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  • Writer's pictureIan Fletcher

Productivity – The Hardest Topic of All


By Ian Fletcher

In Mid-December, the official statistics for the New Zealand economy showed a small but quite unexpected contraction in the economy in the three months to September. It was masked by the effect of significant immigration. The Herald summed it up:

As Finance Minister and Prime Minister Nicola Wilis and Christopher Luxon have a challenge on their hands to boost New Zealand’s productivity, and Ian Fletcher hasn’t seen a lot in their plan that will achieve it.

"The economy shrank 0.3 per cent compared to the June quarter and GDP per capita fell 0.9 per cent, … despite some record-setting recent net migration."

This is the productivity issue: how well the economy works, measured (essentially) as changes in wealth per capita. I’ve noted before that (as the economist Paul Krugman famously said) “Productivity isn’t everything. But in the long run it’s almost everything”. Better productivity gives the country room to manoeuvre, coping better with climate issues, an aging population, inequalities and so on. A stagnant economy won’t deal well with these challenges, and is likely to end up in a nasty winner-take-all populism.

The key phrase in the Krugman quote is “long run”. We don’t want to be like Argentina, but it’s not impossible. At the end of the Second World War, there were four new-world countries judged to be both already affluent, and poised to grow on the back of a perfect trifecta of internal peace, significant immigration and great resources: Australia, Argentina, Canada and New Zealand. Canada and Australia have fulfilled that hope. Argentina has not. New Zealand is behind Australia and Canada, and I think we risk falling permanently out of the rich group, into the much less attractive middle group.

The point is that Argentina got poor slowly. Short-term expediency was never arrested; the decline was never catastrophic enough to prompt real change. Argentina’s recent election has returned a candidate who says he is ready to do radical things. But history is not on his side.

What about New Zealand? We know we’ve had a productivity problem for a long time. Our relative decline may now be on the brink of becoming an absolute decline in national wealth per capita. Successive governments talk about it; their action suggest that short-term expediency rules. Labour failed dismally to tackle the housing crisis (affordable housing supports a mobile and productive workforce). Public investment in education, infrastructure and the innovation system is all behind where it needs to be. Short term thinking is where governments confuse profitability (or short-term cash surplus) with productivity (long term return on investments across the economy). It’s a lesson we need to learn.

Recently elected Prime Minister Javier Milei has grand plans for Argentina, a country touted as having potential for great prosperity following World War 2, along with Canada, Australia and New Zealand. While Canada and Australia have prospered, New Zealand is at risk of falling back to a “middle group” of nations, such as Argentina, when it comes to measuring productivity, warns Ian Fletcher.

So, what can be done? We need an economic plan (and abolishing the Productivity Commission, as the government proposes, isn’t a plan). There are four challenges:

First, building the skilled workforce we need. Schools, universities and polytechs, and vocational (ie trade) training all need a serious re-think. Our best schools are world class, but many kids languish in schools whose results are second rate. Paying teachers properly, making university education free (yes, free) for the people we need: nurses, teachers, engineers.

National’s idea of an hour a day of reading and maths in primary schools is a simplistic answer to a complex problem. If we had a standardised curriculum (like France), we’d get the same results as France: clever kids would do well, kids from a Māori or other ethnic background would get left behind. Kids with other needs (dyslexia, or autism spectra for example) would fail. That’s not good enough.

Secondly, we need to invest in what makes the workforce more productive: housing and social infrastructure (like really good childcare). The shortage of decent housing in many parts of the country makes the workforce sclerotic, inflexible, and unproductive. A decent health system is part of that too; we should aim for a system no worse than Australia and fund it accordingly.

Thirdly, infrastructure – the transport and IT backbone that moves goods, people, energy and data around. In a big, thin country with a small population that will always be expensive. If we want to move seriously to electric transport (cars, trucks and trains), we will need to invest enormously in both generation and transmission. We can do that by leaving it to the market (so electricity prices go up a lot), or by public investment. Given that it will take regulatory intervention to get diesel trucks off the road, and the fact that KiwiRail is basically broke anyway (despite the fact that it’s the best environmental solution for long distance freight and people), I’d favour public investment. Much quicker and cheaper.

Fourthly, innovation. We should build systematically our ability to develop and sell ideas – technology. We know we can do this, but our successes depend more on luck, or connections than they should. The one policy the new government has announced that may yet really help is to legislate to allow genetic modification. Properly done, it will mean our primary sectors can catch up with the rest of the world. Imagine bees that resist varroa.

That needs to be matched by tax reforms that incentivise investment in new ideas-based companies, and penalise property speculation. That alone would help enormously. In fact, I think taxes need to rise in general to provide the services we want, and to meet climate, aging population and other challenges. We can’t expect European services for American levels of taxation. This will be the conundrum that confronts Nicola Willis next year.

Finally, a word about Australia. Australia soaks up New Zealand’s surplus working population. Australia would act if politics in New Zealand went serious awry, or if our ability to govern ourselves was interrupted by a natural disaster. That means our risk of ending up quite as bad as Argentina is low. But just waiting for the Australians to rescue us, either as individuals or as a society, condemns us to a second-rate outcome. That said, change is afoot – as well as the GDP numbers, the other big story from December was the wake-up call on foreign and defence policy delivered to Christopher Luxon when he went to Canberra. We may now need to sing for our supper… More on that next month …

Ian Fletcher is a former head of New Zealand’s security agency, the GCSB, chief executive of the UK Patents Office, free trade negotiator with the European Commission and biosecurity expert for the Queensland government. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.



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