By Paul Conway*
Apart from recent breaches at the border, New Zealand has done a great job managing the health impacts of COVID-19. Going “hard and early” has been effective to the point that we are among only a handful of countries with a realistic shot at living free of the virus while a vaccine is developed.
As well as the public health response, the Government is now deep into its work of stabilising the economy to soften the economic blow from lockdown. This includes a mix of wage subsidies, direct support, and government-backed loans. Monetary policy is also carrying some of the load, with the Reserve Bank keeping interest rates exceptionally low to encourage demand.
While critical in the aftermath of lockdown, stabilisation policies will have little influence on New Zealand’s economic performance over the decades to come. If we really do aspire to upgrade our economy following COVID-19 we need to add a microeconomic policy agenda into the mix.
The broad objective of this agenda should be to encourage a transformation of our economy away from growth driven by working more hours per capita towards growth driven by productivity improvements.
This agenda also needs to ensure that the benefits of this transformation are spread widely across New Zealanders.
Improving productivity is a means to the end of higher wellbeing and reflects how good businesses are at transforming inputs into value add. Many factors influence business productivity, such as worker skills, market openness, competition, regulations and regulators, management capability, innovation, and the presence of dynamic and collaborative firm clusters.
Given the complexity, there is no single policy solution to lifting productivity. Instead, productivity growth occurs as firms respond to coordinated policy improvements aimed at pushing the myriad of underlying influences in the direction of higher living standards.
While the importance of pro-productivity policies is often acknowledged in principle, reform efforts often amount to tinkering at the margin in practice. New Zealand’s productivity performance still shows no sign of improving, despite focus from successive governments and nine years of analysis by the Productivity Commission.
If we are to build a new and improved New Zealand economy following COVID-19, then a more ambitious agenda is required. History tells us that economic crises are often followed by periods of policy reform, so let’s make the most of this one. These moments do not come along very often, meaning that the policy choices we make now will influence Kiwi wellbeing for years to come. We really do need to get this right.
Open minds are a key ingredient. While economic crises make societies more willing to change, what we do with that opening is up to us. For instance, New Zealand’s long history of poor productivity suggests that simply doubling down on entrenched positions will not improve outcomes.
So, what could we do to really set ourselves up for success? While aiming to do ‘a little bit of everything’ might just keep our heads above water, a policy agenda truly focused on developing engines of growth in our economy is what we really need. Which industries or economic activities are going to set New Zealand up as a thriving 21 st century economy and what needs to change to ensure their success?
While less about a ‘level playing field’, a more focused approach recognises that small economies cannot specialise in everything and are ‘doomed to choose’. This is not about picking winners at the level of individual firms. It’s about focusing on a few key races in which Kiwi businesses have demonstrated strengths and strong international visibility.
Greater focus would bring better alignment across policy areas. The science and innovation systems would be tasked with building deep pools of relevant knowledge and expertise. The education system would need to become more flexible and supply relevant skills. Our foreign direct investment regime could be oriented to secure relevant offshore technology and expertise. Better alignment across different policy areas would encourage much-needed collaboration among researchers and firms.
While a focus on growth engines is an important part of the puzzle, it is not the only thing we need to get right. Improving productivity in firms serving New Zealand’s domestic markets is also key. This would lift wages and lower the cost of living for many Kiwis. It would also improve domestic supply chains for New Zealand firms operating internationally.
Encouraging digital adoption is key. Economic crises often accelerate trends that were already underway, and digitalisation is clearly one such trend. Improving digital skills is critical in improving digital adoption, lifting wages and future proofing Kiwi workers for ongoing technological change.
While a greater use of digital technology is obvious, other areas needing a rethink post-COVID-19 are more contentious. Evidence is scarce, but strong inward migration, until recently, may have added downward pressure to wages and a reluctance from firms in some parts of the economy to invest in capital.
Some business models are based on low-cost imported labour. However, it is not clear that migration settings pre-COVID-19 were consistent with productivity-led growth. The return home of thousands of ex-pat New Zealanders is also an important consideration to factor into policy deliberations and, ideally, a national conversation on migration.
Because productivity reflects a broad range of influences, there are numerous other policy areas that also need to be improved post-COVID-19. For instance, improving the supply of affordable housing would lift productivity by allowing more people to live where their skills are most valued. Relatedly, the tax system could do more to encourage productive investment while improving competition in parts of the services sector would also lift productivity.
Some of these issues are not only relevant for policymakers, but also highlight where the business community can pitch in. For example, BNZ is currently working to measure the digital capability of businesses and individuals to encourage initiatives aimed at improving digital skills.
