OECD economic surveys : New Zealand.

93 Pages·1987·5.295 MB·English

by  OECD

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION DE COOPERATION ET OE D E V E L 0 P P E M E N T ECONOMIQUES
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NEW ZEALAND
MAY 1987
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Pursuanttoarticle 1 oftheConventionsignedinParison 14th December,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
for Economic Co-operation and Development (OECD) shall promote
policiesdesigned:
- toachievethe highestsustainableeconomicgrowthandemployment
andarisingstandardoflivinginMembercountries,whilemaintaining
financial stability, and thus to contribute to the development ofthe
worldeconomy;
- to contribute to sound economic expansion in Member as well as
non-membercountries in the process ofeconomicdevelopment; and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga¬
tions.
The original Member countries of the OECD are Austria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain.Sweden,Switzerland,Turkey, the United Kingdomand the United
States. The following countries became Members subsequently through
accessionatthedatesindicatedhereafter:Japan(28thApril, 1964),Finland
(28thJanuary, 1969), Australia (7thJune, 1971) and New Zealand
(29th May, 1973).
The Socialist Federal Republic ofYugoslavia takes part in some ofthe
work ofthe OECD (agreement of28thOctober, 1961).
Public également en français.
©OECD, 1987
Application forpermission toreproduce ortranslate
all or part ofthis publication should be made to:
Head of Publications Service, OECD
2, rue Andre-Pascal, 75775 PARIS CEDEX 16, France.
TABLE OF CONTENTS
Introduction 7
I. Economic strategy of the government 8
II. The labour market ]2
Institutional framework ]2
Labour market developments 16
Unemployment, labour supply and demand 18
Labour cost and external competitiveness 24
Empirical findings 28
Recent policy action 30
Current reform proposals 31
III. Economic policy 34
Fiscal policy 34
Current reforms 34
Budgetary developments 36
Financial markets and monetary policy 39
Reform ofthe financial system 39
Recent monetary developments 42
Structural policies 45
IV. Recent trends and prospects 48
Recent trends 48
Demand and output 48
The labour market 50
Prices and incomes 51
Balance ofpayments 53
Short-term prospects 54
V. Conclusions 58
Notes and References 62
Annexes:
1. Taxation and benefit reform ofOctober 1986 64
2. Reform of State-owned enterprises 66
3. Technical annex 68
Wage equation estimates 68
Decomposition ofemployment growth 69
Decomposition ofthe real labour cost gap 69
4. Calendar of main economic policy events 71
Statistical annex 75
TABLES
Text
1. Workdays lost in labour conflicts 16
2. Structure of unemployment 18
3. Sources of employment growth 22
4. Personal income tax rates 35
5. Budget transaction 37
6. Fiscal indicators 38
7. Money and credit aggregates 43
8. Customs tariff rates 46
9. Demand structure: forecast and outcome 49
10. Real GDP bysector 50
1 1. The labour market 51
12. Costs and prices 52
13. Balance of payments 54
14. Short-term prospects 55
Annex tables
A.l Effective marginal tax rates 65
Statistical annex
Selected background statistics 76
A. Gross domestic product and expenditure (new SNA) 77
B. Contribution to gross domestic product by kind ofeconomic activity 78
C. Labour market 79
D. Prices 79
E. Money supply and selected liquid asset holdings ofpublic 80
F. Central government expenditure and revenue 81
G. Balance ofpayments 82
H. Imports: value, volume, prices and commodity group 83
I. Imports by country of origin 84
J. Exports: value, volume, prices and commodity group 85
K. Exports by country of destination 86
DIAGRAMS
1. Relative economic performance 9
2. Wage negotiation procedures 14
3. Misery index 17
4. Labour force and employment growth 19
5. Labour supply 20
6. International comparison ofparticipation rates 21
7. Sectoral structure ofemployment 23
8. Labour cost and total supply deflator 24
9. Labour costs, productivity and terms oftrade 25
10. Real labour costs and productivity: international comparison 26
II. Indicators of competitiveness 27
12. Indicators of labour market imbalance 30
13. Primary liquidity and settlement cash 41
