Productivity gains not enough to lift NZ up OECD ladder

By SIMON LOUISSON

Productivity growth has increased but not enough to lift New Zealand up the OECD income rankings, concludes the OECD's annual survey published today.

The comprehensive 159-page report said New Zealand in the past decade had benefited from the reforms of the 1980s and 1990s.

But more needed to be done if the Government wanted New Zealand to rise into the top half of the 28-member club of wealthy countries. Latest figures put it at 20th in terms of per capita income.

"The slide in relative living standards vis-a-vis the OECD average seems to have been arrested, but a further acceleration -- necessary if New Zealand is to move back into the top half of the OECD ranking, as the Government is intent on doing -- is still not in sight," the authors state.

Per capita income had grown annually an average of 2.5 per cent over the past decade and encouragingly that came not just from a recovery in employment rates, but more recently from a pick-up in labour productivity.

"Yet something is still missing as potential output has not been rising fast enough for New Zealand to return to the top half of the OECD rankings," the authors said.

While productivity in the key primary sector had risen significantly, manufacturing productivity had been disappointing.

The OECD admits to being baffled about why past reforms had not yielded larger productivity gains given New Zealand's "best practice" in most policies.

The handicaps of New Zealand's small size and distance from markets are suggested as possible explanations.

The economy is praised for its openness but there was room to make it even more open and the authors frown on the trend towards more Government intervention.

Although New Zealand's labour markets remain among the most flexible in the OECD, "recent years have seen a clear trend towards greater rigidities and higher labour costs".

Individual changes were fairly benign but "cumulatively, their impact may be important".

The proposal to lift annual leave to four weeks from three was "not consistent with the Government's goal of raising per-capita incomes".

The authors advise that addressing residual weaknesses in "fundamentals" should be the Government's top priority.

They identified five areas -- strengthening global linkages, streamlining enterprise support programmes, avoiding temptation to "pick winners", unblocking infrastructure bottlenecks and improving the environmental consent process.

Tax rates around the OECD average "may not be attractive enough", particularly if Australia and the United States sign a free trade deal. The report advises against a preferential rate for foreign investors.

"The more neutral alternative of lowering the statutory corporate tax rate for domestic as well as foreign investors should be preferred."

It praises the Government for promoting global links by removing blockages to exporting and offering assistance packages.

"However, overlap and fragmentation is still excessive and the low take-up for some suggests that they are not really filling a gap in the market."

It notes fostering innovation is a key Government plank but business spending on research and development was low and the complex tax regime may be to blame.

"Its simplification should be a priority."

The report knocks the Government's move to pick industry winners, particularly the film industry, as "unhelpful".

"Setting an uneven playing field may not only misallocate resources, but would also create incentives for wasteful rent-seeking (profits)."

Roading and electricity are the infrastructure areas singled out as needing attention to attract general investment.

The OECD authors advise that road fees should be brought into line with the true social cost, which would also help the Government decide whether supporting the rail service was worthwhile.

They note the electricity market was dogged by problems on both the supply and demand side and an improved regulatory framework was needed to encourage investment.

In a dig at the Resource Management Act, the authors said that infrastructure projects and investment generally had been held up by uncertainty and delays related to environmental consent procedures.

The Government had spent a "small amount" to address the problem and the authors said it was difficult to judge if this was enough. But if business criticism was right then there could be a high payoff to a further small increase.

The report includes a detailed section on the benefits of migration, which the authors said was generally accepted as bringing economic as well as social and cultural benefits.

In a section on the work force, the report advises the Government to strengthen work incentives in the welfare system and a possible work-for-the-dole scheme to reduce the wide income gap between Maori and Pakeha.

In-work benefits should be used to increase the wedge between income from welfare and work. Stronger job search obligations should be applied and New Zealand's case management approach was "too passive".

The budgetary situation was "pleasantly" healthy but the Government is warned to be cautious about its surpluses as there was uncertainly about how much of the improvement was cyclical.

Finance Minister Michael Cullen said he broadly agreed with the report's assessment about returning New Zealand to the top half of the OECD.

"There are some differences of opinion at the margins but these are of long-standing and well-understood.

"The government's approach to getting beneficiaries into paid employment, for example, relies more on the carrot and less on the stick than the OECD would prefer and we are stronger on workers' rights.

"But the areas of policy disagreement are within the context of broad endorsement by the OECD of the government's overall fiscal and economic strategy," Dr Cullen said.

- NZPA

Organisation for Economic Co-operation and Development:

Economic Survey - New Zealand 2003 summary

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