Dan Bidois: Bold reforms needed to improve NZ living standards

In 2060, China and India's share of global GDP looks set to surpass the combined share of GDP from today's most industrialised countries. This fundamental shift in the world's centre of economic gravity will lead to a significant shift in power away from Western countries. New Zealand will need to adapt or face the risk of being left behind.

This is one scenario that has been forecast by the OECD, a Paris based think-tank, in an article titled: Looking to 2060: Long-term global growth prospects.

The composition of global GDP will change significantly between now and 2060. Average income levels in China and India will be closer to the average incomes in OECD countries, and the share of global GDP coming from China and India will surpass the combined income of all OECD member countries in 2060.

Meanwhile, Europe and America's share of total GDP will decline sharply, from 40 per cent in 2011 to only 25per cent in 2060.

Average growth rates in the emerging economies will be three times those in the OECD countries. Growth in OECD countries will remain low in the long term, averaging only 1.7 per cent per annum, but only if global trade barriers are lowered further and domestic competition is increased.

Greater trade imbalances and government indebtedness will pose additional challenges.

At least three strategic implications for New Zealand can be drawn from the article. We need to make trade in goods and services with China a high priority. Any common market agreements we establish in East Asia must involve China. China's share of the world economy is set to go from 17 per cent to 28 per cent in 2060. In contrast, America's share of global GDP will decline from 23 per cent to 16 per cent.

Our economy is expected to grow at an average rate of 1.8 per cent per annum to 2030, and then 2.2 per cent per annum to 2060, slightly higher than the OECD average but lower than the rates during the early 2000s.

To navigate this low-growth environment, we will need to rethink every aspect of government and the services we expect it to provide. In some areas stricter income-related testing measures will be required or higher tax rates will be needed. In health and education, we will need to be relentless about delivering more value from government with fewer resources, by innovating wherever possible.

Structural reforms will need to target policies that increase labour market participation rates even further, particularly among the youth, Maori and Pacific Islanders, and women, as well as reducing barriers to investment and trade.

To be clear, the news is not all bad. Our ranking in the OECD is set to improve by seven places in 2060, mainly because of productivity gains and a decline in European economies.

But if we want to substantially improve living standards bolder reforms will be required. Therefore, the real question we need to ask is, how badly do we want to progress as a nation?

Dan Bidois is an economist at OECD, a New Zealand Fulbright Scholar and a recent graduate of Harvard University.