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Salient: Victoria University Students' Paper. Vol. 25. No. 13. 1962

Economic Growth in New Zealand

page 10

Economic Growth in New Zealand

The Monetary and Economic Council is the latest authority to warn New Zealanders of the slow rate of growth of their country's economy. During the 1950's, our output of goods and services is estimated to have risen by between 3 and 4 per cent. per annum; allowing for the growth of the labour force, this represents an increase in productivity (output per head of the labour force) of about 1.7% per annum.

Note the words "is estimated"; the measurement of the output of an economy is, statistically and conceptually, a hazardous and even dubious enterprise. (What is the output, for example, of a University lecturer? How does one measure changes in his output?) Still, allowing for the possibility that the statistical distort reality to some extent, it is undoubtedly true that productivity in New Zealand has not grown as rapidly as in many other countries. 1.7% per annum is less than one third of the rate of growth, for example, of West Germany and of Japan, fastest-growing of the major economies this side of the Iron Curtain.

Fundamentally, of course, it is productivity which determines the standard of living which a country can enjoy. There are, however, other factors which, particularly in the short run, can affect the issue. In New Zealand's case, two circumstances have combined to reduce the rise in the standard of living below the 1.7% annual increase which the productivity index tells us we might have expected to enjoy.

In the first place, the post-war rise in the birth rate, combined with the success of medical science in prolonging the expectation of life, has increased relatively the numbers of the population in the under-15 and over-64 age groups. Thus the proportion of the population in the age group 15-64, from which the great bulk of the labour force is drawn, has declined from 67.5% of the total in 1939 to 58.8% in 1959. Because of this change in age-structure, the labour force has latterly grown more slowly than total population, and the volume of goods and services available per head of the population has therefore not risen as quickly as the volume produced per head of the labour force.

Secondly, despite some sharp fluctuations, the "terms of trade (ratio of export prices to import prices) have on the whole moved against New Zealand since the early 1950's; and this has meant that part of the increase in our production has been siphoned off; so to speak, to compensate for the declining purchasing power of our exports in terms of imports. During the ten years ending March 31, 1959, for example, goods and services produced in New Zealand rose by 39%; but allowing for the deteriorating terms of trade, goods and services available for consumption and investment rose only by 30%.

Reduced Improvement

These two factors have reduced still further the modest improvement in our standard of living which the relatively slow growth of productivity would otherwise have permitted. On the other hand, they have to some extent been off-set by an inflow of foreign capital — both subscriptions to Government loans and private investment by overseas Companies — 'which has made available resources not drawn off from the current flow of production in New Zealand.

Why is New Zealand's recent growth record so mediocre? It has been fashionable until recently—though the fashion now seems to be on the wane—to consider the rate of capital investment one of the major determinants of the growth of productivity. In this respect, New Zealand's performance has not been too bad.

During the 1950's, for example, we channelled some 21.6% of our output, on average, into capital formation. Though lower than in some other rapidly growing countries such as Australia, this is a substantial proportion of output — very close curiously enough to the comparable figures for the two countries mentioned earlier, West Germany (20.6%) and Japan (21.8%), and substantially higher than those for the United States or the United Kingdom.

The trouble, then, seems to be rather that this relatively large amount of capital formation is not paying off, as it were, in terms of increasing output, so satisfactorily as in some other countries. Why should this be?

One factor is our rapidly rising population. This creates an enormous demand for investment in such things as houses, hospitals, schools, and in ancillary services such as water supply and drainage. Now, unlike investment in new machinery these things characteristically do not of themselves create a big, rise in the output of goods and services.

They give happiness and perform essential services, of course, for those who live in them or use them; but they do not "pay off" in terms of further increases of output as a similar amount of money invested in new factories or hydro stations would do.

New Zealand has, in fact, been investing recently an extremely high proportion of its income in new houses, despite the fact that, a nation, we are already amongst the best housed in the world.

N.Z. Bottom

A second factor is that we won't work our capital very hard. One of the background papers prepared for the Industrial Development Conference held in Wellington two years ago, compared total annual hours of work per head of the labour force for a considerable number of countries. No surprise to find New Zealand near the bottom of the list, with 1928 hours annually against approximately 2400, for example, in Switzerland, or 2310 in West Germany. Moreover, such a comparison conceals the fact that there is also much more shift working in many of the big industrial countries than is here, so that the number of hours annually for which machinery is worked would present an even greater contrast.

This is clearly one reason why a given quantity of capital investment in New Zealand tends not to generate so much additional output in a given period as it does elsewhere.

The third point worth notice is that because of the structure of its economy New Zealand has perhaps not enjoyed the benefits of technical progress to the same extent as more heavily industrialised countries. This may be an extremely important matter. One American economist, for example, has estimated that over the years 1909-1949, the increase in productivity in an important sector of the U.S. economy was brought about far more by improved technical methods than it was by an increase in the amount of capital per worker. In this respect it is not difficult to suppose that New Zealand may not have fared as well as some other countries: the types of economic activity in which the typical New Zealander engages — pastoral farming, light consumer goods industries, office work — are not fields in which the more spectacular advances have occurred.

It seems reasonable to hope that in regard to some of the explanations of our slow growth listed above, the near future may bring a change. Some of the new industries — the oil refinery, for example — will demand 24-hour working for purely technical reasons; and this may prove the thin end of the wedge in introducing shift-work more widely into the New Zealand industrial scene. Some of these industries, also, may prove more adept al attracting the gains accruing from technical progress than have those which have characterised our economy so far. As the large cohorts of post-war children reach the 15-plus age group, which they are now doing, the ratio of labour force to population — assuming we avoid substantial unemployment — should begin to rise again.

Against these favourable auspices we must set some less propitious omens.

Some of the new industries — the oil refinery again, for example, or the hydro-installation and bauxite-smelter in the South Island will demand huge inputs of capital to yield a given quantity of: output, though, once the capital investment has been made, they should go on yielding their output for a long time, and their output per man will be exceedingly high. Considerations such as these may largely cancel each other out, in which case the rate of growth of ' productivity, unless we do something to try to change it, may not be very different in the near future from what it has been in the recent past.

[unclear: O.P.S.]