14. Interest rate developments 44
15. Exchange rate developments 45
16. Cyclical indicators 56
BASIC STATISTICS OF NEW ZEALAND
THELAND
Area(1 000sq.km) 268.0 Urbanpopulation',%oftotal (1986census) 74.7
Totaloccupiedfarmland,%oftotal, 1982 79.0 Populationofmajorurbanareas(1986census)
ofwhich:Grassland 53.0 Auckland 820.8
Christchurch 299.4
Wellington 325.7
THEPEOPLE
Population,31.3.1985(1 000) 3291.3 Civilianemployment, Feb. 1985(1 000) 1 328.6
No.ofinhabitantspersq.km 12.3 ofwhich:Agriculture 139.5
Manufacturing 317.9
Trade(wholesaleandretail) 231.2
Communityandpersonalservices 323.7
PARLIAMENTANDGOVERNMENT
PresentcompositionofParliament: LabourParty55
NationalParty38
DemocraticParty2
PresentGovernment: LabourParty
Nextgeneralelection:atlatestbySeptember 1987
PRODUCTION2
GrossNational Product, 1984-1985 (SNZmillion) 37259 GNPpercapita, 1984-1985 (SNZ) 11 320
FOREIGNTRADE(198e)3
Mainexports(percentageoftotal): Mainimports(percentageoftotal):
Manufactures 23.3 Machineryandtransportequipment 35.3
Meatandmeatpreparations 16.4 Othermanufactures 26.0
Dairyproducts 13.0 Mineralfuels,lubricants,etc. 10.9
Wool 12.1 Chemicals 10.3
THECURRENCY
Monetaryunit:NewZealanddollar CurrencyunitperUSdollar,averageofdailyfigures:
Year 1986 1.917
March 1987 1.775
1. Definedasthepopulationinthe37mainandsecondaryurbanareaswithpopulationexceeding 10000.
2. Fiscalyearending31st March.
3. Yearending30thJune
Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannex table.
ThissurveyisbasedontheSecretariat'sstudypreparedforthe
annualreviewofNewZealandbytheEconomicandDevelopment
ReviewCommitteeon 16th March1987.
After revisions in the light ofdiscussions during the review,
final approval of the Survey for publication was given by the
Committeeon24thApril1987.
INTRODUCTION
Following the formation of a new Government after the July 1984 general elections,
major policy decisions have been taken, aimed at accelerating transformation of the New
ZealandeconomyfromoneofthemostregulatedintheOECDcommunityintoamuchmore
market-orientedone.Someofthereformsenvisagedhavealreadybeencompleted,othersare
incourseofimplementation,andsomearestillatthedesignstageorawaitingexecution.The
direct effects of these reforms, which comprise both macro- and especially micro-economic
shifts of regime, are not easily identified because they work gradually, are highly
interdependent, and are superimposed on other, non-policy-determined, exogeneous
shocks.
SincetheNew Zealand economywas last reviewed in May 1985 themomentum ofthe
reform effort does not appear to have slackened. There has, however, been a considerable
weakening ofoutput growth. The latter has partly been a consequence ofthe tightening of
monetaryand fiscal policy undertaken to reduce inflationary pressureand the public sector
deficit. However, the resulting improvement in the external balance has been smaller than
expected. Inflation has actually increased due to large wage increases subsequent to the
unwinding of previous wage-price controls and a shift from direct to indirect taxation.
Unemployment has started rising again and the process of deficit consolidation has been
interrupted.Thesedevelopmentstosomeextentreflectthefactthatthebenefitsofthemajor
micro-economicreformsonmacro-economicperformancecanbeexpectedtomaterialiseonly
gradually and that in the short run the necessary structural adjustment imposed on the
economy may actually entail a transitory deterioration in macro-economic performance
indicators.
The present cyclical downturn is forecast to bottom out around mid-1987, with some
revivalofoutputtofollowintheremainderoffiscal 1987/88. Unemploymentisnevertheless
likely to edge up, reflecting the weakness of the recovery. There should be a significant
reduction in inflation once the price effects ofthe shift towards indirect taxation have been
absorbed. However, little immediate improvement is expected in the fiscal and external
deficits.
As a background for understanding current developments, Part I of this Survey
summarises the overall economicstrategy being pursued by theGovernment and the major
reforms undertaken or planned. The current structure and past performance ofthe labour
market are discussed in Part II, which also analyses the implications of ongoing reforms.
