Level field but players forgotten

By Rod Oram

Reforms have made New Zealand one of the most competitive countries in the world, right? Wrong.

The most authoritative measure is the annual Global Competitiveness Report compiled by the World Economic Forum. We ranked 5th in 1997 but fell to 13th in 1998, holding that position this year out of 59 countries.

Reformers make much of the plunge, arguing that we have fallen because we have back-pedalled on reform. That's partly true but the whole truth is more complicated.

We rank high because reforms dealt with selected institutional aspects of our economic and political system, as shown by the accompanying forum chart which ranks our strengths (assets) and weaknesses (liabilities).

By and large, we rank high on factors which are macro (big picture) economic policy issues or which reflect existing high cultural standards such as aversion to corruption.

We now have, for example, a very open economy, ranking third in the world in terms of minimal tariffs and quotas. We rank fourth on flexible labour laws. We have the second-least corrupt legal system, the fourth-most independent civil service and the fifth-lowest level of tax evasion.

But these reforms were not enough. We have fallen because the less functional parts of the system are dragging us down.

Our banks, for example, are rated 51st out of 59 countries when it comes to their willingness to take risks. As savers we rank 52nd; our roads are 34th; our investment in infrastructure 41st; our standards of maths and science education are 35th.

By and large these are micro (small picture) economic policy issues. Thus reforms have improved the playing field (the macro) but achieved less for the players (the micro).

The dysfunction between the two can be startling. New Zealand has, for example, the second-most open labour market in the world and our wage rates are relatively low. That would seem to make this one of the best countries in the world in which to manufacture.

Not so. The real question is what value of output a manufacturer gets for the wages it pays.

If you take into account our low productivity, then our labour rates are the most expensive in the world, the Global Competitiveness Report says.

Banking is another example. We rank number one in terms of ease of setting up new banks. But when was the last one established?

Micro issues matter, argue Michael Porter and Jeffrey Sachs, two of the co-chairs of the advisory board for the report. A country can have good macro economic policies but fail to maximise its potential because of its micro policies.

Our micro policies are only the 16th-most competitive in the world. Which party in this election is most focused on improving that?

Parties and lobbyists of the right say market forces can correct these severe defects.

The Business Roundtable, for example, argues that roading and education will benefit from user pays/choice and private investment.

Over the past year, National has moved away from that pure stance to some extent. It has recognised that the market has not ensured competition in some areas such as electricity. But it remains reluctant to get more involved, as its minimalist Knowledge Economy strategy shows.

In contrast, left-of-centre parties argue that government has a role in devising policies to intervene and/or fund to achieve certain goals. Thus, Labour offers a much more comprehensive and interventionist economic development strategy.

International experience shows that the most successful countries are those where policies blend market and government forces, particularly on micro policy and the setting of national strategy.