New govt must change economic direction
Innovation – not immigration – should drive our economic growth, writes economist Greg Clydesdale.
The new government, regardless of who it is, must change the country’s economic direction. For decades, we have followed a slow growth path that has seen other countries track us down and pass us.
This was no more obvious than after the Christchurch earthquake. Many Irish builders came to New Zealand to work on the re-build, but after a couple of years away, they realised that life was better in the emerald isle. They returned home. In the 1970s, Irish would have leapt at the chance of migrating to NZ. This is no longer the case.
In 1970, Irish GDP per capita was US$11,000 compared to New Zealand’s US$18,686. By 2015, the positions were reversed. Ireland earned $58,117 compared to our $33,515.
For years, economists have wondered why New Zealand experiences low growth when we do well on all the economic fundamentals, but there is one fundamental they failed to consider, and that is our capabilities. What you do determines how much you earn, and past governments have actively pursued low growth industries.
History will judge the governments of John Key and Helen Clark as years of wasted opportunity. Their policies facilitated growth in industries with a domestic focus although, ironically, they thought it was international.
These governments pursued policies based on increased urbanisation, particularly with Auckland. Fuelled by immigration, they wanted Auckland to be a global city with international connections that would power New Zealand’s economic growth.
But Auckland, has failed to deliver in the areas that drive sustained growth. Governments expected an ethnically diverse population to fuel exports – it has not. It is widely recognised that Auckland’s exports per capita are much lower than the national average, and the city does not have a comparative advantage.
The governments also expected an ethnically diverse population to fuel innovation. However, despite having one of the most ethnically diverse populations in the world, it produces fewer patents per capita than Christchurch.
Not surprising, Auckland continues to fall down the international rankings. In a ranking of world cities for GDP per capita by the OECD, Auckland has fallen from 69th in 2011 to 74th.
The government tried to create an international city, but we ended up with a city of consumers, not international-class producers. This demand for goods from home has fuelled imports and had a negative effect on our balance of payments.
It is true that exports to China have grown and many people interpret this as a link to immigration, but it isn’t. People in China do not buy more Australian coal or NZ milk powder because someone from China moved here. They are buying it because our trade output is compatible and they now can afford our goods.
Economists provided the government with models arguing that immigration, diversity and agglomeration will produce results. But it is only in these models where growth has occurred –the real world is very different.
Our wealth is a reflection of our capabilities. Instead of developing an international focus, Auckland’s capabilities are predominantly devoted to the domestic market: construction, property, retail, and business services.These industries have low rates of innovation and export potential. As a consequence, Helen Clark and John Key’s governments steered the country along a slow growth path.
Construction and property are highly profitable sectors because of the high demand from population growth. Hence it has become a recipient of much investment and, because jobs are readily found there, many school leavers will study and gain capabilities in these industries. We are also accepting migrants disproportionately into these areas. In other words, immigration to Auckland distorts resource flows into low growth areas.
And it is not just the market that is distorted. Recently, the Mayor of Auckland said that $27 billion is needed to pay for infrastructure to accommodate population growth.
To achieve high growth, we need to either innovate, and thereby bring new additional sources of wealth into New Zealand, or export more. The theories stated that ethnic diversity would help innovation as we gain people with different world views. However, innovation in production does not result from people having different world views.
It comes from people having expertise in specialised areas of production. It is capabilities that drive growth, not ethnicity. To innovate, we need to encourage students into science and technology.
The last two governments have turned New Zealand into an economy for property developers and real estate agents. It is not coincidental that Bill English campaigned on the basis of job growth in the construction industry. For decades, productive farmland on the border of Auckland has been converted into housing for the growing population. But this industry does not provide the innovation nor export income that we need.
If New Zealand is to achieve high sustainable economic growth, the government needs to change economic direction.
Instead of pumping up Auckland with high levels of immigration, the government should have focused on developing the capabilities of New Zealanders. It is capabilities that drive productivity and determine a nations level of prosperity.
Unless there is a change in economic direction, we will continue to descend down the OECD rankings as Asian and Eastern European nations pass us.
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