To lift our productivity, keep markets open

By Phil O'Reilly, September 2017

There was much debate in the election campaign about New Zealand's lack of productivity and how we might improve it.

It is not hard to argue New Zealand has low productivity, we have had it for a while. But it is a bit hard to argue this is New Zealand's problem alone. In fact, the scourge of low productivity is common amongst many OECD countries, as well as quite a few low-income economies.

OECD research suggests it's occurring for several reasons.

Technological change is not leading to the predicted productivity rises. There is persistently weak investment in physical capital. Some firms (the OECD calls them frontier firms) are much more productive than laggard firms - they capture much more of the benefits of productivity and also pay their people more.

Furthermore, the OECD argues traditional measurements of productivity aren't capturing enough of what is going on in our economy these days, especially the growth of the services and digital sectors.

Some of these issues do indeed play out more in New Zealand than other countries. For example, because of our small market, unproductive firms often don't exit markets as quickly as they should. This means they remain unproductive - holding on to capital and skilled labour that could otherwise be redistributed to more efficient companies.

"Frontier firms" meanwhile hold on to productive technology and often dominate their sectors, but this can limit competition. Higher skills and pay are often skewed towards these frontier firms.

Yet many workers often don't have the opportunity to join them because of a lack of knowledge, skills or maybe because they are simply living in the wrong part of New Zealand.

Businesses trapped in a low productivity cycle often face exit barriers and lack the incentive to move capital to more productive areas. They don't know when they are going to be digitally disrupted and by who, so doing nothing is often the default option.

In New Zealand we can add to this a lack of good management capability.

We are not saying that our managers are not intelligent here, rather that New Zealand businesses are more likely to be small enterprises managed by people who are less likely than their peers overseas to have a breadth of experience in, say, mergers and acquisitions and capital raisings.

There are technological and digital impacts too. Peer-to-peer services such as Apple Music are not easily measured in terms of their productive impact. Nor are the consumer benefits of easier interactions (think PayWave), and the rise in abstract skills, like customer service. Profit-sharing and the cost of internal IP is also hard to assess - particularly as large companies shift value around the globe.

Government productivity is also very hard to measure. Environmental measures too. Take for example the value of installing cleaner-burning generators in power stations. This type of thing is often not included in productivity statistics.

Fortunately, we can do quite a bit about low productivity.

First, we should continue to make sure members of the current workforce, as well as future workers, are learning the abstract skills. Not just science, technology, engineering and maths but also the human interaction that remains as important as ever for most companies.

Second, we should make sure we have as competitive a market in New Zealand as possible. This means being much more open to foreign, direct investment than we are today - and really focusing on bringing in skilled migrants who can bring a world of connection and capability to New Zealand firms.

We then need to ensure companies are at least as capable of attracting equity capital as debt capital into their businesses. As a general rule, those small companies who take on debt, particularly when it is secured against the family home, will be very risk averse.

We also should continue to concentrate on building the diversity of our economy.

Latest Treasury statistics indicate business capital investment is at its highest level for many years and that is a good thing. Let's hope it is being invested in building the economic diversity of businesses rather than simply going into new versions of the same old machines.

Furthermore, we need to continue to open ourselves to the world. This means more free trade deals and better use of them. It also includes making sure we have less behind-the-border protection in the economies in which we want to do business. Increasingly digital, technology and services firms are finding tariffs aren't the problem, protectionism inside each economy is the problem.

One thing we do not want to do is reregulate our labour market. Over-regulated labour markets are a key factor in driving down productivity in an economy, for the simple reason that they tend to trap workers in their existing jobs rather than making sure the economy - and jobs within it - are as dynamic as possible.

If we want workers to move to new, high-value jobs, then we need to equip them with the right skills and training, rather than trapping them in a web of ineffective regulation.

Our lack of productivity is not something that is unique to New Zealand. Nor is it something that can be magically increased to suit a three-year electoral cycle. Improving productivity requires "staying the course", building a competitive economy and building the skills of workers within that economy.

Let's make sure that we have that debate in New Zealand