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Partnership 2000 - Executive Summary

Partnership 2000 - Executive Summary

1. Since 1984, New Zealand's per capita income has fallen substantially in comparison with the Organisation for Economic Cooperation and Development (OECD) average. Per capita income fell absolutely between 1988 and 1992, and is likely to have fallen again between 1996 and 1999.

2. The top ten per cent of income earners in New Zealand have been insulated from this relative decline by a substantial re-distribution of income in their favour, and away from the 80% of income earners in the low and middle income brackets. The highest proportionate losses of income share have been sustained by people in the lowest income brackets.

3. Since 1975, New Zealand has experienced serious economic difficulties due to the decline in the international prices of our primary product exports relative to the prices of imports. The free market economic model has not brought about a fast enough change in the pattern of our exports and imports to solve this problem. Instead our economy is languishing with high overseas debt and an excessive balance of payments deficit. New Zealand's ultra-dry monetary policy has made this problem worse by causing the New Zealand dollar to be over-valued for substantial periods of time between 1984 and 1998.

4. There has also been a sharp regional polarisation. A few areas of the country (e.g. Bay of Islands, Auckland, Tauranga, Nelson-Marlborough, Christchurch and Queenstown) have seen significant employment growth. However, the majority of urban areas and regions experienced a fall in employment between 1986 and 1996. The declining areas include most of the eastern, central, western and southern North Island, the South Island West Coast and most of Otago-Southland.

5. As a result of the weak performance of the economy since 1984, unemployment has risen substantially, from under four per cent in 1985 to between six and eleven per cent in the 1990s. The unemployment rate is sharply differentiated along ethnic lines, with Maori, Pacific Island and other ‘non-European’ communities experiencing unemployment rates between twelve and eighteen per cent currently. The pakeha unemployment rate is much lower in Auckland, where there are large Maori, Pacific Island and ‘other’ communities, than it is in Christchurch, where most of the population is pakeha. This shows that ethnicity is not a cause of unemployment but, rather, a factor determining the distribution of unemployment to particular groups of people.

6. In designing economic policy, New Zealand would benefit from a study of contemporary international thinking on the processes of economic, regional and industry development.

7. The Alliance's review of recent thinking on economic development shows that even within the neo-classical school of thought there has been a substantial reconsideration of the basic assumptions of the free market development model. The older theories focusing on a rising labour/capital ratio and diminishing marginal returns have been superseded by newer theories which admit a far wider range of economic influences, including location, urbanisation, acquired human capabilities, and the role of educational institutions and research institutes. These theories allow for the ‘composition effect’ of a large number of influences acting together and suggest that marginal returns may even increase with the development of the economy. Technological advance is now viewed as arising within the production system, rather than somehow existing outside it. In international trade, emphasis is placed on created advantages, rather than inherited natural resource-based advantages.

8. Contrary to the older view that the income gap between Third World countries and developed countries would narrow automatically as a result of economic development, it is now accepted that the income gap between developed countries and most Third World countries has widened. This realisation has caused even more attention to be focused on the cumulative nature of the economic development process, on the ways in which the more economically advanced countries have been able to build on their initial advantages. Countries (such as Japan, Korea and Taiwan) which have broken out of poverty and begun to close the gap between themselves and the high income OECD countries have only done so by means of exceptionally activist economic development policies.

9. The implication is that New Zealand is likely to drift even further behind the OECD average income if we do not take special measures to encourage the development of our economy.

10. The new understandings about economic development have permeated regional development policy in recent years. Governments have been alerted to the possibility of runaway economic polarisation within a ‘free market’ environment. At the same time, appreciation that most advantages in the modern economy are created rather than inherited has led policy-makers to regard lagging regions not as a drag on their economies, but as potential bases for future specialised capabilities which would contribute positively to the overall performance of their national economies.

11. Since cumulative development effects are a form of ‘externality’, arising from the combined effect of decisions taken by a multitude of firms and government agencies, it is widely accepted that governments have a significant role in stimulating economic development. This role extends from basic service provision (e.g. public health and education systems) to large-scale expenditures on science and technology, to the specific encouragement of innovation and company formation.

12. There has also been a growing recognition that social and environmental costs accompany economic growth, and that for sustainable improvements in well-being to occur, social and environmental needs must be addressed directly as part of the development process.

13. Examples of active government economic development policies are the regional development policies of the individual countries of Western Europe, the European Union ‘Structural Funds’, the high-technology science-industry projects of the European Union and the industry development policies of Japan and Taiwan. One particular example which it would be beneficial for New Zealand to study is that of Scottish Enterprise (formerly the Scottish Development Agency), which has played a significant role in Scotland's recent economic renaissance.

14. New Zealand also has its own positive experience of regional development policy, in the form of the Department of Trade and Industry's regional development programme and the Development Finance Corporation's activities in the period 1974 to 1984. These had a positive impact on the regional distribution of economic activity during that period.

15. New Zealand needs an economic development policy which combines qualitative goals with indicative economic targets. Basic goals include full employment, improved environmental quality, reduction in poverty, improved income distribution, improved social indicators and an upward movement in New Zealand's per capita income towards that of the OECD average. Key economic indicators include the strengthening of the tradable sectors of the economy (including the accelerated development of new specialities), employment and productivity growth, reduced dependence on overseas savings and an improvement in the balance of payments.

16. Compared with the rest of the OECD, New Zealand underspends on science and research and development, and needs to make a substantially bigger investment in these areas, and in the economic applications which flow from them.

The Alliance proposes a plan of action with the following elements:

 Investment in sustainable economic development will be undertaken by a regionally based development process. It will be headed by an Economic Development Fund which will enter partnerships with the private sector and local government. Examples of potential partnership contributions from central government include direct development grants, loans, start-up equity capital, R&D, access to expert advice and professional expertise, training assistance packages, development parks and enterprise zones.

 A network of Regional Development Agencies will be established to develop regional development plans, recommend projects for investment, provide professional marketing, managerial and technical support, and coordinate training needs with appropriate businesses offering new forms of skills training.

 Spending on research and development will be substantially increased, particularly in non-traditional high-tech, added value industries with high-growth potential. Public funding for university-based research will be increased and a portion of increased public sector R&D will be applied to joint ventures with the private sector.

 A Strategic Industry Policy will be implemented to encourage the growth of technologically-advanced producers of tradable goods and services and bring about change in the industrial pattern of economic activity.

 Further elements which will assist in shaping partnership-led development.

 A Ministry of Economic Development and Employment will be established to take over the economic development policy functions of Treasury and implement a range of active economic development policies.

 The government will enter a partnership with local government to strengthen the regions of New Zealand. A network of regional and community employment Commissioners will be established to identify the specific employment needs of regions and communities. Public participation in economic development policy will be broadened.

 The legal framework and tax policies will be reviewed to ensure that the business framework encourages new business formation and survival.

 Workforce training and education will be streamlined with better integration of institutional and workplace-based learning. The industrial relations environment will be reformed to emphasise cooperation, and real wage and productivity improvements.

 Monetary policy will be reformed to better maintain overall monetary stability. Fiscal policy will be neutral over the economic cycle. Foreign investment rules and tariffs will be reformed to secure the strongest platform for New Zealand industries.

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