Figure It out

Why we rate poorly in the OECD’s output-per-person stakes.

Listener: 17 May, 2008

Keywords: Growth & Innovation;

Suppose your car goes slower than anyone else’s. What would you think if your mechanic said, “Get a new driver”, or “It should be painted red”, or “It needs a better carburettor” without first putting his head under the bonnet?

I won’t waste time on the parallels in the economics debate. Instead, I report that there are economists examining the growth of the economy with the same care and skill you would expect from your car mechanic.

As yet, we don’t have a comprehensive account of why the economy is doing poorly – if it is. I add this caveat because there is a tendency to accept the available figures as if they are not subject to error. It would be better if each research report included a discussion of data accuracy. I have been around too long not to see the problems that such errors generate.

For instance, we routinely compare our GDP (output) per capita with that of other rich countries, using the OECD database. We fail to observe that the reported measure is actually income, not output. The discrimination against some of our exports (mainly the pastoral ones) lowers our measured income relative to those who discriminate against us. That may cost us 2% to 10% of measured income. The policy implication is the effort put into trying to reduce agricultural protectionism; the research implication is that much of it has been looking for the Bandersnatch up the wrong tree.

The more discerning empirical evidence points to the following reasons that New Zealand’s output per person is low in the OECD ranking. (The following does not cover entrepreneurship, innovation, institutions, management and research and development, which have some influence but cannot be easily measured.)

There is some evidence that we have less capital per worker. Crooked car mechanics will be quick to tell you why, but it would be wise not to jump to conclusions.

Capital is, primarily, a vehicle for introducing better technologies. Recent research by Geoff Mason and Matthew Osborne suggests that a number of sectors are not as technologically advanced as they are overseas. Those where we do well compared with the UK – the reference economy – include the agriculture, forestry and fishing sectors, mining, the hospitality industry, finance and insurance, and cultural and recreational services. The research says we do badly in manufacturing, construction, retail and communications.

Such research is important because it looks at individual sectors rather than the economy as a whole. Even the sectors may be too aggregate. Perhaps British manufacturing produces different things from New Zealand’s. We need to think at the business and product level where things happen.

The research hints that we have too many low-productivity activities, and that we could improve our performance by specialisation. That means plant closures, which are unpopular with those laid off even if other plants expand as a result.

We may be unable to avoid some poor performance. A long, rugged country with a low population is likely to have difficulties with its logistics (transport, storage and telecommunications). OECD research suggests our poor international location may cost us 10% of GDP.

Is our labour good enough? The evidence is that Kiwis overseas are as productive (or more so) than the locals, but perhaps only our best travel. Other measures suggest the labour force is internationally comparable, but, since every country is upgrading its education and skills, we need to keep at that, too.

In recent years, employment has drawn on the reserves of the unemployed, who are less skilled than average, diluting average working skills (but giving more output). Research by David Maré and Dean Hyslop suggests the economy’s underlying productivity has been suppressed by about 0.5% a year as a result. That would put us much higher in the OECD productivity growth ranking and – given that the labour reserves are now exhausted – suggests that our productivity record will appear better in future. Providing we ignore the crooked car mechanics.