3.2.2 Features of poor growth and links to saving
New Zealand's level and growth of GDP per capita are relatively poor
In 2009 New Zealand ranked 21st out of 32 OECD countries in GDP per capita and in net national income per capita. Over the last four decades, it has slipped steadily down the rankings and the slide is continuing with little sign of the policies or the will that will arrest it.
- Figure 3.2: GDP per capita as a proportion of the OECD mean
- Source: OECD Factbook 2010
New Zealand's growth rate of GDP per capita was above the OECD mean prior to the 1970s, but has been mostly below (or similar) ever since. Its period of intensive reform in the late 1980s and early 1990s generated valuable efficiency gains, but the pace of reform slackened markedly after this, and many policy settings are now not supportive of a competitive, sustainable economy. Moreover, countries at a lower level of GDP per capita can normally expect to grow faster than rich countries close to the global technology frontier – but New Zealand has not experienced catch-up growth of this nature.
Closing the gap is a big challenge
In order to close the 2008 GDP per capita gap with the OECD average (32 countries) within 15 years, New Zealand's GDP per capita would need to grow by an annual average of one percentage point more than the OECD mean. To close the gap with Australia over a similar time span, New Zealand's annual average growth would need to outpace Australia's by 2 percentage points.
Examples of OECD countries that have successfully arrested a slide in their OECD GDP per capita rankings include Australia and the UK. Of the 28 OECD countries with available data, Australia ranked 5th in 1950. It troughed at 13th in 1991 and improved to 6th in 2009. The UK ranked 8th in 1950, troughed at 17th in the early 1980s and was 14th in 2009
New Zealand's gap is the result of low labour productivity
The gap between New Zealand and the richest OECD countries is largely in labour productivity since New Zealand's labour utilisation is significantly above most OECD countries (Figure 3.3). This indicates a lot of hours worked but not very productively, and for modest reward.
Available evidence suggests that New Zealand's low level of labour productivity reflects both a low capital-to-labour ratio and a low level of multi-factor productivity (MFP) – an indicator of the effectiveness with which labour and capital inputs are combined to produce valuable outputs.
- Figure 3.3: Labour productivity and utilisation, 2008
- Source: OECD country profile 2010, OECD productivity database
New Zealand's growth has been driven by the wrong things
New Zealand's growth in the period leading up to the GFC(2002 to 2008) was associated with rapid credit expansion, fast growth in consumption, high external borrowing, low private saving, a house and farm price boom, high government tax revenues and spending, and static tradable sector growth. Growth on this basis was unsustainable and had several negative consequences including rapid growth of private-sector debt and a high NFL-to-GDP ratio (Figure 2.7).
There are important connections among these factors and the disappointing growth outcomes.
Low saving is associated with lower wealth accumulation and lower income. New Zealand's external investment income balance is a large negative number - around $13 billion or 7% of GDP in 2009 (this reduced to $7.6 billion or 4% of GDP in 2010). It is a large component of New Zealand's current account deficit and an important driver of rising NFL to GDP (Figure 3.4).[5]
- Figure 3.4: Current account balances (% of GDP)
- Source: Statistics NZ
Easy access to credit (particularly for property financing) was associated with rapidly escalating farm and house prices.
The property boom in turn led households to feel wealthier and increase their consumption. Strong growth in nominal GDP buoyed tax revenues and encouraged often ill-judged growth in government spending.
High private and government consumption have unbalanced the economy
High growth rates of private and public consumption created inflationary pressure that led the Reserve Bank to raise the official cash rate. This, in turn, pushed up the exchange rate.
This standard monetary policy response led to unbalanced growth: reduced exports and increased imports, with a rise in the proportion of domestic resources going to non-tradable production and a reduction in the proportion flowing to tradable production.
It is likely that the reduction in export competitiveness has, in turn, slowed productivity growth. There is evidence that a lower exchange rate creates opportunities for high-productivity firms to grow, achieve scale through exporting, and contribute a range of spill-over benefits to other firms. In contrast, what happened is that non-tradable industries such as construction and property and business services expanded rapidly and attracted labour and other resources at the cost of their availability to export industries such as agriculture and food processing.
Notes
- [5]The figures are interest payments in nominal terms and so include an element of capital repayment to the extent that the real value of the principal (while constant in nominal dollars) is reduced by inflation. For example, a 2% inflation rate would reduce a nominal interest rate of 7% to 5% in real terms.
