I’m spending today in a conference organised by the Productivity Commission and various government departments on technological change and productivity. Yesterday afternoon I went to a seminar at the Productivity Commission at which one of the conference speakers, a senior OECD official, was speaking on technology, “innovation policy” etc. It had been billed as something that would address the huge gap between New Zealand average productivity levels and those in much of the rest of the OECD. In fact, it hardly touched on that issue at all, and much of the discussion had the feel of analysis and advice for the OECD grouping as a whole, and particularly its more advanced members (the speaker himself was Dutch), rather than for a laggard country.
For New Zealand the biggest challenge, by far, is – as it has been now for some decades – catching-up again. Decades ago we were at or near the frontier – economic frontier that is, rather than physical remoteness – with per capita incomes in the top 2 or 3 in the world. These days, probably a few New Zealand firms are at or near the frontier, but the overall New Zealand economy lags quite badly behind.
My favourite base for comparison is real GDP per hour worked. Levels comparisons are really only approximate, but using OECD data – based on the 2010 purchasing power parity (PPP) exchange rates – here is how New Zealand’s real GDP per hour worked compared to the OECD countries that have higher average productivity than we do. You could discount Ireland to some extent – there are some measurement/classification issues around their tax system, and in truth productivity in Ireland might be nearer German or Dutch levels. On the other hand, I don’t show Slovakia which, on this particular metric, went past us a couple of years ago.
As it happens, of the 23 bars shown, the G7 countries’ total is the median observation. Our real GDP per hour worked in 2016 was only 67.6 per cent of that for the G7 group of countries as a whole. In other words, it would take a 50 per cent increase from here – with no change in those countries – for us to catch up again. If we take the subset of countries from Belgium to Germany, it would take about a two-thirds increase in our average productivity to catch up again. When the OECD data series starts – 1970 – average productivity here was about equal to that of the G7 countries as a whole.
Another way of looking at these same data is to look at when other countries reached the level of productivity New Zealand had in 2016 (37.5 USD per hour, expressed in real 2010 terms, converted at PPP exchange rates).
Some of the other OECD countries first get to that level in the early-mid 70s (Luxembourg, Switzerland, Netherlands, Norway). Two only got to our current level in the mid 2000s (Iceland and Japan), but of course even that leaves us at least a decade behind. The G7 countries as a group got to our current level of real GDP per hour worked in 1990, and the median country (as per the chart above) got to our current level of real GDP per hour worked in 1989 – 27 years, or just over a quarter of a century, ahead of us. Jacinda Ardern would have been in primary school then.
One can’t too much weight on the precise numbers/data – different conversion rates will produce somewhat different gaps – but the gaps are huge, and we – in aggregate – are a long way behind. I’m hoping – but am not optimistic – that today’s conference might help shed some further light on the matter. I’d settle for some hardheaded realism about how far behind we now are – lagging the core of the advanced world (the countries we usually liked to compare ourselves too) by a quarter of a century now.
And, of course, the idle hope is that some political leaders might (a) care and (b) set about doing something about closing the gap. Productivity is the foundation for prosperity, and many desirable social goals. It isn’t everything of course – even if, in economic terms, it is almost everything in the long run. But in all the hoopla about the first 100 days of the government, or even its challenges for the next thousand, there wasn’t any sign of a determination to reverse these decades of underperformance. Sadly, although there were a few references to the productivity failure during the campaign, the new government seems to have lost interest even faster than their predecessors did.