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Alison Brook argues the COVID-19 crisis offers the opportunity for New Zealand to reorientate to a 'new normal' that will enable it to shrug off the decades of poor productivity and create sustainable growth

Alison Brook argues the COVID-19 crisis offers the opportunity for New Zealand to reorientate to a 'new normal' that will enable it to shrug off the decades of poor productivity and create sustainable growth
Photo: Hanson Lu, Unsplash.

By Alison Brook*
(This article is part of Interest.co.nz's Election Series).

Before the events of this week, New Zealand was being lauded internationally for successfully containing the COVID-19 public health crisis. Our quick actions to control and suppress the virus had put us in a select club of countries that could concentrate on rebuilding their economies rather than saving lives.

The recent setback only emphasises the urgent need to get New Zealand’s economy running at its full potential as soon as the immediate health crisis passes.

Before COVID 19 hit, the New Zealand economy was performing pretty well by some metrics: unemployment was low, with low public debt and inflation. However household and personal debt were high, incomes were low by OECD standards, growth was slowing and productivity growth had been dismal for decades.

The looming recession gives policymakers an ideal opportunity to reset the economy in a way that will allow New Zealand to emerge from this crisis as a much stronger and future-proofed economy.

Jobs, jobs, jobs

Despite the unexpectedly low second quarter unemployment rate, most commentators expect the number to grow steeply in the months ahead. This will only be exacerbated by Auckland’s return to Level 3 lockdown with the risk of more lay-offs and business closures ahead.

The immediate focus for the government will need to be on keeping people employed and creating jobs to avoid the classic recessionary spiral. Only time will tell if the government’s wage subsidy and retraining measures have been effective in blunting the corrosive effects of persistently high unemployment.

It is the next phase of policy interventions, which will need to address the long- running structural issues inhibiting New Zealand’s economic performance.

Small countries CAN outperform on the world stage

One of the commonly stated reasons for our poor productivity and low growth rates is that we are a small country at the bottom of the world. While isolation plays a big part there is no statistical evidence in a global marketplace that small countries need to perform worse than their larger neighbours.

Economists Shahid Yusuf and Kaoru Nabeshima’s 2012 book Some Small Countries do it Better looked at three small countries (Singapore, Finland and Ireland) who, since the mid-1980s have transformed their economies from middle-income countries to some of the richest in the world. The common factors which led to the rapid growth of the so-called SIFIRE countries were:

 Forging consensus on the long-term strategic economic direction with political opponents and key stakeholders: business associations, labour unions, the financial community and the education sector.

 Creating a “learning economy” to develop the country’s human capital by providing high-quality education at all levels with innovation as a deliberate by-product.

 Encouraging entrepreneurship by building a culture that rewards initiative and risk-taking and is relatively tolerant of failure.

 Building a networked economy by concentrating entrepreneurship around urban centres.

 Building competition and openness to trade.

Tackling Productivity

Productivity growth is the key to raising living standards for a country’s citizens. While productivity has been declining across many advanced countries, the government has acknowledged New Zealand’s productivity performance is poor and declining faster than our international competitors. Even before the pandemic, New Zealand’s GDP per capita was 30% below the OECD average, and similar to that of Mexico, Greece, Portugal, Israel, and Japan. By comparison, OECD research suggests that with New Zealand’s policy settings we should be generating GDP per capita 20% above the OECD average.

A recent report from David Skilling prepared for the New Zealand Productivity Commission points to the need for policy instruments to support the growth of internationally focused “frontier firms” who are much more likely to bridge New Zealand’s productivity gap. Scale is also important as larger firms are much more likely to drive innovation and the global engagement necessary for productivity growth.

Building a learning economy

Yusuf and Nabeshima make it clear that the economic transformation of the SIFIRE countries was only made possible by their investment in human capital. The learning economy requires a country to invest in high quality, mostly-free education from pre-school through to tertiary and vocational training. Vocational and technical training is very important and arguably led to the build-up of technical skills in these countries.

