Reserve Bank chief economist Paul Conway says economists have failed to make a strong case for what New Zealand could look like with a more productive economy.
Productivity growth has averaged just 0.2% over the past decade, lagging behind other countries despite a global slowdown.
For many of those years, Conway was director of economic research at the now-defunct Productivity Commission and told RNZ he felt partly to blame for the lack of progress.
“That's been a vexing question for me, and I feel a little responsible. I think the economics community in New Zealand hasn't really sort of put forward a coherent vision of what a high productivity, high wage economy would look like,” he said.
Policy changes to improve competition, infrastructure, and capital markets would help, but much of the work needs to happen within private businesses. Firms need to invest in new technology, develop digital exports, and adopt better tools instead of simply hiring more workers.
Conway said the data suggests businesses didn’t seem sufficiently incentivised to lift productivity, despite frequent talk about it in Wellington policy circles.
“It's not solely the responsibility of the government and the public sector to fix this thing. Apart from state sector productivity, which is a huge issue in itself, lifting productivity is largely up to the private sector.”
He gave three key reasons for New Zealand’s weak productivity, all of which “flows back to our economic geography, the fact of being a small economy that's a long way from anywhere else”.
First, New Zealand is not well connected to the rest of the world. While it is often called a “small, open economy”, it has low export intensity relative to its peers, and many Kiwi businesses are not “outward looking”.
Second, the economy is labour-intensive and capital-shallow, meaning investment is spread thinly across the population. Many large firms are cooperatives or partly government-owned, which can also constrain investment.
Third, businesses tend not to invest in “knowledge based capital” such as staff education, organisational improvements, managerial capability, or research and development of new products or processes.
None of this is likely to change quickly, although the Government has introduced a tax incentive for business capital investment, which may support productivity growth.
Conway said the Reserve Bank expects it will boost investment, though likely not until uncertainty over Donald Trump’s trade policies subsides.
“In these interesting, somewhat troubled times globally, it is pretty natural for businesses to stand back,” he said.
“A short spike in uncertainty doesn't have much effect on the economy, but if you get a spike and it hangs on up there, it has a more negative effect. And that's very much where we are currently.”
White gold
Westpac NZ’s economics team used a series of recent customer presentations in Auckland, Wellington, and Hamilton to survey attendees on their views of the economy.
Respondents in Auckland and Wellington were “subdued”, while those in Hamilton were more upbeat—likely because its economy is more closely tied to the buoyant dairy sector.
Fonterra has announced its highest ever opening milk price forecast, projecting it will pay farmers between $8 and $11 per kilo of milk solids.
Conway said there is currently a wide gap between provincial and metropolitan economies, but it should start to close as lower interest rates take greater effect later this year.
Westpac NZ also asked clients about Investment Boost—a 20% tax rebate on capital assets—and found that firms already planning to invest were likely to bring spending forward.
“In Hamilton we can see the potential for increased on-farm investment this year. That makes sense given returns are very strong in the primary sector right now,” they said.
However, a large share of firms still didn’t expect to raise investment, as conditions remained tough.
Cameron Mitchell, head of geopolitical risk at ANZ Group, told the NZ Herald that businesses needed to become more comfortable investing during periods of global risk.
“I think it's less about dealing with the level of uncertainty and maybe tolerating the level of uncertainty, because I think we are at the end of a decades long pretty stable geopolitical order. Things are going to get less predictable,” he said.
17 Comments
To much debt tied up in non productive assets, the cost of which is the engine of inflation in all areas. You now which ones...the ones that contribute nil taxation.
Lol - when you incentivise debt gambling on housing capital gains what do you expect?
I raise your LOL. What incentives / solutions has Paul and his ilk contributed to productivity improvements and productive enterprise over the Ponzi? He's part of the problem where capital and money are created to allocate to risk-free, 'non-productive' assets. I'll even go as far to say that what he represents has contributed to the allocation of capital to 'non-risk-free' assets like rat poison. In fact, I was listening on the weekend to a financier speak about the trade-off when someone came to him for funding in a Swiss hotel when he could simply buy BTC and stand to make a far better ROI while the probability of capital investment loss is could be quite similar.
