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Address by Angel Gurría, OECD Secretary-General, to the Chamber of Commerce of New Zealand
29 July 2008, Wellington
It is a pleasure to kick off my visit to New Zealand with you, the distinguished members of the Chamber of Commerce. The OECD greatly values its relations with the business community, and I would like to thank you for inviting me to address what is definitely a burning issue here in New Zealand and throughout the OECD area – namely, how to lift productivity. It is of course particularly important for you as business leaders and key actors in economic life.
Indeed, the intensification and acceleration of globalisation in recent years has made productivity performance all the more important to sustainable growth and competitiveness, and ultimately to the well-being of our societies. Strong productivity growth becomes even more critical in these current times of economic uncertainty.
New Zealand has implemented far-reaching reforms over the last few decades and is naturally expecting the pay-off, in terms of productivity, to materialise.
These reforms have been extremely effective in boosting labour utilisation. However, New Zealand’s GDP per capita level remains significantly below the OECD average. This essentially reflects low hourly labour productivity.
Why is productivity not catching up faster, given your country’s good macroeconomic and structural policies and comparatively low productivity levels to start with? Examining what we know about the drivers of productivity growth, based on analysis and experience in OECD countries, can provide some insights.
What do we know about policy drivers of productivity growth?
A key lesson is that so-called framework conditions matter. Indeed, low and stable inflation, developed financial markets, a low tax burden and a low share of distortionary taxes increase the steady state level of GDP per capita. All of these contribute to the business-friendly environment that is so important for productivity and growth.
Second, infrastructure investment is good for productivity and growth. Ongoing OECD work suggests a positive link between energy and telecommunications infrastructure and growth in particular.
The degree of competition in product markets is also important. Our analysis has shown that strict product market regulation undermines productivity growth. In addition, experience from the United States and the Nordic countries suggests that liberal product market regulation is not detrimental to innovation, as long as it is combined with strong protection of intellectual property rights.
Open markets for trade and investment also facilitate the diffusion of technology and favour productivity growth. Labour market regulation, in particular the stringency of employment protection legislation (EPL), matters for innovation and productivity too. Excessive job protection makes it costly for firms to restructure and also reduces the incentives for the employee to exert effort and to move to higher productivity jobs.
Finally, human capital accumulation has a significant effect on growth. In particular, well-designed tertiary education policies aiming at increasing the availability of human resources for sciences and technology are crucial to raise the capacity to absorb technical knowledge and stimulate innovation.
What can explain New Zealand’s productivity performance?
Solving New Zealand’s productivity puzzle is not a straight-forward proposition. On many counts, New Zealand is a model of good policies in the areas I have just mentioned.
Indeed, indicators of structural policies show the fruits of intensive reform efforts over the past couple of decades. New Zealand is one of the very few countries where the agriculture sector is fully liberalised and that does not impose any systematic restrictions on trade or financial flows. You rank among the least restrictive of OECD countries in terms of labour and product market regulations and from the vantage point of the overall business environment, both of which are closely linked productivity growth.
Yet, NZ productivity is still surprisingly low - barely more than 60% of the US level and 80% of Australia’s - despite the deep structural reforms and good macro-policy framework that now in place.
New Zealand’s geography and isolation are part of the picture. New Zealand is the most isolated of all OECD countries, making global integration all the more necessary but also more challenging. The importance of exports goes without saying, given your small domestic market, but transport costs and exchange rate risk are substantial hurdles.
New Zealand’s industry structure also affects productivity performance, given the economic importance of primary producing sectors like dairy and wool, which generally display relatively low productivity growth.
Finally, rapid growth of New Zealand’s labour utilisation since around 1990 is very likely to have biased its measured productivity growth downwards – as putting to work more marginal workers or working longer, less productive hours will drag down aggregate productivity, for a time.
So, what can be done to raise NZ productivity growth?
We do not have a silver bullet to solve the NZ productivity problem, but based on our experience, we can point to three key areas where action can be taken: infrastructure, human capital and innovation.
The OECD’s Going for Growth indicators suggest insufficiencies in transport infrastructure, in particular road and rail, are constraining productivity growth. NZ has already taken some useful measures to address these issues, but more can be done. Indeed, re-nationalisations in air and road transport, and erected barriers to foreign entry in the airport sector, are worrisome recent trends that need to be reversed.
In the area of human capital, it will be critical to ensure that firms have the necessary management skills to compete in global markets, and this starts with students, before they enter the labour market. The NZ government has already taken measures to increase the efficiency of its tertiary education system, but more could be done to raise attainment rates and the quality of degrees. Sustained efforts are also needed to further improve educational outcomes for under-achieving groups.
Let me now turn to innovation. Innovation in business is key to raising productivity. To allow firms to innovate, governments must be vigilant about barriers to entrepreneurship and the growth of small firms; foster enhanced access to venture capital; and establish the right incentives for firms to undertake R&D.
More productivity-enhancing business investment also depends on boosting household financial savings, which is important for deeper capital markets, less dependence on foreign savings, lower real interest rates and greater exchange rate stability.
Last year, the OECD released its Review of Innovation Policy for New Zealand, which identified several areas for improvement. One is the uptake of information and communications technologies, which is linked to reform in the telecommunications sector – and we are glad to see the progress made on this count. Another is in what we call “R&D intensity”, where New Zealand is also lagging. R&D intensity is not an objective in itself, but it helps create the potential to develop an innovative economy, including through moving towards higher-productivity industries.
Efforts should also be concentrated on making innovation policy more efficient. This could be done by simplifying and consolidating the delivery of competitive research funding and further developing collaboration between universities and the private sector.
OECD countries place great priority on innovation, and we have recently embarked on an OECD Innovation Strategy to help countries and firms adapt and thrive in an increasingly competitive global economy, through a multidisciplinary approach to innovation. I think you’ll be glad to hear that we will be looking at innovation in a range of sectors, going well beyond ICTs and high-tech industries. In developing this Strategy, which we will release in 2010, we will be listening closely to the business community, as key drivers and actors in innovation.
Our discussion this morning is a starting point for that process and an important input for future OECD analysis, and I would be particularly interested to hear your views on what you feel are the key priorities for improving productivity performance in New Zealand.
Thank you.
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