Abstract
In this seminar, OECD Chief Economist Clare Lombardelli will present an overview of the lessons drawn from the latest literature on productivity growth and its policy dimensions, with a focus on three key themes:
- the determinants of productivity growth and its dispersion between leading and laggard firms,
- the role of technology diffusion, and in particular Artificial Intelligence (AI) diffusion, in the context of an aging population,
- the role of human capital, skill mismatches, and labour shortages for productivity dynamics.
Drawing on empirical evidence and policy insights, the presentation will touch on opportunities for long-term growth, as well as potential risks for the level-playing field and inclusive economic development.
Join this hybrid session for your opportunity to engage in a discussion with our guest speaker.
This seminar will be the closing session of the Treasury Guest Lecture Series under the 'Productivity in a Changing World' theme and will be introduced by Dominick Stephens, Treasury's Deputy Secretary and Chief Economic Adviser.
About the presenter
Clare Lombardelli is the OECD's Chief Economist and G20 Finance Deputy. As the Chief Economist and Head of the Economics Department Ms. Lombardelli ensures that the Department is at the forefront of Economic thinking, coordinates the work of the Country and Policy Studies branches to create new opportunities, and enhances synergies and co operation with the whole of the OECD, including through contributions to horizontal projects.
Prior to joining the OECD, Ms. Lombardelli was the Chief Economic Advisor to the UK Treasury and joint head of the Government Economic Service since 2005. Her role was to deliver the UK government's macroeconomic objectives, promoting sustainable economic growth and setting and implementing fiscal policy. She managed the Economics and Fiscal areas in the Treasury and jointly led the professional body for economists in the public sector.
She started her career at the Bank of England and has also worked in 10 Downing Street as the Private Secretary for Economic Affairs to the Prime Minister. Ms. Lombardelli has also worked as a technical advisor for the International Monetary Fund.
Video recording
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Transcript
Dominick Stephens:
[Speaking in te reo Māori 00:00:19] E ngā iwi, e ngā mana, e ngā hoa mahi. Tēnā koutou katoa. E mihi ana ki a koutou, kua tae mai ki te tautoko tēnei kaupapa. Ngā mihi nui ki a Clare Lombardelli, te kaikōrero o te rā. Tēnā koe. Kō Dominick Stephens tōku ingoa. Nau mai, haere mai ki Te Tai Ōhanga.
So, welcome everyone. It's great to see you here at another Treasury Guest Lecture. This is a hybrid event, so we have a number of people in the room, and we've got presumably many people online as well. And we'll be running it in this combined format.
So I'd like to give a warm welcome to our presenter today, Clare Lombardelli, the Chief Economist at the OECD. So just quick health and safety, a couple of items. In the event of a fire alarm, follow the Treasury staff to the nearest exit. You might've heard that we're well practiced here at the Treasury.
In the event of an earthquake, which we're also well practiced at, please drop, cover and hold and stay in the building until instructed by a warden. Bathrooms can be found down that direction to the left-hand side of the little kitchenette there. Walk straight ahead after exiting the rooms.
So turning back to the topic of the day. As I mentioned, Clare is the final speaker in our theme of the guest lecture series for the current year, which has been Productivity in a Changing World. It's an honour to have Clare help us finish the series off with insights on the 2024 OECD New Zealand Economic Survey, which was released on Monday.
So I'd just like to take the opportunity to share a few reflections on the theme Productivity in a Changing World over the past year. It's been a really, I think, it's been a fantastically successful series, and very, very thought-provoking and has come at an absolutely excellent time for the Treasury.
We chose the productivity theme because sustainable improvements in living standards ultimately depend on productivity in New Zealand. It's absolutely critical. So, we asked our speakers to reflect on the challenge of lifting productivity in the context of significant economic, social, environmental shifts facing New Zealand and the world.
This is a really significant challenge for New Zealand. We've obviously got a long-running productivity gap that we've talked about over many, many years. We fell behind in the 70s and 80s, caught up a little in the 90s, but we've failed to really close the gap further than that. But to add to this, productivity has slowed in recent years. So, productivity growth averaged 1.4% between ‘93 and 2013, and it's averaged only 0.2% over the past decade.
So, we published a paper on this on Friday last week. We've got the lead author in the room, Diana Cook over here, just exploring the slowdown in productivity, both in New Zealand and globally. We looked across for trends that fit with the timing and that fit with both the global and domestic nature of the slowdown.
We highlighted a range of possible contributors, the generation and, particularly for New Zealand, the dispersion of innovation or new technologies, the slowdown in global trade, which we've also previously written about, is likely to have exacerbated the challenge of generating productivity through global value change and enhanced connections.
Investment in New Zealand, it's actually we have quite a high rate of investment in New Zealand, but we have an even higher rate of population growth if you like. So, our investment rate has not been high enough to significantly, or to increase the capital to labour ratio on a sufficient basis.
It is true that New Zealand's overall GDP has, productivity has been a negative factor there, but there's actually been other drivers, which have been positive. If you go back, look at the size of our nominal GDP, it's actually higher than the Treasury was predicting a decade ago. We've had massive increase in the number of people in the labour force, both through above expected population growth, but importantly above expected labour force participation.
The other thing that's happened is our terms of trade have increased far further than we were predicting a decade or more ago, and actually these factors might not be happenstance. These could be connected to one another. It's one of the things that we talked about in one of the lectures. So, it's possible that the increase in the terms of trade actually reflects New Zealand firms choosing to chase opportunities involving higher price rather than higher productivity.
Again, the increase in this huge growth in the labour force might not be unconnected either. The more workers you add to a fixed land or set of capital, the last worker tends to be lower productivity than the average. These might not be unconnected, but the key point is we can't necessarily rely on these factors to continue to boost productivity through time. That's certainly not a complete explanation for New Zealand. If we want to continue to increase standards of living, we absolutely need to boost productivity growth.
Now, I mean, the paper we released last week was really about the productivity slowdown, but Treasury has got a long pedigree of talking about the types of things that would boost productivity, including in our Briefing to the Incoming Minister, strong and stable macroeconomic environment, a strong and stable business environment as they're preconditioned for productivity growth, including a streamlined and coherent regulatory system. There's a need to urgently address declining student achievement. We don't actually think that's been a big contributor to the slowdown in recent years, but it could well be over coming years if it's allowed to continue.
Strengthening New Zealand's international connections to help overcome the constraints of our economic geography, and that's on both the import and export side. And smart adaptation to climate change to protect our standards of living. So as mentioned, what I really liked about the paper that Diana and team authored is that it really drew on insights from the guest lecture series. So, we haven't just had speakers through and then said, "Thank you very much," we've really thought about what they've said, and we've wrapped them up in this paper. I really liked that aspect.
So, if I just take the chance to summarise perhaps some of the things that we heard from speakers. One possibility for the productivity slowdown is mismeasurement. That actually it's an artefact of the way GDP is measured and if you measured it differently, the picture might look different. And look, I think that there are some issues there, but Professor Chad Syverson argued that they're not large enough to explain the quantum of slowdown that we've experienced. So, that was a great presentation.
