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.
croaking cassandra 
What is it that these former eastern-bloc countries are doing that New Zealand could adopt? Or is it merely that they are benefitting from a comparably favourable location? As you point out their improvement has slowed over the past 10 years but the fact that they still are, indicates they are doing at least something better than we are.
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They are manufacturing and making things. We are busy cleaning up the mess from 10 million cows for a tiny GDP of $15 billion. A highly government subsidised company like Samsung generates sales of $350 billion with only 350k people.
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Location is a big advantage for these countries, and trade access within the EU (altho the EU membership may have other disadvantages). But many of these countries also impose quite low taxes on business income, and most have very low rates of population growth (some are shrinking), which means that investment spending tends to be focused on building productivity capability per capita, not just keeping up with a rapidly rising population.
Their models don’t directly transplant to NZ – geography is firmly against us, but we could choose much lower rates of business taxation, and to use policy to actively drive up the population, It was disappointing, altho not surprising, to see Tsy and IRD advising the TWG against any cut in business taxation – all the more so, given how weak business investment has been here for decades.
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The gaming tech industry would argue that geography and location is not an issue. Rocketlab and a future space industry in NZ would have the best geographical location for regular and weekly launch windows. I am sure there are lots of other future potential highly productive industries that NZ has the geographical location for. Perhaps what we need is a Chief Future Hi Tech high productivity Minister rather than successive giovernments that is so Primary Industry focused.
Our Chief Scientist is now best known for his take on babies are safe to lick every corner of a P smoking contaminated house rather than any other future tech science which is just a waste of a top position in the science and tech area.
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Agree with your comment about the RER, and I made some comments on Paul’s twitter feed.
The bigger question for me though, is what happens to these recommendations (most of which are eminently sensible). I’m not talking about political inertia here, I’m taking about whether policymakers will look at these strategic-level recommendations and do the necessary background work to turn them into concrete proposals. Or will they just wither on the vine?
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I did have quite a bit to say on high interest rates relative to other countries in the paper and said it is likely/probable that puts unwelcome upward pressure on the exchange rate. I totally agree that there is a great deal in the macro explanations for NZ’s poor productivity performance (but it’s not all of the story). The problem is we simply don’t have the resources/funding to do a proper job of unpicking all that….. (my constant grip about trying to do economics in the NZ public sector at the moment). And I share your fear about what will become of my (eminently sensible!) recommendations. I partly wrote the paper to lob into conversations on “economic strategy” that must be going on somewhere at the moment. But there’s a good chance we end up with BGA 2.0, which is more about marketing rather than economics. Anyway, I look forward to your full review of the paper Michael.
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Paul, I am unsure why it is so difficult to understand that our pre-occupation with Primary Industries and tourism and the decimation of most of our larger scale manufacturing which has lead to our poor productivity performance. Just a single focus on one large scale manufacturing product similar to a Samsung company delivering $350 billion in sales and automatically we would have doubled our productivity. There you go, the answer to our productivity issue, funding problem solved.
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GGS: you are fond of Samsung but they exist in a country with a 50m population. A better comparison might be Finland with its 5m population. As it happens my daughter is working for Samsung; she used to work for Nokia – do you remember them?
Surely trying to start a large manufacturing business must involve risks for a small country unless it is tied to some specific advantage – so if the govt wants to prime the pump for NZ businesses then use our taxes to support world leading research in agriculture, timber and food processing. Incidentally to stay at the forefront would mean genetic research which might well lead to GM foodstuffs – political dynamite? My example for NZ would Nestlé not Samsung.
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Bob, Samsung is just an example of a highly Korean Government subsidised company firstly through its incubation and even till today, to take on the Americans and the Europeans that used to dominate the technology landscape. It required vision from someone prepared to say the status quo is not good enough and that we are good enough and capable enough to take on the very best in the world.
NZ forward looking companies in the tech sector and in future products like RocketLab now USA owned, space tech have been starved of incubation funding. We will readily subsidise the agricultural industries to the tune of billions with even land based tourism based film subsidies alone amounting to $750 million but we only make several million available for the future products.
The gaming tech industry is complaining that they get no subsidies at all and they are now almost a billion dollar industry operating out of their garages.
Fonterra has already demonstrated that they are pretty bad at value add milk products so I don’t think the Nestle model would be where we want to pitch our future manufacturing at. Anyway we are already at Peak Cow so milk is at the cashcow stage of the product lifecycle and we should be prepared that overnight this industry may disappear. Air NZ has already launched plant based protein burgers and we are still caught in the equivalent of a Kodak company that failed to transition.
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By chance and with a layman’s confusion I came across this link to a McKinsey report on international productivity. What I did grasp was that growth in productivity has declined in most countries and secondly that the productivity growth that has occurred has done so in a minority of business sectors. Could that be our problem – the business areas that dominate NZ’s economy are not suitable for productivity growth?
https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-fifty-the-coming-boom?cid=fivefifty-eml-alt-mkq-mck-oth-1806&hlkid=fc279fdaa63146208d4ade7526a14ce8&hctky=10332689&hdpid=4bc3b842-7ae1-46dc-bbc0-d30bdf38d711
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I suspect there is something to that, but it is a more compelling story if we had already reached our potential. We are so far behind at present, that mostly that doesn’t seem to be the story. The PC people also put a lot of emphasis on the divergence between high performing and low performing firms in the same sector. I’m not sure that is a key part of the story, but I wouldn’t rule it out.
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Sometimes absence gives perspective. After six years abroad (’84 to ’90) I returned to London which was now a city with conspicuous beggars on the streets but my ex-colleagues hadn’t noticed because it had just crept up on them. The same type of insight occurred with my recent holiday in Europe (UK, France, Belgium, Switerzand, Austria and Bavaria) – all those countries were clearly better off than NZ. I don’t mean the number of big cars and fancy houses – it was those doing comparively unskilled jobs such as waiters and taxi-drivers who clearly had a bettter standard of living. Totally anecdotal of course but matching the numbers you discuss frequently. NZ is standing still and the rest of the world is moving forward.
A comparison of Franconia and NZ would be interesting – similar forests and cows and wineries and population.
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Blair, given National had 9 years to implement reforms to address these problems and Labour seem to have as priorities that welfare reform comes before economic reform I suggest unfortunately your pessimistic assessment may be the reality.
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It has been a 30 year problem and not a 9 year problem.
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