Productivity, and politicians who no longer care

I was reminded again the other day both how (absolutely) poor even advanced countries were not that long ago, but also how (relatively) rich New Zealand was. I was reading a fascinating book on Ireland’s (rather shameful) history in World War Two and stumbled across a snippet suggesting that “there were nearly 170000 licensed radio sets in Ireland on outbreak of war”, in a country of almost three million people. On digging around a bit, I found that in New Zealand, then with 1.6 million people, we’d had 317509 licensed radio sets in 1939 (then, apparently, third highest in the world per capita). The licence fees in the two countries appear to have been very similar.

The standard compilation of historical estimates of per capita GDP – that of Angus Maddison – is consistent with my radio anecdote. In 1938/39 GDP per capita in New Zealand was more than twice that in Ireland, with New Zealand in the very top grouping (New Zealand, UK, USA, and Switzerland).

How times change. As even Irish official statisticians acknowledge the idiosyncracies of Ireland’s corporate tax system substantially distort Irish national accounts statistics, but doing whatever adjustments are possible (eg the Irish modified GNI measure) or looking at consumption statistics it is clear that these days Ireland is producing considerably better material living standards than New Zealand is. In terms of standard productivity measures – the OECD’s real GDP per hour worked data – they probably went past us in the mid-1980s.

The OECD productivity data go back as far as 1970. By then, we’d already had a couple of decades of relative decline – even though for most countries, including New Zealand, the 1950s and 1960s had seen really impressive absolute growth rates. Of the 23 countries for which the OECD has 1970 data – not all of them (including New Zealand) then part of the OECD – real GDP per hour worked here was just over 95 per cent of that in the median OECD country. We were a touch behind France and a touch of the UK. These days – pre-Covid – real GDP per hour worked is about two-thirds of the median for that same group of 23 countries.

By far our worst decade since these data start was the 1970s. In that decade we had, by some considerable margin, the slowest growth in labour productivity of any of the countries the OECD has data far. Unfortunately, since then there has never been any sustained period when we have regained ground relative to the OECD pack, and if anything the gaps have widened further.

Relative optimists might look at the New Zealand experience this century and observe that there hasn’t been any material slippage relative to the leading bunch of OECD countries.

But that shouldn’t really be any consolation when:

  • the absolute rate of productivity growth has been so poor (our average annual rate of productivity growth for the nine years to 2019 has been a bit worse than our dismal performance in the 1970s –  see above),
  • we’ve managed no catch-up relative to the leading bunch, even though their productivity rates  –  problems at the frontier –  have also been disappointing to say the least, and
  • our performance relative to other countries that aspired to catch-up has also been dreadful.

I first got systematically interested in New Zealand’s woeful record in a stint at Treasury from 2008 to 2010, in the course of which I was heavily involved with the then-government’s 2025 Taskforce – the one supposedly about catching up (in terms of material living standards) with Australia by 2025. I wrote most of the Taskforce’s first report in late 2009 and in doing so I noticed, and reported that, of the former Communist countries of eastern Europe, Slovenia had then just passed us in terms of real per capita GDP, that Slovakia had real GDP per hour worked approaching that of New Zealand.

There have been some data revisions since then, but if we look at current estimates of real GDP per hour worked, in PPP terms, for 2007, we find that Slovenia was indeed about 5 per cent ahead of New Zealand, although the gap to Slovakia was a bit larger (10 per cent) than those earlier estimates suggested. There are eight former Communist countries in the OECD. In 2007, real GDP per hour worked in New Zealand was already only 16 per cent ahead of the median of those countries, that margin have narrowed markedly in the previous decade. Perhaps that earlier catch-up wasn’t too surprising or alarming – if you stop hobbling your economy and get rid of the state-dominated Communist system, you are almost certain to bounceback to some extent.

But where are things now?

Real GDP per hour worked, 2019, $US PPP
Slovenia 45.2
Slovakia43.8
Lithuania42.5
New Zealand42.2
Czech Republic42.0
Poland41.0
Estonia40.8
Hungary37.7
Latvia37.0

Last year we were really just middle of the pack among these countries, and in another couple of years – on policies, practices, whatever in New Zealand and other countries – you’d have to assume we’ll be struggling to stay ahead of Hungary and Latvia for long. In terms of growth rates over the last decade, Hungary was the laggard of the former Communist countries – still grew faster than New Zealand, but not by that much – but it should be slim consolation if we just manage to stay ahead of Hungary.

Not once previously in the history of modern New Zealand has any of these countries previously had productivity or income per head performances to match those of New Zealand. They still lag quite a way behind the north-west European leaders – although the gap is closing. The standout isn’t them catching up, but us failing.

It isn’t just those former eastern bloc countries. At the turn of the century, New Zealand could console itself that if Korea was growing rapidly, real GDP per hour worked was still not much more than half that of New Zealand. On recent rates of growth, they will move ahead of us in another year or two. Or Turkey – with a history of unstable undemocracy, macroeconomic instability and so on. The old Ottoman Empire was the 19th century’s “sick man of Europe”. In 2017, for the first time in modern history, real GDP per hour worked in Turkey moved ahead of that in New Zealand.

But it isn’t all bad news I guess. If you really want to find advanced countries that have done less well than New Zealand – poorer/less productive and with a slower productivity growth rate – I can offer you Greece and Portugal. But falling on those sorts of comparisons is really head-in-the-sand stuff.

But….in the midst of an election campaign, occurring in probably toughest economic times for an election campaign since 1990, is there any sign that (a) any political parties, or leading figures in parties, care about this dire long-term economic performance, or (b) have either any serious ideas, or a commitment to getting and adopting serious ideas, about making a difference? If there are any such signs I must have missed them.

Presumably, if pushed and at some level, the people grappling for office must know that productivity really matters – here was my story why and how. It is about underpinning higher wages (without pricing people out of the market), about underpinning more leisure opportunities, improving access to better healthcare, underpinning improvements in life expectancy, and underpinning the consumption of the bits and pieces of consumer society that most of us seem to value. Perhaps if you are an extreme Green you might have an excuse not to care about productivity – or, at the other end of spectrum, a zealot for the New Conservatives – but for the rest it is hard to see, at least if they are serious about anything more than simply occupying office.

Perhaps one can find slight and partial excuses for our politicians. After all, it is not as if the government’s self-proclaimed premier economic advisers, The Treasury, have been firing on all cylinders, generating a steady stream of searching analysis and research with suggested solutions to our decades of economic failure. Then again, as things are set up why would they? Successive National and Labour (and even NZ First) Ministers of Finance have had no real interest: bureaucrats respond to incentives to, and the State Services Commissioners have played their part in appointing as Secretary to the Treasury people who weren’t likely to rock the boat.

But, at best, it is a partial explanation, not an excuse. Real political leaders set the agenda, with ideas of their own, drawing on the expertise of others, and demanding – or promising – much better from the public service. There is no sign of any of that at the top of either of our main parties (and, mostly, the others don’t really matter much, but they don’t seem any different either). I’m sure they are all nice people, but what are they doing – or promising – that might make a real difference, in reversing the decline in our relative material living standards, not just for the next year or two (borrowed money, redistributing a static or shrinking pie) but for the next generation or two (your kids and mine, our grand children etc). Short answer – on the evidence of years and years, and on the evidence of what parties are talking about and promising in this campaign – NOTHING. It is shameful. (And it is also not much excuse to suggest there is no huge groundswell of public anger, demanding something better: we don’t expect voters to engage on real GDP per hour worked, but don’t we hear again and again complaints about gaps in what productivity and growth makes more readily possible – health, housing standards and so on?)

Instead, any (expressed or public) concern seems to be limited to same predictably small group. There is me, here – and in a longer-form treatment here. There is Paul Conway, formerly of the Productivity Commission – where he led their work in this area, before frustration got the better of him – and now at BNZ, and there is Kerry McDonald, former economist, former head of Comalco, former leading company director. McDonald’s latest speech pulls no punches in its title, Our Economic Disaster and the Tragedy of NZ’s Political Leadership. And not much beyond that. The point isn’t that the three of us would agree of everything – we wouldn’t – but that our politicians and senior officials, our political parties, aren’t even engaged on the issue at all, let alone on serious options for making a difference.

One area where it looks as though there is some overlap in the policy prescriptions of Conway, McDonald, and Reddell is around immigration, and a sense – more strongly put at least in my case – that decades of high rates of non-citizen immigration, often not of people who are particularly highly-skilled, has not served us at all well in lifting productivity, even though the official case for high immigration to New Zealand asserted that it was a “critical economic enabler”.

I illustrated earlier in this post how the central and eastern European countries have been catching up and overtaking New Zealand. In this chart I’ve shown the populations of New Zealand and the median of these eight OECD countries this century, drawn from the World Bank/UN data.

e europe sept 20

Or this table of population growth rates this century

Population growth, per cent, 2000-19
Lithuania-20.4
Latvia-19.2
Estonia-5.0
Hungary-4.3
Poland-0.8
Slovak Republic1.2
Czech Republic4.0
Slovenia5.0
New Zealand27.5

All these countries have birth rates below replacement (generally lower than New Zealand’s) and all have had outward migration of their own citizens – us primarily to Australia, the Europeans mostly to western Europe. The big difference is that New Zealand – alone – has pursued rapid population growth as a matter of official policy, aggressively running one of the largest (per capita) official immigration programmes on the planet.

(As I’ve argued in numerous previous posts, rapid population growth isn’t necessarily inconsistent with rapid productivity growth, but rarely if ever has rapid population growth been a recipe for sustained rapid productivity growth – arguably the 19th centuries colonies of settlement, with abundant land may have been exceptions. Much depends on the opportunities, and locations matter. And yes, although Korea now has very modest population growth, Turkey’s population growth has been rapid.)

But, even amid the Covid disruptions – which could have been a great opportunity to stop and rethink – no political party seems interested in revisiting whether New Zealand’s large scale immigration policy has worked in the economic interests of New Zealanders as a whole, and all the media chatter is about getting going again with the supply of relatively lowly-skilled workers from abroad into the New Zealand labour market. There is no sign it has worked for New Zealanders for the past 25 years, and no obvious reason to suppose that will change for the better now.

But our political “leaders” show no sign of caring, at least about anything beyond the latest stories of firms in low-wage industries wanting a resumed supply of people willing to work at….low wages.

Perhaps there is an alternative credible model for thinking about how to reverse sustainably our decades of underperformance. But if so, you wouldn’t know it from listening to our politicians, or their officials.

24 thoughts on “Productivity, and politicians who no longer care

  1. There may not be a direct corelation between the nature of a countries exports and its productivity, but comparing the top 10 exports by value between NZ and the USA reveals a very different economic mix. A reminder that we are very much an agricultural food producing nation, when compared to (say) the USA which is weighted towards technology, manufacturing and intellectual property.

    Maybe someone working in ICT is more productive, than someone tending sheep? I’m not an economist, I just don’t know, but perhaps it is what we do (or don’t do) that’s the problem, rather than how well we do it.

    NZ Top 10 Exports by value:
    1. Dairy, eggs, honey: US$10.7 billion (27.9% of total exports)
    2. Meat: $5.3 billion (13.9%)
    3. Wood: $3.3 billion (8.7%)
    4. Fruits, nuts: $2.2 billion (5.9%)
    5. Cereal/milk preparations: $1.5 billion (3.9%)
    6. Beverages, spirits, vinegar: $1.4 billion (3.7%)
    7. Fish: $1.2 billion (3.2%)
    8. Machinery including computers: $1 billion (2.6%)
    9. Miscellaneous food preparations: $886.9 million (2.3%)
    10. Modified starches, glues, enzymes: $815.5 million (2.1%)

    USA top 10 Exports by value:

    1. Machinery including computers: US$205.9 billion (12.5% of total exports)
    2. Mineral fuels including oil: $199.7 billion (12.1%)
    3. Electrical machinery, equipment: $173.2 billion (10.5%)
    4. Aircraft, spacecraft: $136 billion (8.3%)
    5. Vehicles: $133 billion (8.1%)
    6. Optical, technical, medical apparatus: $90.8 billion (5.5%)
    7. Plastics, plastic articles: $64.9 billion (3.9%)
    8. Gems, precious metals: $59.6 billion (3.6%)
    9. Pharmaceuticals: $53.6 billion (3.3%)
    10. Organic chemicals: $39.3 billion (2.4%)

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    • Note that these are exports of goods, and including services would change both lists to some extent. Bear in mind too that structures of exports can/do change over time. Denmark, now one of the global productivity leaders, was once largely an exporter of agricultural products (notably dairy and bacon) and a key competitor for NZ in the UK market.

      Much of the rhetoric of the last 30 years had in mind an implied big shift away from reliance on natural resource based exports. It hasn’t really happened. In part, that may reflect a persistently overvalued exchange rate, but I suspect that a bigger obstacle is distance – one unlikely to be materially overcome in the next few decades (at least).

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      • Not to forget that to achieve our top 2 exports in Dairy and Meat we have 10 million cows, which uses a massive amount of land, water and roads that lead nowhere. Add to that the carbon credit costs of Green house gases from methane emissions.

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    • Forty years ago when I worked in the USA their agricultural exports were significant: I remember soya and cotton being two of their largest exports ranking near the top alongside aircraft exports. Checking Google gives “”U.S. agricultural exports were valued at $140 billion in 2018″” so still large but no sub-category making your top ten. But it is not hard to find US food stuffs in Auckland supermarkets.
      Your NZ figures are intriguing; ‘Machinery including computers’ – surely we are not exporting computers built in NZ? What are those ‘starches, glues enzymes’? If NZ gave productivity / wealth creation the priority it deserves then a member of the public who reads the newspaper from cover to cover daily ought to be able to answer questions about NZ exports.

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  2. Your analysis of New Zealand’s productivity performance is always sound but your focus on immigration, I think, detracts from the force of your arguments. Of course, reducing the denominator (or the increase in it), will help the per capita numbers, but NZ needs to focus on the numerator because that is where the root causes lie. You mention Ireland but only to caveat the comparison by mentioning its corporate tax policy. You don’t really discuss why Ireland has outperformed NZ. As a citizen of both countries, I think Ireland is a good comparison and there are some things NZ could learn from it.

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    • Thanks

      My argument is not as simple as “fewer people means unchanged GDP and higher GDP per capita”, but is a story about an economy – penalised by distance – systematically skewed away from an outward orientation by a policy-led drive to raise the population, on a view (held by many economists) that doing so will raise GDP per capita.

      On Ireland, I’ve touched on it in previous posts – there are relevant insights and things that just aren’t that relevant. One relevant comparison is that altho Irish population growth has accelerated this century it has been a response to economic success, not a prime cause of it. I’d have no particular econ problem with high migration to NZ if it responded to sustained rapid productivity growth and high income per capita.

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  3. I agree we need much stronger pro-productivity actions but it’s not clear to me that our politicians are anymore neglectful of the issue in their public pronouncements than politicians in other countries. A politician talking a lot about productivity would be like a car salesman focusing on a car’s horsepower when clearly voters/buyers interested in so many other aspects of the product for sale. Would be more enlightening if you focused on actions (policies actually implemented) than on politician’s sales talk to the general public.

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    • Fair point Carl, but the difference perhaps is that our need is greater – we’ve slipped further, are so far behind, and show no sign of improving. If you are a politician in France or Belgium or the US the need may be less pressing, and since your country is nearer productivity frontiers any problems may be less amenable to indiv national country remedies.

      And, of course, in terms of actions – pro-productivity actions – there have been v few in NZ this century, which is sort of my point.

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  4. According to Statistics NZ, in the year ending March 2019 tourism generated directly 5.8% of NZ GDP with further indirect contribution of 4%. I fail to understand how tourism can be considered a value added activity, particularly its backpacker variety, yet, until the onset of Covid-19 at least, we seem to had been gearing the country to cater for ever expanding numbers of international visitors.

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    • Value-added in a national accounts sense just means that someone paid for the labour and capital involved in providing services to tourists (eg cleaning a motel room is a low paid job, but those earnings still count as value-added in this sense).

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      • Yes, if we consider it this way only. However, tourism-related activities do not create wealth in traditional sense, other than for a small number of tourism company owners, but they put an enormous pressure on an already overloaded infrastructure. Perhaps the way chosen by Bhutan – selective tourism targeted at very wealthy visitors, would be far better solution? Although, It seems to me that the successive governments are lacking the vision and sense of direction. We have eight universities in this country, but what is their actual intellectual output and contribution to the “future-proofing” of the economy, apart from running number of degree programs of doubtful quality targeted at overseas students? We also have a great number of polytechnics, yet suffer ongoing shortages of qualified trades staff. All this at an enormous cost needless to add…

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  5. Thanks for the interesting post Michael. A few questions:

    1. What has been the primary determinant of Ireland’s comparative economic success? I assume that it has been outsized attraction of FDI?

    2. If the answer to 1. is indeed FDI, has New Zealand ever had a generous/accommodating policy towards attracting FDI in its history? If FDI is a key determinant of success in improving economic prosperity then why would NZ employ a policy that appears to be to have the foot on the accelerator when it comes to population growth but the foot on the brake when it comes to FDI?

    3. What were the key aspects of Ireland’s history in WW2 that you found particularly shameful? I find Irish history particularly curious and idiosyncratic so always curious to hear these takes.

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    • On my passing comment on Ireland in WW2, it was mostly the choice to stay neutral itself, altho heightened by the well-known little episode of De Valera going to the German Embassy to pay condolences on Hitler’s death. Ireland was a democracy, totally dependent on Britain (incl for shipping during the war) and not at the sort of risk of imminent invasion and overrun (that might justify Swedish or Swiss neutrality), and even as the full horrors of the Nazi regime became apparent as they war went on, the govt was neutral to the end, censoring the media and private communications to prohibit any coverage that might suggest that HItler’s was the bad side in that war. (Of course, many Irish people volunteered and joined British forces, and many other Irish people moved to the UK during the war for better-paid employment options.)

      On the Irish economic story, I suspect the meta story is one about the Industrial revolution – begun in Britain and NW Europe reaching out and encompassing all of Europe. That is part of the success story of central and eastern Europe as well – a process that was interrupted after 1914 by 2 world wars and then 40+ years of Communism.

      On Irish-specific policies, it is likely that the 12% company tax rate has played a part, as did being part of the EU (especially while the UK was still in), and yes FDI has been an increasing part of turning those positives into real econ gains. On the other hand, speaking English and being located just off the coast of Europe – huge, productive, economy- was an enormous advantage too. We do the former, but our location is really unpropitious.

      Our approach to FDI is quite mixed. For many decades we had basically no restrictions at all, and in the period of high protection (decades after the war) we encouraged FDI, especially in manufacturing to service domestic markets. Even now, one can mount an argument that our restrictions aren’t overly tight in areas that don’t involve “sensitive land” (prob not an issue for the sort of FDI Ireland has attracted). I’m generally in favour of a more open FDI regime – esp as regards other OECD countries (less so China) – but I don’t see any sign of exceptional opportunities going begging here. Other than natural-resource based industries, and domestic-market servicing (where, eg, the banks are mosty foreign anyway) it would be difficult to attract much FDI here, esp with a persistently high real exchange rate.

      Oh, final point on Ireland: the success occurred while Ireland’s population was pretty flat and there was still a net migration outflow. there has been a lot more immigration in the last 15+ years, but it responded to the economic success and opportunities that created, and there is no sign that getting to success was materially driven by immigration.

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  6. Two days ago the NZ herald had an article titled “”Covid 19 coronavirus: Net migrant departures of 111,000 puts economic recovery at risk”” which quotes Sociologist Professor Paul Spoonley as saying “The picture would be terrible especially for employers and sectors that rely on migrant labour”. Isn’t this a problem – we have areas of our economy that rely on migrant labour.

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    • There is certainly a short-run disruption/dislocation for individual firms and sectors, but recall the arguments I have mounted previously, that over time relative wage rates within the economy will adapt to draw NZers into those industries, or (in some cases) those industries might have to adopt new technologies. If the population isn’t growing then – for example – fewer resources (people) need to be building houses etc, and if – for another year or two – tourism is depressed, there are domestic workers in that sector who need alternative employment.

      Of course, it would help if monetary policy were loosened and the exchange rate driven lower – would provide more leeway for export-oriented businesses to bid up wages to attract NZ workers.

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      • Wages in the strawberry sector for an average picker is $36 an hour, already significantly above minimum wage due to a commission paid on picked quantity. Unfortunately we still do not see Kiwis flock to farms to pick. Still easier to stay at home with mum, get a social welfare benefit and online gaming.

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      • Guess we will see pictures of rotting strawberry fields next month. Thank you Jacinda Ardern’s Labour government.

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  7. Hi Michael, just wondering if there has been any effort to dis-aggregate NZ’s sector level productivity vis-a-vis the OECD/Eastern European comps? How much of the under performance is due to differences in composition, e.g. more SME’s, large primary industry sector, small financial services sector? Presumably there will be big differences in performance between sectors and it would be good to be able to focus in on the problem sectors rather than resorting to aggregate level data where everyone and no one is responsible.

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    • I’m not aware that anyone has done this sort of analysis. I keep bringing up the central/east European experience in the hope that some better-resourced agencies (Tsy, NZPC, OECD) might do/commission that sort of detailed work, and draw on relevant similarities/differences.

      Personally, I’m sceptical that a sectoral approach offers many answers – except perhaps around specific regulatory constraints etc – as my hypothesis is a much more macro one. But the work should still be done. (Presumably the leading highly productive sectors in places like Slovakia will be the FDI-led bits of the European auto industry supply chain. I don’t know much about the economies of the Baltic states.)

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  8. I too am mystified by the near-total absence of productivity rom public debate. To your list of people advocating to put the issue on the table (yourself, Kerry McDonald and Paul Conway), I would add David Seymour and Oliver Hartwich (and the NZ Initiative generally).

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    • If we continue the track of shutting down our factories then nothing much to debate because that’s where the productivity lies, more automated robots and less people. We used to just add cows to increase productivity because we do not count the 10 million cows in our economic productivity models, but these days everyone knows we have reached peak cow.

      What is left is bungy jumping tourism and we all know that is a low productivity sector.

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  9. I would first debate the meaning of productivity.
    Most politicians and many people do nothing but support the misguided problem creation agenda of the day. These ignorant actions = negative productivity.
    We should strive to replace ideology of ” negative productivity” with wisdom .
    And in saying that you can’t just look at one pixel( ” productivity” sic) to get a look at the big picture.

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