I first studied economics in 2002 and came across ‘productivity’. It is a simple measure of how good we are at producing output on an hourly basis. Whether that ‘output’ is a product, a service or a university assignment, how much is produced in that hour’s work is called labour productivity.
This matters because productivity drives incomes. As Nobel Laureate Paul Krugman put it, ‘productivity isn’t everything, but in the long run it is almost everything’. If we want to revive our economy in the wake of Covid-19 and ensure higher incomes for all New Zealanders, we need to focus on becoming more productive as individuals, organisations and as a nation.
In 1991, Harvard Professor Michael Porter published a book titled Upgrading New Zealand’s Competitive Advantage. The book outlined why New Zealand’s productivity had performed so poorly since the late 1970s and proposed a set of reforms to improve it.
What should the government do to improve productivity growth in our nation? Click here to comment.
Thirty years on and our productivity challenge remains. For the past three decades New Zealand’s growth in labour productivity, measured by how much economic output we can produce in an hour, has trailed that of other OECD countries. Prior to the pandemic, labour productivity in the OECD was 1.3 times New Zealand’s figure.
Recent governments have paid lip service to our productivity challenge but have failed to deliver.
The Clark government sought to ride a ‘knowledge wave’ in our economy, yet according to the OECD, New Zealand’s labour productivity grew at an annual rate of 0.9 per cent, less than the OECD average of 1.6 per cent and Australia’s 1.5 per cent.
The Key government aimed to ‘close the income gap’ with Australia and even established a 2025 Taskforce to address this. Yet labour productivity did not perform any better, growing at an annual rate of 0.7 per cent, less than the OECD average of 1 per cent and Australia’s 1.4 per cent.
And during the Ardern government’s first term, labour productivity has gone backwards!
A view that is widely shared amongst economists is that a small difference in yearly productivity growth rates leads to dramatically different outcomes over the long-term.
Winston Churchill famously said to “never waste a good crisis”. This government has a unique opportunity to focus on productivity as we rebuild back better so that jobs created are highly paid and improve New Zealanders material standard of living.
What should the government do to improve productivity growth in our nation?
First, we should establish a bipartisan commitment to improving it. This is one of the biggest longterm economic challenges that New Zealand faces, and as such it will not be addressed in a single election cycle. Public commitment is needed from both our major parties to address our productivity crisis.
This could take the form of a declaration in our Parliament, like it declared a climate emergency late last year, or a bipartisan approach to legislation setting long-term aspirations for our economy, such as with the Climate Change Response legislation.
Second, we need a clear long-term strategy from our government on how we will improve it. A strategy connects short-term policy and initiatives with long-term desired outcomes.
As a small country, our government has fewer resources compared to other nations, therefore our strategy needs to focus resources wisely. Our focus should be on the most important constraints holding back Kiwi firms. These are constraints that if removed would produce the largest gains in productivity nationwide.
Domestic business surveys have for the past decade consistently ranked skills shortages and regulatory compliance as the two most important constraints holding back growth.
This government’s vision “for an economy that is productive, sustainable and inclusive to improve the living standards and wellbeing of all New Zealanders” is an aspirational one that most Kiwis and political parties can get behind. The challenge now is to deliver on the productive part of that vision, and this will take much more than a few slogans, initiatives and working group reports.
On education and skills, our focus should be on improving the quality of our education system from end to end (from early childhood education, primary, secondary through to tertiary and include lifelong learning) so that all Kiwis have the skills needed to succeed in an increasingly tech-driven and globally competitive environment.
On regulation, simplifying local and national planning rules and reforming the Resource Management Act are well overdue and would improve productivity and help ease housing affordability issues.
Other research points to our low levels of internationalisation, narrow export base, low infrastructure investment, lack of inward foreign direct investment, low rates of savings, investment, and commercialisation and a general lack of competitive pressures as barriers to improving our productivity performance.
The key to success on all these fronts depends on implementing evidence-based policies and applying sufficient resources so that policies make a meaningful difference to productivity.
Third, we should establish a strong accountability framework to measure progress and ensure public accountability for delivering on productivity. Successive governments have been quick to promise higher productivity in New Zealand but have overall failed to deliver.
Working groups like the PM’s Business Advisory Council, where good advice from the business community typically falls on deaf bureaucratic ears, should be reformed into a permanent Innovation and Productivity Council.
Chaired by the PM or Minister of Finance and made up of industry leaders, key ministers and academic leaders, this Council will be charged with monitoring productivity performance and prioritising efforts.
We need to strengthen policy evaluation practices to ascertain the impact of policy and initiatives on productivity performance. More timely and relevant data on productivity will help the public and the media to hold the government of the day accountable for poor performance.
Countries such as Ireland, the US, France and the Australian state of New South Wales have successful productivity council models to follow.
Next is strengthening the role of the Productivity Commission, a crown entity, to enable it to play a more critical role in policy formation and performance. Right now, the Commission’s agenda is set by the Minister of Finance making it difficult to publicly criticise government efforts on productivity.
And finally, we need to strengthen policy evaluation practices to ascertain the impact of policy and initiatives on productivity performance. More timely and relevant data on productivity will help the public and the media to hold the government of the day accountable for poor performance.
This government’s vision “for an economy that is productive, sustainable and inclusive to improve the living standards and wellbeing of all New Zealanders” is an aspirational one that most Kiwis and political parties can get behind.
The challenge now is to deliver on the productive part of that vision, and this will take much more than a few slogans, initiatives and working group reports.