There are different degrees of optimism for the future and our speakers from the World Bank and International Monetary Fund expected global productivity to continue to slow actually in coming years. Several of our speakers highlighted the importance of innovation and technological change. There was debate between techno optimists and techno pessimists about opportunities for further productivity growth in the future. We had speakers from both sides.
Linked to this was the importance of skills and capabilities which support the diffusion and adoption of new technologies. So, Professor Webster, Professor David Teece and Michael Brennan highlighted that the ability to leverage innovation takes time, requires complementary investment and the ability to apply new ideas and processes.
And last, many of our speakers explored the theme of climate change and its likely impacts on productivity. So, Dirk Pilat and Professor Jonatan Pinkse highlighted the wide range of interrelationships between climate change and productivity, arguing that there's not been enough work on these interrelationships. And just yesterday, Dani Rodrik explored the role of industrial policy in supporting changes in the structure of the economy in pursuit of environmental goals as well as productivity goals.
So, it's been a fabulous series so far, and Clare, I really look forward to your closing it out for us. If you've missed any of these seminars that I've talked about, they're all online and today's seminar will be recorded and provided online for later as well. So, let me introduce the star of the show and exit the stage myself.
Clare Lombardelli is OECD's Chief Economist and G-20 Finance Deputy. As Chief Economist and Head of the Economics Department, Clare ensures that the Department is at the forefront of economic thinking, coordinates the work of the country and policy studies branches to create new opportunities, enhances synergies and cooperation with the whole of the OECD, including through contributions to horizontal projects.
So, prior to joining the OECD, she was Chief Economic Adviser to the UK Treasury and Joint Head of the Government Economic Service from 2005. She started her career at the Bank of England, and actually I understand Clare will be moving back to the Bank of England shortly to become Deputy Secretary in charge of monetary policy. But Clare has also worked at 10 Downing Street as Private Secretary for Economic Affairs to the Prime Minister in the UK.
So, I'll hand over to Clare. We are going to have a Q&A function for those online, if you would rather use the Q&A function in Teams rather than the chat. We'll aggregate those up and curate the questions at the end in a bit of a discussion session. But also, we've got people in the room, and we'd love to create a bit of a discussion at the end. So, Clare, open to you.
Clare Lombardelli:
Hi everyone, thanks very much for inviting me. It's an absolute pleasure to be here. I've been here since Sunday, and on Monday we launched our Economic Survey of New Zealand. So that's what brings me to town, but I was absolutely delighted to be invited to do this, and I didn't realise, you had Dani Rodrik the other day, so now I feel both delighted and very intimidated, but I'm sure I can follow that, no problem.
I'm going to talk a bit about productivity in general as we see it kind of around the world looking from the OECD perspective and a few reflections on New Zealand as well. I'm very conscious that I'm less qualified to talk about New Zealand than many people in this room, but very happy to do so. We do a lot of work on productivity at the OECD. It is one of the things that we consider specialism of ours.
We spend a lot of time thinking about structural policy and the supply side of economies. So, we do a lot of analysis including through something called the Global Forum on Productivity that we run, which is basically bringing together a whole range of countries looking at productivity research and analysis in both the macro and a micro perspective. New Zealand is an important part of that and is a member of that forum. And some of the work I'm going to present to you today is sort of latest data and analysis that's come through that forum.
So, let's get started. As we've heard, and as you know, there's been a longstanding slowdown in productivity around the world. New Zealand is not alone here at all. If you look on this chart that I'm showing you, you can see the position in New Zealand, and this decline we've seen over decades really with a very distinct difference between the period pre-Global Financial Crisis and the period beyond.
So even New Zealand, which you can see is towards the right-hand side of this chart. So, as we've heard, has relatively lower productivity than other advanced economies, but even for New Zealand before the GFC, you were seeing productivity growth around 2%. Now, that's well under 1%, so a real change, and obviously what's going on there is in a sense this is the cause of falling living standards over time. The only way to maintain your living standards over time really is to increase productivity.
Now, if we look on the right-hand side, we've done a bit of analysis on the drivers of this, and you can see here this is across all economies. So, it's not New Zealand specific, but you can see in particular you've got falls there in MFP, quite big falls in capital, and the capital labour ratio you can see is a big driver. That's one of the things that drives this.
Going in the opposite direction has been what's happening on employment. And so across advanced economies we've seen an increase in the rate of employment over this period. And a lot of that is about, for example, women joining the labour market in much greater numbers and participating in the labour market for a much higher share of their career. Other groups as well.
But really, so you've got these sort of two trends, which is MFP falling, capital falling quite significantly, but the employment rate going in the other direction. If we try and understand why, a long debate we can have. One of the big issues or one of the big observations that we notice consistently across countries is the variation across firms when it comes to productivity. This is really high, if you think about...
People often say about productivity, this thing about you see it everywhere except in the statistics. It's true, you do see it everywhere, but actually, what you see and what we often think about when we think about productivity, we think about innovation, we think about technologies, you tend to picture the most advanced firms, which clearly are at the forefront, pushing boundaries, doing amazing things, all those things, that is not typical. Most firms are far from that. Most firms actually are not at the forefront of technology. Indeed, a lot of firms are not even using current technology.
What you really see is a real range. And here what you can see is the performance of the median, the performance of what we call laggard firms, so people at the very lower end of the productivity distribution. This is all taken on firm level data, so quite a lot of disaggregation. But what you really see is even though technology is moving on, and the world's getting better and faster and all of that, actually the majority of firms are just not really participating in that and they're quite far behind.
So, you see this variation, and now we need to think about why, why do some firms succeed? Why are some firms at the forefront? Why are some further behind? And like I say, you have to think about that and look at that in terms of the micro data and what we're seeing here.
Let me move on and talk a bit about some of the specific drivers or specific issues in the literature on productivity. I think this will map on quite well to some of the things you've talked about before. So first, I'm going to talk about digital and technology. If you think about all the drivers of productivity and some positive, some negative, the biggest positive by far is what's going on in the technology space and particularly digitization, which is a huge opportunity.
And to your techno optimist or pessimist question, I'm very much on the optimistic side of this, in terms of what technology can and will do in terms of productivity. We can see here some of the potential, and this is just looking at if you look at different firms and those firms across the distribution that I talked about, how much more MFP, how much more productivity would they show from increasing digital adoption? This is across a whole range of activities that they do, but you can see some really big changes there. In particular, the most productive firms in a sense can gain the most out of this.
What we see is those firms that are already performing very well on productivity can gain the most from new technology, which might be what you'd expect, but of course is part of why we see this widening dispersion. You would think that those who could benefit the most are those that would be investing in, but that's actually not what you see. In a sense, the people at the forefront are continuing to invest. The firms that are further behind are really just not investing in this way and not thinking about how they can use technology to improve their productivity.
Going to talk a bit about Artificial Intelligence, because everyone is, but also the OECD has actually just published a really nice research paper on some of the macro considerations around Artificial Intelligence. So, I'll talk a bit about those now.
