Speech: Makhlouf - Productivity Hub Workshop Closing Address
Productivity Hub Workshop Closing
Address
Published 16 Jun 2017
Speech
delivered at the Productivity Hub Workshop in Wellington by
Bryan Chapple on behalf of the Secretary to the Treasury,
Gabriel Makhlouf, 16 June 2017.
Good afternoon everyone.
Thank you for inviting me to provide a few closing remarks
at the end of this workshop.
I would first like to thank
the Productivity Commission and all the members of the
Productivity Hub for putting on this event. A special
thanks is also due to today’s speakers for sharing their
insights and stimulating our thinking. In particular I want
to acknowledge OECD Chief Economist Catherine L Mann for
joining us. Bringing together experts with a common
interest in productivity is a valuable way to provoke
discussion, increase knowledge, and – most importantly –
generate action.
Productivity, as we know, has been a
persistent challenge. Indeed the OECD has flagged it as the
most important medium term challenge for New Zealand.
Of
course New Zealand has much to be proud of when you look at
how we measure up against the majority of OECD wellbeing
indicators. We rank highly in employment, health, air
quality, social network support and overall life
satisfaction. These are things we care a lot about, and
rightly so.
But it’s a different story when you look at
our productivity. We are middle of the OECD pack at best in
the amount of income we derive per hour worked, and we have
made little or no headway on lifting our productivity
performance rankings over the past 15 years. That’s why
cooperative efforts like the Productivity Hub and today’s
workshop are so important.
Our understanding of New
Zealand’s productivity performance is improving, thanks to
a wealth of information that has recently been released
including as a result of the Productivity Commission’s
report Achieving New Zealand’s Productivity Potential, the
OECD’s New Zealand Country Study and Going for Growth, and
the Treasury’s He Tirohanga Mokopuna. (That last one is a
cracking read, by the way.)
I’m also pleased that we
are making progress in our understanding of issues at the
firm level, for example on technology diffusion and resource
allocation. It’s also evident that we are growing our
understanding of how productivity enhances, but also depends
on, other aspects of New Zealand’s wellbeing. Aspects
like Māori and regional economic development, skills and
education.
Our challenge now is to keep building the
momentum of progress and turning our growing understanding
into action that lifts our productivity performance.
Underpinning this is the use of data to inform policy, which
is the essence of the investment approach.
The
productivity challenge applies to the public sector as much
as it does to the private sector. With core Crown expenses
nearly 30 percent of the total economy, public sector
productivity really matters. If we look wider to include the
activities of organisations where the Crown has an ownership
interest such as Crown Financial Institutions, State-Owned
Enterprises, Mixed Ownership Model companies and Crown
Entities, the significance of productivity becomes even more
apparent. And perhaps most importantly, it’s also the
public sector – central and local government – that
helps shape the rules and conditions in which the private
sector operates. I am really looking forward to seeing the
work from the Productivity Commission’s new inquiry into
State sector productivity.
As I mentioned, we have seen
little improvement on where we rank among OECD countries for
productivity, yet we have been told that we have
world-leading settings.
This raises a few questions for
me. The most obvious is whether what we’ve been told is
right. And if it is right, does that mean that our very
good settings will always be undermined by our size and
distance – a case where plate tectonics overrides great
economics? Or could it in fact be that New Zealand’s
world leading economic and policy settings aren’t so
world-leading anymore?
It’s clear that the centre of
global economic activity has been shifting towards Asia at a
rapid pace. This can only benefit us as a trading nation.
Countries like Indonesia, Malaysia, Viet Nam, The
Philippines and, of course, India and China have millions of
people and growing wealth. One estimate is for the Chinese,
Indian and Southeast Asian middle classes to be almost 2
billion people by 2020. That is a vast group of markets for
us. Part of our challenge is to position ourselves as a key
part of the value chain. And, increasingly, trade within
value chains happens within regions, so we need to not only
focus on our immediate export markets, but also understand
the ultimate destination of our exports. Promoting good
regional trade within Asia will be an important complement
to our own bilateral trade deals.
‘World-leading’ is
always evolving. Looking back through history, Rome, China,
India and the United Kingdom have all at times been world
leading economies, just as the United States is today. So
while some things will continue to hold for productivity and
incomes, we need to make sure we are not working towards
something that used to be world-leading, but is no longer
so. It’s also likely that what’s world-leading will
vary by country so it’s not a recipe that we can simply
copy.
So what matters for productivity? I’d like to
cover five factors that the Treasury believes always matter:
skills, connections, markets, resources and rules. To
improve productivity we will have to be more effective in
the utilisation of these factors and the interactions
between them. But we will also have to make sure we keep
evaluating what works, and keep asking whether something
needs to change or whether there are other avenues to
explore or whether there’s anything missing that could
make a difference. You can never declare victory and stop
looking to improve.
