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Flows of people, capital, trade and ideas are crucial to productivity and economic growth…

Raising productivity is the core economic challenge for New Zealand over the medium term. Small, high-productivity economies rely heavily on international connections – the flows of people, capital, trade and ideas between countries around the world.

In the absence of large markets in close proximity, international connections allow New Zealand to access resources that facilitate high productivity, to specialise in areas of comparative advantage and benefit from economies of scale, to access international knowledge and adapt it to domestic circumstances, and to stimulate competition to spur innovation and move resources to areas of comparative advantage.

…but New Zealand is only moderately well connected with the world economy.

New Zealand is currently a relatively open economy but only moderately well connected with the world economy. Flows of people and inward investment are relatively high. In contrast, flows of imports, exports, and outward direct investment are relatively low, compared with other small advanced economies. Distance from the main producers of new knowledge and low levels of business R&D suggest firms may have difficulty accessing technological developments.

Encouraging international connections requires more than just reducing tariffs…

Many of the means to promote international connections are well known, and New Zealand has in the past considerably reduced barriers at the border to trade and investment. But one of the messages of this paper is that being open is necessary, but not sufficient, to gain the benefits from international connections. More generally, three main aspects in this paper may differ from more traditional discussions:

  • The impact of domestic policy settings on international connections is pervasive. We think policy making would benefit from more consistently considering international aspects, such as comparing with other countries' policy settings or assessing the impact of policy on connections.
  • Perhaps the most important part of international connections is access to foreign knowledge. Knowledge transfer comes particularly through flows of imports and FDI and increasingly from movements of highly skilled and mobile people. The capacity of domestic businesses to absorb foreign knowledge is also crucial.
  • Future global trends in labour mobility, the rise of the service sector, and the importance of Asia should be shaping policy making.
…and policy settings across the board could benefit from taking an international perspective.

Overall, we identify three broad priority areas for policy attention: domestic policy settings, regional economic integration, and further reducing barriers at the border.

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