How too many SMEs, cooperatives and immigrants are contributing to NZ’s productivity woes

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For decades, New Zealand’s economic Achilles heel has been its low productivity.  

In a post-Global Financial Crisis (GFC) world, New Zealand’s economy has soldiered ahead many of its peers. In 2014, it was famously dubbed the “rock star economy” by HSBC’s chief economist.

But as headline growth raced forward, productivity – also referred to as GDP per capita – has stalled and has been lacking for years.

GDP per capita remained at just 0.1% in the last quarter.

It is an issue well canvased by politicians, with the finance-focused MPs on both sides of the political divide wading into the issue countless times.

The problem is so apparent that in 2011, the then National Government set up the Productivity Commission to figure out how to fix it.

“New Zealand’s poor long-run productivity performance has puzzled domestic economists and international observers for decades,” says its Director of Economics and Research Paul Conway.

Conway is the author of a new report that seeks to address this issue and work out what is holding New Zealand back from reaching its productivity potential.

And it is clear from his work that this is a multi-faceted issue.

Over the years, it’s clear to see how far New Zealand has fallen.

In 1950, GDP per capita was roughly 125% of the OECD average. Today, it’s closer to 60% – less than half of what it once was.

New Zealand’s productivity levels have been well below the OECD average for some time now.

https://www.interest.co.nz/sites/default/files/styles/full_width/public/embedded_images/Productivity%20graph.JPG?itok=2MDEXRZj

In the 50s, colonial ties to the UK provided an easy, safe and secure market for New Zealand products, such as wool and lamb, at guaranteed prices.

But the UK’s entry into the European Union in 1972 changed that and, after more protectionist policies from successive New Zealand governments, per capita growth was down to 90% of the OECD average in the early 80s.

Subsequent recessions and market shocks saw that number slide over the following decades to where it stubbornly sits today.

But why has New Zealand failed to keep up with the rest of the world?

The business problem

One major issue, according to Conway, is the makeup of New Zealand’s business environment.

According to the Ministry of Business, Innovation and Employment (MBIE) 97%, almost 500,000, of all New Zealand enterprises are defined as “small businesses” – with 20 employees or fewer.

Conway says this is problematic, as many of these firms simply lack the size and the capital to justify investment into technology which would improve productivity.

But the problems don’t solely lie with small business owners; bigger companies have issues too.

“Among firms with $1 billion-plus turnover is a prevalence of farmer-owned cooperatives and partly-privatized state-owned enterprises,” Conway says.

These include the likes of Fonterra, which in March reported revenue of almost $10 billion.

“A common factor across these firms is a reluctance to provide capital for growth and a strong aversion to risk, especially associated with expansion into overseas markets,” Conway says.

As a result of both these issues, New Zealand businesses are well behind the eight ball when it comes to embracing productivity-enhancing technologies.

“New Zealand’s most productive firms struggle to learn from global frontier firms in the same industry,” Conway says.

Although manufacturing firms in New Zealand have done well to keep up, the services and constructions sectors – which make up a large chunk of the countries productive economy – are continuing to lag.

Conway also points the finger at “weak competition that allows low-productivity firms to survive.”

New Zealand’s relative size and geographic isolation also plays a part in its low productivity levels, he says.

In small economies, international connection is the only way of securing the benefits that come with large markets.

“For a small economy, New Zealand is not well connected internationally,” Conway says.

He adds that the intensity of international trade in both goods and services has declined over recent years and has become one of the lowest among economies of a similar or smaller size.

The Immigration factor

Independent economist Michael Reddell, who is cited in the Productivity Commission report, says New Zealand’s immigration policy is a key factor in its productivity issues.

He says the high level of net migration has been putting pressure on real interest rates, as large levels of investment have been needed to keep up with all the new people.

In a country with a fairly modest savings rate, Reddell says that puts persistent upward pressure on real interest rates. 

That, in turn, has kept the kiwi dollar elevated for years making it harder to export from New Zealand – a major issue for Kiwi firms looking to sell their products to the world.

“The consistent pressure on the real interest rates and the exchange rate squeezes out the opportunities that might otherwise be here,” he says.

This means successful businesses choosing not to set up shop in New Zealand, given the increased costs.

Fewer successful businesses means less innovation, holding New Zealand back from productivity growth in the long term.

“There are plenty of really smart businesses that get going here but mostly they prove to be more viable to someone based overseas – Xero is a good example.”

Earlier this year, the cloud-based computing company transitioned from the New Zealand to the Australian stock market.

The company is moving toward the global market.

So, what can be done?

Reddell says the Government should curb immigration in a bid to keep more companies here.

“I think we should be cutting our residence programme from 45,000 a year to 15,000 – 10,000 a year,” he says.

“That would give us about as many migrants per capita as they have in the US.”

Conway says more work needs to be done by the public sector to lift New Zealand’s productivity game – he says the public sector has a “massive role to play” in terms of lifting New Zealand’s productivity levels.

“All the work the Productivity Commission has done over the last seven and a half years clearly points to room for significant improvement in how the public sector conducts itself and does policy,” he says.

“Inquiries by the New Zealand Productivity Commission have identified serious weakness in policymaking and regulatory governance.”

He says the Government needs to make it easier for our firms to connect internationally.

It also needs to make it easier for companies to compete in the market.

Finally, more investment needs to go into innovation.

“We can improve the way we do science and innovation and convert that into growth in New Zealand.”

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