New Zealand is working harder, not smarter

Low productivity is a chronic weakness of the New Zealand economy.

There are times, and this is one of them, when its effects on incomes are disguised or offset by other things: strong population growth, high labour force participation and hours worked per capita, and favourable terms of trade.

But none of those is durable.

And not only is New Zealand to be found near the relegation end of the OECD league tables for productivity level, the trend is not our friend either. Average annual growth in labour productivity (output per hour worked) over the past 20 years is 1.4 per cent, but for the past 10 years it is 0.9 per cent.

Between 2009 and 2014, New Zealand enjoyed the fifth fastest growth in per capita gross domestic product among 25 OECD counties. But that reflected the third fastest growth in per capita hours worked; labour productivity growth was the fourth lowest.

Yup.  We are and remain a pack of lazy bastards on Island Time.  

A richly informative paper released this week, by the Productivity Commission’s director of economics and research, Paul Conway, reflects on these issues.

It is informed not only by the commission’s inquiries into particular sectors but by the wealth of (anonymised) firm-level data now available from Statistics New Zealand, which provides a much more high-definition picture of the economy’s workings.

It is an economy made up of relatively small domestic markets. That makes it easier for a handful of firms to dominate their market and to protect profit margins not through innovation and competition, but by extracting rents from suppliers and customers.

The single most useful thing policymakers could do to foster productivity gains would be to lift competition intensity in services markets, Conway says.

Let’s be frank. The venture capital sector is embryonic, the sharemarket puny (relative to the size of the economy) and households and banks are preoccupied with housing.
The commission’s inquiry into the services sector has left it critical of section 36 of the Commerce Act. It argues the test for anti-competitive behaviour should be whether a firm’s conduct creates demonstrable harm to consumers, rather than the current test based on purpose and counterfactual speculation about whether the conduct in question would have occurred in the absence of market power.

The prevalence of small domestic markets can also mean that firms looking to grow need to go international earlier in their life cycles than they would in larger economies. That is easier said than done.

Clearly, distance matters, Conway says, but less than it used to.

Advances in information and communications technology mitigate the tyranny of distance (and in the case of the cloud, size).

Weightless exports, like software and digital services but also from the creative arts, make up a growing share of world trade.

But for firms to take advantage of those possibilities and carve out a niche in competitive global markets, they need access both to skills and to capital with the right risk appetite.

New Zealand’s productivity, when compared to well performing Asian countries, has always been poos.  So working harder by building houses, fixing roads and sending more produce overseas has been our only way to “improve”.

Luckily, people need to eat.  And more people are getting richer in the world and want to eat our stuff.

Smarter goes into being more efficient, and “greener” according to the market’s needs.  Like addressing methane producing cows.   But these are step changes and will not see New Zealand thrive through true innovation.

And when we somehow do, we generally lose that industry to a more fertile and productive sector overseas.


– Brian Fallow, NZ Herald


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