This paper’s purpose is to extend recent analysis of why NZ,s productivity is much lower than other OECD countries and to suggest future policy directions.
The term ‘productivity’ means the amount of value added per unit of input. The NZ economy is characterised by some well performing industries and businesses with good productivity and value added, while a much larger part of the economy, including some major sectors employing the majority of the labour force achieve low productivity and value added. The solution is to incentivise all businesses to improve their performance and where they will not, or cannot, then let the resources they employ move elsewhere in the economy, either within the same sector or to another better performing sector.
COMMON POSITED REASONS FOR NZ’S LOW PRODUCTIVITY, some weak/wrong and some very relevant
The following are the often cited reasons for NZ’s low productivity and an analysis of them.
Weak international connection and distance from foreign markets
Despite NZ being relatively open on paper, only a small share of NZ firms engage in global markets through trade and foreign investment links. The weak international connection through relatively low international trade volumes, resulting in low innovation, is suggested to lower productivity. But is this low international connection a cause of, or an effect of, low productivity? In particular, are the factors leading to NZ’s low productivity, especially low managerial ability, the lack of an ‘up or out’ environment, and a lack of interest in innovation, also the reason for the lack of international connection? Low productivity NZ firms cannot compete internationally so do not have international connections. This idea is expanded on later in this paper.
Also often mentioned as a reason for NZ’s low productivity is our geographic isolation. This is cited as perhaps being more relevant in recent years because of the greater proportion of intermediate goods traded as part of global value chains. Transporting goods to overseas markets obviously increases the landed costs in those markets and reduces the net return to sellers. To export and cover the higher (than competitors) freight costs and still receive an acceptable net return exporters must in fact be more efficient (productive) than their competitors. So being an exporter requires a higher than average level of productivity.
Larger NZ firms not exporting, but who potentially could, then fall into the same category as all the other hundreds of thousands of domestic firms lacking strong domestic competition, and thus the need to adopt the best innovative practices. Hence geographic isolation is not the reason for low productivity but low general productivity means most firms are not productive enough to overcome geographic isolation because they do not adopt innovative equipment and processes.
Our geographic position is fixed so we have to live with it and do the best we can in reducing the impact of distance. NZ has been successfully exporting on a large scale for more than 150 years and since the 1970’s when European markets access began declining our growing markets (in Asia) have been much closer. Market distance is not an insurmountable problem. The issue is, what do we export that reduces the proportional effect of freight costs on net returns?
The idea that NZ’s overall low productivity can be partly attributed to the tyranny of distance, especially for intermediate goods is, at best, exaggerated. For example, complete wings and fuselage sections for Boeing 787s are made in Italy and Japan and flown to the USA. Airbus does the same within Europe.
In conclusion geographic isolation is not a cause of lower productivity, but the reverse, our lower than desired level of exports directly reflects NZ’s lower productivity.
Effect of ‘high’ real exchange and interest rates
It has been suggested that NZ’s real interest rates are ‘high’ and with overvalued exchange rates are significant in lowering NZ’s productivity. It is also suggested that the high real interest rates may be connected to persistent excess demand pressures in the economy and low saving. This is a reasonable explanation. And of course in NZ with a substantial proportion of people being on low real incomes it is not surprising that saving rates are low. Given this, is it not the case that high real interest rates are a reflection of low productivity, consequent low incomes, and hence low saving rates? Plus of course a high level of borrowing for expensive housing, exacerbated by high immigration levels and high building costs.
However, I doubt high real interest rates have anything but a marginal effect on business investment decisions. When a business is deciding whether to invest in a capital project they are usually looking to get a rate of return exceeding 10%. Here are recent percentage rates of return on investments for some of NZ’s more successful firms; Air NZ 8.0, Freightways 13.8, Kathmandu 10.0, Scales Corporation 11.1, Skellerup Industries 11.1, Spark 16.3, Tourism Holdings 9.9. So a 1 or 2 percentage point difference in real interest rates between NZ and elsewhere has to be put in perspective.
In regard to the posited overvalued exchange rate (driven partly by high interest rates) the term ‘overvalued’ itself is pejorative. What is too high an exchange rate for an exporter is the opposite for an importer. To the extent the NZ dollar is ‘overvalued’ then this lowers the cost of imported capital goods and services.
When considering productivity policy options, interest and currency rates can only be seen as they are what they are, especially in the medium term, and we should not try to institute productivity enhancing policies to tackle these ‘problems’ directly. Given the above reasoning as to why we have ‘higher than desirable’ real interest and exchange rates, then increasing NZ’s productivity will create a self-reinforcing positive process.
Small insular domestic markets
The NZPC reports NZ firms in the services sector are most likely to operate in small local markets insulated from competition and learning opportunities and with little opportunity or incentive to scale up. Small and dispersed markets allegedly limit firm growth. A lack of international connection coupled with small domestic markets most likely lowers the return on investment in R & D. Firms start small and survivors remain relatively small, consistent with a lack of ‘up or out’ dynamics.