COVID-19 is dramatically changing the world around us. We are currently ahead of the curve in restarting much of our economy, debunking arguments that a strict health response comes with higher economic cost. But to truly grab hold of the opportunity to upgrade our economy, we need a clear and focused microeconomic agenda to encourage productivity-led growth over the decades to come. We have come together to eradicate COVID-19. We must now leverage our ‘can-do’ attitude and sky-high international integrity to build a better economy that delivers for all New Zealanders.
*Paul Conway is an economist working at the Bank of New Zealand. He was previously the Director of Economics & Research at the New Zealand Productivity Commission. Paul has also worked internationally at the OECD and with the World Bank.
27 Comments
"Because productivity reflects a broad range of influences, there are numerous other policy areas that also need to be improved post-COVID-19. For instance, improving the supply of affordable housing would lift productivity by allowing more people to live where their skills are most valued. Relatedly, the tax system could do more to encourage productive investment while improving competition in parts of the services sector would also lift productivity."
Good luck with this, because every time we attempt to 'stimulate' the productive economy, the Reserve Bank drops the OCR and banks create more debt against the property market and prices rise. You couldn't make this stupidity up.
Improving house affordability would be a good start, however there's a bigger rat in the kitchen.
NZ inc needs to own more of its core infrastructure; largely controlled by overseas interests, who are price setters and gauging this country through excessive profit taking. An annual income deficit of $10 billion per annum, and that unlikely to include transfer pricing/profit mechanisms.
Banks, Telecoms, Forestry, Energy, Building Companies, Supermarkets all dominated by overseas interests. Time government started regulating prices on their monopoly practices, or create more competition.
Successive ex politicians have feed us the lie that overseas investment is good for the country, and its not hard to see who they were as they are sitting on the boards of overseas banks.
Can anyone tell me where overseas investment has been good for this country? There might be the odd one that creates more local employment opportunities, but most buy existing businesses for their intellectual property and export future growth elsewhere.
Brave words Paul. Not incorrect by any means, but the key issue here is leadership. Good leadership or the lack of it, is pivotal to everything. Leaders need to be identified early & trained up in order to fulfill their potential. Anyone of any type can be a leader. There is no one size fits all. The best leader I ever worked for was as liberal as liberal gets, but boy could he lead. He was so personally secure that he actively encouraged those around him (myself & others) to challenge him with research, vision & energy. He gave us space to do things & if we stuffed up he never threw it back at us or kept it against us. We all learned & we moved on. What chance of any political leadership of either persuasion embracing such ideas when everything is still so left & right. Unless we get beyond that, there is not much hope I'm afraid. Sorry Paul.
And the third pillar, the dog not barking.
Debt.
Remember the last addressed crisis the 1980's, remember the debt forgiveness that ended the Rural Bank.
Question: any remember who was the author or the Rural Bank borrower bail out?
Needs be similar again.
Why can there be a bad debt, but no bad loan?
Bad loans, bad lending ought to it full recognition, and authors promoted as appropriate.
"The return home of thousands of ex-pat New Zealanders is also an important consideration to factor into policy deliberations and, ideally, a national conversation on migration."
Not an optimistic comment for NZ Inc but here goes. No matter how bad Covid-19 and the economy gets overseas, those who haven't returned to NZ by year end 2020 will have strong bonds to their current location and won't be moving. Spouse, children, career, something which holds them there, combined with a comfort in the risk level Covid-19 presents to them personally. The biggest down side risk for NZ in 2021 is net emigration, and that could start to emerge in early 2021, probably led by high achieving 20 and 30 year olds. There could also be an increase in our current immigant base leaving, including some who have lived here for a decade or more. This could poke an enormous hole in the skills base of some industries, and leave a gaping hole in the property market. Comments please.
Net emigration could bring benefits if we don't fear it. If net migration turns negative in the coming months it is likely those leaving are those in hospo and tourism - sectors which have likely had a negative effect on our productivity and GDP per capita growth in recent years. As for property market, a fall could be great impetus for investors to get out of unproductive property investments and move to more productive investments. As for skilled people moving offshore, that always happens - what's more important is improving productivity and letting market decide what skills are needed and if the price is right the skills will eventuate.
A lot of the blame can be pointed at our poor education system, which prioritizes political correctness and the gaming of achievement statistics over the acquisition of hard skills and intellectual development. This spills over into tertiary as well.
Most of those who make it through with half a brain then end up overseas.
