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New publication: let’s look at the workplace

Friday, December 17th, 2010


I’m pleased to announce another online publication from Policy Progress. This one is written by Owen Harvey and it’s all original material, looking at the issue of workplace productivity, why it’s important and why we never get to grips with it.

From my foreword:

We all know that New Zealand could do better and be more effective in its economic performance. But when we discuss solutions, too often we gravitate to ‘big-picture’ macroeconomic ‘fixes’, which may (savings rates) or may not (tax cuts) have anything to do with the problem at hand.

Owen Harvey doesn’t. His has been a consistent voice, urging to us to look at and think carefully about what happens within the workplace – and what we can do to improve that.

Owen brings together the best and most progressive work in the ‘management’ literature with an appreciation of public policy settings and the contribution they can make.

This short pamphlet provides a useful introduction to his ideas and their implications, which extend to achieving a more environmentally sustainable way of working.

Owen’s discussion of that last point links in nicely to some of the questioning of the ‘growth agenda’ from the likes of Tim Jackson, Wilkinson and Pickett, and Stiglitz and Sen, that I’ve been writing about recently.

You can download a copy here.

And if you’re interested in reading more of Owen’s work, I’d recommend Being More Like Ourselves: Smart New Zealand Enterprises (with Peter Harris and Andrew Huddart), Lean Thinking and Productivity and a conference presentation, Productivity: making skills count.

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Posted in Overview, Progressive Path to Prosperity | 2 Comments »

Material living standards in New Zealand and Greece

Tuesday, October 26th, 2010

A while back, I did a comparison of material living standards in New Zealand with those of Australia, a very similar country but one with 33% more GDP per capita in buying power terms. (There are links at the end to the posts on the Australia-New Zealand comparison, which also outline the methodology for this analysis.)

In this post, I’d like to complement that by comparing New Zealand to Greece, which is a country with (as at 2005) very similar buying power per capita but a less similar lifestyle and culture.

When we looked at Australia we found broadly similar patterns of expenditure on many items, with much of Australia’s ‘growth dividend’ over New Zealand being reinvested in health, education and gross fixed capital expenditure. How, then, do we look alongside Greece?

As we can see in this first graph, New Zealand earned somewhat more than Greece did in pure GDP per capita terms, but when you take into account buying power (i.e. things were a little cheaper in Greece on average), then the Greeks were a little better off than we were. The difference is noticeable but not huge, about $1,500 a year ($29 a week).

This is complicated somewhat by the fact that Greece and New Zealand differed somewhat in the way they allocated their income across the large categories of actual individual consumption, collective consumption, gross fixed capital consumption, change in stocks and net exports.

Greece spent more than New Zealand across both forms of consumption and capital formation, but nearly half of this was financed by them running an even more negative trade balance than New Zealand’s. (Events over the last year may suggest that this was not a sustainable strategy for Greece.)

Looking more specifically at actual individual consumption, which is the aspect of our material standard of living that we experience most directly, the Greeks were spending $1,022 a year more each in New Zealand buying-power terms than us. That equates to about $13 dollars more a week.

But once again we see a differing pattern of consumption, rather than this dividend being spread thinly across all categories. As we see below, the Greeks spent a great deal more than us on food, drink and clothing — much moreso than the considerably richer Australians. (And, remember, these figures are in buying-power terms; they don’t reflect food, drink and clothing being more expensive there, but rather more and/or higher-quality consumption.)

On the other hand, there are number of categories where New Zealanders spent more than Greeks, most notably recreation and culture where we spend on average $32 a week more.

And then there are categories where we spent roughly the same amount (including health and education).

There are of course many, many caveats needed with an analysis such as this. For one thing, these per capita figures tell us about the mean, but they don’t necessarily say much about the lives of the average (i.e. median) Greek or New Zealander — especially if we don’t know about the income distribution of the respective countries.

Nevertheless, this analysis does suggest some broad differences between New Zealand and Greece, and possibly other southern European countries with broadly similar GDP per capita. Underneath the similar aggregates, we appear to be more modest in terms of our food and clothing (as are the Australians) but to spend more on recreation and transport. However, the latter may not necessarily reflect better outcomes for us but may simply mean that they have access to cheaper alternatives that might be just as good or better (the Acropolis and the Metro rather than the rugby match and the private car).

Links:
The earlier analysis can be found in Staring at the gap and If we do catch Australia, what’s the prize?
SourceOECD data on the 2005 Purchasing Power Parity Benchmark results

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Foreign ownership — getting the balance right

Tuesday, October 19th, 2010


I spent this weekend at the Labour Party conference in Auckland, and it was a heartening and energising experience. I had a real sense that the openness to new thinking that I predicted way back in my first Policy Progress post, and which I’ve recently been tracing in the UK Labour Party, was alive and well in New Zealand Labour, too.

