Forces affecting business competitiveness: Productivity, competition and regulation

Paul Conway

Director – Economics & Research

AIG Meeting, October 30, 2014

The Productivity Commission

Our organisation

• independent Crown entity

• three Commissioners

• ~15 staff, plus contractors

Our work • 2 inquiries per year chosen by Govt.

• in-depth analysis taking ~12 months

• public engagement/consultation

• real-world, practical policy advice that is evidence-based

• Non-inquiry research agenda

Just what is productivity?

“…nothing contributes more to the reduction of poverty, to increases in leisure, and to the country’s ability to finance education, public health, environment and the arts.”

Alan Blinder and William Baumol (1993)

Productivity isn’t everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Krugman (1994)

Labour productivity, MFP and capital intensity

The sources of economy-wide GDP per capita differences

“New Zealand has had one of the lowest growth rates in GDP per hour worked among OECD countries.” – OECD

The productivity puzzle

Why international connections matter

• Market expansion via international trade enhances productivity by:– Specialisation and scale– Increased competitive pressure– The diffusion of new and improved technologies– Investment

• Global value chains are becoming increasingly important in international trade

• The negative impact of distance on goods trade may have increased

• The challenge of remoteness to major foreign markets is compounded by a small and sparsely populated domestic market

New Zealand has low trade intensity for a small economy

AUS

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Log GDP (current PPPs, billion USD)

Knowledge based capital (KBC)

• KBC encompasses a wide range of assets:

– Computerised information, innovative property, economic competencies

• Production has become increasingly more intensive in KBC

• KBC tends to be:

– non-rival, partial-only excludability

Investment in KBC looks low in NZ, particularly R&D

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Business sector Government Higher education Other

NZL

There is more to innovation than R&D

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ICT investment (%GDP) New Zealand minus

Benefiting from ICT requires organisational change

2.6 2.8 3.0 3.2 3.4

India

Brazil

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Greece

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Overall management score

0 5 10 15 20

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Greece

Chile

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Estimated boost to productivity from closing

Benefiting from KBC requires smooth resource reallocation

• Why innovate if growth potential is limited?

• Fulfilling the strong growth potential of KBC hinges on the ability to reallocate resources across firms to their most efficient use

• Framework policies are key. New Zealand does alright but could do better.

• The cost of poor policy may be rising with the growing importance of intangible assets

• The market for ideas also needs to work

Policy implications?

Productivity Commission inquiry No. of policy recs.

Housing affordability 33

International freight transport services 26

Strengthening trans-Tasman economic relations

32

Local govt. regulatory performance 29

Boosting productivity in services 31

Regulatory institutions and practices 44

www.productivity.govt.nz

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More information

Labour productivity growth

“The gap in labour productivity has continued to widen … relative to most advanced OECD countries.” - OECD

Minimal participation in GVCs

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forward participation (intermediate goods used as inputs for other countries' exports)

backward participation (imported intermediate inputs)