Adapting policy approaches to New Zealand circumstances
The most remote OECD economy in the world
The five drivers of productivity are to a greater or lesser extent applicable to all countries, and it is important to consider how New Zealand’s specific characteristics alter the emphasis among the drivers, compared with other economies. The largest factors that differentiate New Zealand from other developed nations are its geographical location and size. With four million people, the population of New Zealand is ten times smaller than the average OECD country, and with 10,000 kilometres to the USA or China and even 2,250 kilometres to Australia, New Zealand is a considerable distance from its main trading partners. While the cost of transporting goods, services and ideas has reduced dramatically and allowed for greater levels of trade and financial flows, evidence suggests that distance and size still play an important part in determining New Zealand’s prosperity.
Economic geography and international connections are important for New Zealand’s productivity performance
The costs of transport and communication have fallen
In 1872 a 20 word telegram from Australia to England cost the considerable sum of £9. Even in 1934 the same telegram would cost ten shillings, still a substantial sum of money.[8] Now, information can be communicated at nearly zero cost through the internet. At the same time that these technologies have connected the global economy, many countries have opened their borders to greater levels of international trade and flows of foreign investment. Since 1988, average applied tariff rates have more than halved in the United States and fallen by over 70 per cent in the EU.[9] New Zealand now trades with over 200 countries and territories.[10]
But distance and size still matter
This has led some to claim that the geographical distance from markets is no longer an important determinant of a country’s economic performance and living standards. However, research suggests that countries that are smaller and further away from international markets are likely to be poorer than countries that have larger domestic markets and are closer to international markets. New Zealand’s relatively small domestic market limits the extent to which firms can exploit internal economies of scale, benefit from product market competition and gain from specialisation. Further, as transport costs fall and globalisation allows for the clustering of activities, it may be that less economic activity is located in more peripheral locations such as New Zealand. New Zealand’s size and global position may explain as much as 75 per cent of the per capita income gap with the average OECD economy.[11]
New Zealand’s connections with the rest of the world are an important source of people, resources and ideas
Size and distance can be overcome. International connections, flows of goods and services, resources, people, and ideas can help bridge the distance, providing access to markets and new sources of knowledge that firms need in order to reach an efficient scale or access the most recent technologies. International connections enable greater specialisation and allow entrepreneurs to find global markets for their products. Greater contact with international firms and sources of labour provide a conduit for the flow of information and new ideas. An open economy provides the constant discipline and challenge of fresh ideas, perspectives and products.
Policy settings can have a direct impact on these flows…
The way in which domestic policy settings can enhance these flows is critical for productivity performance and involves the closer consideration of a wide range of important policy issues. There are policy settings that exert control over international flows of resources and have a direct impact on the level of international connections. Immigration policy determines which people are permitted to settle for extended periods in New Zealand to work and study. Foreign investment rules impose conditions on certain classes of foreign direct investment (FDI) by overseas persons.
Other less direct policy settings can impact on the ease of accessing international resource flows. For example, regulatory harmonisation and cooperation with other countries help reduce the cost of transacting with and from other jurisdictions and increase access to foreign markets. The success of education policy settings will influence the stock of human capital and the attractiveness of New Zealand workers in overseas and regional labour markets. Competition policy settings can affect infrastructure underlying the flows of goods, services and people.
…and a range of policies impact on New Zealand’s attractiveness as a location to live and work
Finally, some policies impact on the attractiveness of New Zealand as a place for individuals and firms to locate. For example, environmental and social policies and conditions influence the attractiveness of New Zealand as a place to live, and tax policy influences the monetary returns from working and doing business in New Zealand.
Acknowledging that economic geography plays an important role in determining our productivity performance is important when considering policy settings under each of the five drivers of productivity. New Zealand’s optimal policy settings are not likely to be the same as those of other countries that sit on the edge of large international markets or that can provide a domestic market of hundreds of millions of people. Under each of the drivers of productivity, set out below, the promotion of greater international connections should be considered as a way to improve productivity performance.