I was particularly pleased about Annette King’s Agenda for Change for children, including legislated targets for the eradication of child poverty.

But, for the moment, I want to focus on Phil Goff’s announcement about restrictions of foreign purchase of farmland and strategic assets, and some of the broader issues around economic policy that I think it touches on.

Back in May, I identified that New Zealand’s gross national income (GNI) — what New Zealanders earn — as a proportion of gross domestic product (GDP) — has been declining slowly but steadily for at least the last 40 years.

Source: National Accounts of OECD Countries: Detailed Tables, Volume II, 1996-2007, 2009 Edition

(I also compared us with handful of other countries.)

A main driver of the gap, which had risen to 7.5% of GDP by 2007, is the amount we pay to foreign owners of New Zealand-based resources and productive capacity.

This phenomenon has also been acknowledged by Treasury in a 2009 report, though they are not concerned by it:

Greater foreign ownership increases the gap between GDP (economic activity that occurs in New Zealand) and GNI (income accrued to New Zealanders). However, the gap does not matter in itself; rather, the question is whether the gap results in lower long-term real incomes.

To the contrary, their report argues that “foreign investment brings a number of benefits that are much more likely to increase long-term real incomes.”

In a 2006 essay, David Skilling, who was then the director of the New Zealand Institute, took a much less benign view:

This consistent sale of debt and equity claims on the New Zealand economy to foreign investors translates into a high degree of foreign ownership of the productive New Zealand economy . . . A significant portion of New Zealand’s economic growth therefore benefits the foreign savers who have invested their capital in New Zealand. New Zealand is increasingly becoming a nation of employees rather than of owners.

One important function of capital inflows is not arguable, however: it’s an accounting identity, and thus true by definition. Pulling my old economics textbook by Joe Stiglitz off the shelf, I find the savings-investment identity written as:

private savings + government savings + capital flows from abroad = investment

Or, in other words, “to decrease capital flows, it is necessary either to reduce the budget deficit, to increase private savings, or to decrease investment”.

And here we come to the nub of the challenge of progressive economic policy in New Zealand. Whatever unease we might feel about foreign investment, we need it to achieve even the relatively modest levels of investment in our productive capacity that is currently occurring.

Because, as we hear time and time again, we in New Zealand are not saving enough to drive the investment we need. When I looked at the breakdown of Australian and New Zealand income per capita a few months ago, I found that Australians were collectively spending 66%, or nearly $6,000 a year per person, more on gross fixed capital formation than New Zealanders were. Of course, in part this reflects the fact that Australians are richer than we are, but the consequence is to reinforce that relative advantage.

So, unless and until we can improve our savings levels, we need to maintain current levels of capital inflow from abroad.

But we should be aware of the cumulative impact that this is having. And of just how much of an outlier New Zealand has become. Philip Lane from Trinity College Dublin and Gian Milesi-Ferretti from the IMF have done a lot of work estimating the net foreign asset position of a whole range of countries. This graph from a 2004 paper by them shows that, even for a relatively poor ‘industrial country’, New Zealand’s situation of having a net debt of nearly 100% of GDP is well outside the norm.

They also found that a negative net foreign asset position tends to drive up long-term real interest rates, which makes it more expensive for businesses to invest in productive capacity. A 2003 paper by Christopher Plantier for the Reserve Bank tends to confirm that for New Zealand.

What this all says to me is that we would want to be very confident that our foreign investment is indeed going into building new productive capacity.

If it is, then there is some evidence that there will be positive side-effects as well. Firm Foundations, a 2002 report from the Ministry of Economic Development found evidence that foreign owned firms outperformed domestic businesses and argued that “foreign ownership has provided resources and opportunities to generate substantial positive change to the practices and capabilities of New Zealand businesses”. There are also studies that suggest R&D spillovers.

But where capital inflows are simply coming in to transfer the ownership of an existing asset or resource, with no further development envisaged, then the argument is quite different. Particularly in the case of land, which is a finite resource (“Buy land; they ain’t making any more of it”, the US humourist Will Rogers used to say). The only ‘beneficial’ effect of foreign land purchase (without accompanying investment plans) is to potentially bid up the price, and that’s mainly of benefit only to the seller.

An economic argument against sale restrictions in this instance therefore tends to come down to a faith that whatever a willing buyer and a willing seller agree on is always the most efficient outcome. In other words, it relies on an unwavering faith in the market.

