Doing something differently to lift productivity

Author/Presenter: 
Fujiko Kato
Date: 
15/03/2018

It is widely known that New Zealand has had a disappointing productivity performance

To consider whether “technological change” could help turn this around the Productivity Hub recently held a major conference in Wellington. At this event five international speakers, the Minister of Finance, Hon Grant Robertson MP, and other local experts discussed whether new technologies could be as disruptive to models of production as earlier industrial revolutions and what this may mean for productivity.

This blog presents Fujiko Kato's take on the day. Fuji wrote this blog while based at the Productivity Commission on secondment from Presbyterian Support Northern.

The diagnosis

New Zealand’s low productivity has generally been attributed to:

  • Our geographic location, as distance works against international connections.
  • Our low international trade intensity for a country of our size.
  • Small domestic markets with weak competition.
  • Firms generally not operating at the technological frontiers of their industry.

The result is, the argument goes, the diffusion of new technologies throughout the economy is not strong.  Along with this the cost of capital is high relative to the cost of labour. The Minister of Finance highlighted how this is reflected in shallow capital markets (relatively low investment in non-residential capital) and low labour productivity (GDP per hour worked). As the Minister noted:

“We have to do something different”.

One area where we could do something differently is in our low levels of knowledge based capital (KBC) and innovation. This could reflect our economy’s small share of traditional Research and Development (R&D) intensive industries, and export of raw food products (Wakeman & Conway, 2017). Nonetheless, while there is some diffusion of new knowledge and technologies within the public and private sectors, in an age of rapid information exchange this is something that could clearly be improved.

This requires thinking differently about KBC. We need to move beyond just looking at BERD (Business Enterprise Research and Development). Our firms’ abilities to enhance their KBC also requires investment in frameworks and service design, software development, management expertise, and marketing. Underinvesting in these complementary assets, along with New Zealand’s small domestic markets, inhibits firms’ ability to absorb and apply benefits generated from innovation.

While features of our economy are unique, the challenges associated with structural change within firms, the subsequent impact on productivity, and diffusion of digital technologies are not limited to New Zealand. We can thus learn from the emerging insights on firm dynamism, impacts of technologies, and innovation coming from the OECD, as highlighted in Dirk Pilat’s presentation.

We also need to recognise what Kiwis want. Growth is important – but, as Donna Purdue of MBIE noted, so too are the natural environment and fairness. Increasing productivity can help balance these dimensions. But this requires careful work. Technology-based growth could worsen income inequality in New Zealand with negative consequences for both productivity and social capital. Any strategy also needs to recognise, as Suzi Kerr noted in the context of developing an Emissions Trading System, the deep uncertainty that can be associated with future benefits and costs of actions.

The opportunity

Governments have been trying to lift New Zealand’s productivity performance for a long time, so what makes this time different? And how could we make change? 

Donna Purdue asserted it is now more crucial than ever to find the right combination of solutions to improve productivity and its measurement:

The traditional growth model of setting the appropriate frameworks and letting the growth flow is no longer seen as sufficient to deliver the kind of economy people want".

The economic environment continues to change rapidly. The growing adoption of technologies – including cloud-based services, machine-to-machine automated processes, 3D printing, and autonomous vehicles – is changing how people interact with each other, shop, do business and work.  These technologies could be as disruptive to models of production as earlier technological revolutions. As Paul Conway, from the Productivity Commission, aptly put it:

“New Zealand now finds itself at a cross roads with the opportunity to either “continue sliding down the OECD’s productivity rankings, or shift to a more “weightless” economy that trades knowledge-intensive products down fibre optic cables”. 

Indeed, we could find grounds for optimism in the examples of technological innovation given by several speakers:

  • Geoffrey Heal, Columbia Business School, highlighted the importance of energy storage as a catalyst to invigorate the shift from carbon-based to renewable based energy generation (as storage can help deal with intermittency problems).
  • Professor Patrick Dunleavy, London School of Economics, demonstrated the Kardia Mobile, a clinical grade mobile EKG monitor, which could potentially modify relationships between patients and health professionals.
  • He also highlighted Robotic Process Automation (RPA) and creation of “robot workers”, e.g., electronic passport gates, which could save time for human staff to focus on improvements and improve the efficiency of the processing of data.
  • Ross Young, of Google, discussed the potential of machine learning evident in Google-built artificial intelligence software and gave the example of software that learned to recognise the different calls of threatened native birds.

But in all of these cases success was not just a question of data and information, it’s what was done with it that counted. And the problem is, as Murray Sherwin noted, innovation tends to be in the realm of the rebels.

This brings us back to my earlier point about KBC. Many firms, government agencies, and NGOs are not making the most of the available information and communication technologies (ICT). While there are some pockets of good practice, there are large differences in the utilisation of technologies within industries and sectors.

And this is not the only challenge. As Dirk Pilat highlighted, the “skills-bias” in these changes makes it especially important to get education and training right.

The solution

Going forward the challenge that several speakers raised is how to progress from an economy where growth is based on working longer hours per person – which leads to people being time-poor and putting real pressure on the environment – to one based on boosting productivity and the generation of sustainable growth through utilising new technologies.

The Government is thinking about how to manage any possible adverse effects of technological change. The goal is a sustainable, productive and inclusive economy. In his remarks the Minister of Finance highlighted the importance of a “just transition” for industries and communities. He noted the need for sustainable initiatives and work opportunities, along with a focus on learning for life and the generation of social partnerships between businesses, Government, NGOs, and communities.

This final point highlights the importance of working together. Central Government cannot do it on its own, as no one sector has all the answers. Working together in social partnerships is essential to re-writing New Zealand’s productivity story, so we need to give consideration to how these partnerships are structured.

It is also time to confess that there are gaps in our understanding on how to measure productivity in both the private and public sectors. Dirk Pilat raised the issue of measurement as being one possible factor contributing to the slowdown in measured productivity around the world. As he noted we may be seeing a rerun of the “Solow computer paradox”, where technological change is evident everywhere but in the productivity statistics.

However, compared to 1987, when Solow published his famous remark, we now have data that can allow us to better understand technological change at the level of the firm. As Liz Macpherson, Abrie Swanepoel, and Filippo di Mauro all highlighted, this firm-level data is already improving our understanding of what drives productivity in a number of countries.

Knowledge of the productivity of New Zealand’s state services is also low. It is often thought that measuring productivity in this sector is especially challenging but in his presentation Patrick Dunleavy outlined one approach for doing just this (Productivity Path Analysis (PPA)).  While this is one of a number of approaches it nicely highlights how the barriers to measuring state sector productivity aren’t always technical; it can be done!

When asked ‘Why hasn’t productivity analysis been done before in Government?’ Patrick Dunleavy noted how productivity can be misconceived as surveillance, which in turn creates opposition. But this is based on a misunderstanding of what productivity is. Productivity is about how to better use resources and PPA should be seen as one part of broader efforts to understand an agency’s performance.

Judy Kavanagh, of the Productivity Commission, noted how in their inquiry into state sector productivity they had found hurdles to using already existing data and a failure to give measuring productivity the priority it deserves. She argued there should be an obligation on all state sector leaders and politicians to be interested in improvement and efficiency.

Overall, the discussions on the day showed that while productivity may be the “new black” it needs to be better understood. By allowing us to produce more outputs with the existing level of inputs it can do things like free up time. But not only this, as Donna Purdue argued, we cannot see endeavours to lift productivity in isolation from questions on inequality. Fortunately technological change is providing New Zealand with the opportunity to reset our settings and to work together with a focus on the longer term. But the big question is are we up for it?