Reply to Robert Winter

This is another reply to a comment that I chose to do as a blog so I that could include a graph. In a comment on my Reply to Chris Trotter blog Robert Winter wrote:

I note that both MED and Treasury point to MFP in NZ and Australia preforming very similarly especially since 1988 across the “easy to measure” sectors (which is still very much in the “reform” period).

But, as MED also points out: “While Australia, the UK, the US and Denmark have all had positive five-year average annual growth rates since 1970, New Zealand has had several five-year periods where growth in labour productivity has been negative; that is, the level of labour productivity has declined.” (http://www.med.govt.nz/templates/MultipageDocumentPage____38446.aspx)

The point is that out MFP is nothing special, in comparative terms, but our labour productivity, coupled to our labour utilisation, is lamentable. And that poor labour productivity, is, as Paul Dalziel suggests, primarily an effect of the low-road model of the economy promoted in the reform period.

Labour productivity in the measured sector of the economy grew markedly from the early 1990s when the benefits of the reforms materialised, as the graph below shows.  On a point to point basis, annual labour productivity growth between 1992 and 2000 was around 3%, a huge improvement and high by OECD standards.

Click to enlarge

Then it slumped to below the growth rate of the Muldoon years with policy backsliding and reversals.

The “low road” model is a myth.

FRIDAY GRAPH – MULTI-FACTOR PRODUCTIVITY GROWTH

If there were one chart I would use to illustrate the story of New Zealand’s economic performance over the last 25 years, this would be it.

Click to enlarge

The chart is taken from a presentation to a Business Roundtable retreat last month by Dr Roderick Deane (the presentation is on our website).

It illustrates the trend in multifactor productivity growth, which is perhaps the most important productivity measure.  MFP captures productivity changes (due to things like innovation and technology improvements) that cannot be attributed to capital and labour.

The story is that New Zealand’s multifactor productivity performance improved dramatically, to become among the best in the OECD,  in the post-reform period.

Then, for all the Labour-led government’s talk about ‘growth and innovation’, it slumped in the last decade, with the retreat from reform and policy reversals, to a rate not seen since the Muldoon years.

There is still far too little appreciation of the appalling economic mismanagement of this period.

FRIDAY GRAPH – PORT PRODUCTIVITY

Here is a sobering graph, courtesy of Maersk New Zealand.

Click to enlarge.

  

It shows container productivity (gross moves per hour) in New Zealand ports for Maersk vessels compared with other ports mainly in the Asia Pacific region.

The statistics show productivity as low as 20 GMPH in some locations, including New Zealand, and much higher rates in others.

Port size, ship size, labour restrictions and other factors do not fully explain the differences.

Some New Zealand ports, especially Tauranga, are better than others, especially Auckland.

The picture is consistent with the findings in this 2010 report by the New Zealand Institute of Economic Research for the Local Government Forum.

Port reform in the late 1980s and early 1990s greatly improved the performance of New Zealand ports.  We were ahead of many Australian ports for some years but the position has now reversed.

A renewed effort involving ports, shipping lines and the government is needed to make up for lost time.

Successful reform: past lessons, future challenges

Gary Banks, the chairman of Australia’s highly regarded Productivity Commission, is a valued colleague and good friend of New Zealand.

Last week he gave an important speech with the above title on economic reform in Australia.

It comes at a time when the Gillard government is struggling to establish its reform credentials.  Both major parties in Australia compete to embrace the Hawke-Keating-Howard reform legacy, unlike their counterparts here which often distance themselves from a similarly successful reform programme (even though they have kept in place its main elements).

Gary began by reflecting on the current climate of opinion about reform:

Paul Kelly, Australia’s pre-eminent policy journalist and chronicler of our reform history over the past three decades, asserted earlier this year that “the historic post-1983 reform era is terminated”. Ross Garnaut, one of the most policy-influential academics of that era, recently made the following assessment: “Economic policy since the GST [2001] has been characterised by change, rather than productivity enhancing reform”. He went further: “Attempts at major reforms have failed comprehensively and poisoned the well for further reform for a considerable while”.

