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7 April 2006 Productivity Growth in New
Zealand: How often have we been told that
New Zealand is a productivity laggard? The prime minister famously told
a London School of Economics audience only four years ago that the
economy "marked time' in the 1990s (even though it grew by
about 30% in the decade) and that the 1984-88 and 1990-91 reforms
were failed policies. Council of Trade Union officials
routinely said things like "the neo-liberal reforms of the
past 15 years have not produced a stronger economy nor improved
labour productivity." The New Zealand Institute chimed
in, saying that our labour productivity is actually deteriorating
relative to other countries. Economist Brian Easton wrote just
last year that "we have to move from a low productivity growth/labour
extensive growth strategy to a high productivity one because the
sources of labour are running out." Even people who should have known
better joined the chorus. Academic John McMillan wrote, "Productivity
in New Zealand grew slowly during the 1990s." A 2001 New Zealand
Institute of Economic Research report said the "lift in productivity
from structural change was very small." These claims were severely shaken
by a new study released by Statistics New Zealand last week. Its
key finding was that labour productivity in the sector of the economy
in which it can be measured with some confidence (essentially the
business sector) has grown by an impressive 2.6 per annum on average
since 1988. This performance is slightly ahead of Australia's and
compares favourably with most OECD countries. Was there any excuse for the earlier
myth-mongering? No. Earlier studies had also identified major productivity
gains from the Douglas/Richardson reforms. A major study by Erwin Diewert
and Denis Lawrence published in 1999 found that "After 1993
there was a productivity surge. This is likely to have been aided
by the effects of the labour market reforms of the early 1990s,
among other things." It also found that New Zealand had roughly
matched Australia's productivity performance. A Treasury study published in 2003
reported "a noticeable improvement in market sector multifactor
productivity after 1993", and OECD estimates published in the
OECD Economic Outlook suggested that New Zealand's productivity
performance had been similar to that of a range of other OECD countries. It should have been obvious to
any objective observer that New Zealand's stronger economic growth
performance since the early 1990s, when the benefits of the economic
reforms showed up, would not have happened without improvements
in productivity. Moreover, claims about low productivity
growth were inconsistent with the practical experience of many firms
in increasing their efficiency, especially after the labour market
was freed up. A common finding has been that
measured Australian productivity growth has owed more to capital
investment than has been the case in New Zealand. However, this
is not necessarily a point in Australia's favour. With its freer
labour market, New Zealand did better in absorbing more low-skilled,
low-productivity workers from the ranks of the unemployed into the
labour force. There are other interesting findings
in the Statistics New Zealand series. The new data show that from 1993
to 2005, when the annual average growth in output was 4.1 percent,
labour productivity accounted for most of it - growing by 2.4 percent
a year on average while labour input increased by 1.6 percent a
year. They also point to a marked weakening
of annual average productivity growth since 2000. Compared with
the 1993-2000 period, labour productivity growth halved in 2000-2005
and the multifactor productivity growth rate fell from 2.7 percent
to 1.1 percent. This suggests that recent anti-growth policies such
as high government spending and taxation and labour market re-regulation
have been damaging to productivity and economic growth prospects,
as business organisations have argued. Moreover, the Treasury estimates
that economy-wide labour productivity growth going forward will
only be 1.5 percent per annum, and even this estimate may be too
high. The Statistics New Zealand study
covers industries accounting for about 65 percent of the economy.
Left out, notably, is the public sector. Economy-wide labour productivity
improvements have been lower than those in the measured sector.
This suggests that the major gains have been in private sector industries
that have been deregulated and privatised whereas state-dominated
sectors such as health are lagging. Although the Statistics New Zealand
series may not be the last word on the subject, the findings turn
much of the debate about productivity on its head. New Zealand does not need government
working parties on private sector productivity, interventionist
industry policies, forced savings schemes or a payroll tax to encourage
productivity growth. Instead it needs to press on with
policies that produced the earlier gains, such as lower taxes, greater
labour market freedom, less regulation of the business sector and
greater attention by the government to problems of low productivity
in the public sector, in areas such as health. And it would be nice if some of the naysayers had the grace to eat their words. Roger Kerr is the executive director of the New Zealand Business Roundtable. |