This is very early analysis. There's not a huge amount of analysis out there in terms of the impact of Artificial Intelligence on productivity, particularly Generative Artificial Intelligence. And it's worth distinguishing the two. AI has been with us for a very long time. We're using it all the time. You might not know that, but an awful lot of the services that are provided, for example, financial services using AI.
Generative AI is a different beast. It can completely change all sorts of activities, and it's relatively new. So, there's relatively limited research on what Generative AI can mean and will mean in terms of macro benefits. But what I'm showing you here is some early data on the left, you can see AI in general and some of the increases at firm level of using AI.
On the right-hand side is the most up-to-date data available about Generative AI and what actually is that doing to productivity. Now, this is task specific. So, as I say, it's not macro, it's not even firm level. It's basically looking at if you take a worker doing a particular activity and then they start using Generative AI, how much more efficient do they become?
If you look at this data where you can see as some quite big improvements in effectiveness, so writing, people become 50% more effective. Coding, it's around 60% more effective, so this is all about specific tasks. I think there's a couple of things we can take from this.
One is these are huge efficiency gains. If you become 50% more effective at doing something that is a really big improvement and one that you don't tend to see regularly, this is transformative. The other thing this doesn't capture though is what will happen as we change, not just how we do it, but what we do.
So, if you think about most these general-purpose technologies, you don't just become a bit more efficient. What you do, you actually completely change the methods by which you're doing things, you change what you do. So, if you think about other general-purpose technologies, electricity, the personal computer, they completely change the activities that are undertaken in the economy.
One you would expect Generative AI to ultimately do that. So, it wouldn't be right to just extrapolate from these sorts of within-activity improvements. But I think actually across the board we're likely to become much more efficient, much more productive as we combine activities in different ways to do different things.
Now, that's all very good and the reason for optimism, and we should all feel very positive about that. That said, if you look at the, and as I said, I'll put you all to this paper the OECD has published, but there's a couple of things that it talks about that you need to have in place for economies to really thrive and make the most out of AI, particularly Generative AI.
The two I want to draw out is one is on skills where ultimately to benefit from AI, you have to be able to use it, and actually if you look at digital skills across the OECD, they vary quite a lot. But there's quite a lot of people that have low digital skills. If we look across countries, the US is probably at the forefront of this. Around 10% of people in the US have what we would describe as low digital skills, basically no experience of them.
In a lot of OECD countries though, that's about a quarter. So, about a quarter of adults in most OECD countries have basically no experience of using a computer. If you think about that, these people are not going to be benefiting from the potential productivity gains of AI. So, we've got to do a big job on upskilling our populations to be able to deal with these sorts of technologies.
The other area that is little talked about but is very important when you think about AI, and particularly Generative AI, is competition and regulation. If you think about, there are particular features of AI and markets that use AI, that create specific dynamics that will naturally, will not promote competition.
So, there are a huge winner-takes-all dynamics to AI. The more information that is generated, the better it learns and so on and so forth. You have to think very carefully, and this will mean quite a lot of careful consideration is needed for competition regulation, for regulatory intervention in these markets where AI will operate. This is going to be a big challenge to competition authorities and getting that right will be essential for all companies and all firms to be using AI, benefiting for AI, because otherwise what you'll see is you'll see a small number of firms really pulling away. There's the two factors that I think countries really need to think about, and we'll need to work on and develop is actually how do you make sure populations have got the skills to deal with this, but also how do you make sure you're maintaining dynamic, competitive, contestable markets when you've got these different technologies?
That wasn't what I was expecting, hold on a second. All right, so this shows you what's going on in terms of adoption of AI, and sorry, not adoption, but potential to adopt. Actually, if you look at the activities that parts of different sectors use, what we've done here is some analysis of if you look at the activities going on in those sectors, how replaceable are they by AI or how much can AI be used within them? And it's kind of what you would expect.
AI is going to have the biggest impact, at least initially on knowledge intensive sectors, because it is intelligence and that's where it can build on, adapt and in some ways replace the activities that are done by people at the moment. So, you can see here these are already in lots of cases, quite high productivity sectors, might you see a real potential impact on things like education, on research and development, on finance and insurance and in the sectors that are already in a sense using it. But those are the ones where we expect to see the biggest impact.
The challenge and the issue for labour markets, and there's a lot of discussion about labour markets is will we all be replaced by computers. The answer to that is no. It depends basically on how much activity will be substituted by AI versus complemented by AI. And I suspect, I'm sure many of you you're using it and it can be an incredible complementary tool to activity what you're already doing as well as obviously replacing some of it. So, it's that balance between what can be substituted and what can be complemented that will determine to what extent the demand for labour shifts across these different sectors.
I'm going to move on and talk a bit about trade. So, this is another area, I mean, this is obviously a very live issue at the moment. We talk a lot about globalisation, de-globalisation, the issues and risks and changes we're seeing across the global economy. At the moment, we are seeing very large changes in both the speed with which economies are integrating in terms of trade. We've seen a slowdown in the integration of particularly services trade, but also what we're seeing is a real change in terms of the patterns of trade around the world.
Certainly, you see big shifts, for example, in the US-China trading relationship, big diversions across different trading patterns, but we're still seeing huge amounts of trade across the world. What this chart shows you really is the potential productivity benefits from integrating value chains and having more global value chains. Here, you can see in particular the huge potential benefit from services and from trading in services and integrating value chains in services.
That's an area where, as we look forward and you think about how patterns of demand change and the increasing demand for services, you can see a real potential here. So, that is an area where there's a lot of potential where we also need to think quite carefully about the way in which measures are being taken on the trade side, but a real opportunity here, as I say, if you look at that on the services side. Let's move.
The final thing I was going to talk about is human capital. And this will be familiar to many of you and I'm sure it's been discussed a lot in your previous lecture series, is just the importance of human capital to productivity and the importance of what we've called here workforce composition. So here what we've done is had a look at the most productive firms.
Again, we've looked at this distribution of productivity across firms and we've looked at what is it that makes the most productive firms different and what is it and how are they using their inputs in a different way? And what this shows you is about a third of the productivity gap we see between firms can be explained by the human capital that they have, the composition of the workers, the skills of those workers.
If you look at, as I say, the top performing skills, they have more high skilled staff than other firms do. That's not a surprise, but it's quite striking how much. So, if we take the least performing firms, what we call the laggard firms, about 15% of their staff would be considered high skilled. If you look at the top performing firms, it's about 30%, so about twice as many as a proportion.
Now, the other thing to note is the very best performing firms don't just have high skilled workers. They have a balance. That's because actually what you want is a mix of staff to complete a range of tasks, but we definitely see that the best performing firms have more high-skilled workers working for them. Then the other thing that we see is that the highest performing firms do face the biggest challenge in finding the skills that they need.
And this here shows you about the impact of not being able to find the skilled workers that you need, and therefore the potential. If you can meet those skills gaps where you're seeing large skills gaps, the potential and the value add in terms of productivity benefit, that can come from bringing from either upskilling existing workers or from bringing in workers with the skills you need.
