The Productivity Commission's Hamed Shafiee says the goal should not be simply to rebuild the economy we had, but to shift gear and find new ways for the economy to reach its full potential

The Productivity Commission's Hamed Shafiee says the goal should not be simply to rebuild the economy we had, but to shift gear and find new ways for the economy to reach its full potential

By Hamed Shafiee*

Over the last few months, both the government and businesses have been focused on the immediate need to survive the COVID-19 crisis. Now that New Zealand is at Alert Level 2, attention is shifting to economic recovery. Businesses are developing recovery plans and the government has established a $50 billion Covid-19 Response and Recovery Fund to support firms and the people who depend on them.

When thinking about recovery, the goal should not be simply to rebuild the economy we had. This is a chance to shift gear, to find new ways to help the economy reach its full potential, and to put the economy on a more prosperous and sustainable footing.

New Zealand has debated economic transformation along these lines for decades. But even the substantial economic reforms to open and free up the economy several decades ago have not resulted in productivity growth to the extent that many economists would have expected.

One possible reason is that our most productive “frontier” firms have not pulled their weight. In an inquiry underway, the Productivity Commission is investigating why New Zealand’s frontier firms are not as successful as elsewhere. The inquiry will look at what the government and business can do (or stop doing) to boost the productivity of frontier firms and help diffuse the knowledge, technologies and practices that they ought to demonstrate to other firms and employees. The inquiry has come at the right moment.

Other small advanced economies (such as Denmark, Finland, Netherlands and Singapore) look quite different in what they have done and achieved. New Zealand should learn from these countries’ successes, even if they don’t necessarily use textbook reforms. It is time for New Zealand to be bold and try something new.

Kiwi economist David Skilling has spent the last decade studying the performance of small advanced economies. In his report, released today, he points to the key lessons we may be able to draw from these economies.

Many are aware that the successful development of several East Asian economies came largely on the back of expanding export-oriented industries. Skilling argues that exporting is also the engine of productivity growth in successful small advanced economies. Domestic markets are too small to provide economies of scale, drive competitive behaviour, and incentivise businesses to invest upfront in large amounts of innovation, capital and skilled labour that are needed to increase their productivity. To overcome this barrier, New Zealand’s economic strategy needs to foster stronger international links and generate scale via exporting.

Another interesting argument in Skilling’s report is that successful small advanced economies tend to have several pronounced “clusters” of specialisation. These clusters are made up of related and supporting firms organised around strong capabilities and competitive advantages. They are supported by national research institutes and universities in both research and the supply of skilled graduates. Innovation, at the national level, happens primarily within and adjacent to these clusters. Many of these clusters are anchored by large, successful, exporting firms – from pharmaceuticals in Switzerland to renewable energy firms in Denmark.

The suggested lesson here is that our economic policy should support a handful of deep, sophisticated clusters that can innovate, develop and transfer tacit knowledge, and absorb shocks.

The report states that “small economies are ‘doomed to choose’ if they want to be successful… The risk of a level playing field approach that ‘lets a thousand flowers bloom’ is that it yields a thousand dead flowers, because firms do not have the topsoil of a surrounding cluster in which to grow to become frontier firms”.

But, even if this is the right approach, there is still the question of which clusters New Zealand should choose to focus on and nurture. Skilling argues that parts of the primary sector, such as dairying and horticulture, seem like obvious contenders given their scale. But how can they boost their growth and shift to higher-value products within the environmental goals New Zealand has set itself and in line with changing consumer preferences? Are there ownership, governance and capital-market problems to overcome?

Other candidates he identifies are the weightless industries such as digital, creative, and other knowledge-based services. In these industries, distance from market is much less of a barrier, and New Zealand has already developed some capabilities and competitive strengths. Yet precisely which industries the government should focus on remains an open question.

Many Kiwi firms are striving to be world class, but face challenges in doing so. The government can and should help by strengthening policies that promote innovation and skills development, investing in strategic infrastructure, and addressing management capability and incentive issues.

As noted above, the Commission is investigating frontier firms and their role in successful small advanced economies. It encourages everyone with an interest to read Skilling’s report and the Commission’s recently published Issues paper. Your feedback is invited. Your views will be invaluable to the Commission in its task of advising the government on how it could best help businesses innovate, grow and reach the productivity frontier.

The inquiry team is keen to speak with a variety of business owners, business leaders, employees and researchers. If you would like to share your thoughts with the Commission, you can make a submission or simply get in touch at: info@productivity.govt.nz.


*Hamed Shafiee is a Senior Advisor at the Productivity Commission

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17 Comments

The reset needed is downward not upward, the human race needs to address its own overpopulation of the planet and its over consumption of the planet's non renewals, not put the foot down on the economic accelerator.
Digital is not "weightless" what on earth do you think pays for it?

Covid was addressing this, but we stopped it.

This country has a couple of competitive advantages: it grows great grass, and is nice to look at. Farming is our backbone, like it or not. I watched LOTR again on my new OLED TV this week, and realised the enormous impact it has had on tourism. Again, it’s an economic backbone, like it or not, as are international students. ‘Frontier firms’ will not in the short or medium term create a fraction of the jobs and revenue farming, tourism and education have created, or lost. Yes, farming and tourism do need some tweaks, but hey, baby and bath water. The R word is realism, not reset. What we had wasn’t perfect, but it kept us in jobs and homes and paid for education and health care, plus provided the headroom to more than double government debt. We need to get back what we had as quickly as possible. I think the Productivity Commission should provide a business plan, with forecasts and flow charts, of how this economic reset will work. Woolly words just don’t cut in a time of crisis.

