I had been planning to write today about some of the recent Reserve Bank material on electronic currency.  I even took the papers away with me yesterday to read on some flights, but in the course of that reading  –  coincidentally, en route to another funeral – I discovered that a former Reserve Bank colleague, only a year or two older than me, had died a couple of months ago.    We hadn’t been close, but I’d known him off and on for 35 years beginning with an honours course at VUW in 1983, and when I’d last seen him six months or so ago he’d been confident the cancer was beaten.   What left me a bit sick at heart was that I had commented here last month, moderately critically, on a recent Reserve Bank Bulletin article of which he had been a co-author.   None of the comments were, as I reread them, personal.  But I’d have written differently had I known.  So I’m going to put aside issues around the Reserve Bank for a few weeks (and the blog is taking a holiday next week anyway).

So instead, having listened to a few upbeat stories in the last few days, including the IMF mission chief for New Zealand on Radio New Zealand this morning, talking about the “sweet spot” the New Zealand economy was in etc, I thought it was time to update some productivity charts.

Here is real GDP per hour worked for New Zealand.

I’ve marked the average for the last year, and for the 12 months five years’ previously.  If anything, things have been going backwards a bit for the last three years, and for the last five or sx years taken together, productivity growth has averaged no better than 0.3 per cent per annum.  Some “sweet spot”, especially when our starting position relative to other advanced economies was already so far behind.

And here is the comparison with Australia –  in many respects the OECD economy with most in common with New Zealand (distance, resource dependence, Anglo institutions), and also the exit option for New Zealanders.

In 1989, when this chart starts, New Zealand was already behind Australia.   Since then, we’ve lost another 15 percentage points of ground, about 0.5 per cent per annum.  A decade ago perhaps one could have mounted an argument that the decline had come to an end: looked at in the right light, perhaps we were even showing signs of some modest closing of the gap.  But then we took another step down, and the rate of decline in the last decade as a whole has been about the same as that for the full period since 1989.

For almost a decade now, I’ve been sobered by the performance of the former eastern-bloc countries that are now part of the OECD.  Thirty years ago, when we –  already a market economy –  were in the throes of reform, they were just beginning the journey to freedom (Estonia and Latvia were still actually, involuntarily, part of the Soviet Union).   Their starting point was, of course, a great deal worse than ours –  for all the early 80s talk of New Zealand having an economy akin to a Polish shipyyard –  but the common economic goal was catching-up, reversing decades of relative decline.

In the decades since, New Zealand has lost ground relative to the richer countries of the OECD (and, as per the chart above, has lost a lot of ground relative to Australia, even more recently).  The former eastern-bloc countries have done a great deal of catching up.  They still have a long way to go to catch that group of highly productive northern European economies (Belgium, Netherlands, France, Germany, Denmark), but New Zealand is on track to be overtaken: on OECD numbers Slovakia now has real GDP per hour worked higher than that in NEw Zealand.

There are seven former eastern-bloc countries in the OECD.  The OECD is filling in 2017 data only slowly, and so in this chart I’ve shown real GDP per hour worked for New Zealand relative to the median of the six former eastern-bloc countries for which there is 2017 data (the country for which they don’t yet have 2017 data is Poland, which managed 7 per cent productivity growth in the four years to 2016, a period when New Zealand –  on the measure the OECD uses –  had none).

Some of these former eastern-bloc countries had a very rocky ride (notably Estonia and Latvia, which ran currency board arrangements in the 00s, and had massive credit booms, and then busts), but the trend is still one way.  They are catching up with us, and we aren’t catching up with the sort of countries we aspire to match.

The pace of decline (New Zealand relative to these former eastern-bloc countries) has slowed, as you would expect (in 1995 it was still quite early days for post-communist adjustment) but the scale of the chart shouldn’t lead us to minimise the recent underperformance.   In 2007, we had an economy that was 20 per cent more productive than the median former eastern bloc OECD member, and last year that margin was only 12 per cent.

The measure of success in this economy shouldn’t be whether we stay richer and more productive than Slovenia or the Czech Republic.  All of us are a long way off the pace, far from the overall productivity frontier (best outcomes).    But what these former eastern bloc countries help highlight is that convergence can and does happen, if you have the right policies and institutions for your country (in all its relevant particulars).  Policymakers here used to genuinely believe that. It is no longer clear that they – or their Treasury advisers –  any longer do.

On which note, Paul Conway of the Productivity Commission recently published an interesting article in an international productivity journal on New Zealand’s productivity situation and policy options.  Commission staff were kind enough to send me a link.  Paul Conway has a slightly more optimistic take on the last decade or so than I do, but common ground is in recognising the total failure to achieve any catch-up or convergence.  There is a lot in Paul’s article –  which, not surprisingly, is not inconsistent with his earlier “narrative” on such issues that he wrote for the Commission itself, and which I wrote about here.   I will come back later and write about Paul’s analysis and prescription –  there is a lot there, some of which I agree with strongly, and some of which I’m much more sceptical of.  For my money, he materially underweights the importance of a misaligned real exchange rate as a key symptom, which has skewed incentives all across the economy.     But it is good to see public service analysts contributing substantively to the (rather limited) debate on these issues.