New Zealand has been one of the faster growing economies within the OECD during the past decade. From 1992 to 2002 it grew at an average annual rate of 3.6 per cent, and has maintained a robust pace of expansion during the more recent period of global downturn. This represents a marked improvement on the economic performance of the preceding two decades, during which per-capita income levels in New Zealand declined relative to the OECD average. Underpinning this improved performance has been the programme of reforms that began almost 20 years ago. Those reforms have provided the economy with several important strengths: a sound macroeconomic policy framework; low inflation and a fiscal surplus; a flexible labour market; highquality public administration and regulation; and an education system that delivers top-class overall results for the majority. These reforms have boosted the economy’s sustainable growth rate and its resilience to recent adverse shocks. However, some weaknesses and challenges remain: there is scope to further increase foreign trade; investment in equipment, R&D and information and communication technologies (ICT) is low, possibly because high foreign debt raises the cost of capital; the distribution of education outcomes is wide, with too many people having inadequate skills for a modern economy; and several infrastructure bottlenecks have developed. But the reforms have halted the decline in relative living standards observed since the 1960s, per-capita incomes having grown at an average annual rate of 2½ per cent over the past decade, a little faster than for the OECD as a whole...

The government has set the goal of returning GDP per person to the top half of the OECD, a spot last occupied in the mid-1960s. In the past four decades, per-capita incomes have fallen from well above to about 12 per cent below the OECD average1 (Figure 1). Low labour productivity is the main explanation of this income shortfall, as employment rates and hours worked are relatively high when compared with other countries (Figure 2). The key economic challenge is therefore to boost productivity growth by enough to begin climbing the OECD ladder. But the country faces other challenges as well. While the performance of the labour market has been impressive, employment rates are still 5-10 percentage points shy of the OECD’s star performers. Lifting employment rates to their levels would go a third of the way to achieving the government’s goal...

As discussed in Chapter I, the key policy challenge confronting New Zealand is how to achieve faster labour productivity growth. Almost 20 years have passed since the country first embarked on a broad-ranging programme of structural and macroeconomic reforms. From a starting point of being one of the most regulated economies in the OECD, those reforms were among the most comprehensive and consistently market- oriented implemented in OECD countries. In spite of this, New Zealand continued to lose ground in income per capita terms relative to other countries into the 1990s, and only toward the end of that decade did it witness a sustained pick-up in trend labour productivity. The slide in relative living standards vis-à-vis the OECD average seems to have been arrested, but a further acceleration – necessary if New Zealand is to move back into the top half of the OECD ranking, as the government is intent on doing – is still not in sight...

International migration is a phenomenon that touches a very high proportion of New Zealanders: about 20 per cent of New Zealand’s resident population of some 4 million were born abroad, and it is thought that over half a million citizens are resident in other countries. Unusually for an OECD country, issues relate to both immigration and emigration, as the causes and consequences of both these phenomena are important for NZ policymakers. Over the past 30 years, immigration has been largely balanced by emigration, with no substantial net impact on population change. But the net flow has been variable, with periods of large net immigration alternating with net emigration. Most recently there has been a rapid shift from net emigration (as recently as 1999-2000) to very high levels of net immigration. Issues for policy include whether – and how – policy might seek to moderate this variability, the extent to which immigration policy should be linked to the labour market situation or other factors, and whether emigration of New Zealanders should be seen as a problem or an advantage...

New Zealand’s overall labour market performance is good by OECD standards and has been particularly impressive in the past few years. Employment legislation and the industrial relations framework both contribute to a labour market that has been able to painlessly absorb a significant influx of working-age migrants over the 1990s. The flexibility of the framework has made it easier to cope with significant changes in working practices, including greater use of part-time and temporary work and a shift towards higher skills. It has also given more scope to small firms to tailor employment conditions to their specific needs. In terms of basic outcomes, this framework has delivered above-average employment rates for men and women, and an unemployment rate below 4½ per cent of the labour force. The incidence of long-term unemployment, as measured by the labour force survey, is also low in comparison with other countries. However, a broader measure of joblessness that includes people only marginally attached to the labour force – e.g. those without a job but who want one – is considerably higher (Table 15). Thus, there is still a significant number of able-bodied people who are permanently or frequently out of work and who may be able to be brought into the labour force if particular blockages are removed. This Chapter reviews the labour market position of such people and focuses on social assistance reforms that may help the jobless move from welfare to work while minimising any negative impacts on poverty or social outcomes more generally. It also discusses the importance of maintaining labour market flexibility...

Economic activity has remained buoyant over the past two years despite the global economic slowdown. GDP growth98 has averaged 3½ per cent per annum since the first quarter of 2001 and has been around or above 4 per cent in seven of the past ten years. The economy has also proved much more resilient to climatic and external economic shocks than in the past. This performance can be partly attributed to the improvement in potential output growth that became evident in the mid-1990s and was described in more detail in Chapter I. But it also reflects some temporary and cyclical factors, the most notable being a spike in export earnings early in the millennium and a recent surge in inward migration...

There is growing concern that long-run development may be compromised unless countries take measures to achieve balance between economic, environmental and social outcomes. This section looks at three issues of sustainable development that are of particular importance for New Zealand: containing greenhouse gas (GHG) emissions, reducing water pollution and improving living conditions in developing countries. In each case, indicators are presented to measure the progress and evolution of potential problems, and an assessment is made of government policies that affect the issue. The section also considers whether the institutional arrangements for integrating policymaking across the different elements of sustainable development are working well, taking the example of genetically modified organisms (GMOs) as a case study (see Box 4)...