Productivity matters
A productive economy is essential to Aotearoa New Zealand’s people and its future.
Improved productivity increases the nation’s income and people’s ability to produce and afford the goods and services that underpin a happy, healthy life. It also allows the Government to invest in public goods and services to benefit everyone – like education and health services and infrastructure. The investments that Aotearoa New Zealand makes in its people, communities, infrastructure, institutions and knowledge will determine the lives that New Zealanders are able to lead, as well as their children’s lives and those of future generations.
This report:
- sets out the core productivity challenges and opportunities facing Aotearoa New Zealand, grounded in the Commission’s previous work and stakeholder engagement carried out in October 2023
- proposes a policy and research agenda that could form the basis for work across government to target productivity growth.
Aotearoa New Zealand’s productivity is low relative to other developed countries...
Aotearoa New Zealand’s productivity growth has been low for many decades, with levels lagging behind the growth of its peers since the early 1970s. Aotearoa New Zealand’s workers have been producing less for every hour worked compared with many other OECD countries for half a century.
As in all nations, a range of factors drive productivity performance, and the reasons for Aotearoa New Zealand’s relatively low performance can be attributed across these. Some factors are beyond our direct control – for example, Aotearoa New Zealand’s distance from global markets and small market size.
...and global challenges are approaching
Transformative global “megatrends” are approaching Aotearoa New Zealand. These are likely to significantly impact future productivity performance, and will present both challenges and opportunities for the future. The trends include:
- A changing climate and environment: significant climate and environmental changes will lead to global disruption and scarcity of critical resources, as well as costs and opportunities associated with adapting to, and mitigating, the effects of climate change through new technologies, products and services.
- Technological innovation: the speed of technological change and innovation will present huge opportunities, but individuals, businesses and states may face costs if they are unable to adapt in time to harness the benefits of these advances.
- Complex geopolitics: shifting institutional, cultural and economic alliances and systems will drive a rebalancing of international power relations, and potentially increased conflict, in the face of overall challenges to the role and power of state and non-state actors.
- Demographic change: an ageing workforce will place increasing pressure on meeting skills and labour needs, with impacts potentially dependent on migration patterns.
- Social cohesion in a changing world: increasing polarisation and distrust may be driven by increasing inequality.
- Public health: increasing pressure on the public health system will require active management of the risks and opportunities posed by technology and data.
A focus on the key enablers of productivity can drive better outcomes…
There is no “silver bullet” to achieving improved productivity. Increasing Aotearoa New Zealand’s performance will require long-term commitment, and targeted effort across the range of factors that drive Aotearoa New Zealand’s currently lacklustre productivity outcomes.
Local and international experience demonstrates that there is potential to drive increases in productivity over time – and to be resilient in the face of approaching challenges – by focusing efforts on some key enablers of productivity:
- Innovation and its diffusion – which can support Aotearoa New Zealand to solve big problems while the economy benefits from new and improved technologies and business processes
- Investment in capital –building an asset base that enables labour to become more productive over time
- Growing the value of Aotearoa New Zealand’s human capability through investments in education and health, and balanced migration settings, to ensure we have a workforce that will meet the needs of the current and future economy
- Strengthening institutions to provide capability, capacity, transparency and certainty within which markets can operate and market players can look to the long term.
Aotearoa New Zealand also has some unique characteristics which will present specific opportunities and challenges. In particular, a focus on leveraging the opportunities presented by te ao Māori, and a focus on effective and efficient land use, represent useful avenues for Aotearoa New Zealand to build its productivity performance.
…but action must be rooted in strong foundations
During stakeholder engagement on the core challenges and opportunities for productivity facing Aotearoa New Zealand, participants talked to the importance of having strong foundations for its efforts to improve productivity. They told us that:
- Long-term commitment to improving productivity requires ambition over the long run. We heard about the importance of having a vision for the future to underpin national aspiration, and the importance of thinking intergenerationally and about the long term.
- Driving improved productivity will require making hard choices – to confront highly complex and systemic challenges, to challenge the status quo and its outcomes, and to deliberately invest in – and manage the costs of – change.