Not sure I’ll ever get my head around what happened in 2020 with RBNZ dropping LVRs and promoting an already very frothy property market to go to insane highs - basically encouraging bad lending, which as many of us on here warned at the time was a bad idea, and now some of that lending is in negative equity.
Sure they could have dropped rates but to drop the LVRs simultaneously (with emergency rate cuts) was the most reckless bit of bank management I’ve witnessed in my lifetime.
Indeed, I couldn't believe it either at the time.
Just my reckon, but they already know that the Ponzi falling out of bed is detrimental to the health of our SME ecosystem and overall economy. And at the end of the day, they're protecting their mates at the banks. In many ways, they're horribly conflicted: They have to ensure the economic paradigm for which they have created and nurtured, but through their own words understand that their Frankenstein creation has become too big and all-consuming to be dismantled or neutered accordingly.
So while I agree with you that their 2020 actions are part of the problem, it's much bigger than that (IMO). I'll concede that they were caught with their pants down and panicked. But as you say, manipulating the price of money was probably enough and an opportunity to pump their Frankenstein full of sedative.
Hard agree. There was no need for monetary stimulus at all - fiscal had it covered. Complete failure of coordination.
Yeah completely over cooked it and then wanted to look through the transitory inflation and house prices going up 30% pa … comedy of errors.
Indeed, it was insane. I hope all the people on here that could see it was the stupidest of decisions submitted to the RBNZ. The response I got was even more baffling (basically, we think we are right, you are wrong). My final two paragraphs summed it up well. Written just before the change, if anything it was prophetic on what was about to occur:
In summary, the removal of the LVR policy will be disastrous from multiple angles in New Zealand. It appears to be an ill thought out, ill informed, rushed change. There appears to be no modelling work or research papers to back up the change, it appears to simply be a policy to cater to banks who do not need the support (as evidenced by stress testing) and will lead to a less resilient financial system. It will also negatively affect housing equality, further heightening tensions in NZ society between land owners and renters, which could lead to social and political revolt.
It appears more that the RB is no longer acting in the best interests of the NZ public with such policy changes, but is working for the shareholders of banks and over leveraged property owners. Such bias should not be tolerated by a government intent on resolving long term inequality and will not be tolerated by a public who is becoming increasingly disadvantaged as financial mistakes become socialised in the bad times, while profits are privatised in the good times.
Yes exactly
Great points. And it got me thinking about the why. What was the RBNZ doing and why were they doing it?
I'm not 100% sure about this but I think that in a fiat currency monetary system commercial banks need credit growth (new loans) to be greater than the repayment of existing loans (debt reduction). If this is not the case then a commercial bank quickly becomes insolvent. I guess that's because credit growth is where a bank makes its margin.
So, it's possible that the RBNZ saw a risk that the fiscal actions would create an increase in debt re-payments and a slow down in credit growth - creating a systemic risk ... Possibly, that could be the reason - more research needed.
The last time the RBNZ... "acted in the best interests of the NZ public" was in the 1930's - that's the best part of a century ago - they have served the rentier' financial economy ever since.
“That's been a vexing question for me, and I feel a little responsible. I think the economics community in New Zealand hasn't really sort of put forward a coherent vision of what a high productivity, high wage economy would look like,”
Maybe they're framing things the wrong way. I was thinking about the use of drones in Vietnamese rice farms. The productivity gains are freeing up time for the community and the hardworking souls. This also enables them to spend more time thinking and developing about other aspects of community life - including the development of other businesses outside rice. It's not about being able to afford the flash harry boat, aspirational home in the suburbs, and winter holidays to Fiji.
Very much related to productivity and technology, how on earth did we automate software engineers before REAs? It's almost like selling houses is the pinnacle of human endeavor that needs to be protected from the evil of technology.
