Assessing and enhancing New Zealand’s productivity

Author/Presenter: 
Patrick Nolan
Date: 
05/09/2018

The August 2018 edition of Policy Quarterly was a special issue on productivity. This was edited by and contained contributions from Productivity Commission staff.

The editorial to this edition is reproduced below with the permission of the Journal’s publishers. The full edition can be freely accessed at www.victoria.ac.nz/igps/policy-quarterly

Lifting productivity is the answer to many of New Zealand’s hardest problems. It can mean families have decent incomes without having to work long hours. It can help the country earn a living from the rest of the world while protecting our natural environment. It underpins the provision of state services to an ageing population in a tighter fiscal environment.

The importance of productivity has been understood for many years. It has been almost 60 years since Conrad Blyth began measuring productivity at the New Zealand Institute of Economic Research (NZIER). Yet – except for a short period in the late 1990s – New Zealand’s productivity performance has been stubbornly poor and lagged many OECD countries.

For many years the drivers of this productivity performance were not well understood. There were suspects of course: distance from international partners, small domestic markets, industry structure, and even culture. But generally New Zealand’s low productivity was viewed as a paradox, particularly given the quality of some of our policy settings.

But, as the article by Nolan, Fraser and Conway notes, we have well and truly moved on from this idea of a productivity paradox. The articles in this edition help show why. They represent a sample of recent research. Much more could have been included and, indeed, will be included in future editions of Policy Quarterly.

In their article Pilat and Criscuolo of the OECD discuss the potential impact of digital transformation on productivity. Current and emerging technologies could be as disruptive to models of production as earlier industrial revolutions. But, as the authors note, while the digital transformation of the economy holds much promise, these opportunities will not materialise automatically.

One critical example of the potential of technological change is in transitioning to a low emissions economy. As Bailey and Lewis argue, the effects of this transition will be “profound and widespread” and innovation will be key to avoiding damaging climate change while also protecting (improving) national wellbeing. But they also suggest that it would be wrong to simply expect new opportunities to materialise. Well-designed laws and institutions are needed.

Further, as they note, innovation needs a stable and enduring policy framework. Yet, as Yui and Gregory show, the past 30 years have seen “successive and seemingly endless cases of organisational restructuring.” This is based on new data collected by Yui as part of his PhD research and which could in future be used to test a number of important hypotheses. One question the authors raise is whether we too often use institutional reform as a “surrogate for genuine innovation designed to effectively achieve better policy outcomes.”

Continuing with this theme of a need to lift the performance of the government sector, Lattimore outlines key lessons from the Australian Productivity Commission’s (APC) recent five-year productivity review. He points to a focus on the non-market sector (mainly education and healthcare), the quality of cities, and the effectiveness of government itself as central to achieving better outcomes.

This work by the APC is mirrored by its Kiwi counterpart, as shown in the articles on healthcare (Nolan) and education (Gemmell, Nolan and Scobie). Nolan’s article on health productivity argues that a greater focus on lifting productivity in this sector is desirable given the fiscal outlook and changing demand facing health services. Gemmell, Nolan and Scobie’s article on education highlights the challenge in measuring productivity, particularly in accounting for changes in quality over time.

Some of the challenges facing productivity measurement in the state sector (e.g. services being provided to users free of charge) are now being seen in the private sector. Pells notes that as a result we could be seeing a re-run of the “Solow computer paradox,” where he famously wrote “you can see the computer age everywhere but in the productivity statistics.” However, she argues, despite measurement issues, the productivity slowdown in New Zealand and elsewhere since the mid-2000s simply cannot be written off as measurement error.

Interestingly, Pells also shows that the global slowdown in labour productivity growth (i.e. GDP per hour worked) is largely due to lower growth in the effectiveness with which different inputs are combined in production (a component of labour productivity called multi-factor productivity). Yet, as Nolan, Fraser and Conway show, New Zealand’s recent productivity performance differs from this in key ways. Not only has the slowdown in labour productivity been relatively mild, but our multifactor productivity performance has been stable.

They thus show that the major factor holding back New Zealand’s productivity growth since the Global Financial Crisis has been the failure of capital to grow in line with labour, even with the historically low interest rates over this period. Flatlining business investment (when measured relative to population growth) could mean that New Zealand misses the boat on future technology-led productivity growth and suggests we still have a way to go in making the transition from an economic model that emphasises growth from working more.

This discussion leads to the question of how reform could support closing the productivity gap with the rest of the world. Charles Dickens’ character Mr Micawber was always hoping for something to turn up to help solve his problems. But, as the articles in this edition show, we can and should do better than this. Lifting New Zealand’s productivity requires a broad reform agenda, ranging from topics such as matching skills to jobs, to lifting business investment and trade in services, and to improving government productivity. The opportunity is there – we need to take it.

Patrick Nolan – Guest Editor  

Policy Quarterly August 2018 - Assessing and enhancing New Zealand’s productivity
Read the productivity-related papers and other articles here.