This does not need to be expensive in nominal terms. The SIFIRE economies were able to provide this education at relatively low cost – averaging 4% of GDP between 1980 and 2000.

Most importantly, the SIFIRE’s success in building a learning economy was attributed to the value those societies attached to education, the relatively high prestige and compensation for teachers and the continual pursuit of excellence.

Openness to trade

The Skilling report puts a strong case for New Zealand policy to focus on developing export-led sectors rather than the “current agnostic policy approach, which treats international and domestic sectors in the same way”.

The numbers are stark. New Zealand has the lowest percentage share of exports to GDP compared to any other small advanced economy, and this has not changed in decades.

Source: World Bank World Development Indicators.

There has also been little change in the composition of our export sectors since the 1980s (except for the recently COVID-decimated tourism and export education sectors).

Skilling recommends policy interventions should encourage internationally-oriented “strategic clusters”. Similar to Yusuf and Nabeshima’s networked economy, these clusters would be developed in industries where New Zealand has an existing competitive advantage, such as in the primary sector and the “weightless” digital and creative sectors.

Foreign direct investment

Yusuf and Nabeshima note that for the SIFIRE countries to achieve such improved growth rates required increased foreign capital investment although not “heroic” levels of investment. The FDI triggered a rapid improvement in the business climate of the SIFIRE countries and contributed to technological catch-up and innovation.

New Zealand’s economy is reliant on foreign investment and the levels of FDI have been rising. According to UNCTAD's 2020 World Investment Report, New Zealand received US$5.4 billion in FDI inflows in 2019, a significant increase from 2018 levels (US$2 billion).

Source: Stats NZ.

FDI is often a political football encompassed in the “tenants in our own country” phrase. However, the stark reality, pointed out by the Productivity Commission is New Zealand needs more technology if we are to address our poor record of productivity and income growth. A key way to achieve this is to increase our exposure to international firms.

Despite our reputation as an easy place to do business, New Zealand’s screening settings are very restrictive compared to other OECD countries leading to costs and delays in processing applications.

Source: OECD.

Improving our country’s growth rate will involve a mixture of developing more internationally orientated “frontier firms”, investing in high-quality education and training, and mindful, friendly policy settings for foreign investment. In doing so, New Zealand has an opportunity to reorientate to a “new normal” that will enable it to shrug off the decades of poor productivity and create sustainable growth.

Despite the recent COVID-setback, the country is still in a better relative position than most of the advanced world. The worst thing we could do now is to base our recovery policy settings on historical performance rather than making the necessary changes to enable the country to reach its full potential.


*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission. The New Zealand GDPLive resource can also be accessed here.

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38 Comments

Sure there's a good opportunity, but all I see from our politicians and business leaders is more of the same old. So we'll squander this opportunity like all the others, in my opinion.

And if we shut down the country every few months, ( I hear auckland probably going to level 4 next week) then you can forget about the economy... period!

Anything saying Auckland is going to level 4 next week is a rumour because no decision has been made as the data is not yet available.

Having watched the 1pm briefing today, while the outbreak seems to be larger and of less defined origin than hoped for (and nothing conclusive from genomic sequencing as yet), the evidence so far is more suggestive that Auckland would be in level 3 lockdown next week than level 4, in my opinion.

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How do we "encourage entrepreneurship" when there are such easy safe wins to be had in the property market? Why would anyone risk their capital on business ventures when the tax treatment of property is still so favourable?

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Exactly. It's clear the reserve bank is getting ready to do all it can to boost the property market which is sickening.

Ginger, tax treatment of all capital gains are the same. So why do you use tax as part of your argument? in my personal opinion, everything that NZ has a realised economic advantage is invested in to the hilt. Investing in other areas does not return anything. The cost inputs are very high (labour being the most obvious one, materials being the other) and rewards very uncertain. This is why money ends in property. It is not the other way around. If risks and rewards are favourable, money will go there.