But I think the answer is clear: Open / free markets for labour get disrupted first. But special interests make it illegal to automate things like stevedoring, selling real estate, retail banking (debt lending), public sector bureaucracy. Therefore, they persist in excess.
Cameron Mitchell, head of geopolitical risk at ANZ Group, told the NZ Herald that businesses needed to become more comfortable investing during periods of global risk.
Sounds like a great idea ANZ. Are you going to be there to provide some of the capital?
Conway should indeed feel ashamed.
As should others.
Productivity is energy-efficiency by any other name - as everyone here should know.
And they run into the limits of the 2nd Law of Thermodynamics - which is somewhat more immutable that any concoction 'economics' has ever proffered.
Which is why real productivity will NEVER increase, not in a macro sense, anyway.
Thanks for the article, Dan.
Quoted...
"Reserve Bank chief economist Paul Conway says economists have failed to make a strong case for what New Zealand could look like with a more productive economy.
Productivity growth has averaged just 0.2% over the past decade, lagging behind other countries despite a global slowdown."
IT'S HIGH TIME WE BEGAN MEASURING GDP HONESTLY
Like all eCONomists, Conway merely describes the structural damage to our economy. They offer no coherent solutions because their career paths demand that they obfuscate the root cause. If they did fess up, they would lose their jobs.
They are hired to cheerlead what I label an 'oligarch's banking utility' model, as opposed to a 'public utility' which by design would create long-term societal wealth and rewards for a highly productive globally competitive Kiwi economy.
As we begin to use the PGDP (Productive GDP) measurement we will realise that the 'growth' (sic) figures the talking head status-quo supporters promote, are devised to keep Mainstreet in the dark, as the heist of wealth continues to funnel into the deep pockets of the global financial kleptocrats.
This was a far more insidious process from 1913 to 1971 when currencies were essentially hard-backed, but since they all became fiat, their purchasing power has been increasingly eviscerated at a much faster pace, to the extent that none of them retains any more than 1.5% of their original purchasing power - the British £ and the Kiwi dollar are two of the worst performers in the entire Western world.
THE LOOMING CRISIS - this is much more serious, objectively measurable, and imminent if we use honest measures in calculating where an economy is headed.
This financial architecture is even more disastrous if currencies are not based on sound money principles because, by definition, the entire system becomes a giant Ponzi - one that is guaranteed to collapse.
As I mentioned before, all currencies effectively became fiat in 1971, and the average all-time historical lifespan of fiat currencies is a dismal 35 years - this means that they are all 19 years overdue to self-destruct.
Recently there has been some extensive work done in bringing to our attention the revelation that China's PGDP (Productive GDP) is in the region of 300% larger than that of the U$A. I think many of us suspected that the reality was somewhere in this region, but we never had anything like the resources required to crunch the numbers.
Of course, we now must refigure our debt:GDP ratios, not using the traditional, GDP numbers, nor PPP GDP, both of which are wildly misleading.
We need to be honest and to calculate the number based on Public Debt:PGDP. This works out to be north of 750% and puts the entire U$ economy, into farcically insolvent territory. This in turn calls into serious question the sustainability of the dominant global reserve currency.
The problem is, that even without this bombshell reveal, buyers of U$ treasuries have to completely rethink their yields to match what they see as increasingly risky debt.
The risk is off the charts when you factor in currency shifts when it is explicitly stated U$ policy that this administration intends to devalue their currency, as much as 30%, from the starting point on inauguration day.
Given that the sale of sovereign bonds is the foundation of the entire debt-based Western-centric financial system, IMO the train wreck is about to happen.
THE MONEY CREATION HEART OF THE PROBLEM - the three main theories.
https://globalsouth.co/2024/05/04/economics-part-vi-money-creation-and-cbdcs/
Quoted from the link and paraphrased from Prof. Richard Werner's work...
#1 This one is currently dominant – Banks are financial intermediaries that gather deposits, they then do their analysis of potential borrowers and lend out these deposits based on their analysis, risk management etc.