Much of NZ’s work force operate in tiny businesses dispersed widely across the country with demonstrated low productivity. Of the 515,000 NZ companies 495,000 are classified as small or medium, and 363,000 employ no staff or less than 5 people. And the low productivity/disorganisation of the construction industry must impact negatively on investment costs for other businesses. NZ’s productivity will not improve without a significantly better performance from the large proportion of the economy comprising small businesses. Most commentators take the poor performance of this major part of the economy as unalterable, but if NZ is to improve its productivity on a widespread basis then these thousands of small businesses must up their performance and below are suggestions how to achieve this.
Low investment and a capital-shallow economy
The NZ economy is capital-shallow. Above is discussed and generally dismissed the role of ‘high’ real interest and exchange rates leading to capital ’shallowness’. The main reason for the lack of productivity enhancing investments is the lack of competitive and other pressures compelling business owners, boards, and managers to implement better ways of doing things.
Weak investment in knowledge-based capital (KBC)
While the NZPC notes that little is known about investment in KBC in NZ it also says that in general, R&D and managerial capability - both important in facilitating technology diffusion - are weak. But a key issue occasionally mentioned in various papers but not given the absolutely necessary attention required is the lack of quality management and leadership in these hundreds of thousands of small businesses. The NZPC reports there is evidence that well-managed firms are more innovative. Jaffe and Le (2015) find that firms that complete a management programme are more likely to undertake various types of innovation.
The NZPC also reports on studies that have shown multinational and publicly listed firms in NZ have superior management performance compared with privately-owned firms, family owned firms, and cooperatives and while some NZ firms are managed as well as any in the world, there is a substantial tail of mediocre and poorly-managed firms.
The weak investment in knowledge based capital, especially management expertise and true leadership, is the main reason why NZ business is failing. And one of the core elements of good management is leadership. From experience I know that in the building industry there is a common attitude of ‘this is how we have always done things so this how we will continue’ despite there being better ways. There used to be a firm in Wellington, L V Martin, which sold appliances and had a sales slogan something like “It’s the putting right that counts’ That is totally wrong. It is getting it right the first time that counts.
THE MOST IMPORTANT REASON WHY NZ HAS LOW PRODUCTIVITY
It is the board/managers of a firm who make the decisions as to what to produce, how to produce it (especially the mix of capital and labour), how to market their output, etc. It is the leadership aspect of high level management that encourages all the people in the business to work cooperatively to the common objectives. Managerial decisions and leadership are the only things that determine whether a firm is more or less productive than other firms in the same market segment. It is the managers who make the decisions about innovation and capital investment and motivate staff to perform well. The severe shortage of knowledge based capital in the form of leadership and management is by far the primary reason NZ is failing.
WHAT IS THE RATIONALE FOR IMPROVING PRODUCTIVITY?
The common objective for analysing NZ’s low productivity rate is to help achieve a higher national income through a higher return on capital, increased salaries and wages, and hence increased Government income that can fund improved health, education, social, and other central government services. What share of the improved national income goes to each of these three participant groups in the economy depends of course on the ongoing political process including what economic tools are used to achieve the increase in productivity.
However, one mindset must be altered. This is in regard to using the term ‘wage and salary inflation’. The word ‘inflation’ when used in relation to the price of labour is generally seen to have negative connotations. For example, a 2018 news headline was “Wage inflation is tipped to rise, warns NZ economists” Also a bank economist concurrently said: “He expects the central bank will want to be sure that wage growth will continue to firm before lifting the OCR, meaning hikes are distant”; that is, a sustained increase in the income of wage earners is seen as undesirable and should be dampened down by increasing interest rates. This attitude is also shown by some leaders of manufacturer and employer organisations to whom it seems any increase in the living standards of their employees through higher wages and salaries is something to be abhorred. Rather than, ‘Okay, wages are going up so how can we use these workers more productively’ their approach is to try and suppress the wage increases. These organisations, but not necessarily all their members, have a completely backward and negative approach. Keeping their workers suppressed is probably a lot easier than doing the hard yards themselves improving their own performance.
Increasing salaries and wages and profits, through better economic performance by the owners of capital and by labour is what it is all about. An increase in the price of labour (so called wage inflation) associated with increased productivity is totally desirable.
IMMIGRATION & PRODUCTIVITY
As noted above, the objective is to improve GDP per capita. The two interactive legs to this process are to move resources into those areas of production/service which give the greatest value added and to make those areas as efficient as possible. In recent years there has been an historically high level of NZ immigration and despite policies intended to achieve the opposite the average skill level of migrants has been low. This high level of immigration has aggravated pressures on the nation’s infrastructure, especially housing, health services and roading. As part of this, while total GDP has grown, GDP per capita has stagnated. Immigration has certainly not added to NZ’s productivity.
