, or the savings of other countries. new zealand has a long record of relying on the savings of others. that was hardly surprising when, as a colonial outpost, we drew on the capital of britain to fund our development. we also relied on a flow of migrants to boost the available labour force. together, those imported resources were combined to generate growth and wealth at a rate that was probably similar to that achieved by the asian tigers in the last decade or so. while the flow of migrants is generally rather smaller in modern new zealand than was the case during the late nineteenth century, we ’ ve never fully weaned ourselves from a relatively heavy dependence on the savings of others. we appear to see nothing unusual, let alone undesirable, in continuing to do so indefinitely. it is not at all obvious that we would invest more, or would invest more efficiently, if we generated more savings domestically. but it seems to me, as someone who believes that our being open to international capital markets has been hugely beneficial to our economy and to our society, that we would probably face a more stable and perhaps more secure future if our dependence on the savings of others were reduced. at the very least, we need to recognise that there is little point in decrying the degree of foreign ownership of new zealand businesses and assets if we are not also ready to decry the paucity of new zealand savings. growth and monetary policy so where does monetary policy fit into this growth story? it may surprise you to hear me contend that, as a determinant of long term growth potential, monetary policy has a relatively modest and indirect influence. i say that because, as i have explained, long term growth is a product of labour and capital, and how productively those two factors work together. the things which i have described as being crucial here are essentially ‘ supply - side ’ matters - - the rate of growth of the labour force, the quality of the education system, the extent to which government policies distort the allocation of investment, and all the rest. these are the crucial determinants of our sustainable growth rate. but monetary policy can help in two ways. first, by keeping inflation stable it can, as a by - product, assist in moderating economic cycles - - restraining demand when it threatens to exceed the economy ’ s capacity to supply and encouraging demand to increase when it threatens to fall short of capacity. in other words, successful monetary policy aimed at keeping inflation stable also

engaged in formal employment ( the participation rate ) can be influenced by policy even more substantively. for example, pension and entitlement rules which impose very high effective tax rates on low income people contemplating staying in, or re - entering, the work force tend to reduce participation rates. this makes the current discussion about reforming the benefit system of direct relevance to potential growth. with an ageing population and sensible policies on retirement income, we can expect a greater proportion of the population to remain in work beyond the current retirement age and, with some evidence that people remain healthier, both physically and mentally, when they are employed, that is almost certainly something to be welcomed for reasons going well beyond potential growth rates. moreover, we can probably expect the trend towards higher participation rates for women to continue, and this too will mean that the labour force is likely to grow rather more quickly in the years ahead than does the population generally. the quality of our labour force can also be influenced through public policy choices, but only slowly. it is abundantly clear that the process of economic development and growth goes hand in hand with enhanced educational standards. we in new zealand once routinely listed ‘ a well - educated labour force ’ as one of the clearly identifiable strengths of our economy. we can no longer be so confident on that front. the capacity of today ’ s high school graduates to write grammatical english seems to be disappointing to a great many employers, while international studies comparing the ability of new zealand students in mathematics and science with that of students in other countries suggest that we no longer have anything of which to be terribly proud. in the third international maths and science study, new zealand ranked 22nd out of 41 countries in science and 24th in maths. by contrast, the top four countries in maths were singapore, south korea, japan, and hong kong, with singapore, south korea and japan also occupying three of the top four positions in science. as a general proposition, those economies which have been out - performing us in terms of per capita growth have typically also been out - performing us in educational effort. whether that is because those countries have better educational structures, or just have people who are more convinced of the crucial importance of a good education, i do not know. but the result is that the quality of their labour force is rapidly improving, whereas ours is improving rather more slowly. for the longer term, it may well be that the most important policy area relevant to improving our sustainable growth rate is education policy