That obviously plays into a lot of the debates that are current across all our advanced economies about the importance of upskilling your workforce, around adult skills, but also some of the patterns that we're seeing in immigration around the world as well, where particular high skilled, high skilled, we're seeing a lot of migration going on.
I'm going to move on and talk a bit about policy. I mean, there's a huge amount here, so I'm not going to talk about everything that we do, but one of the things that we think about in the OCD is we put a framework about this, around this. If you are thinking about, "How do we raise our productivity?" Which trust me, every country is, and it's one of the things that I get asked about most when I talk to people in finance ministries is, "But what should we actually do?"
What we've looked at here is we basically looked at the different ways you can decompose productivity into its individual elements and think about actually what can you be doing in each of these levels. I'm not going to talk about all the different blocks, but to structure our thinking, what we've done here is we've divided, as I say, firms into what do you do at the frontier?
What do you do for those behind the frontier? Then the other question is how do you allocate resources across firms, whether that is capital or it is labour. The question is, how do you increase incentives to firms to do these things and how do you increase incentives for the movement of capital and the movement of workers?
On the other part of this matrix is to look at you decompose productivity into its different parts, labour, capital, and an MFP. This gives you a bit of a sense of what should you be targeting to try and drive these effects. I'm not going to cover, as I say, all the different components here, but I'll talk about a couple of specific elements.
So, let's start by talking about capital. As I showed you at the very start, we've seen a fall in capital in terms of the amount of capital investment in economies and this is part of what's been driving productivity. Now on the left-hand panel here, what I'm showing you is actually how R&D investment has been increasing. You can see here how it differs markedly across countries.
So, the US has basically always been and continues to be an economy with very high levels of Research and Development going on in it. You can see that it's very clear when you look at firms. The European Union is another area where that's the same and again increasing. The outlier or the most striking part of this is what's going on in China and just the sheer increase in the investment in R&D that we're seeing in China. Data's a bit older, but you can see here how that is just shooting up and is reaching US levels of R&D.
On the right-hand side, what I'm showing you is actually just in IT industries, but it's some data that we have, and it shows you the difference here across the best performers in the OECD and the average. Then you can see New Zealand there at the lower end.
As I say the top five OECD countries on this measure are investing significant amounts more as you can see that as a percentage of GDP. I think clearly some progress that New Zealand can make here. There's a couple of things also worth noting. I mean R&D tends to be concentrated in incumbents, not entrants. I mean basically, bigger firms tend to do it more, so incumbents tend to do it more.
Of course, that is a challenge because what you want is dynamic markets where you're seeing innovation and new firms breaking in and breaking through and bringing new technology. The other thing that I would say is notable here is when talking about New Zealand is, New Zealand has, I think, a really big opportunity but is quite an outlier in terms of Foreign Direct Investment.
New Zealand has very low levels of FDI for a whole range of reasons, but there is an opportunity there because actually there is a lot of potential investment out there, and there's a lot of, if you like money looking for an investible home and a return. If New Zealand were to change its position on FDI, there is some potential opportunity there as an investible market.
It's one thing to think about, but when it comes to attracting capital investment, the vast majority is domestic, and there you need to think about a range of macro and micro incentives to do that. But clearly a big part of productivity is about the level of investment in the economy. As you can see here, some quite big differences around the world.
I'll skip over skills, I'll skip over that. Another thing I want to talk about because it's quite micro this, but it turns out when you look at the data, it's a really important part of what's driving within-firm productivity and that is managers and the quality of management. It sounds a bit micro for economists to be talking about it, but there's increasing amounts of evidence that basically says if you've got very high-quality management within a firm that will drive higher productivity.
You can see here some data that shows you if you improve the skills of your managers in general, you can see a much bigger productivity impact than any other part of your labour force. In a way that makes sense, because managers are much more responsible for the planning of work and the directing of work. We can see here the effect on productivity can be quite large.
However, on the right you can see it's not enough to just be investing in managerial skills and there's reasons to invest more widely. But it's definitely something that it's worth being aware of is just actually the quality of management. You really see that if you look at particular case studies where quite often you have Foreign Direct Investment that takes over a firm and brings in new management. Quite often you can see quite a transformative effect of productivity from those sorts of things.
You can really see the significant impact there. Then if you look at New Zealand, this is a good opportunity for New Zealand, because there's quite a lot of scope. Here, I'm showing you the performance of the distribution of quality of management across three different countries that we've picked.
The US, as I say at the forefront there, is an advanced economy. I'm showing you Sweden because in some ways, I mean obviously there is no way quite like New Zealand, it's phenomenally unique. But Sweden is another example of a medium-sized open economy. Here you can see again a sort of higher level of management skills. New Zealand I think could move up this distribution and that would have quite a big impact on productivity.
Then the other thing I wanted to talk about is labour market flexibility and how policies that tackle labour market flexibility can really add value. This is about are you doing, are workers being best matched to the places where they can add value. Is there potential to improve productivity by moving workers around more flexibly?
Now, I've shown you earlier the challenge on skills gaps and how gaps in skills can really affect firm performance. If you look on the left-hand side here, you can see how the impact of tightness in the labour market challenges for firms recruiting their skills, what that does to firms in terms of whether they're the size of the productivity decrease that is causing, depending on the amount of labour that they have in those firms.
On the right-hand side, you can see, and again I'm showing you top productivity performance against the OECD average and New Zealand, you see quite a difference in how much countries invest in what we call active labour market policies. So, policies that match available workers to jobs. And again, New Zealand spends a relatively small amount of money on this as a proportion of GDP compared to some other countries.
In particular, you see those top performing countries spending quite a lot on matching people to jobs and quite a lot on ensuring. And including in active labour market policies does include things like skills training and those sorts of policies. You can really see that there is a potential gain there if you invest a bit more in making sure that when people become available for work that they are matched to the best work available for their skill set.
I'll just summarise. This is a summary of for all countries, what are the challenges and what are the opportunities from productivity? There's a number of things that we know in trend terms on attaining high productivity more and more challenging. And in that I would include demographics, which just affect the size of the labour force and so affect growth in that way.
Climate change, we're all obviously going through this huge transition in terms of decarbonizing our economies and that of course will bring lots of potential for new growth in other areas, but we have to be realistic. You're putting a price on an input that was previously, it wasn't free, but we all thought it was free or we certainly classified it in economics as free. Putting a price on that will obviously have an impact and be a challenge.
Obviously labour supply constraints continue to be, and at this point actually in the last few years have become a real problem for an awful lot of countries, an awful lot of firms. Against that, as I say, there is a potential upside from technology, from digitization and from Generative Artificial Intelligence, which comes potential upside there. But we really need to think quite carefully about how we ensure our economies are ready for that.
For New Zealand, just to draw out some of the areas that but we highlighted in our Survey and that are clear when you look specifically at New Zealand, I mean obviously all of the above apply, but there's certainly an issue around capital investment in New Zealand, especially in technology. But it's a country where more capital investment could improve productivity.
There is an issue, and we have a whole chapter on this in our Survey around competition and the competitive markets, the dynamic markets. I mean New Zealand is a small market and therefore quite, you haven't got the scale and that can raise some challenges for competition, but clearly that is... Competitive pressures do drive dynamism, do drive productivity in that sense.
