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Introduction

Motivation

"During their periods of fast growth, [13 successful economies in the post-war period] all made the most of the global economy. This is their most important shared characteristic and the central lesson of this report. ... To put it very simply, they imported what the rest of the world knew, and exported what it wanted."

The Growth Report: Strategies for Sustained Growth and Inclusive Development, World Bank Commission on Growth and Development, 2008

Raising productivity is the central economic challenge New Zealand faces to raise living standards over the medium term.[1] New Zealand's international connections are an important driver of raising productivity, but as this paper will show, New Zealand is currently only moderately well connected to the world economy and faces particular challenges, particularly due to distance from major markets.

International connections are important for driving productivity and economic growth.

Last year, Treasury published a series of papers that set out the key drivers that influence productivity performance and the ways in which it can be improved.[2] The papers identified five drivers of productivity: innovation, enterprise, investment, skills, and natural resources. International connections were identified as important for all five drivers of productivity. This paper adds to that series of papers by describing how international connections can support New Zealand's economic performance and identifying the policy areas to focus on.

The current international environment is dominated by the global financial crisis that began in 2008 and has resulted in a global recession. In the short term, world trade and financial flows are rapidly reducing and a degree of protectionist sentiment is evident in a number of policy responses around the world.

But in an environment of recession and substantial structural change in the global economy, policy makers should be considering how New Zealand can come out of recession in the best possible position for the future. The best outcome would be that appropriate changes occur to New Zealand's policy settings to improve productivity and economic growth. An important part of that mix will be policy changes that strengthen international connections. Consequently, this paper is deliberately focussed on how international connections could be strengthened over the medium term.

While there are a number of different scenarios of how the world economy will evolve over time as it recovers from the current crisis, the central messages of this paper are unlikely to change.

Organising framework

International connections can be thought of as flows of resources: people, capital, trade, and ideas.

In this paper, we use a simple organising framework for international connections, as summarised in Figure 1. The framework is intended to help think about the role international connections can play in increasing standards of living in New Zealand. It is a stylised representation and is not an actual model of economic growth. In practice there are feedback loops and complex inter-dependencies. The main components are:

  • Economic interactions between New Zealand and the rest of the world occur through flows of resources - that is, people, capital, trade, and ideas.[3]
  • The flows provide economic benefits by allowing New Zealand to access resources, specialise, access international knowledge, and stimulate competition—and ultimately drive productivity and economic growth.
  • Engagements with international agencies and other countries can be used to influence international policies and flows in ways that benefit New Zealand. Domestic policy settings across the board, both at-the-border and behind-the-border, have a pervasive influence on international flows.
  • Context is provided by a changing global environment and New Zealand's historical and geographical context.
Being open is generally necessary, but not sufficient, to becoming connected...

We make a distinction between how open and how well connected an economy is:

  • Being open means having low formal restrictions, such as low import tariffs or a liberal inward investment regime (sometimes called ‘de jure' economic integration).
  • Being connected means having high actual flows, such as high levels of immigration or exports (sometimes called ‘de facto' economic integration).

We also make a distinction between polices at-the-border and policies behind-the-border:

  • Policies at-the-border directly affect the free movement of or costs of flows actually moving across borders. This could include formal restrictions (such as tariffs or investment screening) or additional costs (such as international transport and communication costs, or the cost of international capital). At-the-border policies generally influence how open an economy is.
…and becoming connected generally requires looking at policies behind the border.
  • Policies behind-the-border affect international connections indirectly through, for example, different regulatory regimes that create information costs, concerns over electricity security of supply that deter investment, relative prices that affect the dynamic process of economic development, market failures in exporting due to information spillovers, and so on. Both at-the-border and behind-the-border policies generally influence how well connected an economy is.

Paper outline

This paper is organised as follows: The next section briefly covers the dominant international trends that will shape the external environment over the medium term, along with the main domestic characteristics that will influence how New Zealand responds.

  • The following four sections consider each of the four international flows in turn, covering: the link to economic growth, based on evidence drawn from the economic literature; an assessment of how open and connected New Zealand is currently; a discussion of potential adverse consequences that are sometimes raised; the future outlook; and general policy lessons that can be drawn out. Given the breadth of coverage, the paper attempts to set out stylised facts, with references and some additional information included as footnotes.[4]
  • A discussion section focuses on a few particular ideas that we argue, deliberately somewhat provocatively, require a change in mindset to realise the potential benefits from international connections.
  • Finally, the conclusion identifies the main channels through which international connections provide benefit to New Zealand and suggests three broad priority areas for policy attention.
Figure 1: An organising framework for international connections
Figure 1: An organising framework for international connections.

Notes

  • [1]See Treasury (2008a).
  • [2]Treasury (2008b) is the first in the series.
  • [3]The terms ‘ideas', ‘knowledge' and ‘technology' tend to get used interchangeably. In this paper, we generally use ‘ideas' to mean the flow, ‘knowledge' to mean the stock, and ‘technology' to represent the embodiment of knowledge in a new good, service, or management or production process.
  • [4]Comparator countries for all charts in the paper are other relatively small OECD economies (Australia, Finland, Denmark, Ireland) along with more usual comparators (the UK, USA, and Canada).
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