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More bang for your buck

By Donal Curtin

Thursday 25th May 2006

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It's not often that economic statistics spring a pleasant surprise, so people were understandably chuffed with the new productivity indicators released at the end of March. They showed that not only are Kiwis more innovative and more productive than had been supposed, but that we have been just as good as, or even better than, the Aussies at squeezing more goods and services from finite resources.

The statistic that got the most headlines was the one that showed labour productivity in New Zealand over the past 17 years grew by 2.6% a year, compared with 2.3% a year in Australia.

It's all very interesting and gratifying, but the really important news in the new data wasn't the bit that got in the papers. To be sure, labour productivity is nice to know about and it's good that it's been rising at a decent rate. But there is a problem with giving it the lion's share of the attention: it's a somewhat rubbery concept. Give a man with a small digger a bigger digger, and suddenly, for the same hour's work, he can shift far more rock. His labour productivity appears to have soared. But it's all down to the 'capital deepening' effect, and isn't actually telling us anything interesting about whether his own skill or innovation has increased.

There was a more important, but less analysed, indicator in these new statistics and one reason it gets less coverage than it ought is that it's got the mind-numbing label of 'multifactor productivity (MFP) growth'. Its definition is 'the increase in output that is achieved beyond the increase in all inputs'. For example, if you increased the number of people working by 3% and the amount of machinery they worked with also by 3%, but you actually got an increase in output of 5%, the extra 2% is the contribution of MFP. It's extra output that's materialised apparently out of thin air.

It's a phenomenally important statistic, and one, for example, that conservation-minded people ought to take more interest in. High rates of MFP growth, if you could figure out how to achieve them, open up the prospect of providing more of the goods and services that people need, while economising on the resources required to make them. In the year to March 2003, for example, we had an increase in economic output of 5.3%. Of that total, 1.8% could be attributed to more people working to produce it, and 1.1% to more gear for them to work with. The biggest bit, 2.3%, was down to the wonders of increased productivity.

For all its importance, economists don't have a good handle on where greater MFP comes from let alone how to make it happen faster. With some sophisticated analysis, you can strip out the bits that are due to technological improvements in capital equipment, and those that are due to higher levels of skills and education in the labour force, but you inevitably still get left with a mysterious residual of productivity that is only explicable by 'something else'.

For me, smarter management methods are likely to be one of the more important 'somethings'. Although academic economists tend to look down their first-principles noses at their money-grubbing business school colleagues, for me it's undeniable that better business thinking and organisation has been one of the key components. Anyone who's been in business and has experienced a successful restructuring, or a new product launch that was a hit, or gone through a 'total quality management' re-engineering exercise, knows that these kinds of management-led productivity initiatives can have powerful impacts. One of the good bits of news from these statistics is that while New Zealand has had its management failures - and our efforts to crack the corporate Aussie market haven't often been crowned in glory - these latest numbers give a strong hint that, collectively, the managers of New Zealand Inc have been doing a better job.

Before we start popping the corks, however, there's an important proviso. These productivity statistics covered some 69% of the economy - the parts where Statistics NZ can make a go at counting the output of a sector. There's 31% missing - namely those sectors where outputs aren't so easily measurable. They're largely government services: health, education and civil-service administration.

If the recent UK experience is any guide, the productivity story in those sectors may be dramatically different. Tony Blair and Gordon Brown have hugely boosted the funding of education and health in particular. Both sectors have proved to be sinkholes, and while there will always be debate over how to measure their output, the outcome appears to have been patchy or no improvement in either outputs (the likes of operations performed) or outcomes (such as health status) despite the increased resourcing.

By 2010, on Treasury forecasts, over 41% of our incomes will be passing through the government's hands: health alone will be taking over 5% of total GNP. We're going to need these new productivity indicators extended to cover these sectors: the dollars are too big, and the outputs too important, to be flying blind.

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