Experts on waning productivity and solutions to improve it in NZ

Is regulation a restriction on the country’s growth, do other issues need tackling?

Productivity in New Zealand is continuing to wane, despite politicians from across the spectrum continuing to pledge to fix it. New Stats NZ data show that no matter which way you slice and dice the numbers, productivity is sliding.

The issue is complex and multifaceted. Indeed, the two economists the Herald spoke to highlighted different reasons for the drop and pointed to different ways of improving the situation.

Dave Heatley, an economic consultant who worked at the Productivity Commission for the decade to 2021, partly put the problem down to burdensome regulation.

“We’re making it harder to make pro-productivity choices,” Heatley said.

“If a factory can expand when demand goes up, that’s going to help the economy along. But if it costs too much to expand the factory, you’d leave it the same size.”

Council of Trade Unions economist Craig Renney believed the conundrum partly came down to the nature of New Zealand’s key industries.

“It’s very hard to get an extra litre of milk out of a cow, or an extra metre of timber out of a tree,” Renney said.

“But it’s really easy to get additional productivity growth out of IT, or out of financial services.”

Stats NZ said it was useful to look at productivity across “growth cycles” rather than year-to-year, as the figures can jump around on the back of events like Covid-19 and the closure of the Marsden Point oil refinery.

Its labour productivity index rose by an average of 0.2 per cent a year between the 2019 and 2023 financial years, its capital productivity index fell by an average of 1.2 per cent, and its multifactor productivity index fell by an average of 0.4 per cent a year.

During the three prior economic cycles identified by Stats NZ, average annual productivity growth was stronger across all three measures.

Between 1997 and 2000, labour productivity increased by an average of 2.8 per cent a year, capital productivity by 0.4 per cent, and multifactor productivity by 1.8 per cent.

Heatley attributed the productivity boost of that time to computers and the early internet age.

Since then, productivity growth has slowed across the developed world, despite technology improving.

Nonetheless, Heatley believed the situation might not be as bad as it looks.

“We’re getting productivity, we’re just not capturing it in the statistics,” he said.

For example, the stats better capture how many more cars are being made than the fact a broader range of types of cars are being made, which is also valuable.

Data issues aside, Heatley said: “Improving productivity requires change, and we’ve got a lot of institutions that are almost designed to slow down, or even prevent, change”.

He pointed to the country’s planning and consenting system, as well as rules around who financial institutions can lend to.

“The cost of trying to wrap people in cotton wool by restricting their choices is going to appear in the productivity statistics,” he said.

Renney, who is a Labour Party member, didn’t believe regulations were holding New Zealand back.

Indeed, he noted New Zealand is regarded as one of the countries it’s easiest to do business in.

“Our relatively small market and our distance from other countries are much bigger barriers. If [supermarket companies] Lidl or Aldi wanted to be here, the Overseas Investment Act isn’t going to stop them.”

Renney said investment in research and development, and technology, would help New Zealand grow the volume and value of its exports.

Heatley was sceptical about whether artificial intelligence (AI) would boost productivity, like the internet did in the late 1990s.

“AI has a long history of overpromising and under-delivering.”

He believed scientific advancements in health — vaccines, and treatments for cancer and Alzheimer’s, for example — would be the game-changers.

If people are healthier, they’re able to be more productive.

The thing Heatley and Renney agreed on was that improving productivity matters.

They didn’t buy the argument that we’ve reached peak productivity in the developed world and should really focus on how we distribute the resources we have.

Renney said improving productivity gives people choices.

“It’s very expensive to build housing in New Zealand. If we lift the productivity of the building sector, that might give people alternative choices about spending their money somewhere else.”

Similarly, Heatley said it’s always possible to reallocate existing resources.

But because this requires tradeoffs, it’s easier politically to allocate new resources.

Furthermore, Heatley said, “Anyone who thinks that more resources should go into healthcare or education, for example, should think about where those resources are going to come from . . .

“Enough people, in their nature, want to improve their own situations, and the situations of those they care about, and that puts pressure on increasing standards of living.”