 He observed:

If ‘productivity enhancing’ reform is indeed becoming a no-goer, Australia is in for a tough time. For a start, this would make it harder for us to meet the fiscal challenges of the Global Financial Crisis in the short term and, in the long term, the ageing of the population. We would also struggle to meet the demands and costs of more sustainable resource use and desirable environmental rectification. Australians may again start to see international competition and globalisation as threats rather than opportunities. And our capacity to raise the living standards of Indigenous and other disadvantaged members of the community would be weakened when it needs to be strengthened.

Explaining the importance of productivity growth, he said:

Productivity enhancing reform is so crucial to our economic (and social) futures because productivity growth itself – the ability to get more out of a country’s resources – is the mainstay of economic progress …  If, as the Nobel Laureate Paul Krugman has famously put it, ‘in the long run productivity is nearly everything’ Australia’s prospects currently may not appear very promising. Following a stellar performance in the 1990s, driven in large part by the structural reforms initiated in the previous decade, our productivity growth in the early 2000s fell back to its long term average.

Putting numbers on the productivity challenge, Gary commented:

… if (labour) productivity growth could just get back to the long-run average rate of 1.75 per cent that preceded the 2004-2008 cycle, rather than the 1.6 per cent average growth assumed in Treasury’s latest Inter-generational Report, then, abstracting from changes in the rate of employment and investment, per capita incomes would be 6 per cent higher by 2050. And if we could reclaim the 2 per cent average annual growth recorded in the 1990s in a sustainable way – admittedly a big ask – Australia’s GDP would be some $400 billion larger than otherwise, with per capita incomes 17 per cent higher (worth nearly $19,000 per person in today’s dollars).

New Zealand’s productivity growth was actually a little better than Australia’s from 1992-2000 following its earlier reforms, but declined more dramatically than Australia’s in the past decade with the changed policy approach of the last Labour government.

Gary noted that according to the dictionary, ‘reform’ means “change for the better”, but quoted Nicolo Machievelli’s famous remark about its challenges:

There is nothing more difficult to carry out, more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all who profit from the old order, and only lukewarm defenders in those who would benefit from the new.

He talked about where the backing for Australia’s reforms came from:

Support was strongest among the professional policy cadre – within government, academia and the ‘commentariat’, including opinion media. But there was also strong support from peak business, and to some extent from community organisations, depending on the reforms. Broader ‘public opinion’, if not actively supportive, was at least not actively hostile.

In New Zealand’s case, support from academics and the media, with some exceptions, was notable by its absence.

And a little further on in the speech, Gary Banks added:

Leaders with the right vision for a better Australia and the skills to realise it, were fundamental to all the individual ‘success factors’ just described – they could be said to be have been the ultimate success factor.

He ended by listing some of the priority areas for reform in Australia today:

One key dimension is the budgetary constraints that governments face in the aftermath of the Global Crisis.  The combination of fiscal constraints from the Global Financial Crisis and structural pressures from the mining boom suggests that the productivity enhancing reforms that deserve some priority right now are those that can reduce business costs and enhance the economy’s supply-side responsiveness, while being ‘fiscally parsimonious’.

In addition:

Regulatory proposals that would have pervasive effects across the economy need particular scrutiny, especially those impacting on the markets for labour and capital, and key infrastructural inputs to production such as transport (not forgetting coastal shipping), energy, telecommunications and water … Among these, industrial relations regulation is arguably the most crucial to get right. Whether productivity growth comes from working harder or working ‘smarter’, people in workplaces are central to it. The incentives they face and how well their skills are deployed and redeployed in the multitude of enterprises that make up our economy underpins its aggregate performance.

Practically all of this agenda and more applies to New Zealand.  (Water reform, for example, has not even got off the ground whereas it has been underway in Australia for two decades.)

