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Hon Michael Cullen: Speech - NZ Economy

Speech to Productivity Workshop

28 July 2004

Hon Michael Cullen: Speech to Open the Productivity Workshop James Cook Grand Chancellor Hotel, The Terrace, Wellington

One of the most salient features of the New Zealand economy in the last few quarters has been its capacity to confound the forecasters by outperforming the consensus forecasts for growth.

Looking forward, however, the question is whether we can sustain this rate of growth. Most forecasters say we cannot, and for good reason. They expect a slowdown over the coming year.

A number of factors point to this slowdown; the one that needs to concern us all is the evidence of a capacity constraint. Our options for addressing this in the short term are very limited. However, there is more that can be done in the medium to long term, and today's workshop is an opportunity to get a better focus on this. I congratulate the organisers for the initiative.

So what of productivity? Unfortunately, the concept of productivity has had a bad press in some sectors. It smacks of teams of consultants with clip-boards and stopwatches, observing the minutiae of business operations in order to identify tiny increments of costs to be saved or additional output to be produced.

In the 1980s and 1990s we did reasonably well at cutting costs and increasing output. However, I would argue that there are fewer and fewer gains to be made in that direction. We need to find ways of adding more value to what we do.

Achieving a more productive workforce means three things:

- Improving labour utilisation, so that more of us are working;

- Improving workforce skills, so that we work smarter; and


Increasing the level of capital investment per worker, so that we get the best leverage from those skills.

We have already made significant progress on the first of these. Our workforce participation rate is the highest it has been for many years. Since we took office there are more people in the labour force, and more of them are employed, leaving fewer unemployed.

I am not claiming that government policies have been the major driver of this development; however, their impact has not been immaterial. We have been putting in place policies that encourage workforce participation (policies such as improved parental leave). And the major set of initiatives in Budget 2004 - the Working for Families package - includes a set of measures that will strengthen these incentives further, by increasing the returns for workforce participation, and ensuring that good quality childcare is both available and affordable.

However, there are limits to our ability to increase the size of the workforce by improving participation rates; just as there are limits to our abilities to increase it through immigration.

For that reason, we now need to focus our efforts on skills and on capital investment.

Compared to the OECD, New Zealand has low levels of labour productivity, capital per unit of labour, and what is known as multi-factor productivity. So we need to increase the overall level of skills in the workforce; and we need to increase the investment of capital in New Zealand businesses. The objectives go together. The availability of a skilled workforce means that businesses can invest in capital equipment knowing that it will be well utilised.

The recent growth of labour productivity, capital per unit of labour, and multi-factor productivity has been encouraging. Our labour productivity accelerated from a 0.5 per cent annual rate in the early 1990s to a 1.7 per cent annual rate in the six years to 2002. However, we need to do better to make up for the lost time.

This is not just a matter of increasing the number of New Zealanders with elite high level skills; indeed the indications suggest the opposite: that our major shortages now and for the foreseeable future are in the mid level skills that provide the backbone to industries like manufacturing, tourism and agriculture.

The tertiary education sector is one of the key engines of workforce productivity, and hence of economic growth. We have a system that is in many respects world-class, with world-class researchers and world-class teachers. But we need to ask ourselves how well focussed these resources are.

The system we inherited was geared towards increasing the number of enrolments. That may have drawn a greater proportion of New Zealanders into tertiary education; but what is not clear is whether they acquired relevant skills as a result.

It may be time to apply more broadly to the tertiary sector some the features similar to those that make industry training successful, to find ways of getting industry much more closely involved in the tertiary education system. This should not be seen as a threat to academic freedom. This kind of engagement between tertiary institutions could be a standard part of their business, to assist them in identifying skill needs; ensuring that qualifications match the competencies businesses want; and helping them in the monitoring of quality. Engaged education is without a doubt better education.

Education is of course a long-term exercise. We need also to be able to respond to immediate labour market shortages in key industries. The issues are never simple, but invariably involve some mix of training, immigration and thinking around remuneration and working conditions.

Finally, we need to improve the level and quality of capital investment in the New Zealand economy.

We have been working at some of our key regulatory issues, notably some important elements of the tax system for business, and the issues around foreign investment.

On taxation, two key areas where the government is making good progress are depreciation and the taxation of investment.

Finally, I think it's worth remembering that the Growth and Innovation Advisory Board recently undertook some research into New Zealanders' attitudes towards economic growth. The research showed that Kiwis rate quality of life and the natural environment above employment prospects, business opportunities and increasing personal wealth.

There is strong 'headline' support for economic growth. Employers and employees also agree on the need for new ideas and ongoing learning. However, New Zealanders do not necessarily buy into traditional growth messages. There is a fear about the negative consequences of growth and ambivalence about big business. Even the term 'labour productivity' sounds to many people like something that is done to workers without their knowledge or consent. Or worse, it is regarded as code for cost cutting.

So we still need to win hearts and minds by aligning our growth goals more closely with core Kiwi values. This means changing our language and management styles. For government and its policy advisors, it means connecting economic growth with social and community goals, such as better health services and a better environment.

And for the business community it means connecting business growth with a sense of opportunity for employees to give their best efforts to something worthwhile and purposeful, and to be adequately rewarded both financially and in terms of career satisfaction and opportunities for family and leisure.

I am pleased to see the Treasury, Reserve Bank and the Ministry of Economic Development sponsoring this important dialogue. I challenge you to engage in discussions with the end point in mind, and to focus on practical policy measures that support it.


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