1) STRATEGY - Change the strategy
a) Central & local govt to focus on total wellbeing per capita (gdp/capita as first order proxy)
b) Central & local govt to focus on in Gini co-efficent so as to reduce inequality
2) TAXATION - Change the tax system to favour productive use of money
a) comprehensive capital gains tax (although the horse has bolted on property however the comment that using NZ's sparse capital into driving up land prices is insane still relevant)
b) a wealth tax - expensive paintings hanging on walls don't employ many people, maybe 1 the art dealer.
c) add environmental taxes so that taxes favour total wellbeing not just gdp + externalities not paid for
d) reduce income and business taxes
e) reduce the over-taxation of savings (eg term deposits) as savings = investment
f) remove any tax advantages for trusts
g) remove any tax advantages for multinationals
3) GOVERNMENT - Govt is 40% of the economy
a) require all central & local government spending to go through cost benefit analysis
b) sunset all RMA rules and establish national standards based on cost benefit assessment. Require all new RMA rules to go through full regulatory cost benefit assessment
c) require all existing & new government regulations to go through cost benefit assessment
4) PRIVATE SECTOR
a) Make the ComCom take into account the HHI index when making decisions. It takes 7 competitors with equal market share to have a fully competitive market. That seldom happens in NZ
b) Force the demerger of the supermarkets, petrol retailers, power genretailers and any other oliogopolies
Ah yes, I see no issues with reducing income taxes and increasing wealth taxes when our country is already hyper-reliant on a small core group of income taxpayers. Certainly no issues with triggering capital flight amongst those with the resources to mobilise their wealth and skills they can use overseas here at all.
He sure as hell is an economist.
No mistaking the mantra, as taught. Growth. Productivity. Growth engines, for heavens' sake. Why is this stuff still being spouted? And given oxygen?
Seriously, Interest.co, you've been given enough, here, to challenge this. Is productivity a matter of work-done per energy expended? Yes or no? Same question goes to all economists, at this point. What is it about the Limits to Growth, you-all don't understand?
Is productivity a matter of work-done per energy expended? Yes or no?
In my garden there are areas I've sweated digging and landscaping and bringing in compost and making my own compost and feeding with blood and bone and ensuring it drains well. The results are very poor for the time, effort and money involved. And then there is an area I barely weed because I'm rather lazy and every year I get masses of Forget-me-nots and Nasturtiums and Foxgloves and a beautiful plant whose name I haven't a clue but is like a cross between a daisy and a Sweet William on steroids and is probably the best thing in my garden. Almost no input and certainly the only energy expended is the effort to sit and look at it . A great output. So in terms of my garden the answer is a resounding no.
I'm puzzled why an economy cannot be the same - low energy input and satisfying output.
No puzzle. We are urged to consume - and you don't do that virtually (virtual is only a stop on the way). That consumption has to comply with the Second Law. And the energy in your garden is solar - but you knew that. Some plants convert sunlight to sugars (energy) better than others and they all do it better than my PV panels.
What I was getting at, is the fact I often put up here; that human labour is less than 1% of work-done, most of the rest is via fossil fuels and the tail-off in productivity is merely the ff coming up against the limits of the Law. What annoys me, is the oxygen given to the mantra by those who have had this put under their noses........
Low energy input and satisfying output is another way of saying "productivity". I think of it as wellbeing relative to the resource that had to go into creating it. So it certainly isn't about "infinite growth". It's about using our resources wisely to maximise wellbeing with minimal effort. And all within the sustainability envelope of our natural environment. In fact, "productivity" and "sustainability" aren't exactly the same thing, but they are quite close as concepts. And while I'm not into "infinite growth" or "growth for growth's sake", there are plenty of people living here in NZ that would really benefit from higher incomes. Part of that is about reducing inequality. But part of it is also about increasing the value created per hour at work (which is a more narrow definition of productivity).
Thank you for replying.
Firstly, no energy equals no work, equals no production. Of anything. So energy underwrites the 'economy' 100%. Can we agree on that?
Human energy represents less than 1% of energy used globally, and (in the developed world at least) it takes several calories of fossil energy to supply one calorie of food, so even that 'less than 1%' is fossil-derived. And fossil is finite. And deteriorating in quality, given that we take the 'best' first. So while we do indeed need 'an environment', that isn't the problem. The fact that we are 100% energy requiring beings (and societies) means depletion, coupled with reduction of EROEI, is the problem (and don't give me the 'at a certain price-point an alternative.....' nonsense; exponential growth and a finite planet render that wee mantra a nonsense).
Then you revert to straw-man stuff, with 'that would really benefit from higher incomes'. Let's translate that: 'That could really benefit from more access to resources and the energy it takes to procure, process and proffer them'. That's self-justifying, the same way 'housing crisis' and 'child poverty' are self-justifying (is a housing crisis not a 'too many people' crisis? Is it not somewhat arrogant of one species to reproduce itself unlimitedly then argue that it has 'rights'?