Beyond that (apart from strategic assets), we get into more challenging territory. It would seem the first thing that needs to be done is work to to boost household (and/or government) savings levels. If this can be done, then current levels of reliance on foreign capital inflows will (as per the accounting identity) decline of their own accord. Thus more general restrictions on foreign ownership may not be necessary or desirable.


Links:

Further reading:


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Oram v Callaghan: which way should science be going? [re-post]

Tuesday, August 31st, 2010

Originally posted on 16 March 2010




Rod Oram has a column in the latest Sunday Star-Times (not online) that discusses reforms to science funding. There’s some good points in the article (and a few others I don’t agree with so much), but the main thing that struck me was when he discussed the scientific and commercialisation work that the Crown Research Institute (CRI) Industrial Research Ltd had done on superconductors:

But it will take many years to develop the product lines into sizable businesses – and the chance of New Zealand being home to much of that is minimal. We have virtually no experience, scale or markets in these areas of science, technology and manufacturing.

From a commercial perspective it was completely the wrong science to pursue. We must focus instead on the life and environmental fields where we have the scale and the leadership to attract international collaborators.

Sounds sensible. But here’s Paul Callaghan, probably New Zealand’s most high-profile scientist, in his 2009 book Wool to Weta. Transforming New Zealand’s Culture & Economy:

Given our capability in physical sciences and engineering, I think we could generate many more start-ups of the Rakon/Navman variety, and if a fraction of them succeed we may do far better than via the biotechnology route favoured by government. (p. 15)

. . . I am not advocating spending less on biotech research. But I am suggesting that we shouldn’t apply blinkers, that we do have a track record of producing great businesses out of physical sciences and engineering and that we have the potential to a great deal more. (p. 17)

. . . We should discard the myth that because we are good at farming, our best high-technology future lies necessarily in biotechnology. (p. 20)

I have a great deal of admiration for both Oram and Callaghan. I think they are two of New Zealand’s most insightful writers on science and innovation issues. Yet on this crucial issue of where we should be focussing our research capability, they fundamentally disagree.

Who is right? I do not know. But I do think this is an important issue, and it’s striking that this disagreement hasn’t really come to light before now. What that says to me is that (while successive governments have set out ‘official’ views) there hasn’t really been any robust public discussion about where New Zealand should be putting its science dollar.

One other thing: Oram suggests that we need “politicians and bureaucrats to give up micro-management and second-guessing and learn how to trust the scientists, their managers and directors to make good science and business decisions.”

Again, sounds good. But if you give the money to Industrial Research Ltd and leave them to make decisions, they aren’t going to invest in the life and environmental fields, are they? That’s where other CRIs are focussed, not IRL.

Key decisions about the appropriate allocation of science funding between different areas have already been made via the creation and funding of the eight CRIs. In fact, arguably the Jordan taskforce’s recommendations, favoured by Oram, would ‘lock in’ the current allocation for longer.

Which is fine. Unless, like (apparently) Oram, you think that we’re focusing too much of our energies in some areas and not enough in others.

If so, then maybe we need a more contestable free-for-all without any ‘ring-fenced’ pots (which Callaghan seems to favour), and trust the [sic] “bureaucrats” who allocate it to make right decisions. But isn’t that exactly the opposite direction from what the Jordan taskforce, apparently uncontroversially, is recommending?

In any case, that won’t really resolve the Oram-Callaghan debate. Anytime the system makes the ‘wrong’ decision, it will still be easy to blame the ‘politicians’ or the ‘bureaucrats’, when in reality maybe it’s just that if you want things to go in a particular direction, then you have to set the basic operating framework with that direction in mind.

To me, that suggests that we need to have a well-informed public discussion about where we ought to be focusing our efforts, and why. If so, it will need to start by acknowledging that there are smart people with good arguments on both sides of the debate, and no easy answers.

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Posted in Progressive Path to Prosperity | 6 Comments »

Outlook: a lost decade?

Tuesday, August 31st, 2010

Phil Romans // CC 2.0


We seem to be in the midst of something that’s been recurring every few months in this post-Global Financial Crisis world: financial markets and financial commentators around the world are sniffing the wind and asking themselves whether the sky is going to fall again. Last time it was around the Greek bailout; this one seems to be triggered by jitters in the US economy and the focussing of attention on Jackson Hole, Wyoming, where central bankers meet each year.

It will probably come to nothing — or at least nothing dramatic. But there does seem to be a slowly rising tide of anxiety, as the natural resilience of the market economy continues to fail to spring to life.

The economists I tend to read regularly — Paul Krugman, Joseph Stiglitz, Brad DeLong, Nouriel Roubini, Martin Wolf — are pessimistic, but then they always have been. That’s the ‘camp’ they (and, I guess, I) are in. Maybe they’re wrong: maybe the private sectors of the world will spontaneously recover, as more neoclassical writers seem to think, and the main threats are overly-indebted governments and suddenly-reemergent inflation (Krugman & co see deflation as a more evident threat).