Finally, skills which again we highlight in terms of education, but also thinking more broadly about education and skills and what that can do for labour market matching. So, I'll stop there. Thank you.
Dominick Stephens:
Brilliant. Thank you very much, Clare, and yep, grab a seat and a glass of water after the presentation. Fabulous presentation. Thank you very much. Traversed a wide range of areas. So, we'll do Q&A now. If you're in the room, we do have a microphone that's roving around. Please wait until it arrives because then the people online will also be able to hear you.
People online type your question in to the Q&A function rather than the chat. We've got a curator who's going to provide questions as we go, but I think I'll just take the chance to ask one of my own while people think of their questions. And yet if we probably get the microphone moving so that we can keep it going, so I think there's a question over here.
So, Clare, you talked a lot about the variation in firms, these laggard firms and how they lag the top performers and the importance of perhaps dragging up the laggards, it got me thinking about industry policy and I wondered on your view, so you might call it picking winners or industry policy, just wondering how that relates to these laggard firms.
Is industry policy something that's going to coddle the laggards and protect them or is this a potential way that government could lift the bar and provide more of the winners and the leading edge into our economy? What's your take on that? And I'll hand you the mic.
Clare Lombardelli:
Thanks. It's a good question and obviously a very live policy discussion at the moment is industrial policy. And as you say, I mean in general, if you look across history, it's not been a happy... Industrial policy has not tended to be hugely successful, certainly when you're talking about picking winners and those kind of very narrow interventions, it's not tended to be successful.
It has tended to do more of the latter and actually support firms when really you need to see adjustment and fixed capital and labour, and it's not in its most efficient use. So, I think you have to be very, very careful about industry policy and particularly seeing it as a driver for productivity.
There are other reasons that you might want to pursue industrial policy, whether that is around national security grounds, or it might be around technology development. What we would say at the OECD is if you're thinking about industrial policy, far better to focus on the things that cut across economies and would encourage Research and Development, would encourage skilling, for example, than picking particular industries or particular firms and providing support for them.
So, in general, it's quite a risky way to go and the potential to waste a lot of money and to fix resources in a place that isn't the most efficient is the risk that you've got to guard against that.
Ganesh Nana:
Thanks, Dominick. It's Ganesh Nana here, previous Chair of Productivity Commission and thank you for your presentation, Clare. Traversed a lot of spaces and indeed I suppose very common themes coming through from what Productivity Commission's been putting out over the last few years.
One of the things I'd like to focus on is very early on in your presentation was around the difference between the laggards and the frontier. At ProdComm we did a lot of work on the frontier space, I suppose. But the thing that I was quite keen on going into in the next steps was around the laggards, and in particular in the New Zealand context, the large number of SMEs in our context, very small businesses. You could argue they're probably not businesses in the total scheme of things. And what does it actually mean for those businesses when you talk to them about lifting their productivity?
I keep talking about the stereotypical New Zealand construction business, which is the owner in the ute with the dog on the back and maybe the apprentice, who keeps giving me his invoices for the work done, handwritten invoices. And what does it mean when I tell them they need to lift their productivity, but it's well outside their comfort zone? It's not even in there. And you're talking about R&D, and that stuff, but it's just well outside them.
Clare Lombardelli:
You're absolutely right, spot-on. It is the difference between... The impact of firm size on productivity is very, very striking. The largest firms are the most productive by far. And actually, particularly when you're talking about these small, basically micro businesses, one person, two people, it's very, very hard to think about for them what productivity means.
Now, look, if they're happy doing that and actually it's about continuing their way of working, fine. But when you've got large parts of your economy that are operating like that, you will see the impact. So, the question there is what incentives do they have to expand or indeed combine with others and think about actually is there more that can be done there to scale up?
And then for the government thinking about, well, what incentives are being created? In some ways, I think people have, whether it's a small businesses, people see them as somehow hugely special. They don't have a greater moral value than others, but somehow there's a desire often to protect that idea, protect that a bit.
But really, we should be thinking about what incentives can we provide so that people actually do see that there is a benefit for them either from expanding their business or getting together with others so that you can start to experience some of these economies of scale? Because if you're one or two people, it's very hard to see an economy of scale, but you're absolutely right. That is one of the reasons.
If you look at countries where productivity is higher, they don't tend to have this very high number of SMEs. I mean, I should say, you can get incredibly productive small businesses, incredibly productive micro businesses. They do tend to grow though over time and become bigger and bigger. But you do want to have this dynamic economy where people can set themselves up or start businesses, but with the aspiration of growing those businesses into something bigger.
Dominick Stephens:
Thanks, Clare. So, we'll take an online question, just while we get the mic moving, and I'll take an online question first and then we'll go to the in-person one. So, when you mentioned managerial capability, it really struck a chord for me.
I remember a summary from the Productivity Commission some years ago that said, "Well, New Zealand's productivity is low because it's small and isolated and we have capital shallowness, and we have poor management." There were some metrics on our managerial capability and that was poor. But the paper went on to say, "Why? How do firms with poor management capability survive?" And that's because we're small and isolated.
So, it came back to being small and isolated, but we've got to make the most with what we can. So, the question that's come through online is what's the role that policy can play here? So, what are some examples of successful interventions to improve managerial practise in an economy?
Clare Lombardelli:
It's a very good question. I mean, the most obvious, the clearest example you see is when there is investment that comes with ideas, with new technology, and quite often that can be Foreign Direct Investment. So, there's lots of examples of FDI coming into an industry or a sector in an economy but bringing with it the ways in which businesses are managed and led from the investing country.
There you can see some real transformations in terms of productivity. So, you're right, the small and isolated thing, small, yes. I mean isolated doesn't have to be, there is a choice. And increasingly with technology, with the direction in which the world is moving actually, there's no reason to be isolated just because of distance.
Dominick Stephens:
Thanks very much. So, I think we had a question at the back here.
Speaker 4:
Thank you very much. That was a fantastic presentation. I really appreciated it. I guess one of the things that I see that New Zealand is quite far behind on the technology frontier relative to the rest of the world. You see other countries that have transitioned from central control to market economies have done a fantastic job at development. More than the R, they're doing more of the D.
I just wonder whether there's a set of policies that really help that, particularly around incentives and maybe around policies around capital and taxation of that. I guess I'm not really asking you to get into capital gains taxes, that's covered in your report, and it's well traversed here. But thinking more broadly in that space, what would you offer?
Clare Lombardelli:
Yeah, it's true. And you do see from things like Research & Development tax credits if well-designed, and I would stress the well-designed, it can add real value. You're right, you've seen some economies, if you look at, thinking about countries like Estonia, incredibly dynamic, innovative economies have attracted a lot of investment but also undertaken quite a lot of investment themselves, and so have made a real transformation through using those sorts of techniques.
But you have to think very carefully about the design to ensure that what's happening is genuinely additional. The risk is, and you do see this quite often, is whether it's subsidies or incentives for investment are put in, you don't want that basically to just all be deadweight loss. You have to think how do you incentivise actions at the margin that will bring investment in. But you can do it through policy including through taxation.
Philip Stevens:
Hello there, [inaudible 00:49:32] I'll get word in. Hello there, I'm Philip Stevens, also formerly of the Productivity Commission. So, two facts and one question. So just on the management thing, just to add fuel to this discussion is, one, the area where the New Zealand firms lacked in the management matter study was in human resource management.
So, the target setting and the more formal bit, which is we're moving to a knowledge economy and all that kind of thing. That sounds pretty worrying. The other thing is it's highly correlated with competition as well in New Zealand, so great paper on that I should say.
The question is about competition because a really interesting subject is, and you've touched on it a bit there, where the nuance of competition policy is really important and particularly for a small distant economy. And I'm conscious of the work like Rachel Griffiths and Philip Aguilón has done about this idea of a U-shaped relationship between competition.
So, you can have too much competitions in some kind of markets, and which allows rent-seeking behaviour and that sort of thing to go on. That's one of the big worries we have here is increasing the competitive environment might end up creating more rent seeking and a few big winners.
I'd be really interested in your thoughts about where's the nuance in competition policy, which aspects of competition policy should we be focusing on when we have an economy where we are not going to get four or five large players or anything like that? Cool.
Dominick Stephens:
Maybe if we just borrow that one.
Clare Lombardelli:
It's a good question. What we say about competition in the reporting elsewhere, you have to look at this kind of sector by sector, because sectors have very different characteristics and you're absolutely right. There are some sectors where realistically competition, if anything, is likely to reduce investment because you need scale and those sorts of issues. So, you really have to look at this sector by sector in terms of competition.
And the other thing you want to do is think about actually where are the easy wins on competition? So, for example, barriers to entry, the sorts of area where you can address that quite quickly. Other things when you're talking about structural issues or heavier regulation, a bit more difficult, but you're absolutely right, it's not a simple position that it's always better to have more competition.
What you want is markets to be contestable really. You don't necessarily want to have large numbers of players in them. It depends very much on the structure of the market.
Dominick Stephens:
So, I'm told that we, well, that one microphone ran out of batteries, but being a frontier firm, the Treasury has ceiling microphones which have been turned on and will pick up the questions. So just go ahead and speak loudly and then we'll... Next question over here.
Speaker 6:
[inaudible 00:52:30] Vic Uni. I'm just wondering about the opportunities for productivity relating to climate change. Because I can think of a lot of challenges, but any positive developments there that you're wondering about? Thanks.
Clare Lombardelli:
It's a very good question, and I presented it as a challenge to productivity. I think look, that it is, there will be a cost of the climate transition and we need to be realistic and honest about that. It doesn't mean it's not worth doing, and it doesn't mean we wouldn't all be worse off if we don't do it, but we have to be realistic.
I mean, where there is an opportunity is what climate change, the transition to zero carbon economy we'll do is drive a huge amount of technology advancement. We've seen that in renewable energy.
If you look at renewable energy now, the cost of that has absolutely plummeted, the productivity and that has absolutely plummeted, because it has absolutely rocketed because of the increase in technology and research. The research that's gone into that and production at scale now of these new form, solar, wind, all of that has been a huge driver of productivity. There will be others.
New Zealand, I suspect, will lead the world on working out how to do agriculture in a zero-carbon way. But that's going to need, it's going to need research. It's going to need investment, but that will also lead to a technological advances that should roll out across the world in a really positive way.
So, there will be particular sectors, it will drive a lot of research, it will drive a lot of technological advances in that way, but that will need investment to deliver it.
Speaker 7:
Thanks, Dom. [inaudible 00:54:09] It's very nice to see you again, Clare. One of the things that the survey touched on, [inaudible 00:54:14] touched on, the physical challenges of an ageing population, and we can address those super holds in a Teutonic position here that's comparable to triple lock. And one of the things that's been discussed is the possibility of raising the age to [inaudible 00:54:31].
Everything I've seen suggests that all that does is push the challenge down the road, because you briefly stop the increase, but then a few years down the line it just continues going anyway. I wonder if you have any personal reflections, or professional reflections, on credible pathways to providing sustainable retirement loans in the long term?
Clare Lombardelli:
It's a really good question. We don't talk enough about demographics in my view, their impact economically, their impact fiscally. But we are all seeing a massive change. And it is certain. There's not much in economics you can predict, but you can predict this.
I mean, I would challenge the suggestion that raising the age just gives you a temporary benefit. I mean, ultimately, you're right. For this to be really sustainable in the long run, you have to be matching, not matching, but you have to be adapting to increasing life expectancy.
I should say, and we should all recognise, increased life expectancy is a fantastic thing and people living healthier for longer is a fantastic thing. But you can't fix the length of time you work and have all of the benefit taken in time not worked, but in which you're receiving money from the state. That's just not sustainable. You have to share that benefit across working age and non-working age.
I think when you look at countries that have done this successfully, and a number have, there's a few things that you can see. So, one works very well is signalling far in advance what is coming. It is completely unreasonable to say to someone expecting to retire in three years’ time, "Actually, you can't do that anymore." But if someone's 20 years from retirement, that's perfectly reasonable.
In fact, you talk to most young people now, they don't think about an age at which they're going to be retiring. And so that's perfectly reasonable. Signal it in advance, think very carefully, and you have to put a lot of thought into the challenges around the distributional aspect. So, life expectancy on average is increasing but isn't increasing for everyone. In fact, for some groups it's going backwards.
So, thinking about actually, one, how do you improve your public health policies to reverse that? But also, you can't assume that everyone... Raising the retirement age will have very different impacts on different people. So, you have to be quite thoughtful about that and think about whether you need to do more than just raise the age.
The other thing, if you look across countries that have done this from a sort of OECD perspective, it's quite interesting how many countries achieve big changes in their effective retirement age or their retirement age alongside some other crisis. So quite often you'll see something, some economic difficulty comes along or some big change and as a package of reforms alongside that goes into this.
So, it's a take the opportunities when they come, because it's always a very difficult thing to do. But ultimately, we are on a completely unsustainable path as advanced economies when it comes to looking at the fiscal pressures of ageing. We better face up to that sooner rather than later, because the longer you leave it, the harder it gets to change these policies.
So, it really is one of those ones that we are going to look back and think, "Why didn't we do this sooner?" Because it is very challenging, it's very difficult thing to do when you're talking about people's entitlements. But we really do need to plan for this, because it’s obviously coming.
Dominick Stephens:
Thanks very much, really interesting topic. Interesting talking about retirement ages in New Zealand, there was very little labour market disincentive to continue working after the age of eligibility for national superannuation. We have phenomenal growth in labour force participation among the over 65s.
But it just strikes me, this comment to make, is that that's something that is unambiguously good for society if you're not putting an impediment in place for people to work if they wish, and a firm to employ them if they wish. But assuming that productivity peaks somewhere early in life, it's a great thing for society, but is probably a drag on the average productivity when measured. So just as a means of describing that productivity is not the only measure that matters for, it’s not the only measure of policies that are a good thing.
