MORE WITH LESS
Productivity is defined as the value of productive effort or,
technically, as the rate of output per unit of input. The more productive we
are, the wealthier we become as we generate more from the same or less units of
input.
Productivity, or lack of, is an issue around
much of the world. New Zealand’s productivity as measured by real gross-domestic-product
(GDP) per hour worked has been slipping compared to the average of the major
advanced economies (G7 being Canada, France, Germany, Italy, Japan, United
Kingdom and the United States), for the last 50 years.
On this measure, New Zealand’s real GDP per
hour worked was less than 70% of the G7 average in 2016, compared to a par
performance in 1970. The reasons are probably many and varied, but being a
sparsely populated country with duplication in many areas (transport hubs, healthcare,
local authorities) doesn’t help. New Zealand is also less industrialised than
many other developed economies, with primary industries and the service sector
still quite labour-intensive.
Many countries are
going to have to produce more with less in the future. Public policy can ensure the
quality of its population is as high as possible (education initiatives and
higher skilled immigrants), while at the same time being fiscally smart to
ensure real interest rates and the real exchange rate remain as low and
competitive as possible.
For the rest of us, technology can lead the
way to higher productivity. The cost and time required to access and share
information is declining rapidly (email and Google versus postal letter and
encyclopaedia). The cost to transport goods and move people from A to B has
dropped substantially over the past two decades and looking forward, autonomous
vehicles and delivery drones will reduce the cost of transport even further.
On-line communication and smart technology (“the cloud”) is allowing many
people to work from remote areas, partially reversing the urbanisation trend
that has dominated demographics over the past several decades.

You can now get a tertiary qualification
on-line. Ensuring the provision of and access to digital learning seems a more
cost-effective and productive education experience than expanding and building
large tertiary institutions. The health sector is embracing technology at the
operating and diagnostic levels, but the administration, record-sharing and
monitoring of patients seems ripe for innovation, all of which should allow us
to do more with less.
Reduced cost of transportation, time savings
from less commuting, fewer scale and density constraints on businesses and
advances in technology lowering costs in manufacturing and services (robotics),
will allow many businesses to deliver economic output on a smaller scale.
We have a Productivity Commission in New
Zealand that is tasked with providing advice to the Government on improving productivity
in a way that is directed to the overall well-being of New Zealanders, having
regard to the wide range of community interests. The Commission has been in
existence for nearly seven years, so the recommendations provided are either
being ignored or are poorly targeted. Government policy can incentivise
(carrot) or penalise (stick), with taxes being the usual stick.
The coalition Government has established a
tax working group with the objective to “examine further
improvements in the structure, fairness and balance of the tax system”. It seems highly unlikely that the working group will come
up with recommendations to reduce taxes.

Yet arguably, lower
taxes could be beneficial to both businesses and workers and help boost
productivity. Unfortunately increasing the tax burden for companies reduces
cash available to invest in capital and innovative changes. It also limits the
resources available to pay additional workers and/or pay increases for existing
staff. In effect, higher taxes are partly paid for by workers, as businesses
have less money for payrolls. For a business owner who cannot maintain profit
margins as liabilities increase, capital investment becomes constrained. Some would
argue the forces of market competition and regulatory imposition should ensure
companies innovate or die, no matter what the level of tax they have to pay.
But whatever the cause, the higher the costs, the less that is available to
remunerate staff and invest back into the business.
Working-age
populations are set to decline along with general population numbers in much of
the world in coming years. This includes Asia (excluding India), Europe and
Latin America. China’s working-age population (15-64 years) peaked at a record
high of 1.02 billion during 2014 and is projected to fall to 815 million by
2050. Europe’s working-age population peaked at a record 503 million during
2010 and is expected to decline to 361 million by the end of this century.
To reverse the decline in productivity,
applying the old carrot and stick approach needs to be re-thought. The world is
rapidly changing, and policy makers and businesses will need to work together,
embracing change, being forward thinking and innovative in solutions while anticipating
future challenges. All policies should be benchmarked against wealth creation,
not market share.

Kevin Stirrat
Head of Investment Strategy
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