We should hope the optimists are right, but we would be unwise to discount the pessimists. Events so far have done more to bear out their fears than their opponents’ hopes.

But amongst the pessimists (realists?), there are also two views — or rather, most of the pessimists feel that things could still go either of two ways. The first is a ‘double-dip recession’, where rather than recovering properly the economy sinks back into decline again, possibly worse than last time. That’s the more commonly discussed prospect, and the one that is haunting Jackson Hole this week.

The second is a ‘lost decade’ (or longer). The model here is Japan, which after decades as a ‘miracle economy’ suddenly ground to a halt in the early 1990s after a financial crisis, to be plagued by years of sluggish growth, and deflation or virtually-nil inflation, from which it has still not completely recovered. Krugman, in particular, has carefully studied the Japanese experience and the range of largely-unsuccessful efforts by the government there to lift their economy out of the mire.

To me, the ‘lost decade’ is in many ways the more worrying scenario. A ‘double-dip’ would be terrible, but it would also galvanise policy-makers and impel action. With a ‘lost decade’ we might be like the proverbial frog in the gradually-heating pot: adjusting our expectations to the changing environment and ‘defining prosperity down’ as Krugman puts it. We can already see indications of this both in US and New Zealand as higher levels of unemployment get accepted as normal by the government and media alike. (A kind of structural and social divide between the ‘kind of’ people who get hit by unemployment and the ‘kind of’ people who decide the news agenda helps with this.)

So what would this mean for New Zealand, and how would it affect the agenda for progressive politics? It is possible that, even if Europe and the US were afflicted by a ‘lost decade’, Australia and New Zealand might escape by hitching our wagon to China and other Asian economies. But this is a precarious hope, and, in any case, it is beginning to look as if China will not be as immune to the global doldrums as had earlier been thought.

For progressives in particular, the implications are dispiriting. The Key-English-Hide government has miraculously solved our Crown debt predicament (with enough left over for lashings of tax cuts for everybody, and an extra scoop for the very rich) through two feats of accounting wizardry. Firstly, they have taken a ‘holiday’ from saving for our future through the New Zealand Superannuation Fund. And secondly, they have assumed downwards the amount of money that future governments will spend in future Budgets — which means the projected growth-path for health, education and other public services over the next decade looks very meagre indeed.

In both cases, Key-English-Hide were robbing from our future in order to make our present look rosier. But the trick for the next progressive government will be to undo these shortsighted decisions — restore contributions to the Super Fund and restore real per capita growth in public services — without causing Crown debt to blow out in the process. That may not be too hard if economic growth exceeds Treasury’s current forecasts, but under a ‘lost decade’ scenario it might instead come in lower than Treasury thinks.

Of course, the first priority for a progressive government in that situation would be to do everything it can to strengthen our economic performance, while taking active steps to assist the unemployed. But if the whole world has gone the way of Japan, then there will be a limit to how much domestic economic policy can do.

We would probably need to look at options for boosting revenue, but we would need to move cautiously. The international tide would likely be in favour of public austerity, with most other countries facing much worse public debt situations than ours. (Thanks, Michael Cullen!) But that could foster a climate of antipathy towards new revenue and spending measures both amongst supposedly ‘informed’ people at home and amongst ratings agencies abroad — even when those measures balanced each other out fully.

It’s not a pretty picture, but nor is it an inescapable one. Leading progressive economists are convinced that determined action by governments and central banks can avoid a ‘lost decade’ — if the will is there. But that will not be decided in New Zealand. Our progressive movement will need to hope for the best, prepare for the worst, and send our best wishes and support to our counterparts in the leading economies.

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Posted in Progressive Fiscal Policy, Progressive Path to Prosperity | 34 Comments »

Pick ICT and niche manufacturing as winners, says NZ Institute

Tuesday, August 24th, 2010

The New Zealand Institute is probably the only really serious thinktank we have in New Zealand (as opposed to the handful of right-wing advocacy groups that style themselves as such). Its current focus is on how the New Zealand economy can be more prosperous and effective, which is also a topic that I’ve been looking at here at Policy Progress in the ‘Progressive Path to Prosperity’ workstream.

So, when the Institute last week released its report A goal is not a strategy: Focusing efforts to improve New Zealand’s prosperity, I was keen to take a look, especially since I knew its director Rick Boven would be speaking at the Fabians seminar What Will Fix New Zealand’s Economy? (held last night).

