Last week, Stats New Zealand released the productivity statistics for the year ending March 2007 (see Stats NZ). Here are the main findings:
- Labor productivity growth averaged 1.1% p.a. over 2000-2007. However, it grew only by 0.5% in the year ending March 2007.
- Capital productivity fell 0.5% p.a. over 2000-2007. Moreover, it fell by 2.1% in the last year.
- Multifactor productivity growth averaged 0.4% p.a. over 2000-2007. However, it fell 0.6% in the last year.
The recent productivity figures in NZ show that for the period covering the current Labour government’s term of office (2000-2007), labor and multifactor productivity growth have fallen compared to the 1990s. For instance multifactor productivity growth fell to 0.4% p.a. during 2000-2007 from 2.3% p.a. during 1992-2000 (these are annual averages, point-to-point).
All this is important for multiple reasons. First, multifactor productivity growth influences the speed at which real income p.c. increases. Second, it shows (at least partially) the effects of past policies and their impact on entrepreneurship. While there are all sorts of issues with measuring factor productivity, the trend in productivity figures provides an idea as to how good the conditions are for (socially-beneficial) entrepreneurship. Indeed, because entrepreneurs discover opportunities for profit and exploit them, they are the key behind multifactor productivity increases. In an environment where entrepreneurship is unhampered, relentless market forces push entrepreneurs to use their factors in the best way possible (including finding new ways) thereby improving overall productivity. (To continue reading, click on the link below.)
Unfortunately for the Labour-led government, labor productivity growth for instance has fallen back to below the level recorded before the beginning of the reform process in the early 1980s (1.4 % in 1982-1985). The recent figures also suggest that all the government’s claims about the positive effects of its “economic transformation” policies have no evidential basis. As I mentioned in a paper written while at the NZ Treasury in 2001 (which has recently been removed from the Treasury’s website, which may show to what extent the NZ Treasury cares about economic analysis these days), economists had many good reasons back then to suspect the failure of the government’s (then) new industrial policy.
The current Labour-led government has criticized the “failed policies of the past” (i.e. the reform period and the deregulation of the 1980s and 1990s) for not delivering enough. Instead of continuing to improve the institutional context for socially-beneficial entrepreneurship, Prime Minister Helen Clark decided, among other things, to increase government spending (and the number of government bureaucrats), re-regulate the labor market, increase taxes (i.e. distort the tax structure, thereby rejuvenating the tax planning industry), intervene in utilities markets, provide more welfare, reintroduce corporate welfare, and renationalize businesses. All this is surely reflected in the weak growth in multifactor productivity, and eventually in economic growth statistics. As time goes by, statistics seem to show how wrong this position was.
Since a picture is sometimes worth a thousand words, see the graph above from Bryce Wilkinson at Capital Economics Limited, New Zealand, which depicts the trend line estimate (not the annual average compounded growth ‘point-to-point’ rate between the start and end points of each period) for multifactor productivity growth rates over three periods: 1985-2000 (“the failed policies of the past”); 1992-2000 (after the labor reforms and 1991 Budget); and 2000-2007 (Fifth Labour-led government). Note that the trend line approach uses all available information whereas the ‘point-to-point’ approach weights only the start and end point observations (this makes it very sensitive to outlier events or measurement errors in these periods).
The chart above may lead one to assume that everything from 2000-2007 is the current government’s fault. Of course, factors other than government policies, including noise and measurement errors, also affect the productivity trends during these periods. Moreover, some of that trend may have started before the current government took office—for example, a proportional system of representation (MMP) was adopted in 1996. Even so, this reduced trend suggests the lack of substance behind the current politicians’ unsubstantiated claims that New Zealand’s reforms during the 1984-1993 period failed to produce real benefits compared to the record during their own term of office (2000-2007). While one can argue over the reason as to why this is the case, there are good reasons to believe that this is mostly due to the deterioration of the institutional context in which entrepreneurial activity takes place. In other words, the graph suggests that entrepreneurs have not been able to discover and use factors as well as they could have, and this slowed productively growth in 2000-2007 as compared to the 1990s.
It is true that because the labor market has been tight for a while, a low-skilled workforce has been employed. Research (e.g. the work of Dean Hyslop and David Maré on employment and the compositional effect) finds that this has reduced measured real wage growth and (perhaps) labor productivity growth since 1999 by the order of 0.8 percent per annum. However, the same factor may have been operating during the 1991-1999 period (as unemployment also fell during a good part of the 1990s); so it is not clear how relevant it is to the historical comparison. Regardless, the bad trend is reflected in multifactor productivity, which, in addition to labor inputs, includes capital inputs.
It is becoming more and more evident that the current Labour-led government has implemented failed policies that have impaired the quality of the institutional context necessary to entrepreneurship and already slowed economic growth in New Zealand. This has a price. Real income p.c. was around US$18,000 in 2000 in New Zealand. If the failed policies of the present have cost New Zealand 1% growth p.a., that’s US$1,300 less p.c. income today. If they reduced growth in NZ by 2%, it’s US$2,500 less p.c. income today. As always, the victims are the people who voted for those who impoverished them.
Thanks to Bryce Wilkinson of Capital Economics Limited (NZ) for his graph and feedback.