Going for growth

-Donal Curtin

Friday 1st February 2008

How are we going to get our act together and raise our living standards more towards the top of the OECD league table?

When it comes to views on how to grow the economy, it's a bit like dissecting the All Blacks' loss - everyone's got an opinion. Education! Exports! Infrastructure! Asia! Savings! Value add! Investment! Tax breaks! Leadership! Planning! Specialisation! Science!

Of course it would spoil the arguments to let too many facts in, but let's do it anyway. A good place to start would be understanding what growth we've managed so far, and where it came from, and as it happens Statistics New Zealand has just come out with almost 30 years worth of analysis on that very topic ('Productivity Statistics: 1978-2006', free on the Stats website).

First fact: over this long period, we've averaged 2.6% growth in GDP a year, and over the more recent half of the period more like 3%. From one perspective, that's not so shabby. At 2.6% growth people's standard of living doubles in 27 years (more like 23-and-a-half years at 3% growth), and at either rate we'd have a good chance of overhauling the more Euro-sclerotic end of the OECD. Is it enough to stop the whole of the emerging world blasting past us? No. Is it enough to pay for people's expectations - for example, having the same access to fancy medical treatments as the rest of the world? Your guess is as good as mine, but I'd say, not. Especially as the numbers don't count some sectors (education, health, government services) where you'd strongly suspect output hasn't actually been growing by 2.6% a year. Or arguably at all, but that's a story for another day.

Second fact: to get more output, you can do only three things: throw more people at it, throw more gear at it, or work smarter. That's it. The historical record from Stats shows that half of all our growth has actually come from investment in more gear, and nearly all of the rest comes from working smarter (alright, strictly speaking from growth in 'multifactor productivity', but same difference for all practical purposes). Relatively little has come from more bums on office seats, which is kind of comforting: with the country already at full employment, it would be a bit worrying if finding more people were the answer to everything. It's also suggestive that whatever the answer to faster growth is, it probably includes a reasonably big role for investment in capital equipment.

Third fact: the statisticians can do some jiggery-pokery with the numbers and can split out your productivity and mine into two bits - the bit that comes from having more gear to work with, and the bit that comes from being a smarter, more experienced, more organised fellow. Over the long haul, you and I each produce 2.2% extra output a year. Of that, half comes from having more gear to work with, and the other half comes from the working-smarter end. It's just another way of cutting the data, but again investment in gear looks to be one of the bigger levers.

Fourth - and perhaps more controversial - fact: if we look at the 'smarter' component of growth, which is almost as important in the great scheme of things as investment, we achieved by far our best performance in the 1990s. Without hiring a single extra person, or buying a single extra machine, the 'working smarter' component on its own would have seen the economy grow by over 2% a year in the nineties. Is that cool or what, especially if you are approaching economic growth from a sustainability perspective? No increased resource use, but 2% more output anyway. That's an outcome everyone from the greenest to the greediest would like to keep on producing. Trouble is, whatever we were doing in the nineties seems to have fallen away in this decade: that 2% is down to a pale shadow of its former self at 0.7%. Maybe we've stopped innovating on the same scale: it's hardly a secret that by the general election of 1999 Joe & Joan Public had had a gutsful of continual change. But it's also possible that we've knobbled the most promising source of faster growth.

We can pull together some practical ideas out of this traipse through the statistical record. Growth at any rate, let alone growth at a faster rate, depends overwhelmingly on two things: the quantity and quality of investment, and the smartness of business organisation. Screamingly obvious from the get-go? Well, maybe, but it isn't any less right for being obvious.

And it does feel right, from a micro perspective as well. I'm closely involved with five businesses. For two of them the key issue is revenue generation: get and keep the customers and the contracts. But for the other three, it's that 'working smarter' thing, and it's a reasonably acute issue at that. If all three could figure out just one element of working smarter - how to make the whole place perform at the standard of its best bits - we'd be home and hosed.

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