Is Productivity Growth the Gateway to Prosperity for New Zealand?
I am starting a series of Blogs focussing on the issues surrounding New Zealand’s Productivity crisis. Yes we do have a crisis! I will be looking at the problems that are causing this situation and looking at viable solutions.
You may ask, ‘why write on such a dry topic?’ Firstly I am a nerd and I love economics but more importantly, New Zealand’s future prosperity is very much linked to our productivity rate. As a nation we need to adopt technology to increase our efficiency and increase our productivity rate, or we will be left behind the rest of the OECD, more than what we are already.
I run a Software Development company that specialises in Electronic Data Interchange (EDI), increasing Supply Chain efficiencies and reducing costs, so I know first- hand how slow New Zealand firms are in adopting technology.
Politicians have not been focussing on productivity enough. Why?
The issues with productivity in NZ have been like a ‘perfect storm’; Brewing for several years but the effects were not being felt until more recently.
To demonstrate my point, during the years following the 2008 Global Financial Crisis, the NZ economy has been performing better than many of our OECD partners. In fact, in early 2014, Paul Bloxham, HSBC economist dubbed NZ as being a ‘Rock Star Economy’ – so why focus on productivity?
Well, to assist in the discussion, I need to give a simple economics lesson of how productivity is measured. For all you non-economists reading this, please stay with me because this is really important!
The Two Paths to Economic Growth
There are basically two ways to grow the economy;
a) Work more hours per capita (i.e.) employ more people to produce the output we need – This is termed “Higher Labour Utilization”.
b) Produce more output from each hour worked (i.e.) get more output from each person you employ – This is termed “Higher Labour Productivity”
In third world countries where labour is cheap, these economies tend to adopt Higher Labour Utilization. They employ lots of people doing manual tasks to get the output they need. As you can appreciate, this method is not very efficient.
In first world countries where labour costs are more expensive and due to increased world-wide competition, these economies tend to adopt both methods but with a tendency towards Higher Labour Productivity. This is where technology and mechanisation are used to do those manual, repetitive tasks, increasing output per person employed and doing that more efficiently.
As a first world country, New Zealand should be adopting Higher Labour Productivity right?
However, when we look deep into our statistics for productivity gains over the past 18 years (i.e.) from turn of the century, we see a very different story!
I will continue this discussion in my next post which will be released early next week.
Read on in my next article ‘Why New Zealand has productivity wrong’.
Comments