I’m glad I did. It’s a useful report, with some interesting facts and figures scattered throughout, and a proposal that I think is definite worthy of debate.

But I’m also a bit frustrated. There’s some important gaps and a lot of the really crunchy issues and difficulty decisions have been pushed out to the next report in this series.

In essence, what A goal is not a strategy is advocating is that New Zealand make a definitive choice to back information and communications technology (ICT) and niche manufacturing as the crucial sectors that we need to grow.

This, of course, is ‘picking winners’ and for a generation we’ve been told by ’serious’ people that doing that was economic lunacy. But the policy cycle seems to have swung around again, and a lot of heavy-hitters now seem to be open to at least a cautious version of the ‘picking winners’ approach.

I don’t have a problem with that. And the report makes a good argument that the more even-handed open-to-all-players approach has resulted in ‘insufficient aspiration and lack of a sufficient focus’:

Aspiration is missing partly because there is not yet sufficient agreement that ICT and niche manufacturing should be the priority sectors. As yet there is no consensus that agriculture and natural resource development will be insufficient, nor that New Zealand can build a prosperous economy based on innovation and exporting value-added goods and services.  (p. 33)

The other thing I like about this report is its insistence that an economic strategy has to have some real consequences if it’s to make a difference:

A strategy is a reallocation of resources to achieve a valued goal. If the goal is important and the strategy is sound then the reallocation should be material; sufficient to change the outcome. A few tens of millions of dollars is not material. Competing small countries are committing hundreds of millions of dollars to efforts they regard as strategically important. (p. 3)

Their critique of the failings of government efforts to support cluster development (p. 46) illustrates this point well. An evaluation of New Zealand Trade and Enterprise (NZTE) programme four years on found it to be “too small, too thinly spread and its objectives and outcomes were insufficiently defined to support true cluster development”. So was the response to put more money in and tighten its focus? No, the programme was abandoned as it was felt “that regions were in a better position to prioritise and make decisions that suit their needs which may include cluster funding.” (There may be another side to this story, but on the face of it that seems an illogical response to those findings.)

But I have some misgivings, too. Firstly, it’s not clear to me that picking “ICT and niche manufacturing” really narrows things down that much. It represents a clear choice not to rely on agriculture as our engine of growth (while preserving our existing strength there). But there isn’t really a definition of what that does and doesn’t include, and why.

Nor is it conclusively demonstrated that things like, for instance, the previous government’s focus on the development of the food and beverage sector were a misjudgment. The report makes much of the low productivity rate of the agriculture sector overall, but surely this masks quite a range (as with manufacturing) and there are high-tech high-productivity pockets in agriculture and affiliated industries.

Secondly, while some of this is yet to be unpacked, it reads like what the report is advocating is pouring an awful lot of money into business assistance. Maybe that is what we need to do, but I’d like to have seen a bit or evidence about that sort of thing being a good spend.

Personally, I’m still cautious that throwing contestable grants (or loans) at individual business who meet the right tests and are in the right industry is the most important thing we need to do. I’m inclined to feel that more cross-cutting issues like our low rate of savings and (related) the capital shallowness of New Zealand business are more the sort of things we need to address, and that implies rather different policy levers. (These issues are touched on in the report, but aren’t its main focus.)

One of the general problems that the report does have a bit of a focus on is our weak management capability, and I’d tend to agree that this seems to be a problem. But I’m a bit perturbed by the lack of evidence of our weakness that they’ve actually assembled here. I think the report does a good job reconciling some of the areas where we are reported to be strong — we score well on measures of entrepeneurship and on ease of starting a business — with our overall weakness: we end up with a lot of SMEs satisfying people’s desire for independence but not really building up the kind of skilled entrepreneurship that’s needed to break through into successful exporting.

But there really isn’t anything beyond assertion to show that we really do have weaker levels of management capability than our competitors. The MED report Management Matters is cited but its findings aren’t really presented.

That means that report doesn’t really offer us any insights about why or in what ways our management capability is weak, and what structural factors might be responsible and need addressing. That gap results in some rather out-of-left-field solutions: is ensuring one of our ten MBA providers offers a “full-time world class” programme focused on international entrepreneurship really a transformative difference??

This all leads the report to the conclusion that supporting success at ‘internationalisation’ in ICT and niche manufacturing should be New Zealand’s economic strategy priority. But exactly what ‘internationalisation’ entails isn’t spelled out and “[t]he specific actions, resource reallocations, and policies required to lift internationalisation performance remain to be identified and agreed” (p. 51).

I guess we have to accept that this report is one step in a wider work programme, and only takes us so far. And despite the limitations I’ve outlined, I think it does provide a good conversation-starter for a debate on which winners to pick and how best to help them. But we need to have that debate, and argue back and forth about the evidence — we can’t take it that the New Zealand Institute has made a settled case for anything, as yet.


