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Working smarter – we've got no choice

Working smarter — we’ve got no choice

Improving the productivity of the New Zealand economy is often touted as the key to raising our standard of living from its current position in the bottom half of the OECD.   Grasping the "work smarter, not harder" mantra would seem to be particularly apt for a country where average working hours are among the longest in the world.

Although such rhetoric is freely tossed around, there are aspects of the New Zealand economy’s make-up that suggest such an improvement is more easily said than done.   New Zealand’s export incomes, in particular, are highly dependent on the agricultural sector, and the evidence is pretty clear that our farmers are among the most efficient in the world.   The removal of subsidies and other agricultural assistance schemes in the 1980s made sure of that.   The performance of our farming sector has to be lean and mean given that agricultural protection remains an issue in the US and across much of Europe, and our production takes place a long way from the final market.

Intuition suggests that the diminishing size of our manufacturing sector is removing an area that has some of the greatest ongoing potential for productivity improvements.   Manufacturing is naturally machinery-intensive, and advances in technology continue to facilitate more cost-effective processes with a lower reliance on labour as an input to production.   But with Asian-based production enjoying a shorter distance to market, greater economies of scale, and lower labour costs, the inability of the New Zealand manufacturing sector to compete on a global scale means that we shouldn’t look to it as our great productivity saviour.

The high proportion of small businesses in New Zealand (89% under 20 employees) would also suggest that scope for improving our productivity growth is limited.   The very nature of small businesses arguably means that they have less scope for wastage and inefficiency than large organisations.

So should we run up the white flag and accept that New Zealand’s size, economic structure, and geographic disadvantages mean that we’re consigned to a future of relative mediocrity?   At an economy-wide level, there is no choice but to recognise the importance of productivity and pursue it.   The age profile of the population provides a compelling argument for the necessity of focusing on productivity — growth in the number of working-age people is only going to slow over the next 50 years.  The unemployment rate is already down at a 20-year low of 3.4% and businesses are grappling with persistent labour shortages that are only likely to intensify over the medium-term.

A productivity gain in the agricultural sector that isn’t immediately obvious over the last 15-20 years has been more of a focus on producing what the world wants.   Twenty-five years ago, there were 70 million sheep in New Zealand, and the aim of farmers was to produce as many lambs as possible.   Rationalisation (as well as the expansion of dairy farming) has reduced the number of sheep to 39 million, and the production focus is now very much on higher-quality meat that commands a much higher price.   In simple terms, farmers need to sell 65% fewer sheep to buy a new ute than they did 20 years ago — effectively this change represents a productivity improvement and lift in real incomes for farmers, and New Zealand as a whole.

The prevalence of small firms in New Zealand should not be used as an excuse for falling short in our pursuit of productivity.   Efficiency gains can potentially be made by exploring synergies between individual businesses, with the continuum of cooperation stretching as far as mergers between firms.   Smaller firms may be more individually efficient in the work they do, but certainly don’t enjoy the same economies of scale enjoyed by larger businesses.

The retail sector is a clear case in point over the last 15-20 years.   Social commentators may decry the demise of small local stores, but the economic benefit to consumers of the greater efficiencies achieved by nationwide firms being passed on in lower prices is substantial.   There is still room in niche areas for small retailers, so consumers now have a larger range of products to choose from with a broader range of prices.

Achieving productivity gains has historically been the domain of the primary and secondary sectors.   But the increasing size of the service sector, and its labour-intensive nature, mean that services are now the area where there is the greatest potential for gains to be made.   Slicker distribution and stock-management systems in the wholesale and retail trade areas are a clear example of where productivity has improved.  This sort of change is the edge of a quantum shift that needs to occur in the service sectors given the ever-increasing shortages of labour.

There is no single solution to lifting our productivity performance, but it is clear that embracement of change and innovation is a central theme.   Historically, the adaptability of New Zealanders has been one of our key characteristics, but the challenge is to convert that dynamism into improving our productivity growth from the pitiful performance of the last 40 years.   Next week we look at the role that government can play in maximising the economy’s productive potential.

 

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