Yvan Guillemette

Structural Policies to Overcome Geographic Barriers and Create Prosperity in New Zealand

New Zealand’s living standards remain well below the OECD average. This is entirely attributable to persistently low labour productivity, which in turn is related to economic geography as well as structural policy factors. The small size and remoteness of the economy diminish its access to world markets, the scale and efficiency of domestic businesses, the level of competition and proximity to the world’s technology frontier. This points to the need for a “New Zealand policy advantage”, that is, a set of structural policies attractive and welcoming enough to overcome the geographic handicap and attract the drivers of prosperity – investment, skills and ideas – to New Zealand. The reforms of the 1980s and 1990s laid much of the groundwork for creating this advantage and for a pick-up in productivity growth. But in recent years, New Zealand has lost ground relative to its OECD peers. The reform focus shifted away from growth and the government introduced much often poor quality regulation. Policies should be refocused around the productivity goal in a number of areas, beginning with those covered in this paper, namely international trade, the business climate for domestic and foreign investment, public sector efficiency, infrastructure, innovation and natural resources management. This paper also evaluates the recently legislated emissions trading scheme through a productivity lens. This Working Paper relates to the 2009 OECD Economic Survey of New Zealand (www.oecd.org/eco/surveys/nz). Les politiques structurelles requises pour surmonter les obstacles geographiques et promouvoir la prosperite en Nouvelle-Zelande Les niveaux de vie en Nouvelle-Zelande restent bien inferieurs a la moyenne de l’OCDE. Cet ecart est entierement attribuable a une croissance durablement faible de la productivite du travail, qui s’explique pour sa part par la geographie economique ainsi que par des facteurs lies a la politique structurelle. La petite taille et l’eloignement de l’economie limitent son acces aux marches mondiaux ainsi que l’echelle et l’efficacite des entreprises interieures, et influent sur le degre de concurrence et la situation par rapport a la frontiere technologique mondiale. Il faut, dans ces conditions, elaborer des politiques qui representent un avantage pour la Nouvelle-Zelande, c’est a dire un ensemble de politiques structurelles suffisamment attrayantes pour surmonter le handicap geographique et attirer dans le pays les moteurs de la prosperite – investissements, competences et idees. Les reformes des annees 80 et 90 ont largement prepare le terrain a la mise en oeuvre de telles politiques et a un redressement de la croissance de la productivite dans les annees a venir. Ces dernieres annees, cependant, les autorites ont grignote une partie des progres realises durant la periode de reformes, notamment en introduisant de nombreuses reglementations, souvent mal concues. Les politiques devraient etre recentrees autour de l’objectif de productivite dans plusieurs domaines, a commencer par ceux couverts dans la presente etude, a savoir le commerce international, les conditions de l’investissement national et etranger, l’efficacite du secteur public, l’infrastructure, l’innovation et la gestion des ressources naturelles. Le systeme d’echange de droits d’emissions, qui a recemment fait l’objet d’un texte de loi, est aussi examine ici dans l’optique de la productivite. Ce Document de travail se rapporte a l’Etude economique de l’OCDE de la Nouvelle-Zelande 2009 (www.oecd.org/eco/etudes/nz).

Saving, investment, capital stock and current account projections in long-term scenarios

The paper describes the framework used in long-term economic scenarios for the projection of the saving rate, investment, capital stock and current account. The saving rate is determined according to an estimated equation which suggests that demographics, captured by the old-age dependency rate and life expectancy, is a major driver, with additional effects from the fiscal balance, labour productivity growth, the net oil trade balance, the availability of credit and the level of social protection. The evolution of the business sector capital stock depends on the economy’s cyclical position, product market regulation, employment protection legislation and the user cost of capital, and may be constrained by current account deficits depending on the degree of capital account openness. Business sector investment is derived from the capital stock projection via the usual stock-flow identity. The public sector capital stock-to-output ratio is assumed to be constant in the baseline scenario, but a public investment shock can be simulated in alternative scenarios. The current account balance is obtained as the difference between national investment and saving, and in turn determines the evolution of the net international investment position. A global interest rate premium helps to bring global saving and investment into balance.

The fiscal projection framework in long-term scenarios

The paper describes the fiscal framework used in long-term economic scenarios, with some emphasis on revisions made since the 2013 vintage of the long-term model. Long-term projections for public spending on pensions, health and long-term care are now separate from other primary expenditure and sourced from previous OECD work taking account of population ageing and other cost pressures. Other primary expenditure are assumed to remain constant in real terms on a per capita basis, rather than remaining stable as a share of GDP. This difference is important for long-term fiscal projections because government finances are sensitive to the employment rate, whereas expenditure is linked to the total population. A fiscal rule adjusts government revenue to ensure that public debt eventually stabilises as a share of GDP, making government revenue as a share of GDP the preferred indicator of future fiscal pressure.