The Productivity Commission told us for a decade how NZ had a productivity problem; how Kiwis are so dim & lacking in skills that we don't know how to add value to products. It never made sense. Kiwi workers are greatly valued all over the world. Fly a Kiwi to Australia or US, give them capital to work with (machines, equipment, super computers, infrastructure) and they will work as productively, more so, than others.
We split the atom. The UK can't run a space program. NZ does - the largest private one in the world, after Space X. UK Richard Branson's Virgin Galactic is a bankrupt joke. Shane Legg from Rotorua founded the world's first, most influential Artificial General Intelligence company. Elon Musk & Kiwi citizen Peter Thiel were desperate to buy it ahead of Google, since it changed the future. When it comes to education, we're told in NZ we're bad at Maths, but international scores like PISA rank our average above the US. Our literacy rates are in the top part of the world's distribution.
So what's wrong in NZ and how do we fix it? To answer, we must first define Total Factor Productivity (TFP). As this is a Blog, let's take liberties with Maths, and not discuss influential American economist Robert Solow, who invented the ideas behind it. Here's a definition of TFP: Output = TFP * Labour * Capital. In words, Output (measured by GDP) is produced by Labour and Capital (multiplied together here). Say 1 person uses 1 unit of capital to produce 3 units of output. TFP measures the technology behind the production. In this case, it equals 3 (i.e., 3 = Output = 3 * 1 * 1) and GDP per capita is 3 (=3/1). Below is a graph of Total Factor Productivity in NZ & Australia over the past 50 years:
Click to view
How has NZ been doing? Since 1988 NZ's Total Factor Productivity has been growing at the same rate as Australia's. Technology is rising here just like the best of them. But our GDP per worker is languishing as follows:
Click to view
Whereas we had similar per capita incomes as Australians 50 years ago, now they're nearly 40% better off than us. How can you reconcile the above two graphs? Whereas Australians (Americans also) invested and have built up capital, Kiwis did not. We have less capital to work with compared to them. Our roads are harder to drive, our transport & technical equipment suffers under-investment & buildings have become run-down, by comparison. Here's proof:
So what's wrong in NZ and how do we fix it? To answer, we must first define Total Factor Productivity (TFP). As this is a Blog, let's take liberties with Maths, and not discuss influential American economist Robert Solow, who invented the ideas behind it. Here's a definition of TFP: Output = TFP * Labour * Capital. In words, Output (measured by GDP) is produced by Labour and Capital (multiplied together here). Say 1 person uses 1 unit of capital to produce 3 units of output. TFP measures the technology behind the production. In this case, it equals 3 (i.e., 3 = Output = 3 * 1 * 1) and GDP per capita is 3 (=3/1). Below is a graph of Total Factor Productivity in NZ & Australia over the past 50 years:
Click to view
How has NZ been doing? Since 1988 NZ's Total Factor Productivity has been growing at the same rate as Australia's. Technology is rising here just like the best of them. But our GDP per worker is languishing as follows:
Click to view
Whereas we had similar per capita incomes as Australians 50 years ago, now they're nearly 40% better off than us. How can you reconcile the above two graphs? Whereas Australians (Americans also) invested and have built up capital, Kiwis did not. We have less capital to work with compared to them. Our roads are harder to drive, our transport & technical equipment suffers under-investment & buildings have become run-down, by comparison. Here's proof:
Click to view
Although in 1974 Kiwis had more capital per worker than Aussies, now they have 50% more. Using our example above, assume capital rose from 1 to 2 units in NZ over the past 50 years, but rose from 1 to 3 units in Australia (with Total Factor Productivity remaining the same & labour staying at 1 unit). Then GDP per capita in NZ would've risen from 3 to 6 (= TFP * Labour * Capital = 3 * 1 * 2) but in Australia from 3 to 9 to (= 3 * 1 * 3). So their incomes would now be 50% higher than ours. Its an example, but (roughly) what's happened.
The implications of these graphs are astonishing. The PM said in his Parliamentary Maiden Speech how NZ suffers a 'productivity disease'. It does not. Our Total Factor Productivity, which measures technology & innovations, has been rising for 40 years at the same pace as Australia's. But NZ has suffered weak levels of investment, leading to a low capital base. The PM says National's "plan is to focus on the 5 levers of prosperity & productivity: education & skills, infrastructure, technology, business environment & connections with the world". He should sell his shot gun and buy a silver bullet. NZ must fund more investment using overseas & domestic savings. We must tear down walls stopping foreign savers investing money here (& curtailing returns even if they do). We must cut red-tape that hampers all investors, domestic & foreign. We must ramp up domestic savings with mandatory accounts (that's why folks like me promote Singaporean or Australian-style systems). America doesn't need them - the US dollar is the world's Reserve Currency - everyone wants to invest there.
The PM has one job to do to return NZ to being a rich nation - up investment and the savings that support it.
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
2 comments:
Invest in something and get screwed by regulations and high wages. Save and you’ll get taxed on the dollars you have already been taxed on.
An offshore client with $10 million invested in New Zealand recently told me he now sees the country as too risky to invest in. He reads the NZ media and no longer sees the country as having a future as a liberal democracy. New Zealand will struggle to attract investment from anyone sensible enough to do their due diligence.
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