Postscript: I drafted this post before going to the Fabians seminar last night. I took the opportunity at that event to ask Rick Boven whether the significant sums he envisaged this emerging strategy as requiring were actually to be spent primarily on business assistance programmes, as the report seemed to suggest (and as I mentioned above). Surprisingly, he said no — he felt the priority spend was on various innovation-friendly tax-breaks in areas such as depreciation.

I thought that was pretty interesting as in some ways it chimes in more with my mention of cross-cutting obstacles (above) than with needing to pick winning sectors (although the tax-breaks could be restricted to certain sectors). It’s also an idea that’s entirely absent from the report except in a ‘case study’ on South Korea (pp. 40-41). That case study felt somewhat superfluous when I first read it, but it may turn out to be an important pointer to the New Zealand Institute’s further work in this area.

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Posted in Progressive Path to Prosperity | 2 Comments »

Commentary Round-up

Wednesday, July 21st, 2010

This week’s offerings from Commentary Round-up’s trio of leading commentators traverse some common themes: environmental policy, New Zealand’s relationship with Australia, and what makes the National Party tick.

There’s no new Listener column from Brian Easton this week, but he has posted three new speech notes on his website:

The best explanation for the divergence in growth rates, which began in the late 1960s, is that is when the Australian mineral boom began, while New Zealand suffered a palpable shock when the price of its wool, which made up two fifths of export revenue, fell 40 percent . . . The Australian mining boom kick-started their economy, whereas the collapse in price of a major industry was a kick in the guts for New Zealand.

(Easton goes on the explain how the “Rogernomics Recession” was the second crucial setback.)

Why the focus on GDP per capita? The one group in New Zealand who are closest to direct beneficiaries of material economic growth is the business sector. In the long run the profit rate is roughly equal to the growth of GDP. Profits are the objective of business. By arguing for a higher growth rate, it is arguing for a higher profit rate. They may want to have a high profit rate, but that does not mean it should be the ultimate objective of government. Business is a means to an end, not the end in itself.

The prospect in the twenty-first century is that tradeable activities will be increasingly where the population is . . .  the implications for New Zealand’s economic (and therefore social) development and direction is likely to be enormous, pushing us back to being a food and fibre supplier to the world and challenging the very foundations of the left’s account of New Zealand.

Colin James has his two regular columns:

  • A bridge to better policy (Fairfax papers) is an appreciation of Nick Smith on ACC and especially environmental policy;
  • Catching Australia’s wages (Otago Daily Times) looks at the state of the National Party as revealed at their conference, with discussion of employment law changes and (again) Australia, including this interesting point (which resonates with Easton’s):

It is that pay differential which lures employees to Australia, not the rate of rise in GDP or the GDP-per-capita difference . . . This is the snag in Key’s push for more dairy farms and tourists. Farmers and hotel owners and managers get better off and the country gets more cashflow. GDP-per-capita goes up. But both pay most employees low wages. That doesn’t fix the wage gap.

Rod Oram’s Star-Times column is entitled Environment policy so bad things can only improve but the criticism is levelled at the status quo that Nick Smith has inherited, rather than his initiatives — Oram has tentative praise for the Environmental Protection Authority idea. He also discusses the latest dairy sector deals on Radio New Zealand’s Nine to Noon.

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Posted in KiwiWatch, Progressive Path to Prosperity | 2 Comments »

A closer look at Communications Services

Tuesday, July 20th, 2010

In last week’s column I identified that Communication Services was the stand-out performer amongst New Zealand industries in terms of productivity:

  • It had significantly higher productivity growth than any other industry over the period 1978-2008, both in terms of labour productivity and in terms of multi-factor productivity;
  • New Zealand’s productivity growth in Communication Services was far higher than Australia’s over 1986-2008 (the period for which comparable data is available); and
  • As at 2002, our labour productivity level in Communications Services was significantly above than of the United Kingdom.

The first two of these findings comes from a recent Statistics New Zealand report; the third from a 2007 working paper produced for the New Zealand Treasury in 2007 by Geoff Mason and Matthew Osborne of the UK National Institute of Economic and Social Research.

But what activities does Communication Services industry cover, what has driven its phenomenal productivity growth — and are there lessons for the economy as a whole?

Going back to that Statistics New Zealand report (Chapter 15), we learn:

The industry comprises firms providing postal, courier, and telecommunication services.  The last includes wired and mobile communication services, and Internet services, while postal and courier services include standard pick up, transport and delivery services, package and parcel delivery, and express door-to-door courier services.

