An international perspective on the New Zealand productivity paradox
New Zealand’s broad policy settings should generate GDP per capita 20% above the OECD average, but it is actually over 20% below average. Closing this gap would dramatically lift incomes and wellbeing for New Zealanders.
The country has good resources – investment in physical capital and average years of schooling are broadly consistent with other countries. Employment of low-skilled workers also plays only a minor role in New Zealand’s poor (measured) productivity performance.
Instead, over half of New Zealand’s productivity gap relative to the OECD average can be explained by weaknesses in our international connections. New Zealand firms face reduced access to large markets and limited participation in global value chains, where the transfer of advanced technologies now often occurs.
Most of the rest of the gap reflects underinvestment in “knowledge-based capital”. In particular, R&D undertaken by the business sector is among the lowest in the OECD, reducing the capacity for “frontier innovation” and the ability of firms to absorb new ideas developed elsewhere (“technological catch-up”). The quality of management in New Zealand is also low, which lowers the productivity gains from new technology.
The paper outlines how New Zealand’s productivity gap might be closed, given the unique features of New Zealand’s economy.
- Financial Times Money Supply blog: The productivity puzzle: New Zealand edition (registration required), 16 April 2014
- Interest.co.nz: Productivity Commission, OECD blame tyranny of distance from big markets and suppliers, plus low investment in innovation for lagging NZ productivity, 16 April 2014
- Stuff: New Zealand productivity still lags, 16 April 2014
- NBR: OECD explains NZ’s productivity lag (subscribers only), 16 April 2014
- BusinessNZ press release: Overcoming distance to improve productivity, 16 April 2014
- Scoop: Low innovation and weak international connections, 16 April 2014
- Stuff: Labour will revive R&D tax credit, 17 April 2014