We do not need any more low skilled migrants going into low paid jobs but should only allow in skilled workers that meet critical needs. Our productivity problem, and consequent low average real personal incomes cannot be solved by mass immigration as much as some employers would like this as a means of keeping labour costs down and avoiding the need for them to improve their performance.
NZ LABOUR MARKET
This section is intended to illustrate the type of issues the NZ labour market faces which can only be resolved in productivity terms by the improvement of labour productivity within industries and the movement of labour from one industry to another.
On a daily basis there are comments from employers that they can’t get the workers they need, albeit, labourers, carpenters, mechanics, truck drivers, panel beaters, farm workers, software analysts. The kiwifruit, apple, forestry, tourism, and wine industries are all expected to grow significantly but can only do so on the current production models with the import of large quantities of cheap labour. It is only recently that the kiwifruit employers have begun to acknowledge that to get more NZ and backpacker employees they will need to raise wages, and improve terms and conditions by such things as longer term contracts.
In looking at the NZ labour market for examples of where things must change it is impossible to avoid the tourism industry. It is a large industry, one of our biggest foreign exchange earners, employs a significant part of the population, has low productivity, and significant environmental effects. It employs thousands of people doing menial jobs at minimum wage rates. At the same time in tourism hotspots like Queenstown there are major infrastructure problems including housing. To improve NZ’s overall productivity the tourism industry must be one of those sectors which greatly improves productivity and wages, or shrinks.
The NZ Government has promised more teachers, more nurses, more police, and more social workers - all highly skilled workers. In the short term this demand can only be satisfied by immigration and in the longer term newly qualified people beginning their first job or people leaving other industries and retraining.
It is not that a shift of labour and management to businesses where they can be used more productively means that whole industries/sectors need to go out of existence. Productivity within sectors varies considerably. For example, within the kiwifruit industry there are large variations between orchards in production per hectare due to different climate, soils, and particularly orchard management. Kiwifruit pack-houses are already replacing some labour by automation. Efforts are being made to develop robots to pick fruit. Increasing labour costs would force both orchard management and off-orchard activities within the industry to improve. There would be orchard amalgamations and some orchards with less favourable soils and climate would cease operation. It is at the lowest productivity margins of the different sectors where the ongoing changes will be.
So to improve overall productivity policies need to be established that do not allow scope for existing industries to expand on the basis of low productivity supported by the import of cheap labour. Essentially NZ is ‘trying to do too many things’ and needs to put its resources where they are best used, including the adoption of labour enhancing technology.
RAISING PRODUCTIVITY THROUGH FOCUSING ON HIGH TECH IT
A 2018 report of the Technology Investment Network summarised the performance of the top 200 technology companies ranked by turnover showed;
- total annual turnover of S10 billion
- total annual export receipts of $7.9 billion, which was less than dairying and tourism but more than the meat industry and forestry
- they had a 38% increase in operating profit growth
- they employed a total of 47000 people, with 25000 of these in NZ
These are very impressive figures and show the potential of individual technology companies. But the total number of NZ employees, 25000, is miniscule compared to the total NZ workforce. From the TIN report I would think that the total number of people employed in NZ by advanced ‘software as a service’ firms is no greater than 10000 - against the hundreds of thousands working in low-value-added traditional businesses.
It is often suggested that the best way to raise NZ’s productivity is through a multitude of firms producing information technology products delivered to the end customer over the internet; e.g. Xero, Vista, and Pushpay. There are also other companies, some doing well and others not so well.
While this option looks enticing there are a number of constraints to rapid expansion. First somebody has to have the entrepreneurial skills to identify the product idea and have the skill set necessary to develop the product and market it. Next, how many software developers are there with sufficient knowledge to develop the very advanced software needed? I know from personal contacts that these leading edge firms already struggle to obtain sufficient highly skilled and experienced technical staff. While the universities and polytechs annually graduate hundreds of IT staff only a small percentage of these have the ability to advance to the higher levels after some years of experience.
While it would be great if we could use IT as an engine for growth the reality is software development and marketing is the creme de la creme of innovation.
WHAT SKILLS ARE NECESSARY IN A SUCCESSFUL BUSINESS
To start and run a successful business in 2020 requires knowledge/skills in a number of subject areas. There is a set of knowledge areas common to all businesses and these are supplemented by more specialised skills for particular types of business.
Among the common knowledge/skills are: product/service identification and development, market identification (geographic and other), employment law, staff management, health and safety, financial management (e.g. understanding your accounts, cash flow forecasting, costing, taxation obligations, financing), how to identify and incorporate new technology into the business, marketing/advertising, planning law relevant to what you are doing, and environmental issues/expectations.
Then for a business such as a builder there is a need to know about matters such as; resource consent and building consent requirements, costing of jobs, a very good knowledge of cashflow analysis and planning, job scheduling, establishing effective arrangements with sub-contractors, identification of legally approved materials, and of course the actual technical building skills.