The following graph summarises how output growth in  the industry has varied from one sub-period to another and what has driven it in each period.

Output growth was strongest over 1985-2000 and peaked in the late 1990s. It is also noteworthy that the main driver of growth has shifted from increased capital input (investment in equipment) in the early years to multi-factor productivity (which implies the industry working smarter and more effectively) in more recent years.

The report also describes how the industry has changed over the period studied:

With technological development, the industry has become much more capital intensive, producing complex outputs requiring high levels of capital infrastructure.  Labour input has declined due to the automation of many activities.  With many new developments over time, such as mobile telephone services, wired and wireless Internet services, and other satellite communication technologies, the communication services industry has changed substantially.

That’s all very well, and does begin to give us an idea of why an industry in the midst of so much change might have increased its productivity more rapidly than other industries in New Zealand.

But what about the comparison with Australia and the United Kingdom? Unfortunately, this chapter of the report doesn’t look at international comparisons, so we are forced to speculate.

These positive results don’t tally easily with all the reports we see showing how much more costly telecommunications services are in New Zealand than elsewhere. Of course, it’s possible that the strong productivity increases compared to Australia represent ‘catch-up’ — i.e. that we were even less efficient compared to other countries in 1978.

But that doesn’t explain the Mason and Osborne result that New Zealand’s labour productivity in Communications Services is 15% superior to that of the UK.

A closer look at that study however provides some valuable additional information about this. Firstly, New Zealand has overtaken the UK only quite recently, in 2001 (Appendix Table A1).

Secondly, the difference is entirely due to the much higher capital-intensity of the New Zealand Communication Services industry.

The average physical capital per hour worked was more than twice as much (229%) in New Zealand as it was in the UK (Table 7). This is very unusual since in most industries New Zealand is much less capital intensive. Moreover, the report suggests that New Zealand’s Communication Services capital intensity may be on a par with the US and France, which generally have much higher capital intensity than the UK (p. 17).

By contrast, the multi-factor productivity of the New Zealand Communication Services industry is quite a bit lower, only about three-quarters (74%) of what it is in the UK. That doesn’t mean New Zealand’s Communication Services doesn’t have high multi-factor productivity by New Zealand standards, but it doesn’t compare to that in the UK (where multi-factor productivity levels are generally higher than our’s).

So it appears that when we say that New Zealand’s Communication Services industry has very high labour productivity, what this primarily means is that the industry has a particularly high ratio of plant and equipment to workers.

We can see the flipside of this by looking at labour input, as measured in Table 1.09 in the Excel spreadsheets that accompany the Statistics New Zealand report. The following graph depicts the Communication Services column of this table.

As you can see, employment in the sector (measured by hours worked) dropped precipitously after 1987, so that by 1996 it was down to 60% of its 1978 level. (Employment throughout the measured sector overall had dropped during this period but only to about 98% of its 1978 level.)

It is likely that this industry had become less labour-intensive in other countries, too. Yet Mason and Osborne report that in New Zealand in 2002 Communications Services accounted for 6.0% of market sector output but only 2.0% of the hours worked, while the UK employment share was bigger at 3.1% even though its output share was smaller (4.1%) (Table 5).

In other words, our industry seems to have been a notably smaller employer for its size within the economy than its UK counterpart.

To sum up then, the Communication Services industry doesn’t offer any particularly useful productivity lessons for the rest of the economy, unless we consider that labour-shedding is the path to prosperity.

This analysis also provides a useful reminder than impressive-seeming figures aren’t always what they seem, especially when it comes to productivity statistics.

Links

Last week’s column, Communication leads the way — New Zealand’s productivity performers.

Statistics New Zealand’s Industry Productivity Statistics 1978–2008 page.

An earlier column covering the Mason and Osborne study.

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Communication leads the way — New Zealand’s productivity performers

Tuesday, July 13th, 2010

This one is Keith Ng’s fault.

Today’s post might quite likely have been another in the Theoretical Foundations series. But then in the middle of last week I got the summons from Keith: he wanted to talk about the new productivity report that Statistics New Zealand had just released. Well, Keith’s a famous blogger at the prestigious Public Address site and also a columnist for Unlimited magazine, so I figured I better comply.

We had a good chat — half an hour or so of data-geekery — and then I headed off and Keith went back to writing up his thoughts on the report (and related issues). You can find out what he came up with when the next issue of Unlimited goes onsale (and online).

Meanwhile, I had productivity thoughts swirling around in my mind. This new publication Industry Productivity Statistics 1978–2008 really does add a lot to our knowledge, particularly when it comes to productivity trends in individual industries. And it includes a detailed industry-level comparison with Australia.

