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Economic growth - the Prime Minister backs down

Economic growth - the Prime Minister backs down


Don Brash Writes
5 March 2003

Economic growth - the Prime Minister backs down

New Zealand's economy is about to slow down according to most observers, including the Prime Minister.

Over the last decade, our economy has grown at the same rate as the US economy, and only slightly slower than Australia's. In the last year or two, growth has been particularly good - close to 4 per cent - because of the reforms of the late 80s and early 90s, strong export prices, a very low exchange rate, and, somewhat ironically under the circumstances, the sharp easing in monetary policy during 2001 when, as Governor of the Reserve Bank, I assumed the weak world economy would knock New Zealand around more than it did.

In December, Treasury projected 2½ per cent growth for the year starting 1 April 2003 - and that was when the trade-weighted measure of the NZ dollar was at 57. The further appreciation of our dollar to over 61 on the TWI could knock another ½ per cent off growth over the next 12 months. This slow-down will affect lots of small businesses - and will be especially hard on those exposed to the export sector, such as farmers.

But this will only be a cyclical slowdown. Far more serious is that New Zealand won't be returning to the top half of the OECD within a decade, despite achieving this target being one of this Government's key goals - repeated on several occasions by the Prime Minister just two years ago. I'm not alone in realizing that - it's the consensus view of the business sector, and was confirmed quite unambiguously recently by the Prime Minister when reacting to the second Knowledge Wave conference, held last month.

Two years ago, it was estimated* that New Zealand would require annual growth in GDP per capita of between 4½ and 7½ per cent for 10 years if we were to reach the mid-point of OECD living standards within a decade.

That may not sound too tough a goal, especially as last year we had GDP growth around 4 per cent. But that 4 per cent growth delivered growth in GDP per head of only about 2½ per cent, a long way short of the 4½ to 7½ per cent range estimated to be needed to reach the mid-point of OECD living standards within a decade. And the 4 per cent total growth achieved last year was when growth "peaked" (to use the word the Prime Minister used in Parliament last month).

So we're not within a bull's roar of achieving the growth required to get back into the top half of the OECD within a decade, and even the Prime Minister has admitted that reality. So much for her commitment to growth! The present Government is intent on wealth re-distribution, not wealth creation. So unless it changes direction fundamentally, there's no prospect of any significant increase in our growth rate.

In my first email newsletter, sent out on 3 February, I listed many of the recent policies that will slow New Zealand's growth. Professor Paul Romer of Stanford University,** speaking at the Knowledge Wave conference last month, gave New Zealand "1½ out of 3" for having the policies in place to encourage growth - hardly a ringing endorsement - while (pleasingly) he gave the highest mark for our monetary policy framework, passed into law with the support of both Labour and National in 1989.

Little wonder Treasury projects total GDP to grow at a gradually declining rate over the next decade, with per capita GDP growth stable at around 1½ per cent - a far cry from the minimum per capita growth of 4½ per cent judged to be necessary.

I suspect the public aren't too fussed about this lacklustre performance because 'growth' has a bad name in New Zealand. Economists, and I'm one of them, have done a lousy job at explaining why growth is important. Too many people say that people are more important than economic growth, as if somehow economic growth was not about people! Economic growth

* gives people the opportunity for more interesting and better-paid jobs;

* gives our kids the chance for a better education;

* reduces the hospital waiting lists and funds the most effective drugs for those who are ill;

* provides better housing and more holidays;

* provides choice about what people do with their time;

* reduces the pressure on those struggling under the burden of high mortgages and buying clothes for the family;

* offers attractive career options for our kids, so they don't feel obliged to move to Sydney, or Melbourne, or London to get a job;

* provides a better standard of living for those in retirement;

* ensures we can afford to pay to keep our best sportspeople, so they compete for New Zealand rather than some foreign country.

Yes, growth is crucial. In recent years, the number of New Zealanders leaving the country has exceeded the number returning by almost exactly the number by which births have exceeded deaths. In other words, were it not for the immigration of non-New Zealanders our population would have been static. With our birth rate gradually declining and the gap between living standards here and abroad showing few signs of declining in a meaningful way, we are at serious risk as a society.

A few days ago, the National Party issued a discussion paper on economic growth written by me. The paper highlights the kind of things I think should be done to increase our growth rate, and seeks feedback from the public and Party members about these ideas. The paper can be found on the Party's website at:

http://www.national.org.nz/

Political correctness gone mad

*********

Birds' nest shells not PC say Maori

North Shore Times Advertiser, 27 February, 2003

Culturally unacceptable sand scuttled a beach project and now culturally unacceptable shells threaten to delay nesting beds for dotterels already holding up a major motorway.

A Maori group says shells from Thames for eight rare dotterels, which have delayed building the $32 million Esmonde Rd motorway interchange project, aren't acceptable.

The nesting beds to keep the rare birds happy are expected to cost about $200,000.

Ngati Whatua representatives are unhappy over mixing local and outside shells, and want them locally sourced..."

*********

The article explains the extra costs and delays involved in trying to source shells from the Auckland region. Have we totally taken leave of our senses? When nearly 400,000 adults of working age are on a benefit, including tens of thousands of Maori, we incur costs of millions of dollars (including the substantial cost of delay) to avoid mixing shells from the Coromandel with those from the Auckland region. This is political correctness gone mad and should be stopped at once.

Don Brash

http://www.donbrash.com

*By Treasury economists Grant Scobie and Peter Mawson.

** Professor Paul M Romer, Professor of Economics, Stanford University; Senior Research Fellow, Hoover Institution.


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