Is NZ’s productivity problem the real economic elephant in the room?

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1. 0:06Speaker 1: Kia ora, I'm Chelsea Daniels, and this is The Front Page, a daily podcast presented by the New Zealand Herald. New
2. 0:16Speaker 1: Zealanders are working, the economy is growing, so why aren't we getting much more out of it? For more than a decade, New Zealand's productivity growth has been painfully weak,
3. 0:27Speaker 1: and that could be one of the biggest economic problems facing the next government. but you wouldn't necessarily know it from the election campaign. The parties are promising tax cuts,
4. 0:37Speaker 1: more housing, cheaper groceries, changes to immigration and more spending on public services. But how many of those policies will actually make New Zealand more productive? Today on the front page,
5. 0:49Speaker 1: University of Otago Economics Associate Professor Dennis Wesselbaum reckons productivity is the economic elephant in the room this election.
6. 0:58Speaker 2: He joins us now.
7. 1:02Speaker 1: So Dennis, when economists talk about productivity, what exactly are they talking about?
8. 1:09Speaker 3: So at the very big picture, productivity is the comparison between the amounts of goods and services, the stuff that you produce, relative to the stuff that you put in.
9. 1:19Speaker 3: So you compare outputs to inputs and that connection between them is one idea of what productivity actually measures.
10. 1:27Speaker 1: How serious is New Zealand's productivity problem?
11. 1:31Speaker 3: Look, it feels a bit like Groundhog Day. It's one of those issues that has been in the media, has
12. 1:39Speaker 3: been in the government's thought for probably quite a while.
13. 1:44Speaker 3: And New Zealand has been, unfortunately, have quite low productivity for decades now. So I just looked into the numbers this morning. So the latest productivity numbers that I could
14. 1:56Speaker 3: find was that productivity, capital productivity, multifactor productivity, so factoring in labor and capital, last year actually fell by another percent.
15. 2:08Speaker 3: And if you go back to the 90s, we had probably something like one and a half percent. And then
16. 2:17Speaker 3: since the global financial crisis, we've been down to almost nothing. So, yeah, this is a longstanding problem, and it's not exactly a
17. 2:27Speaker 3: new shiny problem that we're debating, but it is a very structural fundamental problem.
18. 2:33Speaker 1: Yeah, so productivity growth averaged around, like you said, about 1.4% a year between 93 and 2013, but just around 0.2% over the following decade.
19. 2:38Speaker 2: What happened? Can we pinpoint where this all went wrong?
20. 2:49Speaker 3: So, you know, if you well, I'm sure you've talked to more economists than myself. And, you know, we generally don't have one answer. We have a whole, you know, a long range of answers. And I think that's the
21. 3:01Speaker 3: same here. There is not one thing that we can say that's the factor that's driving this result. But if you bear with me, so a couple of factors that
22. 3:11Speaker 3: drive our low productivity and the puzzle that we're facing is we are A country that has generally weak competition,
23. 3:21Speaker 3: and that means that the pressure to innovate is quite small, so that's a problem. We have seen quite a fall in educational performance, so especially in the STEM, the math,
24. 3:32Speaker 3: the sciences. We are not really that great in taking up and diffusing new technologies, partly because of skill shortages.
25. 3:44Speaker 3: So that's the immigration argument. We don't really have that deep of a capital market. So for firms, for new firms,
26. 3:53Speaker 3: startups to get funding, that's quite difficult compared to other countries.
27. 3:59Speaker 3: High energy costs, that is not just a current phenomenon, but quite a structural thing. Planning regulation and just the fact, and that's nothing we can change, We are a small
28. 4:11Speaker 3: domestic market, right? There's five point something Kiwis, a million Kiwis around, and we are quite away from the global supply chains. So if you put all of that and
29. 4:21Speaker 3: probably more factors together, you get this quite low productivity numbers that we've been talking about.
30. 4:28Speaker 1: When it comes to our biggest barriers to better productivity, what do you think are the big ticket items that we need to tackle first? Because it's not like a silver bullet kind of situation, right?
31. 4:39Speaker 3: No, no, there is not one policy and suddenly it's solved.
32. 4:44Speaker 3: So if you want a ranking, then you definitely have
33. 4:49Speaker 3: to put competition, infrastructure, education, capital markets. That would probably
34. 4:58Speaker 3: be my ranking. We have to think about industrial and tax policies. But yeah, that would probably be my ranking, how I would approach that.
35. 5:08Speaker 2: And competition is a funny one, right?
36. 5:10Speaker 1: Because we're always constantly hearing about how we do need competition.
37. 5:14Speaker 2: And it's quite right.
38. 5:14Speaker 1: If you're running in a race and you are the fastest person and everybody is slower than you, then, you know, you win. Whereas if you have competition, if you have somebody that's maybe equally as fast as you are, you
39. 5:26Speaker 1: are going to push that extra little bit.
