behind-the-border” policy settings.

1. Building external relationships: New Zealand's focus should be on our three largest trading partners - Australia, China and the United States - as well as India, given its significant future growth potential.

2. Reducing “at-the-border” barriers in New Zealand and overseas: New Zealand exporters continue to face high formal and non-formal barriers in most international markets. Progress is continuing to be made through trade agreement negotiations, which need to remain a key focus. On the other hand, New Zealand's formal at-the-border restrictions are generally low. The exception is our investment screening regime, which has become both more restrictive and less transparent in recent years, while most other countries' regimes have become less restrictive (figure 22).

Figure 22: FDI regulatory restrictiveness; 2006 & 2010
Figure 22: FDI regulatory restrictiveness; 2006 & 2010.
Source: OECD

3. Domestic “behind-the-border” policy settings: domestic policy settings are critical for international connections because they affect:

  • the attractiveness of New Zealand for internationally-mobile people, business and investment, and
  • the international competitiveness of firms located in New Zealand and their ability to interact with the world.

Reforms to domestic policy settings therefore need to take account of both international and domestic contexts. Although OECD and other international organisations assess many of New Zealand’s policy regimes to be at or close to best practice, our geographic disadvantages and relative vulnerability to global shifts in investor sentiment mean that our domestic policies need to be ahead of other countries’ with whom we compete.

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