While many advanced countries have suffered from falling productivity since the Global Financial Crisis, New Zealand’s productivity performance has been lacklustre since the mid-1990s. Our productivity growth since 1996 has been a paltry 1.4 percent and our output per hour worked is 40 percent below the top half of OECD countries.
This is important since a country’s ability to improve its standard of living in the long term depends almost entirely on its ability to raise its output per worker. In fact it has been shown that at least two thirds of global GDP growth since the beginning of the first industrial revolution resulted from increased labour productivity.
The latest report from the Productivity Commission notes that the most productive New Zealand firms are less than half as productive as their international peers in other small advanced economies (SAE) like Belgium, Denmark, Sweden, Finland and The Netherlands.
However New Zealand has several idiosyncrasies that make direct comparisons with other SAE difficult. New Zealand is a small country with a dispersed population, and it is also more geographically remote from its trading partners than most of its small, advanced country peers.
This has meant New Zealand is less connected internationally and has not had the benefits of technology diffusion from foreign firms that other SAE have had. Most of New Zealand’s larger firms are servicing the small domestic market with very few exporters for a small remote country. According to the Productivity Commission, only 30 firms account for half of our exports. Domestically, firms are not exposed to competitive pressures of much higher performing international firms that might otherwise lift their productivity performance.
The tyranny of distance
There is no doubt that geographic remoteness affects the level of economic activity that can be achieved. The Australian Treasury estimates distance from major markets accounts for around 45 percent of the gap in labour productivity between Australia and the United States.
A 2014 Productivity Commission report on the subject similarly concluded New Zealand’s small size and isolation, limited domestic competition, clustering of economic activity and “the extent to which domestic firms are able to exploit opportunities for scale and specialisation” all of which are key drivers of productivity.
The also OECD released a paper in the same year that estimated New Zealand’s distance from markets plus persistently underinvestment in R & D by the public and private sector could account for most of the productivity gap with the average OECD countries.
Given that geographic isolation cannot be changed, are there are still things that can be done to improve our productivity performance?
Role of the government in productivity growth
Governments alone cannot “fix” the productivity problem but they can clear the way for productive firms to grow. Productive businesses need sufficient capital, people with the right skills and access to international markets. Governments can assist this by forming long term strategies to:
- Form close trade ties with our nearest neighbours and markets
- Reduce barriers to foreign direct investment including changes to tax regime
- Incentivise the development of industries that play to our natural advantages and are not precluded through remoteness e.g. agritech
- Create a culture of celebrating export firms
- Reduce regulatory requirements on businesses
- Encourage greater household savings
- Invest in business education to upskill our managers and digital skills for all workers
- Invest in infrastructure.
While changes have been announced on a number of these fronts (e.g. reforms to vocational training and infrastructure investment) these changes are not happening at a fast pace. Meanwhile the government has also introduced labour market reforms (e.g. minimum wage and Fair Pay Agreements) which the OECD warned in their 2019 economic survey are likely to further dampen productivity growth.
In addition, successive governments have enabled high levels of immigration without targeting this to close the skills gap of NZ workers. This has resulted in high levels of labour force participation but poor productivity and low wages.
Role of Business in productivity growth
Businesses also need to take responsibility for increasing their own productivity. The few highly productive, or “frontier firms” we have managed to develop have forged ahead rather than waiting for government assistance.
Businesses across the board need to take more responsibility for developing the skills of their managers and employees. New Zealand ranks poorly in terms of managerial competence compared to our OECD counterparts (Green and Agarwal (2011)). Management capability also plays a big role in whether technology is successfully adopted.
Other things businesses can do which will make a material difference to productivity include adopting new technology and adapting their business process to get the full benefits of this the technology.
According to a recent OECD working paper firms who adopted technology into their core business processes can achieve significant productivity gains both for the individual firm and the industry sector.
Productivity growth associated with digital adoption
Digital Skills Shortage
The latest Digital Skills Report 2021 confirms that New Zealand has a huge digital skills shortage, and yet at the same time is producing too many under-skilled graduates.
The report highlights the shocking finding that in 2019, 3,265 students graduated with computer science, IT, or software engineering degrees, but only 352 were able to get internships, despite 2,699 registering. Meanwhile 2,683 visas were approved for IT professionals.
It is clear that businesses have relied on immigration to fill the digital skills gaps but have under invested in developing the technical skills of their own staff. In fact, “Less than 10 percent of large organisations and Government agency training was spent on digital technology upskilling”. This has been exacerbated by declining interest in IT and maths-related subjects for domestic students at both secondary and tertiary level.
Trying to be the best
In a global market, we are all ultimately competing on the world stage and we need to ask ourselves if our products, business processes and governance are truly world-class. Research from McKinsey showed that 75 percent of productivity growth can be achieved simply “catching up” with existing best practices. It is often said that there is no silver bullet for improving productivity however New Zealand can achieve a great deal by aspiring to adopt work practices, processes, and technologies of our more productive international peers, while making a commitment to invest in the capabilities of our people. With so much at stake, the question is what is holding us back?