40. 5:28Speaker 3: That's precisely the point of having low competition, that the incentives to innovate are very different compared to having many,
41. 5:36Speaker 3: many competitors. So that's one of the, let's say, levers that are available to policymakers to create incentives that will
42. 5:46Speaker 3: then create more competition in the long run. And that's one important part of the answer. As you said, there is no silver bullet, and there's clearly no silver bullet
43. 5:56Speaker 3: that in a quarter or two or in a year or two magically is going to create more competition. So
44. 6:03Speaker 3: this is a very long-term issue. where these quick solutions don't exist and where it becomes quite difficult with a
45. 6:14Speaker 3: three-year election cycle to set the right policies that will have long-run effects in 10 years.
46. 6:21Speaker 1: What could be one way that we haven't particularly looked at or thought about that would improve competition in New Zealand?
47. 6:29Speaker 3: So the probably not very interesting answer there is... Regulation
48. 6:37Speaker 3: is one of those things that has been in the past election, has been in this election, heavily discussed. And it is true that if we reduce adjustment costs, barriers
49. 6:48Speaker 3: to entry, trade liberalization that increases foreign direct investment, these are issues which are just good policymaking. And that's the
50. 7:00Speaker 3: stuff that we definitely need. But then if it's about things that we maybe have not quite debated to the
51. 7:08Speaker 3: degree that we might should, industrial policy, I think, is one issue that hasn't received much attention. And for some people,
52. 7:16Speaker 3: it's a bad word. But yeah, targeted subsidies, tax incentives, especially research and development, right? The innovation aspect, if you
53. 7:24Speaker 3: think about AI. New Zealand tried to create clusters back in the, I think, 90s that didn't go too well because of infrastructure and just the fact that New Zealand
54. 7:36Speaker 3: is quite a spread out country. But you could think about doing that these days with new communication technologies and
55. 7:44Speaker 3: And a policy agenda that would create incentives for new businesses to be started. We talked about financial markets and
56. 7:54Speaker 3: access to that. So those are, I think, issues that I haven't seen debated to the extent that they probably
57. 8:02Speaker 3: should be debated in terms of improving competition productivity later on.
58. 8:13Speaker 4: We've seen that AI is enabling businesses to move forward.
59. 8:16Speaker 4: We work with Deloitte Economic Access and they have found that smaller businesses, so SMEs effectively in New Zealand, are seeing about 4.5% increase in revenue when they're using AI
60. 8:27Speaker 4: and large organisations closer to 7%. One of the interesting things that came out around the whole research is that New Zealand productivity year on year hasn't moved. We've seen a slight uptick in R & D.
61. 8:41Speaker 2: Obviously, the election campaign's officially started.
62. 8:44Speaker 1: It does feel like it started in January, but it has officially started now. So using your productivity lens, so to speak, what has jumped out at you in terms
63. 8:55Speaker 1: of party promises in regards to perhaps improving productivity?
64. 9:01Speaker 3: Yeah, I probably have a quite sinister take on that.
65. 9:05Speaker 3: I haven't really seen much big picture thinking around productivity or that being highlighted as a structural problem that needs
66. 9:15Speaker 3: to be fixed. Of course, there is some good policy making around reducing barriers. The regulation angle, that's certainly true.
67. 9:25Speaker 3: Trade deals, as proposed by National, are a way to reduce trade barriers. So that's a good thing. But other
68. 9:36Speaker 3: than that, I haven't really seen much that would immediately be a policy that comes to mind that would, to
69. 9:45Speaker 3: me at least, raise competition and productivity, neither in the short run nor in the long run. So, yeah, I have to say I'm a little bit disappointed by what
70. 9:57Speaker 3: I've seen about addressing this long-standing situation. structural problem. So unfortunately, I don't have a very optimistic answer to the question.
71. 10:05Speaker 1: No, that's okay because it's interesting because when we think about competition, you know, living in today, 2026, we immediately think about supermarkets, right?
72. 10:12Speaker 3: Yeah.
73. 10:13Speaker 1: And it's like, well, how can voters decipher whether a policy will actually affect productivity in the long run? Or is it something like the competition in the supermarket sector
74. 10:24Speaker 1: where it's kind of seen as kind of a Band-Aid fix?
75. 10:27Speaker 1: This is a quick fix for now for something that you're suffering from right now.
76. 10:31Speaker 3: Yeah, and look, it's extremely complicated because each of these policies that we could go through from each party, they might have a merit on their own. The question is
77. 10:42Speaker 3: whether they, one, address some underlying productivity problem for the entire economy, and second, whether the actual policy solves the
78. 10:52Speaker 3: problem that it's supposed to fix. Now, whether a government-run or legislated, not quite sure how you want to frame it,
79. 11:00Speaker 3: supermarket is going to increase competition is maybe a topic for another day. It is certainly a very interesting idea.
80. 11:11Speaker 3: I'm not sure if it's ever going to work, but hey, it's an interesting idea. And people have to think about,
81. 11:20Speaker 3: do we really think that that policy makes common sense?