#2 The slightly older theory, which was dominant until the 1960s, is known as the fractional reserve theory of banking – this one holds that similar to #1... each bank is a financial intermediary, but in aggregate, there is something mysterious that is happening in the banking system collectively, and as they interact with one another, money is being created – this one is particularly intriguing for students – hmmm, the inkling of the outrageous concept of money creation being undertaken BY BANKS – blimey!
This theory claims that this process is happening in aggregate, through some sort of complicated diffused process which is very difficult to understand as a function of the money-multiple formula.
*(I haven’t bothered to try to unravel this one – what on earth would be the point when the entire intermediary theory is complete tripe anyway?)
#3 The credit creation theory, this is the oldest one, and which was dominant until #2 took over in the 1920s – this is the most shocking one. It holds, that banks are not financial intermediaries – not on an individual level, nor an aggregate basis.
The credit creation theory states that banks are creators of money as individual banking entities. Each time they create a loan, the process has nothing to do with deposits per se – they are not lending out deposits – rather they are creating new money which is added to the money supply – this is what is being lent out as newly created money.
These three theories have existed for at least the last century, with eminent people supporting each of the three. Keynes and some others have at various times ducked and dived around and eventually, at different stages, supported all three.
Keynes in his early career supported #3, later changing to become a disciple of #2, and then, lo and behold, towards the end of his career he supported #1 – as Werner quips – he (Keynes), actually became ‘wronger and wronger’ in his analysis as his career ‘progressed’ (sic).
And so What Was The Natural Thing For Werner To Do?
Instead of endlessly arguing the toss about the truth of money creation, surely it was time (like at least 2000 years overdue) to allot the time to undertake a serious empirical trial and to prove the actual mechanism definitively once and for all.
How incredible is it that this mystery dates back 5000 years – right to Babylonian times – yes, banks made cashless loans back then too, including even distant foreign exchange deals and well before formal countries with defined borders even existed.
The banking industry was of course very keen to keep their dodgy secrets to themselves, and it suited them fine that the mechanisms were shrouded in mystery since time immemorial.
Werner, who I regard as the bravest and most principled financial contemporary contrarian, took the bull by the horns and proceeded to do something for the first time in recorded history. In doing so, he empirically proved #3, the credit creation theory, to be the correct one.
He conducted the experiment, and then published his findings, welcoming critique by pundits and peers alike, in what turned out to become one of the most downloaded financial articles of all time. To this day no one has seriously challenged the validity of his findings.
WE DESPERATELY NEED THIS DEBATE WITHIN NZ
Without a groundswell in Kiwis's understanding of which entities benefit from the status quo system of money creation, we will continue to enrich the global oligarchy at the expense of our productive economy and descend into socioeconomic collapse.
The fact that the central bankers of the world, and most notably by decree of the BIS, are throwing ALL fiat currencies under the bus means that this topic needs to be urgently brought into the public forum.
Hopefully, I.co.nz can assist in promoting discussion for arriving at a solutions-based approach.
I have to say, I am not holding my breath regarding a productive outcome. I have already been the target of some nasty ad hominem comments from two or three individuals who attacked me right out of the gates for daring to suggest that there were indeed some historically proven solutions out there and that there was no need to try to reinvent the wheel.
Sadly, this is a tall order in a country that suffers from an acute mix of both financial Stockholm and Tall Poppy Syndromes.
I take my hat off to the amazing work that Iain Parker* is doing in highlighting how NZ has been ripped off financially, for going on a century, by the global private banking and central banking cartel.
*(Uniting Peoples Credit Movement NZ)
Until a critical mass of the population can understand how this wealth heist occurs, then we have zero hope of developing the collective will or the political architecture for reform. This involves fundamental 100% financial fiscal and monetary structural reform, beginning with sound money and money creation.
None of our incumbent political parties understand the concept, let alone attempt to address it. Until the political will to confront this evolves, we will be sucked deeper into a debt trap vortex.
The real tragedy is that it might take a tragic financial meltdown on at least the scale of the Great Depression, where the population flat-out demands this fundamental reform before this appetite develops.
Regards to all
Col
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