Productivity – there is a solution

The hardest part of many tasks is simply getting started. When we procrastinate, the task is relegated to the future. Action is postponed, and by delaying, the task itself grows. Not only does the original work remain, but we must also contend with the additional burden created by delay. What once required focus now demands repair.

Such might be seen to be the case with New Zealand’s productivity.

New Zealand’s productivity performance relative to other many other small advanced economies – including Denmark, Finland, Israel, Singapore, and Switzerland – started faltering several decades ago. By the 1980s and in parallel with globalisation undermining much domestic manufacturing, a clear divergence had emerged as the others addressed their risks through strategic investment in research and innovation.

The growing divergence has persisted for decades without a sustained or coordinated policy commitment other than relying on the pastoral sector and migration. Fifty years on, procrastination has hardened divergence into deficit. Today, New Zealand’s labour productivity sits roughly 40 percent below the leading OECD economies. Through delay, a manageable gap became a structural weakness.

We are still classified as a small advanced economy. But unless we change our approach, that status is not guaranteed.

New Zealand’s long-running underperformance is often described as our “productivity puzzle.” But the puzzle is not that we do not know what to do: rather, it is why we have repeatedly failed to learn from others and do it in a sustained, coordinated way.

In the late 1980s and 1990s, the dominant focus was market efficiency. Liberalisation, deregulation, privatisation, and inflation targeting were grounded in the belief that once prices were right and markets freed, productivity would follow. Some gains were real: macroeconomic stability improved, inefficient protections were dismantled, and consumers benefited. But these were largely one-off efficiency gains, not the foundation of a durable productivity growth path.

From the 1990s onward, attention shifted toward skills and education. Participation in tertiary education expanded massively, vocational pathways were reworked, and immigration was increasingly used to address skill shortages. Yet while qualification rates rose, productivity did not keep pace.

In the 2000s and 2010s, innovation and research and development (R&D) moved to the foreground, especially in comparable jurisdictions. Governments introduced grants, tax credits, and innovation strategies. Treasury, the OECD, and the Productivity Commission pointed to weak business investment and low diffusion of technology as binding constraints, noting that sustained R&D spending is one of the few levers associated with long-run productivity growth.

But as other countries have shown, innovation requires investment in science – not a strong feature even now in our policy response. Innovation policy has focused largely on the private sector despite international evidence showing the linkage to public sector investment. Innovation policy was marked by churn — introduced, removed, reintroduced — and rarely sustained long enough to change firm behaviour or lift the long tail of firms that account for much of New Zealand’s productivity shortfall.

More recently, attention has turned to urban infrastructure. International evidence shows that productive cities drive national productivity through agglomeration, scale, and knowledge spillovers. Yet in New Zealand, housing constraints, congestion, and fragmented planning have blunted those benefits. Infrastructure investment arrived late and slowly, often without the related reforms needed to let cities respond.

New Zealand does not lack productivity ideas. It lacks productivity sequencing, coordination, and institutional persistence. In this sense, productivity is a classic ‘wicked problem’ – one that cannot be solved through isolated interventions, short political cycles, or single-agency fixes.

The diagnosis is familiar. So too is the political obstacle. Productivity reforms are long-term. Their benefits accrue gradually beyond electoral cycles, while their costs are immediate and visible. Left to normal politics, productivity policy remains vulnerable to delay – a defining feature of wicked problems more generally.

Some countries have confronted this by designing institutions that work around political short-termism. Finland, for example, embedded innovation, education, and industrial transformation within institutions insulated from short-term political pressure. Funding was protected, mandates were long-term, and decisions were delegated to arms-length bodies. The result was persistence.

New Zealand itself offers relevant precedents. We granted the Reserve Bank operational independence. We created the New Zealand Superannuation Fund to manage long-term demographic pressure. We built ACC as a universal, non-partisan system. Productivity deserves similar treatment.

At minimum, this would mean a legislated Productivity Accord – a cross-party commitment that lifts productivity policy above day-to-day politics – supported by protected funding and an arms-length body with a mandate to sequence reforms and hold governments to account.

The question must arise:  does New Zealand’s productivity problem persists not because it is insoluble, but because it is politically inconvenient to focus on long-term solutions that do not have immediate return?

There is a solution. It lies not in discovering new ideas but in finally deciding to treat productivity as the long-term national project it has always been. The question is no longer whether we know what to do. It is whether we are willing to stop postponing it.

Dr Christopher Erwin is a Fellow at Koi Tū Centre for Informed Futures whose research spans education, the labour market, and equity. Chris’ previous work explored adult literacy and numeracy, crime interactions, and productivity signals in higher education.