Visiting economists from the International Monetary Fund and the Organisation for Economic Cooperation and Development say a new mindset is needed to lift the New Zealand's living standards, as policymakers cope with technology change, rising inequality and slowing productivity.
The international experts delivered keynote speeches to the government economics network (GEN) 2017 annual conference in Wellington, at a time when the new Labour-led administration wants to adopt a more holistic approach to measuring the economy.
Finance Minister Grant Robertson may give a steer on that thinking next week when he delivers the half-year economic and fiscal update and Budget policy statement and outlines funding plans for areas such education, healthcare, housing and water quality while maintaining healthy growth.
IMF director deputy research Jonathan Ostry said governments have traditionally focused on aggregate growth rather than its distribution but now "we must learn to walk and chew gum at the same time ... the issue of how we sustainably grow the pie is very closely intertwined with high or rising levels of inequality."
It is a "dangerous gamble" to focus on growth and assume equality will take care of itself and all areas of economic policy should analyst both growth and distribution, Ostry told the conference. To the contrary "we may face some impediments to a sustainably larger pie if we don't deal with some of the distribution problems we face."
Globalisation makes countries richer on average, but it is important to consider who the winners and the losers are, and not just in terms of openness to goods trade but also regarding financial globalisation, which he said was in "no way a bit player" in rising inequality.
He pointed to different channels, noting that mobile capital may diminish the bargaining power of labour, and said there is evidence increased financial integration may make it harder for the state to perform its redistributive role.
"If rising financial globalisation leads to a race to the bottom in taxes, the state is going to find it much more difficult to perform a lot of its tasks," he said.
Ostry also said there is an "unhealthy obsession with public debt in some quarters." He noted that some countries have "ample fiscal space" but seem to be gearing policy toward running fiscal surpluses to pay down the loans "on the grounds that it is good insurance for the future and lower public debt lays the foundation for economic growth in the future."
He argued, however, there are costs to paying down the debt and it may be better to simply live with the additional public debt and allow it to decline organically through growth.
Catherine Mann, OECD chief economist and head of the economics department, said the international trade landscape has largely stalled, direct impacting inequality levels.
Trade integration is growing at about 1 percent per year versus 3.4 per cent between 1986 and 2007 and "this time period where trade has grown more slowly has been the time of greatest rise in inequality. Not the time when trade was growing rapidly, but at the time when trade was growing slowly."
She advocated pushing for a liberalisation of cross-border services, given they are restricted in many economies. On the digital front, she said data regulation was not going in the right direction, with the trend toward more restriction and eroding the potential for services trade.
"If we could return to that period of time of global engagement that was deepening as opposed to lessening, we would gain about 0.2 percentage points on productivity growth," something that is currently growing at 0.5 per cent.
She noted gross domestic product growth per person is currently lower than it was in the 1990-2007 period and real wage growth has disappointed, and that "new tech is desperately needed" to help break that circuit.
"The idea that we are going to get higher growth and higher real wage growth without any technological change is unrealistic," she said.
However, distribution of how technology has diffused through economies is very different, and Mann said highly-productive 'frontier' companies - the top 5 per cent in each sector - raised productivity 135 per cent to 140 per cent over the past 15 years, whereas the other 95 per cent have shown almost no productivity growth over the same period.
Mann added that frontier firms pay their workers a lot more and "if we can unlock the productivity dispersion problem, we might be able to unlock the inequality coming through real wages," she said.