If this wooly article is anything to go by, it makes you wonder if government departments have any qualifications to make a real world business plans.

It's not like we have inept government departments governing an otherwise successful business landscape. How about the fact that even NZ monopolies such as Fletcher and Fonterra were facing financial difficulties back in 2017-18 when economic activity was abuzz in their respective sectors.
If we want a full socioeconomic reset, how about we start with owning our failures instead of blaming them on authorities.

The obvious differences are;

Businesses use private money, bear the costs of their own failures and then suffer the consequences of those decisions.

Government departments, by contrast, use public money, dump the cost of their failures on tax payers and can waste huge money for decades without any material consequence.

Businesses come and businesses go, but Inept government is the most enduring landmark of our economy.

Realism yes. It's a better approach. Not reset.

The reports don't talk about ownership. Maybe it's not polite in the political landscapes.
When successful operations remain locally owned, they stay.
We should use ownership as a method.

Classic economist. Remember Fonterra fostered international links by hiring a Dane (Theo) who tried to run them in to the ground by giving all Fonterra's money to his crooked Chinese mates/business partners. Yet as soon as Fonterra stopped fostering it's international links by sacking him and writing off the Chinese debacle, they returned to profit.

Biggest change government can make is to tax unproductive industries (here's looking at you housing market) and remove tax from productive ones. Here's an idea - if someone starts a new business, no income tax for the first 2 years. Yes it would require checking that they are actually selling something (or on track to), but that's not that hard. Guess where they were doing that and it led to a huge increase in new businesses? China.

What you don't do is remove grants for start-ups to grow: https://www.callaghaninnovation.govt.nz/grants/growth-grants

What you don't do is double down on the housing market by giving everyone a free holiday backed by taxpayers taking on risk.

What you don't do is spend $100s of millions every year subsidising motel owners.

What you don't do is spend 85k per person temporarily housing homeless people.

What you should do is use Callaghan and NZ Trade and Enterprise information to look at all your start-up companies and give each of them a big piece of the money printing pie you are throwing around to all and sundry. They would expand, take more people on and help solve your unemployment issue and help mount an economic recovery.

What you should do is provide co-funding arrangements with that printed money to large organisations for R&D for the next couple of years.

What you should do is set aside a "great idea" fund to start new companies, that is run by business people and not influenced by politics - a government funded "Dragons Den".

What you should do is slant your corporate tax system to favour productive industries, taxing the unproductive slightly more than the productive.

None of that will happen though because consecutive governments of any colour have no idea how to actually affect productivity.

An excellent range of meaningless buzzwords, ‘shift gear’, 'reach our full potential’, ‘sustainable footing’ before blaming ‘“frontier” firms’. Whoever frontier firms are.

The four comparisons (Denmark, Finland, Netherlands and Singapore) are all in almost entirely different situations than we are. Three of them are part of the European Union, an open market of 447M people on their doorstep.

But we Workshopped this at Scale and with Pace, drawing on the synergies inherent in our Diverse milieu, and modelled only battle-tested and market-friendly scenarios before we stopped for a cuppa.....

I wish I could be paid to come up with ideas like the ones mentioned in the article. The secret to becoming wealthy is to get a lot of money. If you want to be a good basketball player, try to get 2.2m tall and move like a sprinter. To be successful at farming, it has to rain frequently and adequately. How much can i get for sharing my wisdom?

"New Zealand’s economic strategy needs to foster stronger international links and generate scale via exporting." New Zealand has one of the highest proportion of foreign born residents in the world yet this doesn't seem to be providing much help in fostering stronger international links and our extremely high level of inward migration mainly serves to drive our economy inward.

A suggestion for an outward looking double-tap export opportunity. A window that will remain open briefly. If NZ succeeds in eradicating Covid-19 it will have the potential to market that success. “Pure NZ” water bottled in recycled PET bottles. Cancel the water extraction rights given to Chinese bottlers in Christchurch and require them to buy off local producers. Market it to the world – now – while the going is good. NZ has the chance to become the premier global supplier of bottled water

PET plastic can be recycled to total purity.
NZ imports 20,000 tonnes of PET annually, but only recycles 8000 tonnes.
https://www.stuff.co.nz/environment/95633368/nzs-first-pet-plastic-proce...

Er, private capital formation? Why not have a tax free band for business profits taxation to enable SMEs to retain profits and grow? It seems to me that countries that do well in exports and run capital account surpluses always subsidise the SME sector as it there that the potential for high productivity growth exists.

This article was a load of well intentioned waffle. Not meaningless, but just too many words and not enuff content.

In my view...the biggest barrier to raising productivity in NZ is the near complete absence of a deep capital market from which small SME's can raise capital to invest in high productivity technology. Any successful start up this Country develops inevitibly goes off shore insearch of capital support OR is sold off to foreign capital years ahead of their true ROI potential simply because the Kiwi owners can't grow it anyfurther beyond their shoestring garage based operation. When you've got banks falling over themselves to loan low productivity dairy farmers millions ahead of tech start ups with world changing ideas that are based in a storage unit in West Auckland your economy has got a massive problem.