Let me start with skills, because
they, and in particular the people that have them, are at
the heart of productivity. The Treasury believes that
opportunities remain to lift skills and resilience in the
workforce, and it’s important that those opportunities are
pursued. Jobs growth has been strongest in those industries
that have a greater concentration of workers with
post-school qualifications. And labour market skill
requirements are likely to keep increasing, especially as
competition intensifies both domestically and in our export
markets, and as the adoption of new technology – not least
artificial intelligence – accelerates across most sectors
of the economy. We also need to explore how we can better
utilise the skills in our workforce, because there is
increasing evidence internationally that under-utilisation
of skills in the workplace inhibits productivity. One study
by the OECD has suggested that reducing New Zealand’s
skills mismatch to best practice would increase productivity
by 7.2 percent, compared with an OECD average of 6
percent.
Of course as the world changes, so too will the
types of skills we need change. The need for people to
develop more relevant and higher skills over time will
require businesses and their employees to think hard about
skill development and retraining. A key question for all of
us is whether systems and incentives are supportive of
lifelong learning.
The next factor is connections.
Connections matter, in particular people-to-people
connections. And as Asia continues to dominate economic
activity, perhaps those types of connections – ie,
relationships – matter more than ever. Improving
connections can help to improve the flow of people, capital,
trade and ideas that contribute to productivity. Strong
people-to-people relationships build confidence and
understanding and promote learning. They help our
businesses to identify capabilities that will help them
improve their productivity and ultimately compete and
succeed in both domestic and global markets.
And markets
is in fact the third factor I want to cover. In the
Treasury’s view we need to continue to lift the
competitive intensity of the New Zealand economy. The
pressure of competition pushes firms to be more productive,
for example by innovation to improve quality or cut costs.
We need to ensure our markets are as competitive as possible
by reducing the barriers to entry, including for imports
(whether in goods or services), or by regulating the price
and quality of goods and services in markets where there is
little or no competition, such as in our telecommunications
and electricity markets. And we need to maintain the
effectiveness of competition laws and institutions. If we
want competitive markets and the productivity gains they
bring, we have to ask ourselves: what are the regulatory
barriers preventing competition and what can we do about
them? How bold do we want to be to invite
competition?
These aren’t just questions for the
tradable sector. Having a high-performing, productive,
efficient and competitive non-tradables sector makes a big
difference to the cost base for exporters, and it’s great
for our domestic economy too.
Our natural and physical
resources are next. One of the most high profile issues
we’re examining in New Zealand – housing – illustrates
how these resources are a significant factor in
productivity. We are all aware of issues in house price
growth in Auckland and the inefficiencies in our use of land
which are proving to be a bottleneck in New Zealand’s
growth and productivity. The Productivity Commission has
published a number of excellent reports on the issues
here.
At the heart of the matter is the allocation and
development of our natural and physical resources. At the
moment, it can be argued that too much of our natural
resource use is determined by incumbency rather than most
efficient use. Better rules around use and around pricing
externalities such as pollution are critical to making best
use of resources and are likely to be key to promoting
significant diversification of the economy and contributing
to an improvement in productivity.
To use water as an
example, the ‘first-in first-served’ approach to water
allocation means it may not always be allocated to the
highest value use, and the current system lacks sufficient
incentives for use to move to a higher value one. The
Freshwater Allocation Work Programme is considering options
that could be more appropriate to ensure that we are getting
the best use of our water resources.
And to briefly cite
housing again, the degree of its affordability or
unaffordability is a product of our entire urban development
chain and of multiple interacting areas of policy. We’re
considering these issues holistically, as well as
particularly how land owners capture the economic rents and
potentially magnify the problems. We see the concept of
competitive land markets as an important part of the way
forward.
Finally, I want to talk about rules. The making
of rules and regulations – whether by central or local
government or even by self-regulated occupational groups –
has an impact on productivity. All rule-makers help shape
the environment in which investment, enterprise, and job
creation is either promoted or limited. Rule-makers in the
public sphere have a double responsibility: to ensure
effectiveness in public spending and decision-making, and to
provide the best possible regulatory and policy
settings.
I believe the investment approach to
policy-making can be an important driver to greater
productivity, especially – but not only – in the public
sector. Better data and powerful analytics can make a big
impact in our understanding of the economic system,
measuring the effectiveness of regulation and policy, and
feeding evidence of performance back into decision-making.
The Treasury is a fan of feedback loops.
We need to
continue to test our assumptions about what does and
doesn’t work, and to apply new things were they make
sense. I know there’s a lot of willpower and brain power
here to ask questions, find solutions and take actions to
raise New Zealand’s
productivity.