So, we've got some more questions coming through online. I'll just choose one. What market imperfections might cause some countries and not others to underinvest in R&D? So, do some countries simply have a comparative advantage in R&D production? And what might be the origin of such a comparative advantage?
Clare Lombardelli:
That is a really interesting question. I mean actually when you look at what drives the differences in investment, some of it is around market structure, some of it is around incentives, as we talked about before. A lot of it is actually cultural and is about how do firms think about the future, how do they plan for the future?
It's interesting when you ask decision makers in firms, "How much impact do they think the decisions that they have will impact on the future?" So, if you talk to, as I say, in countries where you see very high levels of investment, finance directors in those countries think that by investing they are affecting their own future, their potential.
Whereas in other countries where there's lower levels of investment, people seem to be a bit more, they'll respond much more around, events are what determine the success of the firm rather than leave us within their control. So, a lot of it is cultural.
A lot of it though, if you're a firm in an environment where all your competitors are investing, you're more likely to invest. So, you do see these network effects that go on as well, and the question is how do you get yourself from one equilibrium to another?
Dominick Stephens:
Thanks very much. We've got in the room a couple of in the room questions.
Simon Wakeman:
Simon Wakeman from the Ministry of Business, Immigration and Employment, you mentioned agriculture and the debate we are having is how much is our productivity going to increase by increasing our agricultural, tourism sectors versus transforming into a more sort of knowledge-based, tech-based economy. How do you see that playing out? And particularly advice for New Zealand, should we be investing more in agriculture, in agricultural industries or moving into other industries?
Clare Lombardelli:
Well, you clearly want to be investing in agriculture to make it as efficient as it can be, and it'll clearly always play a big part in the New Zealand economy. It's a huge part of the economy now and it will be. And actually, New Zealand needs the world in terms of efficiency of agriculture, so really strong story there.
But of course, as we continue the knowledge-based economy ever expands and as technology develops in other areas, New Zealand like other countries will want to think about diversification and actually how do you also build success in some of these very advanced knowledge-based sectors as well?
Similarly, tourism, it's clearly always going to be a big part of the New Zealand economy, and that's a great thing, but these heavy service sector economies like that are quite difficult to get very high productivity gains out of, but it is still possible. So, I think the strategy will need to be one of diversification going forward and thinking about where are the opportunities to take advantage of knowledge-based economies, sectors that will be growing and expanding.
Speaker 9:
I was interested in your comments on FDI, Foreign Direct Investment. Now, of course it can offer benefits, but our experience from the evidence that we have seems to indicate that it has been rather low quality in New Zealand. So, for example, it tended to invest in areas where firms could get [inaudible 01:02:44] sector. Raising productivity in firms has been, investing in firms already with high productivity rather than raising the productivity of existing firms, a lot of takeover rather than Greenfield, poor diffusion through the labour channel, those kinds of things.
So really, the key question for us I think is how do we get firms that are really going to make a difference? And some of the work the Productivity Commission did was on frontier firms and saying actually if you've got a large foreign firm that was at the frontier of technology and could diffuse that through building up suppliers and so on in New Zealand then that could produce benefits. But that implies some element of selection. So, I'm just wondering how you ensure that those are real benefits rather than something reliving the past, if you like.
Clare Lombardelli:
It's a very good question. As you said, it could be huge varieties across FDI, but actually what that is doing is in a sense mirroring what you're seeing going on in the economy, because what you've just described will be true of domestic firms as well. It's how do you get them to invest in developing the supply chain, bringing forward technology and research and that.
But you're right, I mean New Zealand at the moment has very restrictive FDI rules. So, if it was decided to think about whether or not those should be reconsidered or relaxed, what you would want to do is focus on those elements as you say, where you'd be relaxing it with a specific view to bringing in a particular knowledge, particular investment that could help the sector more widely and not just be about purchasing and holding, but actually is about development over time.
Dominick Stephens:
Thanks very much. I'm enjoying the way we are sort of traversing a wide range of topics here, so you're incredibly versatile in your answers. But I'll just take an online question.
We've talked a lot about competition, capital. Let's talk about the movement of labour. This is an issue that we wring our hands about a lot in New Zealand. Is the loss of our highly productive people to countries who can offer greater complementarities to those people. So how might New Zealand attract and retain people with the highest capability? Might we be stuck in a spiral where lower productivity and lower attractiveness for people feedback off each other?
And as I say, this is something that we think about and wring our hands about a lot in New Zealand, but I'm very, very interested in an outside perspective, very, very interested in an international perspective on how the movement of people is shaping up around the world and how New Zealand is placed within this scheme, as you see it.
Clare Lombardelli:
I should say from this audience, you've attracted quite a lot of the high skilled people from the UK, so you're doing something right. I mean, actually, if you look at, we are seeing huge transformations in migration around the world at the moment. All advanced economies are seeing very, very high level of immigration at the moment, people moving.
But New Zealand, even by those standards is incredibly high in terms of the number of migrants. Now this builds on a very successful history. New Zealand has a frankly fantastic history in terms of people moving to the country, making a success of that, and also openness to immigration, which has been to the real benefit of the New Zealand economy.
So, like you say, you see these very, very high numbers. Now, I'm aware and conscious of there is also a pull, high skill people to move around. I mean high skilled people are incredibly high demand everywhere in the world and can attract increasing salaries and increasing incomes through moving.
New Zealand has got a great value proposition in lots of ways. It's a beautiful country, I'm sure it's a wonderful place to live. It can't however compete in terms of salaries and cost of housing with a number of other countries, and so that will have an impact in terms of attracting or retaining the highest skilled people.
But actually, what you're seeing is if you look across advanced economies, New Zealand's a real beneficiary of immigration. You see higher numbers of people moving here across the skills distribution, and that is actually what you need because there's also gaps in the lower skilled parts of the labour market.
What you need to think about though, and there's a couple of challenges. One is making sure the absorptive capacity of... You're attracting migrants at the rate you can absorb them, and that is about other public services, it's about housing. Those sorts of issues really matter for immigration.
Then the other thing that I think is just less clear at the moment, we know that immigration is great for growth, and it really raises growth, and we know it's good for productivity as well. What's a bit less clear at the moment is what's happening in particular the impact on wages and certainly at the lower skill end of the distribution.
So, as we're seeing these very, very high movements around all advanced economies are seeing this, what's the impact there? But in general terms, the economic benefits are clear and have been a real benefit to New Zealand. And I suspect will continue to be so.
Dominick Stephens:
Thank you, and our question.
Speaker 10:
Suzanne Snively, independent economist, and I have worked in the financial sector, I just wondered if you could give us some advice. I think one of the other challenges falling on from Bill's question about FDI in New Zealand is that people who have got quality FDI are interested in us, because the bottom line seems to be 500 million before they really want to take an interest. You got any thoughts, having looked at small economies in [inaudible 01:08:43]?