That isn't what the Tax Working Group found. Sorry for google images link but the image is otherwise embedded in a PDF: https://images.app.goo.gl/cHG9zqUpRWkSi4wVA

Owner-occupied housing has a marginal effective tax rate on equity of 11.3%, compared to 29.4% for rental property equity. The next lowest is company and PIE taxation at 47.2%.

That's a massive 35.9% taxation gap between owner-occupied property equity and business equity.

My point is about taxation of capital gains. Not effective taxation on types of investments. The fact that capital gains are not taxed automatically means that low or risk free investments (with no or very little prospect of any capital gains) are taxed at much higher proportion of the income they generate (as their nominal income is pretty much what they make vs a rental property that both earns rent and gains from sale). And Ninja is talking about high risk investments no bank deposits and bonds (which are effectively loans to properties).

As for investments, You know that they include imputed rent from owner-occupied housing? (i.e. you are earning rental income by living in your own house and because you do not pay taxes on that, it is a distortion). exclude that and that will remove much of the said distortion.

The difference between companies tax and the property is also the result of paying out capital gains in form of dividends, vs realizing gains when shares are sold. So if you own a business and do not pay dividends and then sell the shares in your company, your gain is not taxed. So the paper assumption is right about very large companies which pay dividends. But I think it is absolutely misleading if you are talking about start-ups, who do not pay dividends and money is generally made by selling shares when business is proved to be successful. So in that case (i.e. developing a business idea like Xero or Trademe) you pay nil tax and there is absolutely no preferential treatment from taxation point of view.

Fake News: Pay attention and keep up to date. I have posted here before. Very few of the NZX50 top 50 companies in NZ pay the mandated company tax rate of 28%. Too many of them pay zero tax. Of the others the commonly reccurring amount seems to be around 15%

Not really. Provided you hold your property beyond the Brightline, I doubt any Property Investors are paying Capital Gains.

In addition access to leverage on Property Investment is much cheaper and amplifies the capital gain. Other investments do not benefit from such preferential bank lending. Property Investors also have their rents underwritten by the tax payer via accommodation supplement. And with an implicit guarantee that RBNZ will do anything it can to prevent a serious property market correction, which further reduces risk on the investment.

Ginger, while true, not of these are tax preferences (which was my point). But when there is more money to be made elsewhere, none of these factors would stop flow of money to those businesses.

Eh? Is there a brightline test for other assets?

There are similar concepts in play. If gains are considered capital gains they are not taxed. See my response above

The property market isn't always safe and wins can be meagre. Bad tenants, leaky buildings and so on. People here often deride property as a poor investment compared to shares.
Maybe they should do something about bank interest and share dividends, such easy wins for people?

If an investor couldn't make a capital gain and/or become cash flow positive on a property in NZ since 2009 they are an idiot.

Bad tenants, sure. It happens, although you can insure against this to an extent and also have property managers involved in the application process to reduce risk of that.

I spent 250 k on a vineyard 20 years ago, now I don't even pick the grapes, prices are too low. If I had used that money to buy a house in Havelock North borrowed 50%, I would be the best part of a million dollars better off. I'm never going to invest in anything that requires labour or capital dependent on markets, why would I?

The knowledge exchange hub needs some more knowledge

Sorry, but this is mantra-chanting of the unquestioning kind. Productivity? How often has this been challenged - virtual activity (which is most of us) are just churn; real activity is thermodynamically limited. Why, oh why, do these folk keep conflating 'work' with the churn?

We need to be beyond this. https://www.resilience.org/stories/2015-05-24/is-the-slowdown-in-product...

"In the bizarro world of modern economics, energy and materials are not considered "tangible."

Touche

The issue here is not opportunity but very low productivity.

