Sunday, 26 October 2008

OECD ladder too steep for NZ to climb

Dr Trinh Le of the New Zealand Institute of Economic Research has an interesting piece in the National Business Review of October 24 2008. Her article is entitled OECD ladder too steep for NZ to climb, a title which right now seems all too true.

Le points out that
In 2007, New Zealand’s GDP averaged $US26,600 per capita in purchasing power parity terms, ranking 22 out of 30 OECD countries.
Over 2000-2007, New Zealand’s real GDP per capita grew at 2.1% per year, while the average growth rate for the rest of the OECD was 2.4% (or 1.8% if weighted by population).

If each country continued to grow at its average growth rate for the period 2000-2007, New Zealand would only reach the middle rung of the OECD ladder in 2170.

In the last three years, New Zealand’s growth performance was poorer than the rest of the OECD (1.5% vs 3.0% per year). If these growth rates were sustained, New Zealand would drop to 24th place in 2010 and continue to fall further later on.

Assuming that other countries maintain their average performance of the period 2000-2007, New Zealand’s GDP per capita will need to grow at 4.6% per year in the next decade to reach the top half of the OECD. That would mean an average growth rate of 5.9% in total GDP, assuming a population growth rate of 1.27% (average rate for 2000-2007).

A growth rate in GDP per capita of 7.4% is required for the goal to be achieved in five years. Since 1970, there has not been a single year when New Zealand recorded growth of at least 7.4%, let alone five years in a row. The highest average rates over 5- and 10-year periods were respectively 2.9% (1992-1997) and 2.6% (1992-2000).
But may be the worst thing that Le points out in our growth in labour productivity. The graph below comes from the NBR article.With labour productivity heading in that direction we are very unlikely to be able to improve our growth rate to the level required to move up the OECD ladder.

Why is growth so bad? A number of policies have contributed to this outcome.
Interest-free student loans, raising the top marginal tax rate and not indexing tax brackets to inflation, high effective marginal tax rates (through Working for Families), the Employment Relations Act, KiwiSaver, re-nationalisation of ACC and the railways, the Emissions Trading Scheme, and increasing government spending and regulation are some of the many growth-retarding policies that have been introduced in the last nine years.
Le ends her article by noting
Getting back to the top half of the OECD is a commendable goal, but its achievement is highly unlikely under current policy settings. It would be a good thing if the need for substantial changes to policy settings informed public debate during this general election period.
Looking at the election campaign so far I don't see any evidence that such debate is taking place. I have yet to see what I would call pro-growth policies have any of the parties.

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