Although productivity growth is picking up, New Zealand still has a large productivity gap compared to other OECD countries.
Organisation for Economic Co-operation and Development (OECD) research, published by the Productivity Commission, shows that New Zealand's broad policy settings should generate GDP per capita 20% above the OECD average, but we are actually more than 20% below average. Closing this gap would dramatically lift incomes and wellbeing for New Zealanders.
"Understanding the potential causes of New Zealand's productivity gap is no easy task" said Paul Conway, Director of Economics & Research at the Commission. "Physical capital investment and average years of schooling are roughly consistent with other countries looked at in the report. Having high numbers of relatively low-skill workers employed also does not explain New Zealand's productivity underperformance."
"Instead, this OECD work finds that New Zealand's productivity gap reflects weaknesses in 'knowledge-based capital' and international connections."
Knowledge-based capital has become increasingly important in driving productivity gains in the digital age. It encompasses a wide range of assets including product design, inter-firm networks, R&D and organisational know-how. While New Zealand ranks well in software investment and trademarks, R&D undertaken by the private sector is among the lowest in the OECD. This not only reduces capacity for "frontier innovation" but also the ability of firms to absorb new ideas from elsewhere, slowing down "technological catch-up".
As well as R&D, successfully adopting new technologies such as ICT requires firms to adapt their business practices and train their workers. However, cross-country surveys show that the quality of management is below average in New Zealand, which lowers the productivity gains from new technology.
Weak international connections also hold New Zealand back. Global value chains - where production activities are spread across countries - have become a feature of international trade. However, transport costs limit participation by New Zealand goods-producing firms. Services that can be successfully traded internationally - ie, that can be recorded in some form, have high information content and require limited local knowledge - are still rare. An important exception is computer and information services, which has grown rapidly as a share of international trade, including some success by New Zealand firms.
"This research estimates that most of New Zealand's productivity gap compared to the OECD average reflects underinvestment in knowledge-based capital, limited international trade and low participation in global value chains where the transfer of advanced technologies often occurs."
"An International Perspective on the New Zealand Productivity Paradox", New Zealand Productivity Commission Working Paper 2014/01, by Alain de Serres, Naomitsu Yashiro and Herve Boulhol, OECD Economics Department, is available from www.productivity.govt.nz.
The working paper was produced for the Productivity Symposium, held in July last year and supported by four agencies of the Productivity Hub - the Productivity Commission, the Treasury, the Ministry of Business, Innovation and Employment and Statistics New Zealand.
About the New Zealand Productivity Commission
The Commission-an independent Crown Entity-completes in-depth inquiry reports on topics selected by the Government, carries out productivity-related research, and promotes understanding of productivity issues.