These days everyone is talking about productivity growth, or rather the unnerving lack of it.
It’s with good reason; productivity drives income growth and raises everyone’s living standards.
While many advanced countries have suffered from falling productivity growth since the global financial crisis, New Zealand’s productivity performance has been lacklustre since the mid-1990s. The productivity discussion in New Zealand has become even more urgent in recent years because of fears that the slow adoption of new technologies will leave our local firms even further behind the rest of the world.
While the impact of advanced technologies like artificial intelligence is not yet being reflected in the widespread disruption of the global workforce, it’s likely that the full effect won’t be known for some time. As wider adoption of these digital technologies occurs internationally there is a real concern that this will only exacerbate New Zealand’s relative productivity position.
The effect of declining labour productivity
Declining global labour productivity, or output per hour worked, is often referred to as the “productivity puzzle”. It is a puzzle that needs to be solved if we don’t want to see our standard of living and economic growth continuing to erode over time.
According to the New Zealand Productivity Commission in a recent report, if productivity stays at the current level of growth, then real GDP will be 18% lower in forty years’ time. New Zealand’s GDP per capita is 30% below the OECD average, and similar to that of Mexico, Greece, Portugal, Israel, and Japan. By comparison, OECD research suggests with New Zealand’s policy settings we should be generating GDP per capita 20% above the OECD average.
GDP per capita (% of average of top half of the OECD)
The primary drivers of productivity growth are investment and innovation. For these conditions to exist the country needs to have an environment that fosters openness and competition. Competition is the key, as it weeds out the weaker, non-competitive firms and enables stronger companies to thrive and innovate.
The current government, for its part, is looking to address competition issues at a firm-level through the proposed changes to the Commerce Act’s anti-competitive behaviour provisions. At an industry level, it has begun market studies to analyse the level of competition within the sector. The first of these was the retail fuel sector with more of these to follow.
Weak labour productivity for three decades
Unlike other developed countries, New Zealand’s productivity decline has been longstanding. It emerged in the 1990s following extensive free-market reforms, which turned New Zealand from one of the most to one of the least regulated countries in the world. While designed to boost the country’s competitiveness and productivity, New Zealand’s labour productivity is currently around 40% below the top half of OECD countries. A 2016 study by the Productivity Commission found that NZ firms were on average one-third less productive than comparable international firms in the same industry.
In addition, since 1996 New Zealand workers work 17% more hours than the top-performing OECD countries but achieve below-average incomes and relatively low living standards. What was it about these reforms that failed to deliver productivity gains?
Drivers of poor productivity in NZ
Weak productivity growth in New Zealand seems to be due to a mix of factors including the high cost of capital, small markets and firm size plus our remoteness from large international markets. This, plus high population growth, relatively low wages and a labour skills mismatch has meant New Zealand firms are more inclined to throw unskilled labour at production issues rather than investing in new technologies which would ultimately make them more efficient and internationally competitive. An increasing number of international firms in the construction, retail and food sector are now spotting an opportunity to set up in New Zealand and potentially disrupt our local market.
One of the key factors in New Zealand’s poor productivity growth seems to be weak technology diffusion. Technology “diffuses” or spreads throughout the economy when firms decide to adopt it. This is important for economic performance as technology diffusion tends to lift a population’s skills and wages and improve their overall standard of living. According to the Productivity Commission, technology adoption in New Zealand has stagnated because of uncertainties over costs and benefits, risk aversion and management capability.
Despite the myth of New Zealander’s being early adopters of new technology, it is clear this is not the case. As the draft New Zealand Technology and Productivity report explains, New Zealanders have “historically been poor at adopting new technology” which is hurting our productivity rates.
The benefits for non-tech firms adopting technologies were the subject of Harvard University research last year. It found that those non-tech firms who adopted digital technologies:
- Showed stock price movements that had more in common with technology companies than to their industry peers, suggesting that their digital activities were making them similar to tech companies
- hold more cash and are larger, younger, and less capital intensive
- had higher valuations
Having the right skills on board is important though as the study showed firms with senior technology executives performed better when going digital.
“Low to middling” management capability
According to one study (Green and Agarwal (2011)), New Zealand manufacturing firms rank poorly in terms of managerial capability compared to our better performing OECD counterparts. Other research suggests that New Zealand managers lack the ability and the incentives to manage the assets and resources of the business to create value for shareholders. This is exacerbated by the high level of owner-operated firms where owners can control and influence the management of the firm to protect their interests in an already weak competitive domestic market.
Bright spots on the horizon
Despite the big hurdles facing New Zealand businesses and individuals in the coming years, there are some promising signs that the next decade will bring different results from our experiences over the past three decades. According to funds manager Simplicity, New Zealand is slowly moving from a capital-constrained market reliant on overseas funds to one that will be flush with local funds from Kiwisaver, NZ Super amongst others. This new capital base provides local business with an opportunity to invest in their staff and technology requirements and gives them a chance of competing on the international stage.
New Zealand has been good at creating jobs in recent years but now it needs to focus on creating the right sort of jobs. It also needs to focus on creating a business environment that is adaptable and fit for purpose for the next stage of growth. Companies, for their part, need to invest in new technologies that will encourage innovation. Most importantly they need to commit to lifting the skills and competencies of their managers and workers. In a global market, we are all competing on the world stage and we need to make sure our workforce, products, services and business processes are truly world-class.
*Alison Brook is from the Knowledge Exchange Hub at the Massey University campus at Albany, Auckland. She is on the GDPLive team. This article is a post from the GDPLive blog, and is here with permission.