Is improved productivity over-hyped as the key to economic growth?

OPINION: Most economists and I think that includes the OECD, put great emphasis on improved productivity as the key to improved economic performance.

In NZ we even have a special Productivity Commission and it has produced several influential reports.  The most recent target has been the construction industry which has been hindered by poor productivity for years and generally performs worse than similar industries overseas.  This situation is likely to get even worse in the short term because of the problems being caused by fires such as the London cladding fire, problems with import of substandard materials and the continuing saga of leaky buildings.  The instinctive reaction to such problems by the government is more regulation which all too often is ineffective and simply makes productivity worse.

Improved practices

For all of that productivity is indeed important and there are huge gains to have in many industries.  Gains can come from better practices, a better trained and more efficient workforce and the impact of innovation and improved design.  It all depends on the situation.  A classic example of the power of productivity improvement is the performance of the foiling catamarans that were used for the present America’s Cup finals

However, improved productivity is not the only or even sometimes the best answer.  There are often cultural and similar reasons for limiting productivity gains, and it can be like pouring money down a bottomless pit. Industry size is also a factor – without a scale, it may be difficult to make productivity gains work.

Introduction of new technology or industries 

The alternative – or the additional factor because improved productivity may still be a powerful force – is the creating of new products and/or industries where it is the product itself which is the source of added value – not productivity gains.  The classic example in recent years had been the development of the Smart Phone but new ideas are entering the market all the time.  If the product itself has the value then at least initially productivity is not a major factor – productivity becomes more important as new products mature and the pressure comes on prices and costs.  It sounds as though the iPhone is very near this stage of life.

The search for new products is a powerful driver behind the investments by the Government and by industry to some degree, in research and development.  And this R&D has been very successful in some areas in creating improved and new products which have created growth and wealth for New Zealand.  The Kiwifruit industry is a classic example.  And so too it the IT industry which has created a host of new products many of which have been fabulously successful.

What next?

So should we give away productivity and concentrate on new and improved products?  I think the answer is a bit mixed.  I think myself that an economy that focuses almost exclusively on improved productivity is actually limiting its ability to grow.  Productivity is subject to diminishing returns and in some cases, it is just too hard to implement because of ingrained practices –  any gains made are exceeded by the costs of getting them.  The clever economy is the one that picks off the productivity improvements that can be implemented without too much cost, or where the gains clearly exceed the costs, but concentrates its efforts on the attributes of the products it produces and how successful they are or can be in world markets.

In that respect, I think New Zealand had yet to find the “sweet spot” – the place where there is the optimum balance between looking for productivity gains and promoting new and improved products.

By Bas Walker

This is another of Bas Walker’s posts on GrownUps.  Please look out for his articles, containing his Beachside Ponderings.