So to run a successful business in 2020 a business must have, or have access to, a very wide range of knowledge. It is unlikely that any one person, or even 2 or 3 working together, have the complete skill set necessary at a sufficiently advanced level. Of course a business operator can overcome any identified lack of skills by employing advisers and the most commonly used one, and for many businesses the only one, is an accountant. But outside consultants are relatively expensive and limited in number compared to the number of small businesses in NZ.
It is at this stage of this analysis that two old adages are extremely pertinent; ‘You don’t know what you don’t know.’ and ‘If you keep on doing the same thing in the same way don’t be surprised to get the same outcome.’
If people don’t know there is a better way of doing things then they won’t learn about and use that better way. For example, if you don’t know that formal cash flow forecasting is a critical business tool then you won’t use it.
The converse to the lack of essential knowledge in the hundreds of thousands of small businesses is that the larger significantly more productive firms, especially those exporting have all the basic essential skills available in-house or are of sufficient scale to afford outside consultants.
MOTIVATING MANAGERS AND WORKERS
The classic assumption in economics is that if you want a person or firm to improve their or its performance you pay them more money. Cuts in personal and business taxes are often suggested by some vested groups and political parties as a way to encourage better business performance, but where tried have generally proved ineffective.
The ‘house, bach, boat’ syndrome is suggested as one reason why many NZ small businesses are not growing, i.e. once a person has sufficient income to achieve ownership of these assets they cease trying to expand. In terms of environmental impact and claims on the world’s physical resources placing personal limits on your material consumption is no bad. But the same self-limitation can be achieved in a higher productivity situation using less resources.
In looking at the role of monetary incentives the reverse of paying more to achieve better outcomes needs to be examined. By this is meant the situation where businesses/people have to work harder or more productively to achieve a desired monetary outcome. An example of this is the Japanese Government during the Meiji Restoration period when Japan was trying to move from an essentially agrarian economy to an industrial one. The need was to shift labour from the rural rice growing sector to industrial production while still maintaining the total amount of rice produced - in other words increasing the productivity of rice farmers. The Government achieved this by increasing farmer taxes. They had to be more productive to survive, literally.
Also, there is a growing body of analysis showing that monetary rewards are only one of the factors motivating people to perform better in the workplace. While a certain level of income is essential to workers they make a bigger effort if they feel valued, are treated as contributors to the business, are listened to in regard to how things are done, and generally feel they are genuine participants in the firm. The term ‘teamwork’ encompasses these positive aspects which are present in successful firms. For a country which worships sports teams it is amazing how little teamwork exists in many workplaces.
NZ’S BUSINESS STRUCTURE
The NZPC correctly identifies that one of the main reasons for NZ’s low productivity is the thousands of small firms spread though the country serving only their local markets, and not subject to competitive pressures and the ‘up or out’ scenario. I would add that these small firms also significantly lack KBC in terms of wider business skills and management/leadership, a situation which is directly related to the small staff numbers. In contrast the NZPC notes that non-exporting firms that have a national presence through branches or subsidiaries have higher productivity.
It is often assumed that the multitude of non-competing small firms is an inevitable outcome of NZ’s small population spread over geographically isolated regions. That is not correct. By example, for the building industry, it implies that the huge numbers of independent builders, electricians, plumbers, drainlayers, roofers,
kitchen makers, etc., each employing 2 or 3 people, that currently exist, cannot brought together in larger firms still serving the same markets, but with better economies of scale, better and more knowledgeable management, and capable of adopting innovative technology. E.g. in regard to electrical services there is no reason why there cannot be national firms supplying electrician services to new houses, factories, commercial buildings, doing repairs, etc. throughout the country. Each regional area could be serviced by a branch or a franchised operator. Such national firms could then employ the fullest range of management and technical expertise. Just because the market is geographically dispersed it does not mean that the servicing firms have to be small. The same applies of course to retail where the franchise model is common. Also with fewer, larger, better managed firms with a drive to grow there will be greater competition.
The customer, contractor, sub-contractor, sub-sub-contractor system in NZ has performed extremely poorly. Another building industry model would be large firms directly employing the total range of tradespeople necessary for the whole job. One advantage of this is that each trades person would recognise that any mistakes they make create additional work for themselves or another trade within the firm and thus adversely impact their own firm. These multi-trade building firms would necessarily be larger firms needing an ongoing flow of work.
THE PYRAMID OF PRODUCTIVITY
The small percentage of firms exporting is lamented and this has been suggested as being due to the low productivity of potential exporting firms. But the cause is deeper than that. To successfully export a quality product or service to a competitive overseas market the exporter must be on top of their game in all aspects of production, supply, transport, finance, marketing, etc. But it is difficult to do that if the firms they source inputs from in NZ are inefficient, charge higher than necessary prices, unreliable in quality and delivery, or in other ways don’t meet the needs of the exporter.
Even a firm supplying only the domestic market has to rely on inputs from other businesses and if that supply of inputs is troublesome then it reduces the productivity of the first business. For example, if you have to spend hours repeatedly trying to get a telecommunications firm to fix a problem with your telephone/internet then you not only suffer from the lack of availability of the telephone/internet but you have also wasted time that could have been usefully spent working elsewhere on your business.
Thus while there are suggestions that the lower than desirable export performance leads to lower rates of innovation and capital shallowness elsewhere in the economy through the lack of a trickle-down effect, it is the reverse that applies, i.e. the lack of export performance is due to the lack of a solid foundation of quality, high productivity, supporting businesses.
So the generally low levels of productivity in NZ undermine the country’s ability to increase exports. Greater capital density, better management and innovation, and better leadership throughout the economy is the foundation of better export performance. Exporting of advanced products and services (as against the exporting of bulk commodities) is the peak of the pyramid of NZ productive processes.
SUMMARY OF ABOVE CONCLUSIONS
Better business management and leadership is the key factor to improving productivity through:
- firms being more innovative.
- firms being more capital intensive both in terms of physical equipment and knowledge based capital, so that they adopt world best equipment, processes, and practices.
- employees being more knowledgeable and committed to common objectives
Consolidation of the hundreds of thousands of small firms in NZ into larger businesses, with better/wider skill sets, improved management and leadership, that are more competitive, and especially with higher productivity, is a perfectly feasible objective.
NZ’s weak international connectivity, together with high real interest and exchange rates, are the result of low productivity not a contributor to it.
International geographic isolation simply means that NZ firms have to be more productive/clever than those with which they are competing closer to the market.
The current high number of low skilled migrants is not helpful in either the short or long term. The industries employing those potential migrants must be placed under pressure to employ labour more productively.
The development and ‘export’ of sophisticated IT products can only be the cream of productivity on a relatively small scale. The emphasis within the bulk of NZ businesses should not be on inventing new technology and science but in applying the latest proven technology to existing industries to improve their productivity. Being a ‘fast follower’ is the key.
NZ can not have a sufficient population increase to supply all the likely need for lower skilled workers already identified by some industries/sectors without both failing to achieve the desired productivity increase and creating further infrastructural pressures.
There is a need to create an economic environment that creates pressures on industries/sectors to increase productivity or else shed resources, i.e. an ‘up or out’ situation.
POLICY SUGGESTIONS
Essentially a situation needs to be created where firms, including everybody within them are incentivised to increase innovation, use more and better equipment, use better work practices, develop more comprehensive skill sets, and work as teams. As always the best policy approach entails both the ‘carrot’ and the ‘stick’.
The carrot is a more comprehensive and proactive labour market policy than currently, with a heavy emphasis on training and retraining and with a major Government financial input. As noted above ‘You don’t know what you don’t know’ so much of this training will need to be compulsory in order to preserve qualifications. Currently most professional bodies require members to undertake a specified number of hours of education yearly. This should be extended to all tradespeople so that they are at least exposed to all the skill sets needed to run a business. Some will not have the ability or interest in developing a working knowledge of the various facets of business, but at least they would have a better idea of what the business they work in involves, other than just the work on the tools. Others with the ability and interest may want to study further to widen their skill set and improve their management and leadership skills for the future. Another group of people who also need considerable skills improvement in is the directors of the hundreds of thousands of private companies running small businesses. These directors are often also the owners and workers in the same business and often do not know their governance responsibilities or have the financial knowledge to be effective directors. This group of industry participants should also have ongoing annual education requirements.
The ‘stick’ to achieving increased productivity, including domestic business restructuring, comprises two elements: a stronger competition policy, and a steady, faster than CPI, increase in the minimum wage. Increasing the minimum wage would also result in increasing wages/salaries at higher levels within firms in order to maintain relativities.
Implementing a steady increase in the minimum wage would be contentious. The employer organisations would cry foul and say it would put them into an impossible position and everybody would go broke. But that is an exaggeration. They would probably also argue that it would severely hamper the non-urban regions by preventing firms taking on new workers. But it is in those non-urban regions that some of the greatest future needs for low-skilled workers will be; horticulture, forestry, farming, and tourism and thus a need for greater labour productivity. Also increasing wages in the non-urban regions will increase the spending power of people and improve the prospects of other businesses in areas which have seen a steady decline in service businesses. There is also the factor that higher regional incomes will attract people from the large urban areas and reduce the infrastructural problems there. Plus increasing minimum wages would make working more attractive than living on benefits.
A steady, faster than CPI increase in the minimum wage would need to be accompanied by an appropriate fiscal and monetary policy stance.
The reality is that ‘There is no such thing as a free lunch”. There is no perfect policy that contains no negative consequences, particularly during the adjustment process. That is why I suggest there needs to be a more active labour market strategy that uses the existing income support mechanisms, greater free training/retraining, and even relocation cost subsidies for people to move into the more productive jobs. Also there are no other productivity enhancing policies including taxation changes (personal and business) that can achieve such widespread economic benefits in forcing firms to up their performance.
SUMMARY
It is clear that the top down approach to improving productivity in NZ has not and will not work. Generally the so called leaders of business have not shown leadership but the essential decisions needed to increase productivity within any firm can only be made by the board/management. Grants and tax breaks for R&D and innovation will only work for firms that are already motivated to innovate.
For hundreds of thousands of NZ firms there is no real pressure to improve their performance, yet there are major shortages of knowledge based capital in these same firms.
NZ has a major shortage of workers at all skill levels if we want to continue to do all the production and service activities currently underway and planned using existing practices. If NZ tries to overcome these shortages, especially in the lower skill areas, by importing workers at the existing wage rates then this is going to exacerbate NZ’s infrastructural deficit, do nothing to improve productivity and real wages, and add to inequalities in incomes and wealth.
The keys to improving NZ’s productivity are:
- Increased training and education for workers at all levels within firms.
- Encouragement /pressure for the multitude of small firms to merge into entities that can internally have almost all the skill sets necessary to run a successful business.
- Improving the competition regime in NZ.
And most effectively, a gradual real increase in the minimum wage that forces firms to either improve their productivity or exit their industry.
Kevin Sampson, B SC, M Com (Hons Economics), is a reader with a long standing interest in New Zealand economic policy.
25 Comments
in an ideal world treating everybody fairly would solve the productivity shortfall,no doubt there are innovative and progressive employers out there who do have a focus on upskilling and rewarding their employees,they could be seriously outnumbered by others who exploit and cheat them and the state of their due reward.
I read it all, and can sum it up in two words: Wrong, and Ideology-based.
Firstly, a productivity-gain is an efficiency-gains. No more, no less.
Efficiencies are an energy/work/output equation, and as such run into the Laws of Thermodynamics. Give that the gains were expressed in exponential (%) terms, they were always going to run into the thermodynamic limits with exponential speed. Thus the levelling-off globally, these last decades.
This piece also fails to ascertain 'wealth'- as in future buying power from the like of those better-paid employees. They expect to exchange their increased 'wealth' for 'more' processed parts of the planet (which knock-on expects others to be bypassing the Laws of Thermodynamics too.
The laws of thermodynamics, the descent of Energy Return on Energy Expended (EROEI) globally, the inevitable trend to entropy (2nd Law, but physically observable as decaying infrastructure) and ever-more people wanting to join in the bidding, are inexorable trends. No amount of business-merging, economies-of-scaling, or intellectual innovation, can stave off the plateauing of 'productivity' rates.
The base-line problem is that the economics 'profession' failed to describe productivity correctly. The fact that the neobibs forced the issue by using the false (economics) interpretation to trash unions and head for places with the lowest-labour-cost slash slackest-environmental-controls, is worthy of note but not a game-changer.
No move, top-down or bottom-up or clever, can alter this coming up against the ceiling of the Limits to Growth. Despite a great number of words (including freely purlioned ones like 'work' and 'resources') this piece fails the test. It shows how a perfectly adequate intelligence can become curtailed by a discipline which got carries away with a belief in itself and which hung on to a set of observations which were only valid during a short window. Which we are past.
The goal now is to set up a regime which can be handed on to future generations - of more species than just our own - in as-good or better condition that it was inherited. That does not include handing on more bank-computer-held digits, it involves handing on as much resource and energy-availability per head, as we inherited. We aren't doing that in spades, and in very short order there won't be anything to hand on, period.
And our valuation-system has to be related to something real.
https://books.google.co.nz/books?id=YletVzzoqxcC&pg=PA195&lpg=PA195&dq=…
""a productivity-gain is an efficiency-gains. ..... Efficiencies are an energy/work/output equation "" That is reasonable. You are assuming we have reached theoretical maximum efficiency. The laws of thermodynamics started with an analysis of the steam engine. The first steam engines had an efficiency when converting energy (coal) into potential energy (lifting water out of mines) of 0.05%. With endevours by the likes of Watt and Stephenson that efficiency increased many multiples to about 7%. Checking wikipedia: ""Steam engines and turbines operate on the Rankine cycle which has a maximum Carnot efficiency of 63% for practical engines, with steam turbine power plants able to achieve efficiency in the mid 40% range."" So you are right in saying inprovements in efficiency are limited by the laws of physics. But look wider - the replacement for the steam train was a desiel engine but could be a solar powered train or an airship or best of all query if transport is needed. With the Coronavirus epidemic people may finally use video conferencing and last week I spoke to a supplier of vehicle spare parts - he is seriously investigating using 3D printers to create aluminium parts accurate to 0.02mm. So investment in technology can increase productivity and reduce energy consumed and help our environment. Admittedly our govt finds it easier to bring in more cheap foreign labourers and transport them on ever more congested roads but it doesn't have to be that way.
Everything runs into the same 2nd-law limit. Even feed-stock-requiring, feed-stock-melting 3D printers.
Energy consumption reduction follows a pathway of diminishing returns, sorry but that's just fact.
And no, it's not 'helping our environment', any more than electric cars do. You can argue that you're trashing the environment less, but not that you're helping it. That's the fallacy of 'Green Growth'.
The 2nd law of thermodynamics [ Isolated systems spontaneously evolve towards thermodynamic equilibrium, the state with maximum entropy ] has the universe eventually dying. Plenty of time before it happens. And today on earth we can improve what we do. And while the sun exists the earth is not an isolated system.
I agree with much of your ideas - take one example when I was a kid the number and mass of all domesticated animals probably matched the wild animals. Now it is over 99% domesticated and it cannot be taken any further (well only 1% further with even NZ having fewer kiwis year by year). However with MIT suggesting nuclear fusion will be working in ten years the energy problem may (or may not) be resolved. I would appreciate NZ businesses gaining efficiency - instead of hundreds of litres of fossil fuel flying parts from Japan to NZ we could use a 3D printer that might be driven by solar power for all I know. Agreed not a perfect solution - it will not stop the heat death of the universe - but good enough.
As regards to being a business owner or not, maybe, maybe not, but the points raised in this article are valid none-the-less. I've often been challenged by poor leadership, from both sides of the equation. If we are not prepared to innovate & keep learning, then we're probably going backwards, even though our businesses may seem to be ticking over nicely. The point about raising minimum wages to force innovation is valid. We've done that within our business & seen the 'buy-in' from those same people add to the productivity. It works. We've still got work to do in our being smarter with technology side, but that's mainly waiting for key people to become full-time when family commitments allow. As for ongoing education; we all need to spend a couple of weeks every year learning something new. It should be mandated into our superannuation entitlements somehow. And everyone should have to resit their drivers license every 5 years as well. Grow or go.
I suspect that comment is born of immediate frustration.
But it is correct. We need not to 'fund for depreciation'- we need to ringfence, stockpile and not deplete, enough energy and resources to maintain whatever we decide to 'spend' our taxes/rates on. The assumption was that more money would produce more when needed - the old fallacy upon which economics is based; the supposed fungibility of money for stuff. Nobody counted the stuff, everybody believed in the bet.
And I'll give you the tip - there ain't enough planet left to do that. Too many infrastructural balls in the air already already. Soi more and more triage nd more and more of the available effort going into fixing aging stuff. Expect productivity graphs to invert - if the society creating them stays coherent enough to keep bothering
"". In recent years there has been an historically high level of NZ immigration and despite policies intended to achieve the opposite the average skill level of migrants has been low. This high level of immigration has aggravated pressures on the nation’s infrastructure, especially housing, health services and roading. As part of this, while total GDP has grown, GDP per capita has stagnated. Immigration has certainly not added to NZ’s productivity. We do not need any more low skilled migrants going into low paid jobs but should only allow in skilled workers that meet critical needs.""
This is the nub of the issue: INZ attmpts to define 'skill' rather than let wages/salaries define it. INZ is no better than communist Russia's 5-year planners used to be. How can they distinguish between a poor and a great computer programmer, chef, retail manager, etc? If the chef earns as much as Gordon Ramsey and the retail manager controls the Warehouse chain then they are skilled and they will be earning over $200k. Instead we have computer programmers who are Uber drivers.
The current deep bureaucratic freeze in INZ's visa processing is actively stopping productive investment with some potentially great immigrants sat in an endless near stationary queue.
Personally, I think the constant battle with inane regulations and fashionable ideas just takes it's toll. The overheads grow faster than the business. Rates inflate at 8% a year, ridulously expensive accomodation, anti-profit academics and anti-business civil servants brogging their noses into everything. Productive people just give up and find something more fun to do. If younger, they move to Aussie and earn big money in mining and buy a nice house; or if older, they sell their productive business and move into property, or invest in Aussie miners and go fishing,
Productive people respond to incentives, not threats. Bullying makes them seek to remove the bullies from their lives by doing something else.
I don't think you're listening.
Take away all the red tape, all the rules, all the safeguards, all respect for a liveable tomorrow, and you're STILL going to be going backwards from about now.
I work in manufacturing. In the last 2 weeks I've had 4 audits to check compliance with various safety regulations, insurance, chemical etc. If I use a contractor, I can't rely on common sense, I have to go through a 4hr induction process to tell them about hazards and controls on site. I've Recently hired a crane operator to do a job on site. Job took 20mins. Paperwork took 2 hrs. Govt regulation has a lot to answer for. Everyone is scared of worksafes unreasonable rulings. I suspect the impact on GDP is much more significant than the govt would admit.
What do think, have we got too many processes that rely on people to perform them, or is generally procedure and processes too ill defined to be able to fit within compliance framework.
I am seeing many situations where the self leading team, or the witt and character of individuals are depended upon to meet production/deliver service.
- Where process is defined and amended verbally.
With you crane operator, was the compliance a default job planning session as well?
The concept of increasing the minimum wage as the solution sounds good. In practise the sub-sub-contractor (eg my son the apprentice builder) is effectively under-cutting the minimum wage - wet day, no work, no pay or car breaks down, no work, no pay or new tools needed - less take home pay, etc. My only business only employed one person: myself. The thought of the hassles involved in taking on staff meant I never gave it a thought. However it also meant my customers could not depend on my business (I might be ill or on a foreign holiday). There needs to be some means of rewarding businesses willing to take on staff - a reward that is aimed at the first extra employee and declining as more are taken on otherwise we would have councils adding ever more public relations staff and compliance officiers.
Good article.
1. Yes. A primary national objective should be to lift incomes. Currently we have a de facto policy to keep incomes low. Just nuts.
2. Stopping the use of immigration to keep wages low would build incomes, and bring the desired business changes and skill changes. Such a different labour market sends better real signals than regulation about minimum wage.
I disagree about company size. I see small companies are very efficient. Big outfits are often appallingly inefficient. Their business process often relies on market dominance rather than being productive.
Look at the big firms who spend big buy up the small new disruptors to eliminate them.
Look at the super market cartels, who fence out the innovative smaller producers.
2. It is hard to understand a political party called 'Labour' that is willing to accept and even encourage low paid immigrants. It is unfair to the immigrant and unfair to the Kiwi who has to accept the same wage. Well paid immigrants are good for all of us - more taxes, more international knowledge. If Uber charges us more and the coffee shop puts up it prices because they are paying decent wages well so be it.
The reason is that our political and financial system was colonised by neoliberal policy makers in the late 70s early 80s and has infected thinking across the board to the degree that even the green party has an ex corporate as its co leader. If you could find anyone in parliament near the levers of power that actually is able to influence conditions for workers in the way they desperately need I would be very suprised. What happened to the vaunted sector award system?
1) NZ's wealth per capita is high - 5th in the world (credit suisse 2019 global wealth report) so we are actually doing really well. But there is a risk that much of this is artificially bid up land values due to an inelastic RMA, very high immigration rate per capita pushing housing demand, low interest rates (pushing up asset prices) & a tax system favouring housing investment.
That said:
2) NZ is stuck between a rock & a hard place. To get economies of scale would require a much higher population, but such growth already bids up land prices and means government (tax payers) having to spend significantly on infrastructure growth (those taxes could be put to more productive ends). Its particularity bad as the growth is focused on Auckland creating infrastructure dis-economies of scale. The alternative is to manage the immigration rate at a lower sustainable level and focus on gdp/capita growth.
3) The tyranny of distance is real as are the economies of scale that go with it. Ashburton will never be Christchurch, Christchurch never Auckland, & Auckland never Sydney. This same scaling applies internationally for NZ as a whole. There has been a constant march since I was a kid of companies headquatered in Chch, then AKL & then Sydney.
4) With the lack of economies of scale, distance & lack of capital successful listed NZ companies are bought out by larger overseas companies.
5) Other than 4) we have a history of management failure and once successful NZ companies going bust - e.g. Air NZ, BNZ etc destroying capital.
6) We lack productive mobile capital because we are small and much of NZs existing savings are tied up in bid up land prices. Kiwisaver may help increase savings (investment = savings)
7) NZ's main exports Dairy products, meat, logs and wood products, fruit, wine, fish and seafood are already produced at economies of scale and probably relatively productively. (The export of "Inbound tourism" is harder to scale as tourists arent widgets being made in a factory) They probably mainly fit in the (515,000-495,000=20,000) companies in 8) & have the scale to export.
8) That leaves "Of the 515,000 NZ companies 495,000 are classified as small or medium, and 363,000 employ no staff or less than 5 people" - given economies of scale the 495,000 small and medium companies are never going to be "productive" and most unlikely to export and certainly not at scale.
9) The governments proposed legislation to force fuel wholesalers to sell fuel at a gate rate to all-comers will help in terms of competition & reducing fuel costs which are a major energy cost to the economy.
10) To grow the productivity further means either:
a) The large companies adding value (e.g. post processing logs). This is possible as the raw materials are in NZ but we are already running into environmental constraints (e.g. water quality), or,
b) The smaller companies finding niches where they have comparative advantage. However, the issue is with this is that for many smaller companies which are successful (not based on raw materials being in NZ, e.g. software) are in the long term better off headquartered/manufacturing overseas where their main markets are.
Didn't the NZ Initiative identify several years ago that NZ needed minimum 5 million residents just to sustain a stable local economy? I think thats why immigration has been so high for so long now. On productivity, in my humble view the author rightly targets the piss poor levels of management ability in NZ, which is something that many expats I meet are shocked by. In many cases they have immigrated from far bigger countries and left jobs in big succesful corporations and are readjusting to working for what in comparison is something akin to the corner dairy !
Sounds like communism...
Straight out of a textbook...
Increase the price of everything and call it value...
No understanding of the small business owner... doesn't want a "boss" and rules... is only aiming to keep up with the Jones'... invest in more property and retirement...
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