Is “Productivity” the Wrong Goalpost?

A recent research report1, looking at the reasons for New Zealand’s relatively poor economic performance, has some fascinating theories as to why we have paradoxically lagged behind other developed nations despite many structural advantages. It also raise questions about whether aiming for “productivity” parity with Australia is the right goal for New Zealand.

The report, authored by Professor Philip McCann, observes that New Zealand has struggled to compete on the OECD ladder since the economic reforms of the mid-1980s, despite its notable status as a free economy. In fact GDP per capita has been eroding steadily for over 40 years, a trend that shows little sign of abating. Few now doubt that this reduction in income has increasingly serious implications in regards to the affordabiity of the lifestyle currently enjoyed by New Zealanders.

In a world where human and financial capital are highly mobile, McCann theorises that economic geography, rather than macro-economic settings, constrains New Zealand from achieving its full economic potential. McCann says that focusing on a “productivity” gap with Australia is entirely the wrong approach, when in fact we should be looking at how we can leverage regional advantages. Only through regional cooperation can we hope to position for better growth.

He says that New Zealand has been constrained in adapting fully to the era of globalisation because of its small scale and distance to global markets. He also observes that worldwide economic growth is now being concentrated within larger cities and hyper connected regions. Such regions attract creative people and are increasingly associated with knowledge-based, high value economic activities, according to work by other researchers.

Because of the intense competition for talent and capital from power-house “global cities” on the Pacific Rim such as Shanghai, Singapore and Sydney, second tier cities (like Auckland or Adelaide for example) have no choice but to actively strengthen the existing web of interrelationships that bind them together on a sub-regional basis, suggests Professor McCann. Unfortunately, enormous reductions in capital flows during the recession have only added urgency to addressing the challenge of regionalisation.

The World Bank reported2 that from a peak of $296 billion (U.S. dollars) in foreign direct investment (FDI) into Asia during 2007, the figure had dropped to around $88 billion in 2009 as European and American institutions reviewed their investment strategies. Despite a forecast investment rebound to about $120 billion in 2010, the refinancing needs of the region have been estimated in the order of $200 billion per annum, leaving a substantial deficit to be covered by borrowing. This situation is likely to have considerable flow-on effects to neighbouring countries and trading partner nations across the Asia-Pacific rim.

So where does this leave New Zealand? A 2009 survey by Financial Times subsidiary publication FDI Magazine placed both Auckland and Wellington in the top ten of 133 Asia-Pacific cities in terms of quality of lifestyle. Auckland also surpassed many others by ranking an impressive number 10 with its FDI attraction strategy. But New Zealand cities ranked poorly in terms of infrastructure, education and the ability to create jobs through foreign investment or by leveraging technology and intellectual property. So whilst we can attract people for lifestyle reasons, our conversion rate is somewhat less impressive in respect of wealth creation.

MacDiarmid Institute physicist Shaun Hendy has been looking at patent data from the OECD. His study3 showed that Australia was well ahead of New Zealand on numbers of patents filed per capita, but that this was to be expected because data also suggested that larger cities produced more patents anyway. However he found that individual inventor productivity did not increase markedly with city size. This suggests that there are quite likely other influences such as quality of educational institutions, existence of research networks and availability of funding. Interestingly, the role of social effects and “knowledge spillover” on science researcher productivity has yet to be fully explored in this context.

Might the government’s well intentioned but controversial efforts to bridge the perceived “productivity gap” with Australia possibly be aiming at the wrong set of goal posts? Unless we fully acknowledge the importance of attracting and connecting people and capital on a regional basis we risk having to compete in isolation with much more powerful players throughout Asia-Pacific. A joint Australia-New Zealand investment showcase planned for March seems like the perfect opportunity to demonstrate a commitment to regional cooperation. But the government will have to ensure that the talk is followed up with decisive and timely actions as well as a leadership vision.


  1. McCann, Philip. (2009). Economic geography, globalisation and New Zealand’s productivity paradox. Motu Research Group Public PolicyPaper
  2. Seward, J. (2009). Would a regional fund help get Asia through the financial crisis? World Bank weblog – East Asia and Pacific on the Rise.

A bullet point summary of the McCann report can be found here:

Photo Credit: Luke Appleby

7 thoughts on “Is “Productivity” the Wrong Goalpost?

  1. Paul, this is one of the smartest pieces written on our economic situation. It is also written fairly and without political bias.
       I agree with your points. We have indeed slipped, and the reasons are plentiful. My focus is on addressing the availability of funding and the creation of clusters here: the movie industry has already shown what is possible in Wellington. The problem is that most political efforts to date have been half-hearted, with central government, over the last 20 years, giving little more than lip service to cluster creation.
       The current government has shown little by way of vision and desire to build on promises such as the national broadband strategy. I am worried that with the investment showcase, there will be the usual talk and appearance of doing something for the people, a few choice words from the PM or the Minister of Trade, and then a steady decrease in anything being done.

  2. The film industry is an interesting and useful case study. For the most part they just got on with business without resorting to government intervention. Weta and the PJ empire simply had a really good product to sell and some smart people went out and did it by making the right connections with the industry in Hollywood.

    Outside of the film industry, the concept of cultivating clusters has quietly been dropped by government agencies on the back of conflicting overseas research into their efficacy. Now with the emphasis firmly on innovation within the agricultural sector, government agencies have much less appetite for promoting areas such as software, digital games or manufacturing.

    Therefore it behoves us to learn from the film industry model and look outside our silos. We must engage with more effectively with each other, as well as offshore and thus attract capital investment that actually makes the pie bigger at home.

  3. I’d rather have a country with a sustainable growth than a country that claims to be first world by it’s own press when actually they have dropped to being third world!

  4. Tenth in the world as far as FDI is concerned is really a great achievement. You should be rather proud of it and build on it more.

  5. John – I agree. 10th for FDI is an excellent result for Auckland.

    But being based in Wellington, I’m rather concerned that we don’t even appear to have an FDI attraction policy for our region.

  6. Thanks for the reflection on an interesting and very important debate, Paul. Capital can certainly fuel productivity through investment in automation, process efficiency and capability development – but maybe we are victims of our own success. NZ lifestyle’s can be a natural break on outputs; as people achieve them, they lose the drive to do more.

  7. Pingback: Wrong Thinking From Right | Genius Net

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