Opinion: How NZ can increase productivity by focussing on global connections

By Neville Bennett Treasury's latest paper strongly advocates opening New Zealand up to more competition. This is a good idea for the purest classical economist but even they might question pursuing that policy in a deep recession. New Zealand could have a more liberal regime to immigration, it could have less restraints on foreign capital (especially on buying land), and it could take away our few remaining tariffs on textiles and footwear but is that a good thing? My own inclination is to say that we have got the mix about right although I have some doubts about immigration, when I see who gets permanent residency (I am a JP). But a more liberal regime can, arguably, improve productivity and we all approve of that. Advances in productivity are the main cause of long-run increases in real income. To grow, one must use inputs of capital and labour more intelligently. Beyond that, gains can come from the introduction of innovation, skills, investment, entrepreneurship and natural resources. International connections have been suggested as another key driver, especially since a World Bank study of 13 top economies emphasized that "they imported what the"¦ world knew, and exported what it wanted". The link between international connections and rising productivity is a hypothesis. Certainly is seems valid and New Zealand's Treasury is to be commended in considering it as part of its on-going valuable research. A new study assumes the theory is valid, but more will be required to substantiate it. To some extent I smell a rat. It is as though Treasury wants to advocate more openness but suspects politicians will not go with its proposals for fear of losing jobs. So it wraps the argument in the warm fuzzy idea of improving productivity. My suspicion rests in part on a lack of quantification of what more openness can deliver in productivity gains. The study Nevertheless, this is important research because, contrary to many views, Treasury believes New Zealand is currently "only moderately well connected to the world economy". Clearly adjustment could assist this country to come out of the recession well-positioned for rapid take-off. Strengthening international connections should be a priority. What needs to be done? There has to be some hard thinking first of all. My motto has always been "question everything", so I endorse the argument that "being open is generally {a} necessary, but not sufficient condition to becoming connected'. Being "open" merely means low formal restrictions such as low tariffs, while being "connected" means actually having substantial trade, immigration or capital flows. There is also a distinction between policies at-the-border, (like investment screening) which generally indicate how open an economy is. Thinking can stop there, but "becoming connected" requires looking at policies behind-the"“border; at regulation, or security of electricity and a myriad of matters which affect relative prices, even market failure. Essentially, New Zealand already benefits economically from a series of international flows in trade, people, capital and ideas. These allow us to access resources and knowledge, stimulate competition, specialize in niches etc, in order to produce more smartly and grow. Obviously, cooperation with international partners can help to develop beneficial policies and flows. What to do? New Zealand has to overcome the "tyranny of distance", to access resources that will increase productivity and find niches where it has a comparative advantage. It can increase its connectivity, although it scores highly in flows of people and even of inward investment, but its trade and outward direct investment are floundering. Treasury rightly argues knowledge of the world comes through flows of imports, migrants and foreign investment. This may underrate the universities and business, I think, as internally generated and dissimulated knowledge is important. Problems New Zealand's remoteness and small size makes foreign competition significant. The OECD calculates distance lowers GDP per person by a 10%. Agriculture faces strong trade barriers and has low R&D; tourism is more important to New Zealand than it is to more developed economies. "Virtual Water" is a key export. Visitors are overwhelmingly tourists, although foreign students are very significant because NZ has a higher proportion of foreign students in its student population than any other country, except Luxembourg. Migration is a "brain-exchange" as migrants have higher education levels than New Zealand"“born residents. The Kiwi diaspora is large, about 14% of the population. The exodus of skilled workers is the largest in the OECD. Some conclusions By being active internationally, New Zealand can get access to resources that improve productivity, including talent, capital and foreign goods and services, either as final products or intermediate inputs. Perhaps knowledge, especially technological change, is the most important international connection. New Zealand needs to tap into though imports, capital injections, and an interaction between residents, migrants, scholars, tourists and overseas kiwis. The study arguably under-emphasizes business in this role. Priorities Domestic policy settings should attempt to create comparative advantages through enhancing competition and increasing benefits arising from our resources. Moreover integration with the Asia-pacific regional market should be increased. Restraints on inward and outward flows should be as low as possible. Domestic Policy should: "¢ Ensure tax and regulations encourage entrepreneurship, interestingly partly by shifting the tax base from mobile bases (income and profits) to immobile bases (land and consumption). "¢ Dampen exchange rate volatility to encourage the tradable sector. "¢ Develop an integrated approach to international flows of people, covering migrants, students, overseas kiwis, business and researchers. "¢ Improve our overseas presence to help business abroad "¢ Facilitate international knowledge transfer. "¢ Allocate natural resources more efficiently to support developments that use water inputs, and produce carbon as a by-product. Becoming an integral part of the Asia-Pacific regional Economic Market: "¢ Have a clear strategy of engagement with the region "¢ Continue to develop a single market with Australia as part of the wider aim. Further reduce barriers; "¢ Phase out existing tariffs "¢ Improve, even remove, investment screening "¢ Low cost border and custom control "¢ Ensure low cost, high speed broadband "¢ Encourage saving to reduce cost of capital "¢ In negotiation, press hard for reduced barriers on our goods and services. My reactions This is first-class, valuable research. I have supplied only some of the bare bones but the interested readers will find fascinating discussion and compelling detail in the very cogent, well-integrated research. It shows that much can be done to stimulate the economy. Some measures may seem a little doctrinaire and politically difficult, for example I cannot condone increasing distress among textile and footwear workers (and other manufacturers) for by removing our few remaining tariffs merely to show how virtuous we are in being tariff-free. Nevertheless, this research could inform a progressive government's agenda for several years. "”"”"”"”"” * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. http://www.treasury.govt.nz/publications/research-policy/tprp/09-01/tprp09-01.pdf