Clare Lombardelli:
I mean I haven't on the specifics, I'm afraid. I don't know the specifics of the sort of investment that you're trying to attract and are struggling to land here. I would've thought there is huge potential though just from changing the restrictions, given where New Zealand sits on that scale. So, I would've thought there is potential to bring more Foreign Direct Investment in, but I'm afraid, I don't know the specifics of individual sectors.
Dominick Stephens:
We'll go to one more online question, and then we've got an in-person over here. So how large a component of firm performance reflects innate non-replicable capabilities? So, is just innate to the firms, and I guess the idea is can you really lift the laggards?
So, you can think of firms in part as being avail for people, they're made up of people, people have innate capabilities or capability varies across people. How much of a proportion of the variation among firms just reflects innate non-replicable capabilities?
Clare Lombardelli:
Sorry, I'm not sure I actually understand the question there. I mean what we're doing here is we're comparing firms within a sector, so they're all trying to do the same thing or roughly the same thing. So, you're comparing like with like, maybe I'm misunderstanding, I'm not sure what an intractable capability of a firm means. Sorry.
Dominick Stephens:
I'm not completely sure I understand it either, but I think the idea is if you have 10 people all running the same race, they're going to finish at different times no matter how much you train the slowest. How much of the variation among firms is similar to that or?
Clare Lombardelli:
I'm not sure. I mean if you think about the comparison with people, I mean training makes a massive difference. We're all completely different at doing our jobs now than when we were left school or whatever. You learn a lot as you go, so there's quite a big difference there.
But if you think about firms, what are they doing? They're combining people and technology together. There's nothing innate about that. It should all be improvable, but I think I'm not quite understanding the question, I'm honest.
Dominick Stephens:
That's fine. That's completely fine. But let's move to an in-person question.
Geoff Lewis:
Hello, Geoff Lewis, yet another ex from the ex-Productivity Commission. A question on the labour side, going back to that, you mentioned active labour market policies, and that not only is New Zealand quite low in its activity on that, but also potentially quite low of benefits. Could you tell us a little bit more about what good active labour market policies look like?
You mentioned better matching, but as I understand it's not only matching existing skills to the jobs out there, but also retraining people. You've mentioned a lot about digital skills and the importance of that. So, just a little bit more about what good active labour market policies might look like.
Clare Lombardelli:
So, in general, this is around, well, there's a number of different elements of it. So, one is just taking people who are unemployed and getting alongside them and helping them find a job and think about what their skills are and what the sorts of jobs are available and encouraging them and supporting them and where necessary helping them, whether that's with helping them write their CV and do the application process.
But it can become more interventionist if you've got, say, an area with a very high demand for a certain sort of worker, but the available people don't quite have the skills. Do you do a bit of retraining but actually provide training programmes? Do you do that in conjunction with employers that are short-staffed? You can go all the way from the helping someone fill in job applications, all the way through to more activist workforce planning where you're actually bringing together employers, training providers and individuals looking for work to try and actually construct a bit of a plan there.
In those countries that do this incredibly effectively, what you see is sort of very active, almost formal partnerships between training providers and big employers to think about actually what is the future workforce need, and therefore, can the local training providers be providing training programmes that deliver workers with the skills that are going to be in demand and those sorts of things. So, there's a range that you can do here. It obviously varies by country, but it's clear that across all of these, New Zealand does seem to do a lot less in this space than some other countries do.
Dominick Stephens:
Last question. Is that Geoff?
Geoff King:
Thanks. Geoff King from the Ministry of Foreign Affairs and Trade, we think a lot about trade and how that can help prosperity through productivity shifts. I was taken by your slide, which mentioned the big boost from GVCs and how that promotes productivity globally, and I reflect on New Zealand as an economy that isn't potentially as integrated as some of the high-performing OECD members.
But my question was more broad in terms of the global shifts and draws on Dominick's question on industrial policy, because what we're seeing is a shift in many countries in their trade or the economic policy, domestic economic policy, away from efficiency in terms of value chains towards more resilient spaced policies that are designed or stated at least to enhance issues like security, whether it be economic security or national security. I wondered if you saw that as a potential future drag on global productivity as those GVCs reorientate and are less efficient than you figured.
Clare Lombardelli:
I mean certainly if you reduce trade, if we revert to protectionist policies, then that will absolutely reduce productivity. It's very, very clear. The relationship between trade and productivity is a very strong one, and trade brings not just higher growth, but it's the transfer of knowledge, it's the transfer of ideas, it's the better matching of resources to their most efficient use. So, trade, if we were to turn away from that, that would reduce productivity for sure.
Now, we are seeing a change in trade patterns around the world, and some of those will be positive and some less so. Where countries are seeking economic resilience through diversifying their supply chains, moving to a wider range of suppliers. I mean, that's all for the good, and that's actually the best way to build resilience is you don't want to be in a situation where countries are overly reliant for particular critical parts of a supply chain on one particular provider, whether that be a company or a country or whatever. So, you do want to, and we would encourage diversification.
What I think you need to be careful of or what we need to be careful about is using or describing or overattributing economic security to all sorts of things that are not actually about security at all. We should be avoiding any kind of protectionist tendencies in that sense, because these just lead to inefficiencies and they don't make countries more resilient.
I think you have to be careful, it's absolutely right that countries need to think very carefully about security and make sure that they have security of supply, diverse suppliers, they know what their dependencies are, and they have plans for all of that. But actually, that you can do all that consistent with a free and fair rules-based trading system in which countries are integrating, global value chains are integrating, and that's the way to achieve higher productivity and better economic resilience.
Dominick Stephens:
Thank you very much, Clare. If we can just thank Clare in the usual way. Thanks for a really insightful presentation and an incredibly diverse Q&A session at the end. I guess when we talk about productivity, I mean, it is quite an all-encompassing thing to talk about, across the economy.
Well with that, I'm going to close a little bit over a year-long theme of Productivity in a Changing World. Thanks to those of us who've sort of followed us through. Our coming theme for the next year or just over a year, is the future of fiscal policy. So, this is all about creating fiscal policy that is stabilising, sustainable and effective.
Stabilising meaning fiscal policy over the economic cycle. Sustainable meaning obviously sustainable for the long run, including but not limited to retirement policy. And effective means getting the best bang for our buck from fiscal policy. So fiscal theme for the coming year, we've got a fantastic speaker. It's going to line up next month with a very exciting opening speaker, so keep your eye on the Treasury website to start that theme up.
With that, I'll close today's proceedings with a short karakia.
[Speaking in te reo Māori 01:18:52] Piki te Kaha. Piki te Ora. Piki te Wairua. Hui e, tāiki e!
Thanks everyone.
[Speaking in te reo Māori 01:18:59] Mā te wā.
Productivity in a Changing World seminar series
At Te Tai Ōhanga – The Treasury, we want to facilitate learning and debate on the important issues facing New Zealand. In 2023 and early 2024 the Treasury Guest Lectures are being organised under the theme: Productivity in a changing world.
This theme recognises that lifting our productivity performance continues to be central to improving New Zealanders' wellbeing and that we are facing this challenge in the context of significant economic, social and environmental shifts. These shifts will require considerable changes in our economy if we are to sustain and improve our economic and productivity performance.