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Insights On Economic Growth And Innovation

NZBR: Media Release

26 March 2003


"A new OECD study entitled The Sources of Economic Growth in OECD Countries is relevant to the government's objective of returning New Zealand to the top half of the OECD income ladder and the work of the Growth and Innovation Advisory Board", the executive director of the New Zealand Business Roundtable, Roger Kerr, said today.

The study follows the 2001 OECD Ministerial report on growth, The New Economy: Beyond the Hype.

A key point highlighted in the latest report is the importance of "getting the fundamentals right". In contrast with analyses of the New Zealand economy that focus on its size and location, the OECD states "Policy and institutions are also found to play an important role in shaping economic growth."

In this context, the OECD finds that "there is some support to the notion that the overall size of government in the economy may reach levels that impair growth." This is consistent with the point made by the Business Roundtable that no country that is comparable to New Zealand has achieved growth in per capita GDP of 4 percent a year or more on a sustained basis with our ratio of government spending to GDP.

Also relevant to New Zealand, given its high level of welfare spending, is the finding that "On the expenditure side, transfers, as opposed to government consumption and - even more so - investment, could lead to lower output per capita."

On taxation, the report says that "high levels of taxation ... crowd out resources that could be used to raise growth potential." It adds, in particular, that "high personal income tax rates can discourage entrepreneurship since entrepreneurs are self-employed and/or managing unincorporated businesses."

When discussing growth and innovation, and measures to foster new technologies such as ICT (information and communications technology), there is no mention in the OECD's policy conclusions of 'picking winners', 'hands-on' policies, clusters, incubators and even public sector R & D: the OECD says that "the analysis could find no clear-cut relationship between public R & D activities and growth, at least in the short term."

Instead, the report constantly emphasises the importance for innovation and R & D of flexible labour markets, especially reduced employment protection legislation (rules governing hiring and firing), and of opening regulated product markets up to competition (an example in the New Zealand context is accident insurance).

"The report makes the point that the spread of new technologies such as ICT "has not fundamentally changed the policy prescriptions for sustainable long-term growth". Clearly the Growth and Innovation Advisory Board's work should be firmly anchored in the OECD's findings if it is to serve a useful purpose in helping the government to realise its goals for growth", Mr Kerr concluded.

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