Working smarter â€“ 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 itscurrent position in the bottom half of the OECD. Grasping the "work smarter,not harder" mantra would seem to be particularly apt for a country whereaverage working hours are among the longest in the world.
Although such rhetoric is freely tossedaround, there are aspects of the New Zealand economy’s make-up that suggestsuch an improvement is more easily said than done. New Zealand’s exportincomes, in particular, are highly dependent on the agricultural sector, andthe evidence is pretty clear that our farmers are among the most efficient inthe world. The removal of subsidies and other agricultural assistance schemesin the 1980s made sure of that. The performance of our farming sector has tobe 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 diminishingsize of our manufacturing sector is removing an area that has some of thegreatest ongoing potential for productivity improvements. Manufacturing isnaturally machinery-intensive, and advances in technology continue tofacilitate more cost-effective processes with a lower reliance on labour as aninput to production. But with Asian-based production enjoying a shorterdistance to market, greater economies of scale, and lower labour costs, the inabilityof the New Zealand manufacturing sector to compete on a global scale means thatwe shouldn’t look to it as our great productivity saviour.
The high proportion of small businessesin New Zealand (89% under 20 employees) would also suggest that scope forimproving our productivity growth is limited. The very nature of smallbusinesses arguably means that they have less scope for wastage andinefficiency than large organisations.
So should we run up the white flag andaccept that New Zealand’s size, economic structure, and geographicdisadvantages mean that we’re consigned to a future of relative mediocrity? Atan economy-wide level, there is no choice but to recognise the importance ofproductivity and pursue it. The age profile of the population provides acompelling argument for the necessity of focusing on productivity â€“ growth inthe 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 businessesare grappling with persistent labour shortages that are only likely tointensify over the medium-term.
A productivity gain in the agriculturalsector that isn’t immediately obvious over the last 15-20 years has been moreof a focus on producing what the world wants. Twenty-five years ago, therewere 70 million sheep in New Zealand, and the aim of farmers was to produce asmany lambs as possible. Rationalisation (as well as the expansion of dairyfarming) has reduced the number of sheep to 39 million, and the productionfocus is now very much on higher-quality meat that commands a much higherprice. In simple terms, farmers need to sell 65% fewer sheep to buy a new utethan they did 20 years ago â€“ effectively this change represents a productivityimprovement 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 ofproductivity. Efficiency gains can potentially be made by exploring synergiesbetween individual businesses, with the continuum of cooperation stretching asfar as mergers between firms. Smaller firms may be more individually efficientin the work they do, but certainly don’t enjoy the same economies of scaleenjoyed by larger businesses.
The retail sector is a clear case inpoint over the last 15-20 years. Social commentators may decry the demise ofsmall local stores, but the economic benefit to consumers of the greaterefficiencies achieved by nationwide firms being passed on in lower prices issubstantial. There is still room in niche areas for small retailers, soconsumers now have a larger range of products to choose from with a broaderrange of prices.
Achieving productivity gains hashistorically been the domain of the primary and secondary sectors. But theincreasing size of the service sector, and its labour-intensive nature, meanthat services are now the area where there is the greatest potential for gainsto be made. Slicker distribution and stock-management systems in the wholesaleand 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 theservice sectors given the ever-increasing shortages of labour.
There is no single solution to liftingour productivity performance, but it is clear that embracement of change andinnovation is a central theme. Historically, the adaptability of NewZealanders has been one of our key characteristics, but the challenge is toconvert that dynamism into improving our productivity growth from the pitifulperformance of the last 40 years. Next week we look at the role thatgovernment can play in maximising the economy’s productive potential.