Two cheers for the OECD’s Economic Survey of New Zealand

Dr Bryce Wilkinson
The National Business Review
5 July, 2019

The Organisation for Economic Corporation and Development’s latest economic survey of New Zealand was published last week.

I always read these surveys with a somewhat jaundiced eye.  They are a compromise between deferring to an elected government’s right to squander money as it sees fit and the tooth-sucking bureaucratic need to point out that this might not be entirely for the best.

The 2005 survey most over-stepped the balance in my view.  The then government’s prime economic objective was to lift New Zealand’s ranking for GDP per capita into the top half of the member countries of the OECD. It was not remotely plausible that its policies could achieve that.

The opening sentence of the OECD’s 2005 Economic Survey of New Zealand declared the government was on track to achieve that goal. Yet the body of that report pointed out that New Zealand’s trend productivity growth rate was below that for the median member country. The implication was that the goal was out of reach as matters stood.

Fourteen years later what does the OECD have to say about the matter? Buried in the body of the 2019 document is a comment that, since the mid-1990s, “the gap [in New Zealand’s GDP per capita] with leading OECD countries has not diminished.”

The early John Key government’s goal of closing New Zealand’s income gap with Australia by 2025 has come and gone the same way. It is not entirely the electorate’s fault that political froth can dominate substance. MMP confers undue power on minority populist parties.

Reducing flexibility, growth

The useful things of a tooth-sucking nature that the OECD’s 2019 Overview report pointed out included the proposed “fair pay” agreements, the ban on offshore oil and gas exploration, the increases in the minimum wage, and the barriers to foreign investment.

“Fair pay” agreements could be expected to reduce firm flexibility and lower productivity growth.  The ban on offshore oil and gas exploration was estimated to cost 0.22% of gross domestic product (GDP) annually – for no clear reduction in global emissions.

The proposed hikes in the minimum wage rate probably hit youth and “prime age female” employment hardest. OECD-wide modelling suggested GDP per capita could be 1.8% of GDP lower in the long run, if New Zealand was a typical case. Pricing the least productive would-be workers out of the labour market can be expected to scar them deeply while reducing national income. Why is it necessary?

Policies that lower income per capita matter. The University of Oxford in the UK has a data lab that maintains a website for research on happiness and life satisfaction across and within countries. Their website reports that there is strong evidence that citizens’ wellbeing is higher when income is higher, both within and across countries.

Income growth also matters for wellbeing. Average surveyed life satisfaction rises as countries get richer. (Remember that higher incomes make better healthcare and a cleaner environment more affordable, and people value such things.)

These results accord with common sense and daily observation. The importance people put on having more money is evident in the constant pressure on governments to increase spending.  Even schoolteachers and nurses clamour for more pay.

Of course, the Minister of Finance’s media statement last week welcomed the OECD’s report. It blandly assured New Zealanders that its recommendations “fit the policy direction the government is taking, including in the Wellbeing Budget.” Nothing to be learned from the OECD review, move along.

Breaking barriers

One can only wonder what the budget focus on wellbeing means, apart from sanctioning yet more ill-justified government spending.

To care about wellbeing is to care about increasing income per capita. That means caring about lifting labour productivity. Greater capital per worker can achieve that. It requires more investment.

Freeing up barriers to foreign investment can help. Small countries such as Ireland, Singapore and Hong Kong have built their economic growth on the back of foreign investment. Much the same could be said about China once it opened its borders to US technology and know-how.

Earlier OECD reports have pointed out New Zealand’s screening regime for foreign direct investment has long been one of the most restrictive in the developed world. This government has generally made it more restrictive for foreigners to invest in New Zealand.

The OECD’s 2019 review dryly comments “New Zealand has a comprehensive and poorly targeted foreign investment screening process that creates delays, significant compliance costs and uncertainty for investors.” It suggests that the restrictions could be eased but clearly sees no reason for optimism about this.

So what were the OECD’s recommendations? To a considerable degree they were bland, endorsing “prudent” fiscal policy and an accommodating monetary policy and better integration of wellbeing analysis with policy development.  Any minister of finance could concur.

On water quality, it strongly recommended settling iwi/Māori rights to water and expanding charges for the use of water to improve its quality and quantity. The New Zealand Initiative has been advocating the greater and better use of pricing mechanisms, along with concrete suggestions for ways of doing so.

Local development

On housing, it commended focusing on easing the supply of land, reducing regulatory red tape, and greater targeting through user charges for water and roads and targeted rates. It also recommended giving councils greater access to “additional revenue linked to local development “to improve the “fiscal dividends from growth.” Such housing recommendations have long been advocated by The New Zealand Initiative.

Research reports by The New Zealand Initiative have also drawn attention to the undue barriers here to foreign investment, and the greater attractiveness of Australia as an investment destination. Australian workers overall have far more capital per worker.

The OECD also recommended useful changes to make it harder for unscrupulous employers to victimise migrant labour.

Given the cavalier attitude in New Zealand to value-for-money in government spending, The NZ Initiative has recommended establishing an independent fiscal council that would report directly to Parliament and the public on these matters. The OECD supports creating an independent fiscal council and notes that the government proposes to establish one.

So why only two cheers for the OECD’s review? The bottom line is that its key recommendations have essentially nothing to offer on the debilitating issue of New Zealand’s low labour productivity growth. Perhaps its authors decided there was no point.

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