Achieving New Zealand’s productivity potential

Productivity growth has slowed across most OECD economies since the mid-2000s. While important aspects of New Zealand’s economic performance have improved over this period, productivity growth is still comparatively low. This continues a long-run trend of poor productivity in New Zealand, which is the key reason why average incomes are still below the OECD average notwithstanding recent strong growth. Given that framework policy settings are often regarded as fit for purpose, this long-run track record has puzzled international and domestic economists for decades. The apparent disconnect between policy and performance naturally raises questions about the broad policy directions and institutions necessary to close New Zealand’s still-substantial productivity and income gaps relative to leading OECD economies. In an effort to provide some answers, this paper outlines the extent and nature of New Zealand’s long-run productivity underperformance and the broad economic reasons why lifting productivity has proven to be so difficult. On the basis of this diagnosis, the paper sketches out broad areas of policy reform that would help improve long-run growth in productivity and incomes. In some respects, this represents a new reform challenge with a focus on investing in the assets necessary to fully benefit from the important changes taking place in the global economy.