Why is New Zealand’s productivity poor and why does it matter? Kiwi economist Paul Conway has been invited by the World Bank to talk in Turkey next week about New Zealand's productivity.

Conway is director economics & research at the Productivity Commission.

Photo: 123rf

He told Jesse Mulligan that Turkey’s productivity is on a par with New Zealand’s despite us being a wealthier country, and compared with more comparable OECD economies, we’re seriously lagging behind.

“I guess I was unpleasantly surprised to see that productivity in New Zealand, which is a measure of how much value we create for each hour that we go to work, is currently about the same as it is in Turkey.”

And the reason we are comparably richer than Turkey is we work more, he says.

“Average incomes are still higher than in Turkey. But the reason for that is that we work more hours per capita than the Turks do on average,” Paul Conway says.

Productivity isn’t about sweating workers and assets to extract every last dollar, he says.

“As economists we think about how much value add we're creating in an economy conditional on how many resources we're using. So if we look productive, that means that we're creating more value add from the same types of resources.”

Conversely it is creating the same value with fewer resources, he says.

“So it's not exactly the same thing as sustainability, but both of those concepts are about using resources, to the best of our advantage.”

New Zealand is very much a mid-ranking nation on the productivity scale, Conway says.

“We're not a basket case when it comes to productivity, but you know we're not that flash either.”

As a comparison the New Zealand economy is 40 percent less productive than the US economy, he says.

So why is this the case? Traditionally New Zealand’s distance from other similar economies has been a big factor.

“New Zealand is quite a specific little economy, it's quite a tricky little economy to understand. But there's three main reasons why productivity has been such a problem for us here. And the first is that we're just a small, isolated economy.”

He says despite what we tell ourselves, New Zealand is not that connected internationally.

“If you look at trade, for example, exports and imports in New Zealand as a share of the economy is quite low, compared to other economies, because it's harder to export and import or takes longer and is more costly.”

Distance gets in the way of connection, he says.

The emerging digital economy could start to change that structural disadvantage, he says.

“Now we can trade products down fibre optic cables in the blink of an eye, which is exciting for New Zealand. And I think we're seeing some sort of green shoots in the economy."

We are also a “capital shallow” economy, Conway says. Which means investment hasn’t kept pace with growth in the labour force.

“The tools, the equipment, that we have at our disposal when we go to work has a big impact on our productivity. And in New Zealand that hasn't changed much, whereas other economies have gotten more capital intensive.

The third, somewhat related, weakness is a lack of emphasis on knowledge.

“In the 21st century economy knowledge is the new oil. But if you look at things like R&D by New Zealand firms it's a bit on the low side, if you look at management capability there's indications that it's not that flash and that hurts us.”

The impact of lacklustre productivity has been seen in a slow decline in our wages, he says.

“It's sort of been a slow bleed. We're kind of the frog in the pan of water with the heat just getting turned up underneath it.”

This gradual decline relative to the rest of the world can be seen all over New Zealand, he says.

“You don't have to go far to see there's plenty of deprivation in this economy across some of the communities that make up Aotearoa New Zealand and that's linked to a poor productivity performance.”

Public policy in New Zealand, to my mind at least, isn’t based on evidence or the economics to the extent that it ideally would be.

“Productivity has been a vexed issue here for us in New Zealand, people sort of rub their hands together and we used to talk about a productivity paradox, and that we don't really understand why we're a low productivity economy, or what policymakers should do to fix it, but I kind of push back against that and I think after 20 years of research and debate, we do actually have a good idea of why New Zealand’s a low productivity economy.”

And, he says, we’ve got a reasonably good idea of the types of policies we could pursue to turn things around.

These should include trade strategy, making investment easier and more effective, lifting competition in some parts of the economy and strengthening the economic return from science and innovation, he says.

“The Productivity Commission has got, many large volumes of very detailed policy analysis and suggestions for lifting productivity. So, you know, it's not about whether or not we know what to do. To my mind it's about economics leadership within the public sector and ambition to get it done.”

New Zealand needs a productivity strategy and it won’t be fixed by one magic bullet policy, he says.

We need to really push hard on this and lift productivity and we can lift productivity, it's not that we're just sort of condemned to be this low productivity, low income economy - we can, and we must do better.”