82. 11:24Speaker 3: Do we really believe that a supermarket run by Wellington is somehow better than run by people who have been dedicating their life to running their businesses. So it's obviously
83. 11:36Speaker 3: not a policy that I would say would immediately reduce food prices. But hey, there's some kind of common sense check.
84. 11:47Speaker 3: And then I think we need more and better standards in terms of reporting policies, election policies. And we have to do what we're doing. We have to get the
85. 11:59Speaker 3: media that needs to fact-check these types of policies across all parties. And then the voter has to make a decision.
86. 12:08Speaker 3: But yeah, the question I think that should be in mind is, is this actually going to improve our standards of living in 10 years from now rather than a
87. 12:17Speaker 3: quick fix? And again, the supermarket... If you think that if you have a third supermarket or whatever number of supermarkets you would like, that that immediately is running, I
88. 12:29Speaker 3: think it's, yeah, I'm not very optimistic about that policy as you can probably hear.
89. 12:34Speaker 1: In terms of our low productivity, how much of this is uniquely a New Zealand problem?
90. 12:41Speaker 2: Or is this something that every country in the world is battling?
91. 12:44Speaker 3: I think that it has been a particular problem to New Zealand because the gap between between us and our
92. 12:52Speaker 3: OECD comparisons has been widening over time. So I would
93. 13:01Speaker 3: characterize this as a very particular New Zealand issue. Certainly the case that countries are struggling to improve productivity, and
94. 13:11Speaker 3: that's a fair point. But if you look at the gap between us and comparative OECD countries, that has been widening.
95. 13:19Speaker 3: So I think this is a, this particular problem is a very specific New Zealand problem.
96. 13:25Speaker 2: It's frustrating though, isn't it?
97. 13:26Speaker 1: Because if you ask anybody out on the street, they go, well, we're, Kiwis are hardworking, right? We're known as being quite hardworking, a hardworking nation. You know, you do your nine to five or whatever it is, and you bring home the
98. 13:38Speaker 1: bacon kind of thing. So what makes us so different to the rest of the world?
99. 13:44Speaker 3: Yeah, absolutely. And I think that that is what people want.
100. 13:48Speaker 3: People want to have a good job, a stable job, earn a decent income that supports the family. They want to be healthy. And that is the standard that we
101. 13:59Speaker 3: should put the policies to. Now, what is driving that in New Zealand? I don't think it can be put at the feet of the workers, not working hard enough
102. 14:10Speaker 3: or not putting enough effort. And I think it's quite the opposite. I think some of the, you know, still keeping our economy going is the hard work of the workers,
103. 14:20Speaker 3: especially during the COVID recession. So I think it's the incentives that are created at a very high policy level
104. 14:28Speaker 3: and how these are then kind of structuring or restructuring the economy over time. And I think that over that
105. 14:36Speaker 3: period of time, we might have just missed to set the right incentives to steer the economy in the direction
106. 14:43Speaker 3: that we wanted to go. Again, financial markets, competition, education, all these things that we talked about. I think there
107. 14:54Speaker 3: we probably, if we could replay the last 20, 30 years, we would have probably made different decisions. And hopefully that would have resulted in higher productivity and living standards. But yeah, again,
108. 15:06Speaker 3: it's not one factor. It's a combination of factors. But overlying of that, I think setting the incentives has been a bit of an issue. And yeah, again, we need
109. 15:16Speaker 3: to understand that some of the productivity gains in other countries is also the fact that they are more easily
110. 15:23Speaker 3: integrated into global supply chains and financial markets. And we are just far away from that. And so that is
111. 15:33Speaker 3: always a factor that will always work against us. But hey, we have to accept that and work around it.
112. 15:39Speaker 1: If we fail to address this problem now, and it actually does in fact get worse, what does New Zealand look like in the next 10, 20 years?
113. 15:48Speaker 3: So if productivity stays low, we will face the fact that our wages will not increase as much. Our living
114. 15:59Speaker 3: standards will not be as high. So in one of my classes, I'll show students living standards by the year 2100.
115. 16:09Speaker 3: And I compare the US economy that always is growing like two-ish percents to New Zealand. And I think in the US case, I'll have to double check the numbers,
116. 16:19Speaker 3: but I think for the US case, it was something like an increase in living standards of 800%. whereas New
117. 16:27Speaker 3: Zealand was more like 200-something percent. And so that highlights the crucial importance of productivity in the long run because
118. 16:37Speaker 3: it's cumulative. And so if we don't do that, then the gap between us and the rest of the world is just going to go larger. And yeah, there are
119. 16:48Speaker 3: certainly fixes here and there, but if we're not fixing this productivity problem, we're just setting us up on a trajectory that is lower than what it can be and
120. 16:59Speaker 3: lower to other countries.
121. 17:00Speaker 2: Thanks for joining us, Dennis.
122. 17:02Speaker 3: Thanks. Thanks for having me.
123. 17:06Speaker 1: That's it for this episode of The Front Page. You can read more about today's stories and extensive news coverage
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