Distance, weak local competition and high dollar all causes of poor NZ productivity

Tuesday 2nd July 2013

New research presented to a symposium on New Zealand's poor productivity finds distance from export markets continues to be a major factor to explain what should be much better performance, along with long-known weakness in research and development investment.

In a paper to the Productivity Hub seminar in Wellington, Alain de Serres, a counsellor to the chief economist at the Organisation for Economic Cooperation and Development, said New Zealand's policy settings suggested the country should be doing far better than it is.

Instead of being some 30 percent below the OECD average, policy and institutional settings suggested New Zealand's output per head of population should be 20 percent higher than the OECD average, he said.

But another major factor of New Zealand's remote location is that weak firms tend to survive better than in larger, more globally connected economies, in part because activist shareholders play a greater role in forcing laggards to improve.

"Remoteness explains a substantial portion of New Zealand negative country fixed effects," said de Serres, who discounted the relative impact of other factors widely cited as hampering the country's productivity performance, including skill levels and investment in capital assets, although it was clear R&D was a weakness.

"Incorporating market access along with R&D reduces New Zealand's multi-factor productivity (a measure of the numerous elements bearing on productivity performance) gap against the OECD average by up to 17 percentage points," said Serres.

Both New Zealand and Australia scored relatively poorly in the capacity of firms to get the most out of information and communication technology, despite ICT being an acknowledged driver of improved productivity.

Other sessions heard that New Zealand's import substitution sector had been hampered in its ability to compete with exports by a persistently high New Zealand dollar and high interest rates by global standards.

This made New Zealand comparable to Latin American rather than European economies, said the chief economist at the Ministry of Innovation, Business and Employment Roger Procter.

Argentina's productivity slumped during the 1990's, when the country pursued "hyper-open" economic policies, he noted, with New Zealand showing similar patterns, although inefficient reallocation of resources within industries was as much or more of a factor than resources leaving a productive sector to be reinvested less productively elsewhere.

Like Latin American economies, New Zealand had remained overly dependent on low value commodity industries and had suffered over-valued exchange rates, with the only major advantage over those countries being a comparatively flexible labour market.

In a session on access to capital for expansion, Productivity Commission member Sally Davenport highlighted what she suggested was a "cultural" disposition among New Zealand business owners to resist ceding control when seeking new investment capital.

BusinessDesk.co.nz

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