Changes to an economy seldom happen overnight. But, just like Rachel Hunter's hair, they do happen. Developments just take a long time to filter through.

It is human nature to focus on the short term. When the economy is going well many of us hope for instant improvements to our living conditions, such as higher wages. Likewise, when public policy changes are instituted, it is natural to ask: how am I affected today?

In economics, little happens in the blink of an eye. A policy change will result in reverberations that might not be apparent for several years. Commentator John Hyde is a former Liberal member of Australia's parliament. In a 2001 speech titled ‘We set up the economic conditions after 2010 today', Hyde argued: “The rewards of sound economic policy, particularly policy affecting investment, may lag by as much as a decade”. In Australia's case, he said, it was not until after the recession of 1991 “that we began really to enjoy the benefits of what was done in the 1980s”.

On this side of the Tasman there were complaints during the 1980s and early 1990s that there were no immediate benefits from the economic reforms of the Lange-Douglas and Bolger-Richardson governments. This expectation of instant nirvana was naïve and unrealistic. The country's economy was very sick. It was characterised by unproductive, uncompetitive industries that survived because they were protected by the government. Because economic policies had been heading in the wrong direction for decades, the turnaround could be no five-minute affair.

Commentators who based their opinions on the absence of on-the-spot results were short-sighted. As finance minister Dr Michael Cullen acknowledged in the December 2004 economic and fiscal update, those 20 year-old reforms should be credited for the economic successes of today.

There are many lags in an economy. Consider skill levels. One indication of a population's skill level is the rate of participation in tertiary education. In the 1980s this was relatively low. Thanks in no small part to the reforms of the early 1990s, it is now relatively high. However, skilled new entrants remain a small proportion of the overall workforce. The average qualification level of the workforce will only rise significantly over the next decade or two. This will benefit the economy regardless of whether other government policies are good or bad.

Wages are another area where a short-term view is often taken. When the Employment Contracts Act was introduced in 1991 there were complaints that it did not produce instant improvements in labour productivity, and that wages did not rise across-the-board. At that time companies were busy absorbing the jobless into the lower end of the workforce. An artificial, universal wage rise would have reduced employers' ability to hire unemployed workers just as they were gaining a foothold in the labour market.

As the rate of unemployment has come down, wages have moved up in areas of high demand for labour. The difficulty of finding skilled and unskilled workers is the highest it has been since mid-1974. According to the New Zealand Institute of Economic Research, “this points to future strong growth in wages”. The Institute says wages can be correlated to the difficulty of finding skilled labour two years earlier.

These lags appear to vex some observers. Listener deputy editor Tim Watkin wrote recently that workers were losing ground. He believed “the pay packets of most New Zealanders are not reflecting the boom”. This argument ignores the fact that wages reflect supply and demand. Where notable shortages occur in the economy, pay increases occur faster. This does not just happen in so-called ‘high skill' sectors. Help desk operators, mechanics, scientists, customer services managers and engineers were among those who had the highest wage growth of 2004, with each group enjoying increases of more than five percent.

Because economic developments take time to occur, it is easy to become complacent about our country's overall performance. However, policy makers should be sensitive to the fact that New Zealand is losing ground in annual measures of economic freedom.  The Heritage Foundation/ Wall Street Journal Index of Economic Freedom shows that, over the last nine years, countries that have done the most to improve their economic freedom scores have in general experienced the highest rates of economic growth.  New Zealand's overall score in the 2005 index was the same as in 2004.  However, the country's ranking slipped from third last year to fifth-equal in 2005 - behind Hong Kong, Singapore, Luxembourg and Estonia. 

Standing still does not mean that the sky falls in, or that the economy suddenly crumbles. It means that we do not perform as well as we could. Lower rates of growth in productivity mean lower wages compared to our cousins in Australia, and less money to spend on education and health. Too many recent policy changes have been anti-business and anti-growth. The fall-out from these moves will not happen quickly, but it will happen.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz