In my post on Monday I drew attention (again) to the fact that New Zealand has made no progress at all in reversing the decline in relative economywide productivity (relative to other advanced countries) since what was hoped to be a turning point, with the inauguration of widespread economic reforms after the 1984 election. If anything, the gaps have widened a bit further, and more countries (most former Communist ones) have entered the advanced country grouping, first matching and now overtaking us. Despite being so far behind the OECD leaders there are also clear signs that labour productivity growth has slowed further in the last decade or so.
All that discussion proceeded using simple measures of labour productivity (real GDP per hour worked). The data are readily available for and are more or less comparable across a fairly wide range of countries, and there is meaningful levels data. Labour productivity is a common measure in such discussions, even though total (or multi) factor productivity (TFP or MFP) is the in-principle preferred measure. It is the bit of growth in output or output per capita that can’t be explained just by the addition of more inputs (labour or capital). Some decades ago the late Robert Solow, recently deceased, observed that in modern economies perhaps 80 per cent of the growth in output per capita had been attributable to TFP.
It is a line that should be taken with several pinches of salt since in practice (a) TFP is an unobservable residual, and b) much of the innovation and new knowledge often thought of as the basis for TFP growth is probably embedded in better human and physical capital and the disaggregation is a challenge (to say the least). Thriving economies are likely to have better smarter people, better tangible and intangible capital, all used in better smarter ways etc.
But with all these caveats I thought it might still be worth having a fresh look at the OECD’s MFP data for the last few decades. They only have MFP (growth) data for a subset of (24) member countries (mostly the “old OECD”, and including none of the central European countries). For New Zealand, the first MFP growth data is for 1987, and with the annual data available only to 2022 that gives us 36 years of data.
There is a lot of year to year noise in the series, but for illustrative purposes I simply split the data in two, to compare the record for the 18 years to 2004 with the 18 years to 2022. As it happens, the global slowdown in productivity growth in leading economies (US and northern Europe) can be dated to about 2005.
New Zealand averaged annual MFP growth of 0.9 per cent in the first 18 year period, and only 0.2 per cent per annum in the second 18 year period to 2022. It is a pretty dire picture. (All data in this post use arithmetic averages, but using geometric would not make any material difference.)
Now, champions of the reform story might be tempted to look at that simple comparison and say something like “yes, you see. In the wake of the decade of far-reaching reform New Zealand made real and substantial economic progress, but then after the reform energy faded and drift took hold it all faded away to almost nothing.
Unfortunately for that story, here is how New Zealand MFP growth record compares (on the OECD’s particular methodology) for New Zealand and (the median) for the other countries (most of them) for which there is a complete set of data.
We all but matched the average growth performance of those other advanced OECD economies in the earlier period, in the wake of our reform process, but even then didn’t do well enough to begin to close the large levels gaps that had opened up in earlier decades. And then in the more recent period, we’ve done worse again: the comparator group (typically richer and more productive, nearer the productivity frontiers) slowed markedly, but we slowed a bit more still. When you start so far inside productivity frontiers there is no necessary reason why New Zealand could not have made some progress closing the gaps even if the frontier countries themselves ran into difficulties. But no. (Over that second 18 year period when New Zealand averaged 0.2 per cent per annum MFP growth, South Korea - also well inside productivity frontiers on an economywide basis – is estimated to have averaged 2 per cent per annum MFP growth).
It is only one model, and only one set of comparators but there is simply nothing positive in the New Zealand story. There is, and has been, no progress in closing those gaps, and our living standards suffer as a result.
And what of Solow’s 80 per cent? In New Zealand real GDP per capita increased by an average of 1.7 per cent per annum between 1987 and 2004. MFP growth averaged 0.9 per cent over that period. For the period 2005 to 2022 average annual growth in real GDP per capita increased by an average of 1.4 per cent per annum, but over that period MFP growth averaged just 0.2 per cent per annum. (The comparisons are no more flattering if one uses the OECD “contributions to labour productivity growth” table as the basis for comparison.)
Whichever measure of productivity one looks at the New Zealand performance is poor. Champions of reform 40 years ago would, I think, have been astonished if they’d been told how poorly New Zealand would end up doing. I hope they’d be even more alarmed at the indifference to that woeful record that now seems to pervade official and political New Zealand.
[And since I’ve already had one past champion of the reforms objecting to my characterisation in this post and Monday’s post, I’m equally sure that all serious observers now - ie excluding our political leaders and officials - have their own story about what else should (or in some cases shouldn’t) have been done over recent decades. That doesn’t change the fact - on my reading and my memory – that if asked in say 1990 most would have envisaged several decades of catch-up growth as the decline of the previous decades was slowly reversed. It is quite clear from the documentary record that that was the goal, and the intense political disputes of the era were not about that goal.]
croaking cassandra 
“Champions of reform 40 years ago would, I think, have been astonished if they’d been told how poorly New Zealand would end up doing.”
Perhaps. It depends what you compare New Zealand’s productivity against.
With regards to international comparisons, obviously NZ’s performance has generally been atrocious. Yet the 1980s reforms shouldn’t be dismissed so casually.
What would New Zealand’s counter factual productivity performance have been if the Marxist Muldoonist economic policies were kept in place for the past forty years? Countries like Venezuela, Cuba & Zimbabwe, who continued down the Marxist road, give us a clue of what could eventually happen. They are now experiencing famines etc.
I suspect that without the 1980s liberalisation reforms, NZ would have experienced economic collapse.
Alas, recent governments in NZ have been re-introducing neo-Marxist policies, once again imperilling the economy and society.
I hope that 2024, like 1984, will prove to be an inflexion point, and we again turn off the neo-Marxist road. We will see…
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don’t get me wrong: I supported and still support most of the things done in that reform era, But not having recovered any ground subsequently, even as the terms of trade surged, is bad.
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You need to acknowledge that when NZ reformed, most other countries also did undertake reforms as well. You also have to consider that our monetary policy has been hawkish and quite harsh with much higher interest rates than most of our OECD counterparts. Our higher interest rates has meant that our cost to produce is also higher which equates a less marketable product.
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Our reform process was generally acknowledged to be more thoroughgoing than most and having started from a worse place than most. The OECD for example often spoke v highly of the policy regime in NZ after the bulk of the reforms were done and of their own surprise that gaps to the rest of the world did not begin to close.
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Having arrived in NZ 40 years ago as a young Accountant, looking for work and only $50 in my pocket and now with a Net worth above $10 million even after 2 divorces and the loss of relationship property , I certainly have no complaints about the reforms. Comparing my experience with many of my University mates where I completed my undergraduate Bachelor degree studies in Melbourne, most have scattered around the world. Comparatively many of my ex University mates scattered around the world have significant accomplishments. The main advantage I have is that the New Zealand dollar and my investment property portfolio values have stood up very well.
University mates that have built careers and Net wealth in the USA, Australia and NZ have fared very well. Those that have ventured out to China, Hong Kong, Malaysia are struggling to even return to Australia or New Zealand as the currencies, the house values and investment share portfolio, businesses of those countries shrink. Even in Singapore where the currency has held up strongly, mates that have ventured into Singapore have returned have significant diminished New wealth comparatively.
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Who are the Champions of reform that you have in mind Michael – the ones who you think would be astonished?
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Where the 1980s reforms failed is that they didn’t properly address disastrous state productivity.
A government has two models to choose from:
1. Funding – It can fund public services that are produced by the private sector, or
2. Provision – It can use state institutions to produce public services.
Successful countries use the funding model (Switzerland, Singapore, Sweden etc).
Unfortunately, NZ governments predominantly choose the provision model.
The 1980s reforms did outsource some of the State. For example, the Ministry of Works was outsourced to the private sector. Overall, this was very successful. Nobody credible would want to return to the previous approach.
Alas, these reforms left education, health and state housing almost exclusively produced by the State in-house.
Government is now 41% of GDP in NZ. The State still produces the most crucial services in our lives (health, education, and housing). Alas, the Ministries of Education / Health / Housing etc continue to generally be appalling at performing their core functions.
In terms of improving New Zealand’s productivity, moving to a government funding model rather than our provision model seems crucial to me. For example, in education funding should follow the student. Also, changing the curriculum to Cambridge or similar would improve accountability, enabling the government to assess the quality of their spending.
The reforms needed in NZ are fairly obvious, but they almost certainly won’t be implemented. The question of why this is the case is probably an issue for another day…
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It is actually pointless to talk about productivity without also talking about profitability. They go hand in hand.. It is a balancing act. To gain higher productivity you either have humans working longer hours or working faster. With the dawn of the computer age that is as fast as we can get humans to function.
The next age is AI or intelligent robots. But they are costly investments. It comes down to scale. Elon Musk has built largely automated mega factories to build EV cars. But AI robots are actually not that smart. With humans you can change entire factory processes with a pen and paper or with drawings on a paper napkin, gather the staff for a quick briefing. With robots you need to fix a lot of computer programs to make changes. You gain productivity but you lose profitability every time a change is required. With the loss of flexibility you can lose market share.
I bought a new Lexus recently because it had the latest new look. Why? Tesla cars looks the same as its very first mega factory built model more than 10 years ago. It is looking old.
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Tesla cars looks the same as its very first mega factory built model more than 10 years ago. It is looking old.
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To reiterate my previous posts, , a major reasons for NZ appalling productivity is NZ ‘s over regulation.
The RMA, ETS ,WFF ,labour market regulation plus many many other Govenment constructs are leaders in the field of reducing productivity.
Entrepreneurs and business are taxed and regulated into shutting down or leaving NZ with whatever capital they have left. (See balance of payments figures,) The tradeable economy has been in decline for decades.
Any measurable growth is in service industries, bureaucracy and regulations.
It is a perfect storm.
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How reliable is the “per hour worked” data? And is there an industry breakdown for it? Dairy farming is a big one for NZ, and my own experience, with dairy farming, is of less time and increased output per hectare, over the decades. Income? Well, hmmm… it’s bounced around a bit.
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At an economywide level, and using annual data, it is pretty good. Per capita measures are more accurate but less meaningful so there are tradeoffs. SNZ has some quite good sectoral productivity series (altho I think only to the level of “agriculture” in total rather than diary specifically). there is no doubt that labour productivity is a lot higher than it was, but we have made no progress in reversing the gap that opened between us and other advanced countries in earlier decades (so we sit with average productivity perhaps 60% of that of countries like Belgium, Denmark, Sweden or the US).
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How could our past performance be any different when our main industries tend to be low profit, cyclical, price takers and to some extent subject to efficiency constraints – agriculture, forestry, tourism and land holding. You wouldn’t be surprised at these outcomes if you were analysing a peasant economy. And in part you are. These numbers can’t turn around until we participate in developing a wide and deep private sector involved in the new industrial-digital service economy. The question to be asked is why and what conditions are required to make that happen in NZ.
PC
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I’d probably differ to some extent. Natural resource based economies can offer really high material living standards – Norway is the premier advanced country example, but one could think of Brunei, Qatar, Kuwait etc (Russia might even be an example if the market were free to operate etc, so abundant are the natural resources) but doing so depends to an extent on not turbocharging population growth. For this v remote corner of the world, where are our own people are leaving, the return of large scale immigration in the last 30 years seems like a major policy mistake.
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Michael, all your examples are countries that are rich in oil and gas and forms the bulk of their primary production. These countries have built up so much wealth that their Sovereign wealth funds coffers built up historically will look after its governments and people(except for Russia which burned its funds figting a Ukraine war) for decades into the future without selling anything. New Zealand’s primary production is Meat and Milk, not oil. We have even banned exploration of oil and gas. We are a self imposed poverty country enriching the named countries, Norway, Kuwait, Brunei, Qatar, Russia all of which are major exporters of oil and gas.