Here are a couple of links which might make you reconsider:
https://surplusenergyeconomics.wordpress.com/2020/06/19/175-the-surplus…
https://ftalphaville-cdn.ft.com/wp-content/uploads/2013/01/Perfect-Stor…
Take the time to read them. The second one, twice. Then ask yourself what the efforts of the Productivity Commission (thus far) should score out of 10? I give it about 3. It has the be the teaching of economics; it must be flawed. There is no other answer - unless of course you wish to rebut the two pieces? You might want to address the false assumption of endless fungibility too .........
Go well
Farming and tourism. That's it. No bullshit about reimagining going forward, at this time. Both dependent on cheap transport costs. So work on those 2. It's not rocket science. Oh, and don't invest overseas. Remember PGG being ripped off by Craig Norgate and the Argies.?Remember Fonterra being ripped off by Theo and his Chinese coconspirators? Just sell to these crooks at prices we can make a profit on. Farmland prices should be 100% based on what money can be made off them. Remember when Dodgie Rodgie took the subsidies off the farmers, land prices dropped to reflect that obvious truism. It turned out the farmers were actually buying the subsidies off each other.
So keep things simple, and do stuff we can make a profit off with the rest of the world. Protect our own manufacturers and business owners as much as the rest of the world will let us get away with. Remember that $1.20 spent locally is cheaper than $1 spent out of town.
I have a special feeling for people who give their money to foreign owned grocery operators and banks, instead of letting that money stay in New Zealand. It is not a good feeling either.
"Remember that $1.20 spent locally is cheaper than $1 spent out of town."
- Not if people aren't getting paid the $0.20 cents. Front-loading moral obligation onto wage earners who companies are quite happy paying internationally poor wages is going to result in a drop in our standards of living.
"I have a special feeling for people who give their money to foreign owned grocery operators"
Woolworths NZ employs almost 20,000 people including some family members. That money stays in NZ and gets spent here.
I have never understood this ‘productivity’ mantra. How can a service economy, which is what we are, be more productive? Does the call centre worker have to answer more calls or work longer hours to be more productive? Does the cleaning lady have to wash more floors to be more productive? Or is this argument just a call for workers to work longer hours? Or is this another idea for infinite growth.... dear god.
No, It's not about "infinite growth", thank God. Perhaps the call center worker could work from home (thanks to digital) and save time commuting. Or perhaps a computer can answer most of the calls. Perhaps the cleaning lady needs a better mop (ok, so that is a bit of a stretch). But some of the most productivity bits of our economy are in the services sector. So you're wrong on that.
Productivity is about more wellbeing for less effort. It is not about working longer hours. We already work some of the longest hours per capita in NZ already. But the pay for a lot of those jobs is not that great. Why the low pay? Because our productivity is rubbish. Better productivity for higher wellbeing with less stress on the planet.
The service sector, in physics terms, merely uses energy to stave off entropy. That's not productive, in a physics sense, at all. Perhaps you measure the wrong thing? Try thinking of cities as giant heat-engines.
And you must have some kind of cognitive dissonance - what, exactly, will those 'better-off, more wellbeing-ed people be buying (more of)? The answer is: More of the planet. Jevons is alive and well, and every tracking I've ever seen suggests the original LTG World3 Standard Run is panning as predicted (the longest-running tracking on the planet in terms of remaining accurate).
Oh - and we will always lag the 'OECD' (always used when politicians need to obfuscate, have you noticed?) because in physics terms, we're further away than anyone. Distance= energy demand. More distance = more energy demand. And there are physical limits to transport efficiencies. Perhaps you could assist the social narrative, by urging the infiltration of physical Limits and realities, into the teaching of economics? I appreciate there would be strong push-back.....
I hope Paul Conway offers more to his employer. I can think of many on this site who could have written this in their sleep.
We must improve our productivity-give him a prize for stating the bleeding obvious. "We need a clear and focused Microeconomic agenda" "We must leverage our 'can-do' attitude". Is that the 'can'do' attitude of putting up thousands of leaky buildings or the widespread pollution of our waterways or perhaps our inability to quarantine a few thousand people properly?
Chuckle. "use our resources wisely" isn't original either. It comes from the flawed Brundtland 'definition' of sustainability we hung our deficient RMA on.
It doesn't matter whether you use them wisely or stupidly, it's the rate of use is the issue. Mother Nature doesn't give a flying whatever, about your self-esteem, merely your actions.
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