Given that I had done posts before both on industry-level productivity (compared with the UK) and on comparisons with Australia, I couldn’t resist having a further read of the report and sharing some of its findings here.

Firstly, here’s a graph showing the different rates of productivity growth in different industries over the the last thirty years. (The report only covers what’s called ‘the measured sector’ – it leaves out difficult-to-assess industries such as government administration and defence, education and health, and property).

When looking at this graph it’s useful to understand that there are two things that drive labour productivity (a.k.a the amount produced per person).

The first is called ‘capital deepening’, which is basically the amount of equipment that each worker has. This reflects the fact that, for instance, you can shift a lot more dirt with a earth mover than with a shovel. Owen has made the argument in comments previously that an inadequate capital stock (and unwillingness to invest in it) is a big part of New Zealand’s economic problem.

The second thing is multifactor productivity, and that’s the really good stuff. That’s when you can get more production out of the same amount of labour and the same amount of capital. That implies (and it’s always worth remembering that with productivity there’s plenty of room for misinterpretation) that we’re working smarter and more effectively.

So this graph looks at labour productivity growth on one axis against multifactor productivity on the other. (You can click on it to see a full-screen version.)

The first thing that stands out is that ‘Communications Services’ outperforms every other industry by a wide margin on both axes.

The second thing to note is how few industry perform strongly on multifactor productivity. The only other ones are ‘Agriculture’ and ‘Transport & Storage’. ‘Electricity, gas & water supply’ by contrast stands out for a high overall labour productivity driven largely by capital deepening.

Here’s a second graph, from the section of the report comparing New Zealand and Australia. (The timeseries for this comparison only goes back to 1986.)

The graph shows New Zealand with higher overall productivity growth than Australia, but a couple of caveats need to be made about that. Firstly, the figures are for the ‘measured sector’ only. Secondly, while New Zealand is ahead across the full period, this reflects much higher growth over 1986-1996 — Australia’s productivity growth has been ahead of New Zealand’s over the more recent part of the period (1996-2008).

Aside from that, however, the thing to notice is the differences at industry level. As the Statistics NZ report says, variation across industries is higher in New Zealand than in Australia. And the industries where New Zealand can clearly be seen to be ahead are: ’Transport & Storage’, ‘Electricity, gas & water supply’, ‘Agriculture, forestry and fishing’ and in particular ‘Communications Services’.

Now, let’s have a look back at my earlier post looking at Mason and Osborne’s analysis of industry-level productivity in New Zealand and UK, in terms of a snapshot of productivity levels rather than growth over time.

This showed five New Zealand market sectors that stood out as having a productivity lead over the UK: ‘Cultural and recreational services’ (where New Zealand’s productivity was 128% of the UK’s); ‘Communication services’ (115% UK); ‘Accommodation, restaurants and bars’ (113% UK); ‘Finance and insurance’ (112% UK); and ‘Food, beverage and tobacco manufacturing’ (105% UK).

The common denominator between that analysis and this more recent one by Statistics New Zealand is the standout performance of ‘Communication Services’. Two other sector highlighted in the UK comparison actually had declining productivity over time: ‘Cultural and recreational services’ and ‘Accommodation, restaurants and bars’. A third, ‘Food, beverage and tobacco manufacturing’, is invisible within the Manufacturing category for much of the more recent analysis.

So, what is the ‘Communication Services’ sector and why has performed so strongly in terms of productivity? Is this just a historical fluke, or is this an area where New Zealand has an enduring strength? I’ll address these questions in next week’s column.

In the meantime I’d be interested in your thoughts and impressions about the productivity picture that has emerged from these reports.

Links

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“If I can’t retire, then where will I work?”

Wednesday, June 30th, 2010

http://www.flickr.com/photos/myglesias/ / CC BY-SA 2.0Matthew Yglesias in the US had a good post recently on retirement ages. It’s worth reading in its (relatively brief) entirety, but I particularly found my head nodding at this bit:

The other issue is that as best I can tell from the labor market fate of people in the 50-65 age bracket, employers aren’t exactly chomping at the bit to hire older workers in any capacity . . . It seems to me that if your desire is to see more people in the 60-70 range working, that you have to show me you’re making some progress on creating meaningful labor market opportunities for older people. Just yanking the safety net out isn’t much of a solution.

As I’ve stated before, I think it’s important that the progressive movement debate the issues around savings levels, retirement incomes and the general costs of an ageing society in an informed and forthright manner.

I’ve published two guest-posts so far by economist Peter Harris, in defence of aspects of the current model. I’d be interested in publishing further guest-posts as well, on either side of the argument. If you’ve got something to say (or know somebody else who does), then send an email and let us know.

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