Editorial: Growing into an uncertain future

THE GOLDEN weather threatens to end and grey recession might follow. So this might be a time to ask whether all that sunshine has blinded us to certain fundamental problems in our economy. The major one being productivity, an ugly word but a concept of crucial importance. Only by increasing our productivity will we become wealthier. Only by increasing it dramatically will we rise from the bottom half of the OECD to the top half. Yet a major report this month from Statistics New Zealand shows that our productivity growth has slowed dramatically since 2007.

The government can fairly claim that this is partly the cost of success. The hefty fall in unemployment under Labour has brought many unskilled workers into the labour market and, as a result, decreased productivity growth. It can also claim that the higher labour productivity rates of the 1990s came at a heavy price. Wages and the workforce were cut, leaving the survivors working hard for lower wages: the result was an increase in productivity but also a big increase in human misery. But that is not the whole story and, in any case, after eight years in power the government's argument will be dismissed as excuses.

And the fall in growth in multifactor productivity is not so easily explained. Economists argue about what this is it is the form of productivity that is neither labour nor capital productivity but its importance is undoubted.

It is, in a way, an index of smartness: it reflects innovation in technology and work practices and better ways of doing things. The fact that the growth rate in this area has fallen under Labour is a serious worry.

Is it fair to argue, then, as Roger Kerr does, that it shows Labour's aspiration for a knowledge economy has been all talk?

Not necessarily, but it certainly shows that the knowledge economy has been much slower to arrive than hoped and it is noticeable that Labour's promise to push us up the OECD stakes is less often heard nowadays. Michael Cullen claims that the government has put a whole lot of building blocks in place to boost productivity. And certainly the government has been busy. It has boosted spending on infrastructure, education, research and development, industry training and is boosting capital investment funds through KiwiSaver and the Cullen fund.

Economist David Skilling says these moves don't go far enough, and he is probably right. In a sense, the government's approach is neither fish nor fowl. It has rejected the free-market approach, but nor has it gone the whole dirigiste hog. It has not gone for major state investments, enormous increases in science and technology spending, "picking winners" and Scandinavian-sized tax rates.

There is no one route to high productivity and the wealth it brings. New Zealand has not really decided which route is best and what's worse, there has not been a deep enough discussion about it. National's recipe personal tax cuts, cuts in "wasteful" government spending and no doubt a bit of tweaking of the industrial laws are also pallid and unlikely to make much difference.

The welcome economic growth of recent years has probably lulled us into thinking that the debate is no longer needed: we're doing well enough as we are. But we're not, and unless we do better we will remain among the mediocre performers of the first world.

What we need is a serious national debate about our fundamental economic strategy, a campaign to find the Kiwi way to greater productivity. The good times perhaps allowed us to ignore this vital issue. The coming bad times will force us to face it. 

- © Fairfax NZ News