Productivity: Better ways to measure NZ’s productivity

Exclusive series
This is Reg Birchfield’s third and final article in his series on productivity. To reread the first two articles go to
www.management.co.nz/TheBigIssues.asp


No lesser person than Reserve Bank governor Alan Bollard recently questioned the measure of New Zealand’s economic performance. The nation’s economy might, he said, be bigger than we think and the income gap between us and Australia smaller. He added the bank was looking at differences in how the two nations measured their respective gross domestic products (GDPs).
And that is the point. Fact or fiction often rests in what and how things are measured. Are they relevant and are they real, given the prevailing context?
New Zealand sticks to fairly traditional GDP-based productivity measures. But the onslaught of previously unimagined scenarios is reshaping our world and almost certainly undermining the value and relevance of some GDP metrics. Economic opinion is swinging toward factoring in more environmental and other social measures. The question, therefore, is whether New Zealand is up with the play.
The world’s most pressing problem is the “so-called real economy”, according to America’s Nobel economist Joseph Stiglitz. “The real economy has been in state of wrenching transition for decades, and its dislocations have never been squarely faced,” he wrote in recent issue of Vanity Fair magazine. “A crisis of the real economy lies behind the Long Slump, just as it lay behind the Great Depression.”
Stiglitz’ comments are embedded in the work he did as chairman of the Commission on the Measurement of Economic Performance and Social Progress set up by French President Nicholas Sarkozy in 2009. The Commission set out to identify GDP’s limitations as an economic performance and social progress indicator and to assess the feasibility of alternative measurement tools.
“What we measure affects what we do; and if our measures are flawed, decisions may be distorted,” the report said, and then added: “GDP is an inadequate metric to gauge wellbeing over time particularly in its economic, environmental and social dimensions, some aspects of which are often referred to as sustainability.”

Wellbeing
Politicians and policymakers push for greater productivity on the basis that it drives growth and enhances individual and national wellbeing. The need to get better fix on relevant productivity measures is important and will grow along with increasing social, environmental and other population growth pressures. The days of single-minded economic measures are probably numbered but it’s difficult to know by how much.
Departing New Zealand Institute director Rick Boven is suspicious of New Zealand’s existing productivity measures. They do not, for example, take account of what he considers important changes in New Zealand’s environmental balance sheet. Driving productivity per capita up in the short term can have long-term negative impacts, such as the depletion of environmental resources.
GDP measures both good and bad activities. GDP will, for example, increase if more people go to hospital or buy inefficient cars. Measures like these can create odd incentives in the behaviour of policymakers. For reasons like this, Boven thinks GDP suffers some serious measurement deficiencies.
And current productivity measures don’t record the effects of participation changes. For example, the last Labour government reduced the number of unemployed by diverting more marginally employed people into lower wage jobs. “We reduced productivity by doing that,” says Boven.
“But while the action was drag on the productivity per capita measure, that didn’t mean it was necessarily bad thing to do. The result could have been that the productivity of existing employees went up and the productivity of the new employees – while lower than the productivity of existing employees – also went up. The aggregate measure, however, went down.”

Distortions
Analysts must, therefore, dig through and disentangle the figures in order to understand the implications of shifts at the margin, particularly when individuals enter or exit the workforce. Boven thinks understanding distortions like this is important because economic benefits can sometimes flow from what, on the face of it, are lower productivity measures.
There are, as Boven points out, other well-established measures of economic performance such as the Genuine Progress Indicator (GPI). It is favoured measure of green economics and sustainability. It attempts to measure whether growth, based on increased production of goods and expanded services, actually delivers national wellbeing.
Shamubeel Eaqub, principal economist at the Institute of Economic Research (NZIER), isn’t “overly concerned about measurement issues”. He acknowledges Bollard’s speech but thinks it’s “something for the statisticians to work out. There are clearly differences in wages and the ability to save, which is the true measure of productivity differences,” he adds. He also thinks Statistics New Zealand’s improved analysis will provide better understanding of the economy.
New Zealand should be more concerned about scale than statistics, says Eaqub. “Many of our small firms don’t go on and become bigger. International evidence suggests larger firms are more productive. This may be constraint on our growth and productive potential. We are also geographically fragmented, which means distance is an issue both within New Zealand and the rest of the world. These are the things we are thinking about.”
Britain’s The Economist magazine recently highlighted some compelling research out of Europe that suggests companies with more than 250 employees are more productive than “micro” firms employing fewer than 10 employees. Unfortunately, more than 80 percent of Kiwi enterprises fall into this latter category.
The magazine also suggested that in healthy economy “entrepreneurs with ideas can easily start companies, the best of which grow fast and the worst of which are quickly swept aside. Size doesn’t matter. Growth does,” it concluded.
Growth, then, is the measure of economic success. Productivity is the key to delivering it. Australia’s Grattan Institute said in report on Australia’s Productivity Challenge last year that “higher productivity and faster productivity growth provide the most sustainable means of delivering ongoing improvements in standards of living and the quality of life”. It didn’t, however, think the “goal of attaining faster productivity growth should override all other economic and social objectives”.

Scorecard
Boven agrees. He wrote in the NZahead scorecard produced by the New Zealand Institute last year that “single measures [such as GDP per capita] are really important, but they can’t tell the whole story. New Zealanders need to understand the whole story if we’re going to be able to identify linkages, set priorities and make good choices.”
The report used 16 social, economic and environmental measures to compare New Zealand’s performance against those of other OECD countries. With seven “D” grades, three “Bs” and not one “A” grade, the report suggests New Zealand “needs to try harder”. (See NZahead report card on opposite page.) No one has leapt to champion the Institute’s report approach, but, says Boven, it stirred interest in alternative ways of thinking about the state of the nation – particularly among some younger politicians.
And that, of course, is where change rubs against political reality. Parliament’s rookies, fired by desire to change and accomplish things, occasionally embrace targets and new metrics. More seasoned politicians, however, keep their heads below the parapet. They avoid measurement because they can’t always control the outcomes.
So where does this Government, or at least its newly-created Productivity Commission, sit on the me

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