Thursday, May 30, 2024

Dr Oliver Hartwich: Time for a tune-up as New Zealand's economic engine sputters

When I was a university student, I noticed my car was not accelerating as smoothly as it once had. At first, I brushed it off, thinking it might just be my imagination.

It was not until I took the car for its warrant of fitness that the technician delivered the bad news: one of the engine’s four cylinders had stopped working completely.

Luckily for me, the problem was caught early enough to fix it without breaking the bank. Had I waited any longer, I might have been looking at a wrecked engine and a much bigger repair bill.

Countries can be a bit like that ageing car.

When things start to go wrong, the signs may be subtle at first. On the surface, everything still looks fine – especially to outsiders. But ignore the warning signs for too long, and the country could be facing a full-blown crisis.

That is why New Zealanders should take notice of their country’s recent slide in the Chandler Good Government Index (CGGI).

The CGGI is an annual ranking that measures the capabilities and effectiveness of 113 governments worldwide based on 35 indicators. It is produced by the Chandler Institute of Governance, a non-profit organisation founded by Richard F. Chandler, a New Zealand-born businessman.

In the 2024 CGGI rankings, released last week, New Zealand fell out of the top 10 to land in a middling 13th place – four places down on the previous year. The scores for “leadership and foresight” saw us tumble all the way to 15th (from 6th place last year), while “attractive marketplace” came in at a dismal 22nd (down from 15th).

Now, some might argue 13th place does not sound so bad. New Zealand is still a relatively highly ranked country, after all. It is also important to note that the report measured New Zealand’s performance towards the end of the previous government’s term, so the results are not an indictment of the new administration.

But here is the thing about these global indices: they tend to move at a glacial pace. It takes a long time for simmering problems to show up in the numbers, and even longer for the world to take notice. When a country sees a noticeable drop in a short period like this, it is worth digging deeper to understand what is going on under the hood.

Unfortunately, the Chandler Index is far from the only red flag on New Zealand’s economic dashboard. The latest IMD World Competitiveness Rankings had us languishing in 31st place for overall competitiveness (ten places down since 2019).

Meanwhile, the OECD’s PISA assessments show New Zealand students’ maths, science and reading skills have been slowly but steadily slipping, both relative to other developed countries and in absolute terms, for years. No matter which way you slice it, there are troubling signs that the fundamentals of the economy are slowly eroding.

Connect the dots, and a worrying picture emerges: the gradual, insidious decline of New Zealand’s economic foundations. The country may not be in full-blown crisis mode just yet, but the warning lights are starting to flash more insistently. If policymakers continue to ignore them, they risk sleepwalking into a much more serious situation down the line.

So, what is behind this malaise? Put simply, New Zealand has been putting off reforms for too long. Consecutive governments have failed to tackle the deep structural issues holding the economy back – things like burdensome regulations, infrastructure bottlenecks, skills shortages and a chronic lack of productivity-enhancing investment.

Like a car owner who keeps putting off essential maintenance, the country has let its economic engine slowly fall into disrepair.

It is time for a comprehensive tune-up. Just as I took my sputtering vehicle to the mechanic before it was too late, New Zealand needs to act now to overhaul its economic machinery while it still can.

To its credit, the new government has started a promising process of reforms in key areas like education and housing. These are exactly the kinds of microeconomic reforms New Zealand desperately needs.

Barriers to entry must be torn down to boost competition and productivity across the economy. Councils need financial incentives to welcome rather than block development, to give them a stake in growing the populations and economies of their jurisdictions. Overregulated markets should be liberalised to increase competitive pressures and spur innovation.

Tinkering around the edges will not be enough this time. New Zealand needs systematic, wide-ranging reforms to rein in runaway spending, slash red tape, attract top global talent, and jumpstart productivity growth across all industries.

Doing so means there will be short-term pain in exchange for long-term gain. But the alternative – a slow, comfortable decline into economic dysfunction – is far worse. Just ask Argentina how that worked out.

The good news is that New Zealand has proven before that it is capable of profound, positive transformation when push comes to shove.

New Zealand must do some economic maintenance before the “check engine” light starts flashing red. Tomorrow’s budget will be an important step along that path.

Dr Oliver Hartwich is the Executive Director of The New Zealand Initiative think tank. This article was first published HERE.


CXH said...

So we need productivity boosting investment. I can agree with that. However why would anyone invest in this when there is a suitable flood of nice, cheap labour to use instead.

Still waiting to see how the NZ Initiative can reconcile the two conflicting desires. Investment in productivity, plus high levels of low skilled workers.

Anonymous said...

Two things:

1) You are dead right about NZ's woes and the "glacial speed" of the indicators are indeed a concern, because it might lull us into a false sense of security when things really are pretty bad on just about every front. One of the more essential for our longer-term success is our education levels. How Iona Holsted and her immediate colleagues/advisors manage to hold their jobs is a disgrace and is an indictment of the dire straits our country is in, and also its apparent inability to act, and decisively so.

2) As a highly qualified and intelligent person with a Phd in law, you are, regrettably, par for the course. In a lifetime of dealing with legal eagles, they almost universally have little understanding of the inner workings of the internal combustion engine, or other mundane life's essentials on an engineering front. That said, your capabilities are well beyond just the law (you clearly have seen the light), so I'll still give you better than a 'pass mark' on this occasion.

Keep up the good work.

Anonymous said...

Your prescriptions seem to be more than adequate, but I fear the command element required for the mission to succeed is just not there. The generation now gripping the levers of power is worse than incompetent. It is irremediably incapable. We are well on the way downhill with the sheer cliff not very far off.