Take a walk along Tamaki Drive and you can see NZ work style in action. Five people loafing around while one slowly does something productive. It is any wonder every large construction project goes way over budget and over time ?

I'd imagine starting or running a business here is a mightmare.

Haven't seen that stereotype for a while. You're targeting a particular group or industry? Or is that everyone you "see"?

You must have the vision of Stevie Wonder if you haven't seen this 'stereotyoe'

It's well known in civil construction work that only 1 person is allowed to work at a time. It's The Rules.

I remember someone here posted.... Is called the health and safety ritual. 1 roadworker working while 4 to 5 stand around looking like directing traffic or something.

I'd say it's pretty widespread from rental real estate agents who dont bother picking up or returning calls to the removal guys who pull a blanket out of the back of the van at 10am for a nap followed by an hour and a half lunch break and a quick exit at 3.30pm or the shop assistant who can be bothered to check stock for an item or the architect who doesn't read your brief properly or ... It's not everyone by a long way but there is enough of it to make you abundantly aware that you are in NZ.

Having worked in retail, I can say that shop assistants not bothering to check for stock is because the company has such poor systems in place that it's often impossible to get the information, or it's wrong anyway. Not the front-line employees fault.

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How many times do we see these same old articles about "let's be productive" or let's "reset". All empty words and will never happen.

It is much too common for successful NZ businesses to be sold off to overseas buyers for a quick profit. If foreigners can see value in our companies then why can't we? Boards of directors and shareholders need to place more value in retaining ownership.
As an example, how much has the value of Trade Me increased since it was sold off?

We need to diversify in terms of what we do .

Milking cows , picking strawberries , cutting down trees , robbing hives and serving meals to Asian tourists is all good , it puts food on the family table , but we need to do more .

We also need to move to a high wage economy , but what we do does not bode well for achieving this

It may start with adding value to what we already produce , but we need to look outside the square

But then all the growing companies end up heading to the ASX anyway don't they?
So how do we encourage, develop, then hold onto them?

The NZX lacks depth, it is hard to raise investment capital in NZ and people here are wary of the sharemarket. Some changes to the tax system to encourage more investment in businesses instead of housing might be a start and the banks might need to be required to invest more into the former and not so much into the latter. There is a lack of private savings plus high levels of household debt in NZ because we have had governments obsessed with running budget surpluses and so this doesn't create the right environment for businesses to grow and prosper unless the business is a bank itself.

And so, if National somehow get in and Judith gives everyone the key to their kiwisaver so they can go and buy a ute and slap some logos on the side.....

Whats the screaming noise.....oh it's the economic brake squeal of another lockdown happening. Picking a lot of hard decisions coming. Those that just survived L4 earlier have to decide whether they double down on the losses, or shut.

With a lot of corporates still teleworking and the staff loving it, I would not want to be long on commercial office space right now. Picking mass appartment conversions in the next five year.

Fun fact.
Many firms now, yesterday & today are over reaching current lockdown.

Already, today put people on work from home.
From yesterday barred staff contact from any who have been in Auckland in past week.

Try getting stuff done now!

"and create sustainable growth"

Just remember, folks, she's advocating an oxymoron. .

All the Irish tradies I have talked with in the last year or so say that Ireland is only just recovering from the glut of houses built when Ireland was the Celtic Tiger. The main reason it has picked up is because of the tax breaks it gives all the American firms to locate their offices in Ireland. That, and being a source of cheap labour for their EU mates. The OECD is famous for it's ridiculous conclusions drawn from inaccurate data. Mexicans as productive as Kiwis? Obviously includes their drug trade as well.

How do you "roar out of recession" when you impose one on yourself every 6 months by going into lockdown?

By drawing a lion in the sand?

Be nice if these opinion writers actually provided some suggestions instead of meaningless esoteric waffle

Tax base change. Incent actually working vs debt speculation on land.

Days to the General Election: 19
See Party Policies here. Party Lists here.