A recent research report¹, looking at the reasons for New Zealand’s relatively poor economic performance, has some fascinating theories as to why we have paradoxically lagged behind other developed nations despite many structural advantages. It also raise questions about whether aiming for “productivity” parity with Australia is the right goal for New Zealand.

The report, authored by Professor Philip McCann, observes that New Zealand has struggled to compete on the OECD ladder since the economic reforms of the mid-1980s, despite its notable status as a free economy. In fact GDP per capita has been eroding steadily for over 40 years, a trend that shows little sign of abating. Few now doubt that this reduction in income has increasingly serious implications in regards to the affordabiity of the lifestyle currently enjoyed by New Zealanders.

In a world where human and financial capital are highly mobile, McCann theorises that economic geography, rather than macro-economic settings, constrains New Zealand from achieving its full economic potential. McCann says that focusing on a “productivity” gap with Australia is entirely the wrong approach, when in fact we should be looking at how we can leverage regional advantages. Only through regional cooperation can we hope to position for better growth.

He says that New Zealand has been constrained in adapting fully to the era of globalisation because of its small scale and distance to global markets. He also observes that worldwide economic growth is now being concentrated within larger cities and hyper connected regions. Such regions attract creative people and are increasingly associated with knowledge-based, high value economic activities, according to work by other researchers.

Because of the intense competition for talent and capital from power-house “global cities” on the Pacific Rim such as Shanghai, Singapore and Sydney, second tier cities (like Auckland or Adelaide for example) have no choice but to actively strengthen the existing web of interrelationships that bind them together on a sub-regional basis, suggests Professor McCann. Unfortunately, enormous reductions in capital flows during the recession have only added urgency to addressing the challenge of regionalisation.

The World Bank reported² that from a peak of $296 billion (U.S. dollars) in foreign direct investment (FDI) into Asia during 2007, the figure had dropped to around $88 billion in 2009 as European and American institutions reviewed their investment strategies. Despite a forecast investment rebound to about $120 billion in 2010, the refinancing needs of the region have been estimated in the order of $200 billion per annum, leaving a substantial deficit to be covered by borrowing. This situation is likely to have considerable flow-on effects to neighbouring countries and trading partner nations across the Asia-Pacific rim.

So where does this leave New Zealand? A 2009 survey by Financial Times subsidiary publication FDI Magazine placed both Auckland and Wellington in the top ten of 133 Asia-Pacific cities in terms of quality of lifestyle. Auckland also surpassed many others by ranking an impressive number 10 with its FDI attraction strategy. But New Zealand cities ranked poorly in terms of infrastructure, education and the ability to create jobs through foreign investment or by leveraging technology and intellectual property. So whilst we can attract people for lifestyle reasons, our conversion rate is somewhat less impressive in respect of wealth creation.

MacDiarmid Institute physicist Shaun Hendy has been looking at patent data from the OECD. His study3 showed that Australia was well ahead of New Zealand on numbers of patents filed per capita, but that this was to be expected because data also suggested that larger cities produced more patents anyway. However he found that individual inventor productivity did not increase markedly with city size. This suggests that there are quite likely other influences such as quality of educational institutions, existence of research networks and availability of funding. Interestingly, the role of social effects and “knowledge spillover” on science researcher productivity has yet to be fully explored in this context.

Might the government’s well intentioned but controversial efforts to bridge the perceived “productivity gap” with Australia possibly be aiming at the wrong set of goal posts? Unless we fully acknowledge the importance of attracting and connecting people and capital on a regional basis we risk having to compete in isolation with much more powerful players throughout Asia-Pacific. A joint Australia-New Zealand investment showcase planned for March seems like the perfect opportunity to demonstrate a commitment to regional cooperation. But the government will have to ensure that the talk is followed up with decisive and timely actions as well as a leadership vision.

Bibliography:

1. McCann, Philip. (2009). Economic geography, globalisation and New Zealand’s productivity paradox. Motu Research Group Public PolicyPaper
2. Seward, J. (2009). Would a regional fund help get Asia through the financial crisis? World Bank weblog – East Asia and Pacific on the Rise.
3. http://sciblogs.co.nz/a-measure-of-science/2009/12/16/the-productivity-of-inventors-in-cities/

A bullet point summary of the McCann report can be found here:

http://www.motu.org.nz/files/docs/McCann_seminar_slides.pdf

Photo Credit: Luke Appleby