PartIII describes current economic policies and reforms in more detail and discusses their
likely effect on economic outcomes. This leads over to PartIV, which interprets recent
developments and assesses short-term prospects up to 1987/88. The report ends with some
conclusions for policy.
I. ECONOMIC STRATEGY OF THE GOVERNMENT
New Zealand's relativeeconomicperformanceoverthelastfifteen years has beenpoor,
bothrelativetotheOECDaverageaswellascomparedwithAustraliawhichhasaneconomic
structurenottoodissimilarfrom thatofNew Zealand (Diagram 1). TheGovernmentwhich
assumedofficeinJuly 1984attributedthispoorperformanceinparttopreviouspolicieswhich
had tried to shelter the economy from external shocks rather than encourage structural
adjustment.Accordingly,ithasembarkedonacomprehensivepolicyreformdesignedtohalt
the country's relative economic decline. The new policy approach is based on the following
principles:
a) Optimal use ofresources is best promoted by allowing economic agents to pursue
opportunitieswithinacompetitiveenvironmentsubjecttogovernmentintervention
tosecurerights,assigncosts (inthecaseofmarketfailure) andreducetransaction
costs;
b) Such a competitive environment can be best promoted by enhancing the
contestability of product and factor markets through removal of unnecessary
impedimentstomarketentryandbyensuringthatgovernmentinterventionsareas
neutral as possible given the objective of the intervention;
c) Intervention can improveequitybyincreasingaccesstomarketsand by targetting
assistance to disadvantaged individuals and groups;
d) However,allinterventionsneedtobeassessedtoensurethatthegainsoutweighthe
costs,basedonarealisticappraisaloftheireffects,takingintoaccountthedifficulty
of achieving appropriate incentives and accountability, particularly in the public
sector.
Theseprinciplesimplythateconomicpolicyhastobeformulatedandimplementedwith
a view to establishing and preserving its consistency and credibility. The former requires
improved integrationofthevarious interdependentpolicyelements, whilethelatter requires
avoidingerratic swings in policyorientationwhich createuncertainty, thereby complicating
longer-term planning. In response to these exigencies, the Government has elaborated its
macro-economicpolicy within the framework of a medium-term financial strategy. Fiscal
policy is oriented primarily to a progressive winding-down of the budget deficit in order to
reduce crowding-out ofprivate expenditure and to obviate the detrimental effects ofpublic
debt on inflationary expectations. Monetarypolicy is directed towards establishing low and
stableinflationrates.Theprincipleoffullfundingofthegovernmentbudgetdeficithassetthe
scene for a non-accommodating stance of monetary policy. Structuralpolicy measures are
designedtoimprovetheeconomy'ssupply-sideresponsivenessandtherebythe"split"between
the real and inflation components of a given increase in nominal income; the principal
elementsare:
i) Strengtheningincentivesbybroadeningthetaxbaseandreducingmarginalincome
tax rates;
Diagram1. Relativeeconomicperformance
1970-85averages
Output(GDP)growth
(percent)
OECD
NewZealand A\
Australia
?' ""2 \
Unemployment
rate
(percent) -
/
Currentaccountbalance
(inpercentofGNP)
12
8
6
Inflation
(percent)
Note: The diagram plots major macro-économie performance indicatorsalongthe four raysfrom the origin.
Measuringscalesarechosensuchthatperformanceimproveswithdislancefromtheorigin.Thediagram
showsthatNewZealandhadlessgrowth,higherinflationandalargercurrentbalancedeficitthanAustralia
andtheOECDonaverage,butthatthecountry'sunemploymentratehasbeenlower.
Source: OECD, Economic Outlook, 40. December 1986and OECD. EconomicOutlook: HistoricalStatistics
19601984.
ii) Reducing major institutional rigidities in thelabour market topromote real wage
flexibility;
Hi) Reducingrelativepricedistortions bycuttingsubsidies, loweringeffectiverates of
protectionandrenderingindirecttaxation as"neutral"aspossible. Thedecisionto
let the New Zealand dollar float freely is also to be seen in this context;
iv) Raisingtheefficiencyofthenon-tradedgoodsandservicessectorthroughincreased
competition, in order to ensure an equitable distribution of the burden of
adjustment.