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With the government sector now responsible for 41% of GDP the logic is simple that productivity weakness will continue. Government department functionairies are essentially just welfare beneficiaries and if we removed their make work schemes from the national GDP count I suspect that private capital is having to paddle faster just to carry the government deadweight. Examples of waste and indulgence are widespread and no one is responsible just that awful collective shrug because we are all connected to the crime. I guess to pad out the numbers and screw over public services we will be importing more high quality migrants from Ghaza . Still bomb making skills could be handy as the race gets tighter for diminishing opportunities.
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I’m late to this thread sorry, but a persistent driver/story of the productivity failure since the reforms of the 1980s is the overhead of excessive regulation.
The reforms led to a period of innovation and diversification. Whether it was a backlash against excesses and abuses or fear of change, in the 1990’s we shifted from a system of responsible, light or self-regulation, with transparency and disclosure, where performance and reputation were valued (doing what worked in small New Zealand), to overly heavy and intrusive regulation, with a rule and compliance based burden that continues to weigh heavily on business.
The excesses and abuses of the regulatory environment in the wake of the reform were relatively few, but conservatives and those affected over-reacted (particularly following the commercial collapse of 1987). We moved to a regulatory regime of independent regulators, licensing, and systems of required approvals or consents that eliminated differences of personal character and responsibility (and the incentive to perform that goes with that) and replaced them with licensing and qualification driven mediocrity, where all are equal as long as they comply with the rules.
Productivity is now constrained because we have considerable overheads involved in the licensing, approvals, consents and compliance processes which value conformance over performance and discourage innovation. Also despite the moral hazards involved we have persisted (under the mantra of “protection” and “integrity”) to provide expensive interventions via systems to insure against or reduce the likelihood of impacts from business failure. (e.g. deposit insurance). These interventions aim to reduce the risks to buyers or investors and reduce the individual’s responsibility to be well informed before making decisions, but increase costs to all. They increase barriers to entry, making size more attractive, reducing competition and stifling innovation, as incumbents benefit from more regulation.
The new Minster of (de)Regulation has some serious challenges.
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Agree with almost all that altho do bear in mind that on most metrics we don’t stand out as much more heavily regulated than many other advanced economies. That regulation can still be very costly in many cases, and should be rigorously and periodically reviewed, but prob can’t explain much of why we do worse on overall productivity than many other countries.
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I know its unmeasurable but I suspect there has been a compounding effect of burdersome and costly regulation on the energy and enthusiasm of kiwis to use good sense and judgement, accept responsibility and “get things done”, when they have been coupled with progressively more centralisation and control and administrative bureaucracy and everyone expecting the Government to “fix” everything – leading to the national malaise and apathy of a “too hard” or “why bother” or “take it to a bigger market’ approach.
Being as regulated as the rest of the world and making us like them, but not better, has never worked for kiwis. We can be smaller and more innovative (#8 wire mentality) and leading, but its become too easy to just be a follower and get into a “she’ll be right” mindset and seek to avoid criticism and be defensive (no-one is ever made accountable for “following the rules”). RB innovation outside the conventional wisdom of most CBs (e.g. the inflation targeting initiative) seems just not possible today….
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In addition to my other comments the impact of monetary policy in earlier days had also a substantial negative impact on the tradable NZ economy.The RB with the highest interest rates in the OECD sustained the NZD at a level that ensured local consumption would continue apace.The NZD was a speculators tool
The adverse effects on the tradable economy of a high exchange rate encouraged a fall off in productivity in the tradeable / export sector.Much manufacturing disappeared off shore and agriculture did not have the resources to continue its high productivity.
By far the most damage to tradeable productivity was originally done by a persistent overvalued exchange rate.
That damage has been continued by over regulatio
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What about their natural environment, social cohesion, cultural diversity, creative industries, etc.? I said this with consideration of the worse conditions in my country, Indonesia. Maybe we need to look beyond GDP and develop a more holistic measure of well-being. I dunno.
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