Beyond the Covid economic shock, New Zealand must focus on long term productivity – and for the best example, we should look to our free trade partner South Korea, writes Dr Murat Ungor.

It’s time for New Zealand to think about long-term growth

We could learn important lessons about productivity from South Korea, which has transformed itself from one of the world’s poorest nations to an innovative success story.

Its government has spent decades committing to expenditure on sectors to enhance its productivity and nation branding, resulting in a remarkable catch-up over the past 50 years in comparison with New Zealand’s decline.

Although the continuing economic fallout of the Covid-19 pandemic has seen all OECD countries report significant negative growth rates in the second quarter of 2020 – including a 12.2 per cent drop for NZ – the short-run damage has been done.

Indeed, China, the only major country to escape recession, grew its economy by 3.2 per cent in the second quarter of 2020 compared to a year ago, rebounding from its initial pandemic-related slump.

Now is the time to think about the steps for long-term, sustainable economic growth.

It has been long known that New Zealand has a productivity problem.

I believe we can look to South Korea’s economic transformation for potential solutions.

The graph below illustrates the productivity problem of New Zealand at the very aggregate level and shows gross domestic product (GDP) per employed person in New Zealand and in South Korea relative to the United States (US) between 1950 and 2019.

GDP is the market value of all final goods and services produced within a country in a given period of time.

GDP per person employed is intended to give an overall impression of the productivity of New Zealand and South Korea expressed in relation to the US, where the US is assumed to represent the frontier economy.

Data are in purchasing power parity-adjusted units to account for differences in relative price levels between countries.

Labour Productivity Levels Relative to the United States (%), 1950-2019

The astounding catch-up by South Korea is visible.

In 1950, labour productivity in South Korea relative to that of the US was less than 12 per cent, but reached almost 63 per cent in 2019.

From one of the world’s poorest nations in the 1960s, Korea has transformed itself into an innovative, high-tech country with well-established global brands such as Hyundai, Samsung, and Kia motors.

New Zealand, on the other hand, has been experiencing a relative deterioration. Labour productivity in New Zealand decreased from almost 92 per cent of the US level in 1950 to below 62 per cent of the US level in 2019.

BNZ economist Paul Conway has been trying to get the attention of policymakers. He has a well-chosen pro-productivity policy agenda for New Zealand and a well-crafted question for policymakers, so here I quote:

“Exactly which industries or economic activities are going to set New Zealand up as a thriving 21st Century economy and what can policy do to remove constraints and promote growth in these areas?”

Government spending can affect growth through several transmission channels, such as investment in physical and human capital and productivity enhancements.

Government expenditure in the forms of public provision of infrastructure such as roads, harbours or public sector research and development (R&D) enter as inputs in the production processes.

Also, government expenditure on education, for example, enhance investment technologies. Spending money for productivity-enhancing activities is going to be key for New Zealand.

Korea’s success story may provide lessons for New Zealand and responses to Conway’s questions.

Nation branding has been a key factor for the development of Korea. In each of the Five-Year Plans since 1962, high-tech sectors and export-oriented, productive industries have been selected and supported.

South Korean governments have been successful in raising the international recognition of Korean brand-name products, placing South Korea as one of the biggest makers and leading suppliers of memory chips, mobile phones, and many other electronic devices.

South Korean governments have also been investing in productivity-enhancing sectors and economic activities.

National broadband infrastructure policies, opening regional innovation centres, introducing techno-parks, and developing government-industry R&D partnerships have been components of Korea’s ambitious and achievable planning.

In the 2000s, the Service Centre for Korean Overseas Investors opened several offices in Asian countries to assist Korean firms.

Then, the Committee for Global Business Operation provided coordination services for Korean investors.

South Korea is also aware of the opportunities presented by Artificial Intelligence (AI). Now, there are hundreds of Artificial Intelligence start-ups in South Korea.

Korea has become one of New Zealand’s largest export markets since the Korea-New Zealand Free Trade Agreement was concluded in 2015.

Kiwi policymakers and business people should take advantage of such close relations to observe South Korean policy and business practices, and produce long-term growth solutions.

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