Life in the slow lane

Dr Patrick Carvalho
The National Business Review
21 June, 2019

New Zealand’s productivity track record is failing us. That was the key message delivered by the Productivity Commission’s new report, Productivity by the numbers: 2019.

“[Our] economy is like a car stuck in first gear, where faster growth comes from revving the engine rather than driving more efficiently,” says Dr Patrick Nolan, co-author of the report.

This is not good news. Low productivity means less money in people’s wallets and longer working hours to support a household. It also means fewer tax revenues to pay teachers better, install more hospital beds and create a supportive social safety net.

If the New Zealand economy remains low-yielding, the Productivity Commission estimates the country’s buying power will be $100 billion smaller by 2060 compared with Treasury’s wishful long-term fiscal projections. That means every New Zealander will lose on average $16,300 of annual income by then.

To accelerate the nation’s productivity growth, the report cautions: “there is no simple quick fix.”

Sure, but there are plenty of possible fixes. Many of our productivity drags are nothing but self-inflicted legislative wounds – from overly restrictive land development laws to irrational foreign investment constraints to piles of distractive business regulations of dubious efficacy.

Immediate action is required – and possible.

A sluggish reality

Decades of slow productivity growth have not come unpunished. Our income per capita, benchmarked by the American economy, has steadily decreased from near parity in 1950 to around 65% of that of the US in recent years.

Since the global financial crisis in 2008, most of the economic growth in New Zealand has been sustained by fast population increases, high employment rates and favourable trade winds. These are all welcome features but not reliable as a long-term growth strategy.

A more sustainable approach would be to improve our ability to produce goods and services per hour of labour (aka labour productivity).

So here is the problem: New Zealand has experienced both low starting level and low growth of labour productivity since 1996. That makes our economy an outlier in the OECD, placing us among a small group of countries with serious productivity issues, such as debt-ridden Greece, fast-ageing Japan and corruption-riddled Mexico.

Most other countries are either in catch-up mode displaying “low-starting level, high-growth” productivity performance (for example: Chile, Korea and Poland) or on a steady course of “high-starting level, low-growth” (for example: Spain, the Netherlands and Australia).

Lots of low-hanging fixes

The commission’s report singled out the low level of capital per unit of work as a key factor behind New Zealand’s sluggish economy. That means low levels of tools and machinery available to workers are undermining our ability to produce more output per hour of labour.

Despite an attractive investment environment (that is, historically low interest rates), the contribution of capital to productivity growth has more than halved in the past 10 years compared with the preceding decade.

If we are serious about speeding up the ability of our workers to produce – and, in turn, higher wage growth – fixing capital shallowness is where to go. Plenty of low-hanging fixes abound to deepen capital use by fine-tuning legislation that penalises productivity.

First off are our land development regulations: amend the Resource Management Act to allow different regions with different needs to experiment with different solutions; implement greater revenue sharing mechanisms between local and central government to create incentives for pro-growth zoning laws; and advance central government’s trials on independent financing entities, which privately raise debt to finance new infrastructure (for example, fresh and waste water, electricity connections) and charge benefited residents accordingly.

Second, subject all investors – domestic and foreign – to the same level playing field. There is no need for a differentiated foreign direct investment regime or overseas buyer bans limiting the potential pool of investment capital. If the rules are clear and enforcement is protected, property rights of New Zealanders to sell to whomever they wish need not be limited further.

Third, fit-for-purpose cost-benefit analyses of government regulations should be a priority. New research details the cost of compliance on New Zealand businesses of more than $5b a year – a sum that could instead go toward productive capital deepening.

True wellbeing approach

Our paltry productivity performance is much more than elusive economist talk and wonkish international rankings. Productivity has a real impact on our daily lives.

As economists Alan Blinder and William Baumol remind us, productivity is paramount to the wellbeing of a nation: “Nothing contributes more to the reduction of poverty, to increases in leisure and to the country’s ability to finance education, public health, environment and the arts.”

If we are committed to improving the wellbeing of all New Zealanders, we must first admit two basic facts: New Zealand’s economy is in the slow lane – and it does not have to be.

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