Is the New Zealand economy on the right track?

New Zealand is a little economy that ticks a lot of boxes. It ranks first in the World Bank’s Ease of Doing Business Report 2020 and third in the Heritage Index of Economic Freedom 2020. It also has a growing tech sector and averaged a respectable 2.9 percent annual GDP growth between 2009 and 2019. But innovation and competitiveness are falling. And let’s not mention productivity. Should the New Zealand government be doing more?

A strong foundation

New Zealand is a small country in the pacific with a lot going for it. It inherited a stable democratic system from the British, good public institutions, and ideal conditions for commercial agriculture.

During the 20th century it enjoyed great economic prosperity on the back of agriculture. And when the terms of trade turned against agriculture in the 1970s, it successfully (albeit controversially) liberalized the economy in the 1980s and 1990s.

Good conditions for growth

In recent years, New Zealand has worked hard to create the right conditions for investment and economic growth as evidenced by its high rankings in the Ease of Doing Business report and Index of Economic Freedom report.

These initiatives seem to be working with the tech sector. The Technology Investment Network 2020 report found that New Zealand now has a record number of tech companies with over 50m NZD in revenue. Total revenue for the TIN200 is $12.7bn. The value of its exports is $9.4bn. The TIN200 companies also employ over 55,000 people in New Zealand and around the world. 4,000 jobs were created in 2020 alone.

And it is not just government support that is spurring this growth. New Zealand has the highest ratio of angel investors per capita in the world according to Startup Genome.

Sliding down the rankings

Despite these successes and efforts, New Zealand still appears at a crossroads.

In the recently released Bloomberg Innovation Index for 2021, New Zealand improved four places to 25th. But this was after falling five places last year and falling from 18th since 2015. The Global Innovation Index from the World Intellectual Property Organization shows a similar slide.

There is also a similar downward trend in New Zealand’s international competitiveness. The IMD index has New Zealand down six places to 22 since 2016.

Harvard’s Economic Complexity Index also shows a decline in the complexity of New Zealand’s exports. Its ranking has dropped from 33 in 1995 to 54 in 2018. Only the agricultural sector (already the largest exporter) has significantly increased its share of world exports. Manufacturing declined after the liberalizations in the 1980s and 1990s. Further, in recent years, New Zealand agriculture has benefited from increased exports to China (particularly dairy).

On top of this, the level of productivity and productivity growth has been stubbornly low since 1996. Capital productivity declined between 1996 and 2020, while labor productivity and total factor productivity averaged only 1.3 percent and 0.7 percent per year.

More needs to be done

If New Zealand wants to maintain or improve its living standards, it needs to do more than provide the right conditions for investment and growth. It needs policies that address international competitiveness and productivity.

Reaping a harvest requires more than good soil and a reliable water source.

Education and R&D is one area for potential reform. Increased research outputs will improve the complexity of New Zealand’s export and will help the tech sector, productivity, and wages.

New Zealand’s education system is world-class with a strong schooling system, respected universities, and a growing choice in private and public vocational options. In the latest PISA rankings, New Zealand’s 16 year-olds scored better than the OECD average in science, reading, and mathematics.

But more can be done to translate this strong foundation into increased R&D and workers for the tech sector.

In the 2020 Global Innovation Index, New Zealand scores much better on innovation inputs (19th) than innovation outputs (33rd). Similarly, the Bloomberg innovation index gives New Zealand a high ranking for research concentration (15th) but a lower ranking for R&D intensity (27th) and patent activity (27th).

The government is recognizing that better links are needed between the tertiary sectors and the private sector. Too many Crown Research Institutes have a commercial orientation and too many are focused on agriculture and geothermal energy.

The government’s new industrial policy is also aiming to encourage better research outputs in key industries like agtech and ICT. These are promising developments.

New Zealand is a small country but small countries often punch above their weight when it comes to tech and productivity. Singapore, Taiwan, and Israel are prime examples.

New Zealand needs to leverage its strong foundations into a new era of R&D and productivity for the 21st century. The government is saying the right things but without the right actions, New Zealand may continue to slide down innovation and competitiveness rankings.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes