New Zealand's productivity dilemma: Working harder but not earning more

COMMENT

As a result of his recent meetings in Washington DC with the governors of the International Monetary Fund and the World Bank – and in New York with the credit rating agencies Moody’s and Standard and Poor’s – Finance Minister Bill English has warned that New Zealand is still extremely vulnerable to global economic risks.

He says that some of the world’s largest economies are about to enter unchartered territory as they shift their focus from stimulus to debt reduction. Such changes will inevitably put pressure on a small country like New Zealand, which has a narrow economic base and is heavily exposed to international trade.

Mr English believes that since there are many forces in the global economy over which we have no control, it is especially important that we focus our efforts on getting our own economy into better shape: further constraining government spending, shrinking our debt to return to a surplus, and lifting the country’s economic output to raise living standards.

The problem is that one of those key factors – lifting the country’s economic performance – is no simple task. It hinges on improving productivity. That means generating more value for each hour that is worked. Or, as the Productivity Commission puts it, “Productivity is about how well people combine resources to produce goods and services. For countries, it is about creating more from available resources – such as raw materials, labour, skills, capital equipment, land, intellectual property, managerial capability and financial capital. With the right choices, higher production, higher value and higher incomes can be achieved for every hour worked.”

Working harder but not earning more
But the problem faced by New Zealand is that while we are working harder and longer, our productivity has stayed more or less static. In other words, our national productivity levels are now too low to lift wages and living standards to the levels to which we all aspire. With many other countries successfully improving their productivity above ours, it is little wonder that some 700,000 New Zealanders, who want to improve their lives, now live overseas – no doubt attracted by the better opportunities provided in countries with higher living standards and better wages.

Economist Dr Aaron Schiff, a former Auckland University lecturer and specialist in competition and regulation, puts it this way in an article "Importing productivity:"

“New Zealanders work relatively hard – an average of 871 hours per person in 2012, on a par with Japan (878 hours) and Israel (892 hours), and 9% more than the OECD average of 802 hours. Only eight of 34 other countries in the OECD worked more hours per person than New Zealand in 2012.

“Unfortunately, hard work on its own doesn’t seem to be a good way to increase incomes. Working harder increases incomes somewhat, but hours worked only explains 7.5% of the variation in GDP per capita across countries. If New Zealanders worked as hard as Koreans (1067 hours per year), we’d increase our per capita GDP by 22%, but we’d still be 12% behind Australia due to our low productivity.

“If we could improve our productivity from its current level to the OECD average and worked as hard as we do now, our per capita income would be 23% higher. If we could make it to the upper quartile of OECD productivity, our per capita incomes would be 54% greater than now.

“Alternatively, if you’d prefer more leisure time, matching the productivity of the Spanish would allow us to work 230 fewer hours per person per year and have exactly the same per capita GDP as we do now – that’s an extra four and a half hours of free time every week for everyone.”

To answer the question about why New Zealand’s productivity is so poor, Dr Schiff points to research that shows that while some of our best firms are world leaders in terms of their productivity, poorer performers in the same industry can still survive in this country even though they are nine times less productive.

“In contrast, the same ratio in Denmark is around 1.6 to 3.5. Danish firms that can’t achieve at least a quarter of the productivity of the best firms in the same industry get killed off by the forces of competition. Perhaps it’s no surprise then that Denmark’s productivity is 61% higher than New Zealand, and although the Danish work 19% fewer hours per person than New Zealanders, their per-capita GDP is 31% higher than ours.”

This is real food for thought. What it points to is that the lack of competition in New Zealand – partly due to our small size and distance from other markets – means that too many Kiwi businesses underperform. And the reasons can be quite varied.

In 2011, Owen McShane highlighted a fairly typical problem in a Breaking Views blog – The Role of Soils in the Roadblocks to Productivity. He had been listening to a National Radio interview with a lettuce grower who was producing 10 crops of 10,000 lettuces a year hydroponically. But when the clearly ambitious grower was asked if he had plans to expand his hydroponic farming operation, he explained that the local District Plan made it impossible for him to do so – even though he had the land and the markets.

The problem was that because hydroponic lettuces do not have their roots in soil, the District Plan deemed his operation to be a "non-farming activity" and he was restricted to using only 100sq m of his 25ha farmlet for his lettuce-growing operation in order to protect "prime agricultural land" and "productive soils!"

When asked if he planned to apply for a Discretionary Activity to expand his "non-farming activity," he explained that since a resource consent could cost up to $30,000 with no guarantee of success, he had flagged it away.

Local planning restricts growth
With these sorts of restrictive provisions in local authority plans up and down the country, it is little wonder that some areas are failing to thrive. Such restrictions represent serious barriers to growth and, unless they are removed, people with the ability and good ideas to dramatically improve productivity, and help to lift New Zealand’s living standards, will continue to be prevented from doing so.

The reality is that as a nation we have to focus on working smarter to produce higher valued products and services more efficiently. Embracing competition is the key, because it is competition that drives innovation and the adoption of the sorts of best-practice methods that lead to world-class performance.

We all saw first hand, the value of competition in the America’s Cup. The incredible innovation and superb sailing that we watched was driven by the desire to win. And although our team came second, we welcomed them home as the champions they truly were.

Yet when it comes to business champions, instead of celebrating their success and the enormous contribution that they make to the general wellbeing of this country – through the jobs they create and the innovation and wealth they generate – all too often they are treated as villains by the socialist left. That kind of mindset is incredibly destructive and should not be tolerated by fair-minded New Zealanders who want to see our country succeed and prosper.

In fact, we should be celebrating every kind of success and excellence: whether on the sports field, in the arts, business, academia, the community sector or any other field of endeavour – it is the ambition and determination of those who are striving to succeed that drives this country forward.

Auckland-based Eleanor Catton is a great example. At 28, she is the youngest author ever to win the prestigious Man Booker prize for literature with her novel The Luminaries. Set on the West Coast in the gold rush days, Ms Catton’s book and televisions rights will promote New Zealand to a growing audience around the world for years and years to come.

There is an enormous wealth of wonderful creative talent in New Zealand – from writers, to artists, designers, film directors, to musicians… each year the numbers that achieve international recognition continue to grow. Just look at the incredible success of 16 year-old North Shore school girl Ella Yelich-O’Connor, or “Lorde”, with her worldwide phenomenon “Royals,” which has topped the US music charts.

Then there are our talented businessmen and women, who manage to defy the tyranny of distance and size to turn their home-grown initiatives into global giants like Fonterra.

Rod Drury has been named Entrepreneur of the Year for establishing Xero as a leading on-line accounting package for small business and personal finance. In readiness for international expansion, the company has been building capital – including from Facebook billionaire Peter Thiel, who together with other US investors contributed $147 million of the $180 million raised.

Xero’s 600-strong Kiwi team of mainly IT professionals is now poised to move into the lucrative US market. Meanwhile, the company’s share price has rocketed up from its $1 listing price in 2006 to nerly $30 – even though it is yet to turn a profit. Mr Drury will represent New Zealand at the Global Entrepreneur Awards in Monaco next June.

The point is that wherever you look you can see entrepreneurial New Zealanders taking their creative talents to the world. For that’s who we are: an innovative and hard-working society – and what the government has to do to help us lift our game is, first, get out of the way but, second, ensure that the business environment in New Zealand is one that encourages hard work and enterprise, removes barriers to growth, and fosters competition.

Policy implications
What does that mean in policy terms? It means a total commitment to ensure children succeed in education so they can all look forward to a bright and exciting future. It means pressing on with infrastructure improvements so all regions of New Zealand have good access to markets – both national and international. It means continuing industrial relations reform so business owners can better ensure their workforce is committed to businesses success.

It means ensuring the tax system is not a repressive regime based on envy and greed but a light-handed affair that rewards hard work and entrepreneurial skills. It means paring back regulatory barriers and compliance costs that destroy innovation and progress. It means pushing ahead with free trade deals to open up new markets around the world – as well as guiding Kiwis with great ideas as they seek to make international connections. And it means encouraging and rewarding businesses for building skills and producing outcomes to match the best in the world, so their productivity improvement will help to raise living standards.

But most of all it means providing exceptional leadership to inspire the country – for it is a combination of the energy and abilities of people striving to better themselves and their families that will ultimately lift the nation.

Dr Muriel Neman is a former ACT MP and director of the New Zealand Centre for Political Research