Inside the Black box: Policies for Economic Growth

Growth in income per capita is or should be a central objective of economic policy. This paper explores how the economy generates economic growth and what is actually going on in an economy when it does so. It describes economic growth as a fine-grained path-dependent process driven by entrepreneurs and involving transformation of the productive structure and the generation of new knowledge and capabilities. It concludes that, while the market is essential for organising economic activity, government intervention is necessary for markets to work effectively, and especially for them to work effectively in generating economic growth. The question then becomes not whether but how the government should intervene. The paper explores the nature of possible government interventions. It concludes that both broad-based policies (often thought of as framework or regulatory policies) and fine-grained policies (often thought of as facilitative or industry policies) have their place and that there is scope for action on both to improve New Zealand's economic performance.