The full speech is here.

A speech with similar themes is this one, Reigniting Reform in Australia and New Zealand, given by Hugh Morgan, president of the Business Council of New Zealand, to a New Zealand Business Roundtable retreat in 2004.

Friday graph: New Zealand/Australia productivity growth

Two charts here from the 2025 Taskforce’s latest report, together with the Taskforce’s commentary on them.

Click to enlarge

Figures 2.3 and 2.4 indicate that labour and multifactor productivity in the measured sector increased more in New Zealand than in Australia during the 1986 – 2008 period as a whole. However, it is also clear that New Zealand’s out-performance was essentially all over by 1995.  New Zealand has lost ground against Australia in respect of labour productivity growth since 1995, but notice that this was, initially at least, because growth in Australia accelerated. Since 1995, New Zealand has more or less held its own against Australia in respect of multifactor-productivity growth, although the growth rate in both countries has been minimal in recent years. But “holding our own” will not close the income gap with Australia.  To do that, New Zealand will need to generate a renewed focus on productivity, efficiency and growth.

Faster productivity growth isn’t the only thing that would close the income gap with Australia – higher workforce participation would also help – but it is the most important thing.

Markets at work – by Top Gear

In buying a new brake calliper for his Porsche James May of Top Gear fame provides amusing but compelling evidence of markets at work (hat tip: Café Hayek). Here’s an excerpt: 

That something as complex as a car can be owned by ordinary people is, I think, one of the greatest achievements of humanity”

I love this stuff.

Working to limits and fits liberates the manufacturing process. Instead of one fitter having to make sets of rods and holes work together, a man in Shanghai can make all the rods while a bloke in Botswana drills all the holes, in the certain knowledge that any two will work together. This is the bed-rock of mass production as far as machines are concerned, if not chicken and mushroom pies.

It’s a pretty simple idea, but it took a long time to sort out. The origins of limits and fits are assigned to the clock-making and gunsmithing businesses, and you can see why they’d be interested, because both these things were required in huge numbers and would break readily – the hammers on guns would shear, and the pallets in the escapements of clockwork mechanisms would wear out.

Prior to the culture of interchangeability, a new hammer for your revolver would have to be made to fit, usually with a bit of filing. The mass-produced hammer would go straight on. Job done.

The earliest cars were made like flintlock pistols, and were machines with no true commonality, even if they looked the same. Each part had to be made to fit by a, well, ‘fitter’, who would remove bits of metal like the man in our original rod-and-hole example. These cars were hideously expensive to buy and hideously expensive to maintain.

It reminded me an article I wrote on productivity titled The Lever of Riches a couple of years ago for the ODT. Here’s an excerpt:

Improving worker training and knowledge, having better technology or more capital to work with, making best use of natural resources and inventing new ways to do things increase productivity. Henry Ford’s development of the assembly line in 1913 is a popular example of a spectacular productivity leap: it reduced the number of hours required to make a car from 17 to one and a half, dramatically cutting the cost of production and making the car affordable.

Ford’s invention effectively pushed his workers up the ‘hierarchy of human talent’. With the creation of machines and tools that can perform tasks better and cheaper than human muscle and basic brain power, people move to jobs that use other, more sophisticated human talents like creativity and people skills. At the same time, manual jobs like sewing machining, assembly line work and telephone operations shift to lower-wage countries where workers can perform them more cheaply. In this way the economy sheds ‘lower order’ jobs, and adds ‘higher order’ jobs like nurses, lawyers, chefs, recreation and hospitality workers, designers and architects, hair stylists and beauty therapists, financial advisors, tourism operators, and so on. 

Read James May’s full article here and mine here.

Donald J. Boudreaux at Café Hayek wonders if James ever read ‘I, Pencil’, a delightful essay by Leonard Read. ‘I, Pencil’ is an old favourite of mine which I highly recommend. The link above includes an introduction by Milton Friedman and an afterword by Boudreaux.