Alison Brook argues the COVID-19 crisis offers the opportunity for New Zealand to reorientate to a 'new normal' that will enable it to shrug off the decades of poor productivity and create sustainable growth

By Alison Brook*
(This article is part of Interest.co.nz's Election Series).

Before the events of this week, New Zealand was being lauded internationally for successfully containing the COVID-19 public health crisis. Our quick actions to control and suppress the virus had put us in a select club of countries that could concentrate on rebuilding their economies rather than saving lives.

The recent setback only emphasises the urgent need to get New Zealand’s economy running at its full potential as soon as the immediate health crisis passes.

Before COVID 19 hit, the New Zealand economy was performing pretty well by some metrics: unemployment was low, with low public debt and inflation. However household and personal debt were high, incomes were low by OECD standards, growth was slowing and productivity growth had been dismal for decades.

The looming recession gives policymakers an ideal opportunity to reset the economy in a way that will allow New Zealand to emerge from this crisis as a much stronger and future-proofed economy.

Jobs, jobs, jobs

Despite the unexpectedly low second quarter unemployment rate, most commentators expect the number to grow steeply in the months ahead. This will only be exacerbated by Auckland’s return to Level 3 lockdown with the risk of more lay-offs and business closures ahead.

The immediate focus for the government will need to be on keeping people employed and creating jobs to avoid the classic recessionary spiral. Only time will tell if the government’s wage subsidy and retraining measures have been effective in blunting the corrosive effects of persistently high unemployment.

It is the next phase of policy interventions, which will need to address the long- running structural issues inhibiting New Zealand’s economic performance.

Small countries CAN outperform on the world stage

One of the commonly stated reasons for our poor productivity and low growth rates is that we are a small country at the bottom of the world. While isolation plays a big part there is no statistical evidence in a global marketplace that small countries need to perform worse than their larger neighbours.

Economists Shahid Yusuf and Kaoru Nabeshima’s 2012 book Some Small Countries do it Better looked at three small countries (Singapore, Finland and Ireland) who, since the mid-1980s have transformed their economies from middle-income countries to some of the richest in the world. The common factors which led to the rapid growth of the so-called SIFIRE countries were:

 Forging consensus on the long-term strategic economic direction with political opponents and key stakeholders: business associations, labour unions, the financial community and the education sector.

 Creating a “learning economy” to develop the country’s human capital by providing high-quality education at all levels with innovation as a deliberate by-product.

 Encouraging entrepreneurship by building a culture that rewards initiative and risk-taking and is relatively tolerant of failure.

 Building a networked economy by concentrating entrepreneurship around urban centres.

 Building competition and openness to trade.

Tackling Productivity

Productivity growth is the key to raising living standards for a country’s citizens. While productivity has been declining across many advanced countries, the government has acknowledged New Zealand’s productivity performance is poor and declining faster than our international competitors. Even before the pandemic, New Zealand’s GDP per capita was 30% below the OECD average, and similar to that of Mexico, Greece, Portugal, Israel, and Japan. By comparison, OECD research suggests that with New Zealand’s policy settings we should be generating GDP per capita 20% above the OECD average.

A recent report from David Skilling prepared for the New Zealand Productivity Commission points to the need for policy instruments to support the growth of internationally focused “frontier firms” who are much more likely to bridge New Zealand’s productivity gap. Scale is also important as larger firms are much more likely to drive innovation and the global engagement necessary for productivity growth.

Building a learning economy

Yusuf and Nabeshima make it clear that the economic transformation of the SIFIRE countries was only made possible by their investment in human capital. The learning economy requires a country to invest in high quality, mostly-free education from pre-school through to tertiary and vocational training. Vocational and technical training is very important and arguably led to the build-up of technical skills in these countries.

This does not need to be expensive in nominal terms. The SIFIRE economies were able to provide this education at relatively low cost – averaging 4% of GDP between 1980 and 2000.

Most importantly, the SIFIRE’s success in building a learning economy was attributed to the value those societies attached to education, the relatively high prestige and compensation for teachers and the continual pursuit of excellence.

Openness to trade

The Skilling report puts a strong case for New Zealand policy to focus on developing export-led sectors rather than the “current agnostic policy approach, which treats international and domestic sectors in the same way”.

The numbers are stark. New Zealand has the lowest percentage share of exports to GDP compared to any other small advanced economy, and this has not changed in decades.

Source: World Bank World Development Indicators.

There has also been little change in the composition of our export sectors since the 1980s (except for the recently COVID-decimated tourism and export education sectors).

Skilling recommends policy interventions should encourage internationally-oriented “strategic clusters”. Similar to Yusuf and Nabeshima’s networked economy, these clusters would be developed in industries where New Zealand has an existing competitive advantage, such as in the primary sector and the “weightless” digital and creative sectors.

Foreign direct investment

Yusuf and Nabeshima note that for the SIFIRE countries to achieve such improved growth rates required increased foreign capital investment although not “heroic” levels of investment. The FDI triggered a rapid improvement in the business climate of the SIFIRE countries and contributed to technological catch-up and innovation.

New Zealand’s economy is reliant on foreign investment and the levels of FDI have been rising. According to UNCTAD's 2020 World Investment Report, New Zealand received US$5.4 billion in FDI inflows in 2019, a significant increase from 2018 levels (US$2 billion).

Source: Stats NZ.

FDI is often a political football encompassed in the “tenants in our own country” phrase. However, the stark reality, pointed out by the Productivity Commission is New Zealand needs more technology if we are to address our poor record of productivity and income growth. A key way to achieve this is to increase our exposure to international firms.

Despite our reputation as an easy place to do business, New Zealand’s screening settings are very restrictive compared to other OECD countries leading to costs and delays in processing applications.

Source: OECD.

Improving our country’s growth rate will involve a mixture of developing more internationally orientated “frontier firms”, investing in high-quality education and training, and mindful, friendly policy settings for foreign investment. In doing so, New Zealand has an opportunity to reorientate to a “new normal” that will enable it to shrug off the decades of poor productivity and create sustainable growth.

Despite the recent COVID-setback, the country is still in a better relative position than most of the advanced world. The worst thing we could do now is to base our recovery policy settings on historical performance rather than making the necessary changes to enable the country to reach its full potential.

*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.