- Strong productivity outcomes are underpinned by high levels of social cohesion. This can be enabled by commitment to policies that promote fairness, inclusiveness, and effective participation for all.
Timing is critical: work needs to start now
Productivity growth will not happen by accident, or over the short term. It requires sustained, concerted investment and deliberate decisions over the long term – but the sooner effort begins, the sooner gains may begin to be realised for individuals, firms, industry and the broader economy and society of Aotearoa New Zealand.
We have outlined a policy and research agenda that will support productivity improvements now, and for future generations.
The key areas we have recommended for further work or investigation are:
- Opportunity 1. Focus on the role of innovation – and diffusion of innovation: Technological innovation, and the diffusion of innovation, has the potential to significantly drive Aotearoa New Zealand’s future levels of productivity and make its economy more resilient in the face of change. Focus is needed not only on encouraging innovation, but perhaps more importantly on encouraging the innovation that does occur to be used and fed into improved business practices, increased efficiency, and investment in products and services that deliver more value and more value for less cost.
- Opportunity 2. Invest in the basics – a skilled, healthy population: A strong focus on investing in skills, education and public health is essential to drive current and future productivity, and to support a socially cohesive and engaged population that is prepared to meet the challenges of the future together. This focus will ensure that firms are able to access an adequate supply of skilled workers, and that access to skills is maintained over time in the face of global health challenges and an ageing population.
- Opportunity 3. Think long-term about Aotearoa New Zealand’s approach to land use and infrastructure: How New Zealanders use land – the nation’s most precious and fundamental resource – will significantly shape Aotearoa New Zealand’s productivity outcomes now and in the future. With urgent challenges in housing and infrastructure, and the economy’s strong focus on primary production, it will be important to consider how to balance the rights of current and future generations, including to meet the emerging challenges of climate change.
- Opportunity 4. Look to the potential inherent in te ao Māori and across the Māori economy: Māori perspectives and a te ao Māori worldview provide opportunities to contribute significantly to Aotearoa’s economic performance. Meaningfully integrating these perspectives could support building more long-term and intergenerational thinking into business models and greater differentiation of goods and services, providing added brand value for Aotearoa New Zealand internationally.
- Opportunity 5. Continue work to address Aotearoa New Zealand’s specific productivity challenges: As a nation, sustained effort is needed to target and address New Zealand’s known productivity issues – from how to understand and address low levels of capital investment, to the role that trade relationships may play in addressing distance challenges. Taking work of this kind forward requires expertise, analytical capability, and the commitment and investment to tackle difficult and complex issues and identify sometimes hard solutions.
We have identified in the body of this report some more specific policy and research topics which could provide a potential starting point for work on each of these opportunity areas. These topics reflect areas already raised (through engagement) as potential issues for the Commission to examine through future inquiries if the organisation had continued to operate. They cover a range of diverse topics: insurance retreat, capital deepening, innovation diffusion, land use, energy system transformation, the readiness of regional economies and labour markets for transition, the care economy, and skilled employees and lifelong learning.
Success will depend on thinking over the long term
The extensive work undertaken recently by pro-productivity institutions in Australia and the United Kingdom contrasts with the lack of high-level strategic direction for productivity growth in Aotearoa New Zealand. While developing such a strategy was outside the Commission’s remit, such work would, in our view, provide much-needed coherence and direction across efforts to improve productivity performance, by setting a clear goal and realistic pathways to deliberately move Aotearoa New Zealand toward an understood and agreed economic future.
We offer this report and the policy and research agenda proposed within it, as a starting point to inform an all-of-government productivity strategy that sets a clear vision for Aotearoa New Zealand’s future economy, and pathways to achieve it.
Such a strategy would help to drive Aotearoa New Zealand’s long-run productivity by reducing confusion and uncertainty and enabling business and society to make informed investment decisions.
We are confident that, through sustained and joined-up effort focused over the long term, Aotearoa New Zealand has strong foundations from which to grow its productivity performance and support better outcomes for its people. This policy and research agenda provides a fresh place from which to start.