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New Zealand faces a big challenge to overcome its long-standing productivity shortfall

One of the biggest challenges facing New Zealand is its productivity shortfall relative to other OECD countries: New Zealand is currently ranked 22nd out of the 30 OECD countries in the productivity league table and an hour worked in New Zealand typically generates 30 per cent less output than an hour worked in Australia. Low productivity is not a new phenomenon; productivity has been an issue in New Zealand since at least the 1970s.

A focus on productivity is desirable not only so that New Zealand becomes more internationally competitive, but also because, in the long run, growth in incomes is fundamentally linked to output per worker. Growth in GDP per person rests on either encouraging a greater proportion of the population into work, or by improving the productivity with which each worker produces output. New Zealand has performed well in encouraging increased numbers of people into the labour market, but there is a limit to how much increased participation in the workforce can drive further growth. Productivity improvements must be at the heart of New Zealand’s future economic growth.

This is one of a series of Treasury papers on productivity performance…...

This paper is part of the Productivity Performance and Policy series of papers that discuss New Zealand’s long-term productivity performance and the factors that may be inhibiting New Zealand from reaching its potential. Putting Productivity First is the overview paper which sets out the productivity challenge facing New Zealand and highlights key issues across five drivers of productivity: enterprise, skills, innovation, investment, and natural resources. The next two papers, New Zealand’s Productivity Performance and Does Quality Matter in Labour Input? The Changing Pattern of Labour Composition in New Zealand, discuss past and more recent productivity performance and the impact that improving labour quality has had on labour productivity respectively. The final four papers address the enterprise, innovation, investment and skills drivers in turn, building on the analysis in the preceding papers by reviewing and interpreting available evidence to draw conclusions for the underlying factors affecting productivity.

A number of factors are important for lifting productivity and there are no quick fixes.For some measures the impact may not be seen for decades.

….. and is about innovation as a key driver of productivity and, ultimately, of living standards

Innovation and the policies that underpin it are one important element in lifting productivity performance. Most of the huge rise in living standards in the developed world over the last two centuries (the era of modern economic growth) has come about through technological breakthroughs based on increased knowledge. Mostly this knowledge has been scientific but it has also been practical knowledge about production processes, and organisational, social, legal and marketing knowledge. The explosion in knowledge has gone hand in hand with tremendous advances in the education and skills of the broad population.

Adding to the case for a focus on innovation is the strong argument that new products and processes are an increasingly vital way for a developed country like New Zealand to prosper in a globalising world. Innovation is the means to compete with countries with low-cost labour that produce a wider and wider range of existing goods and services at very competitive prices.

This paper will look briefly at the evidence for the importance of innovation as a driver of productivity and rising living standards. It will then examine the special characteristics of knowledge that cause it to differ from standard economic commodities. This is important since these characteristics create the potential for markets on their own to fail to deliver the best outcomes for society. As a result there is an important and potentially quite active role for government to create the best conditions for innovation, ranging from subsidising R&D, ensuring that institutions for intellectual property rights and higher learning work well, and encouraging strong links between private-sector firms that apply knowledge and public research organisations that create it.

The paper then looks at the key role of firms in translating knowledge into higher productivity performance. It describes the concept of a ‘national innovation system’. If this system works well, new ideas and best practice spread to multiple firms and this boosts economy-wide productivity.

The paper next takes a look at the performance of New Zealand’s innovation system in recent years. We find that it presents a mixed picture.

Finally, the paper brings together the concept of a good innovation system with New Zealand’s current performance and recent policy initiatives. We draw conclusions on the most important areas for future policy attention. These are the ones that will, in our view, have the greatest impact on lifting the innovation and productivity performance of a large number of New Zealand firms.

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