Productivity Crisis: Four ideas to make more with less

This piece was originally published in The Post as part of a series on six crises facing New Zealand.

New Zealand’s foundations remain strong, reflecting our economic openness, institutional integrity, and disciplined fiscal and monetary policies. Nevertheless, our productivity growth in recent decades has fallen behind most other developed economies. Improving productivity - producing more output from available resources - is essential for raising long-term incomes and living standards.

There’s no single, quick fix for lifting productivity. Reversing recent sluggish performance requires sustained commitments across several policy areas. Four reforms could have particularly significant effects: competition policy, infrastructure, foreign direct investment (FDI) and the social welfare system.

Competition policy

Robust competition encourages firms to improve efficiency, innovate and reduce costs. It’s particularly important in New Zealand because our small population and geographic isolation can discourage entry and contribute to concentrated markets, including banking, supermarkets, telecommunications and parts of the primary sector.

The New Zealand Commerce Commission (NZCC) is responsible for enforcing competition under the Commerce Act 1986. However, New Zealand’s experience with light-handed regulation demonstrates the risks of assuming privatisation automatically generates competitive pressures. Barriers to entry have allowed small groups of firms to dominate some markets.

A priority should therefore be to reduce these barriers and improve market contestability. Although it’s relatively easy to establish a business here, shallow capital markets and restrictions on foreign investment can constrain new entrants. The NZCC should receive additional resources and stronger powers to respond to market-study findings, investigate complaints and scrutinise mergers involving dominant firms. In exceptional circumstances, structural remedies, including breaking up dominant firms, should be considered.

Digital markets provide an additional opportunity. Digitalisation can reduce the disadvantages of New Zealand’s size and distance while generating productivity and innovation spillovers. Competition policy therefore needs to keep pace with digital platforms and network effects, with closer coordination with Australia.

Infrastructure

High-quality infrastructure is an essential input into productive economic activity. Roads, rail, ports, airports, energy, water and telecommunications networks enable firms to operate efficiently and connect with domestic and international markets.

New Zealand’s problem is not simply inadequate infrastructure spending. Despite relatively high public investment as a share of GDP, New Zealand ranks poorly in spending efficiency. Low population density and difficult terrain raise costs, but policy choices also contribute to poor outcomes. Projects are frequently affected by shifting political priorities, while inadequate maintenance reduces the value of existing assets.

A more long-term, expert-driven and politically independent approach to infrastructure planning is needed. Investment decisions should be based on rigorous assessments of benefits and costs rather than short-term political considerations. Better coordination between central and local government is particularly important for growing urban areas such as Auckland.

Funding arrangements should also improve. Value-capture mechanisms can help finance infrastructure that increases surrounding land values, while debt financing is appropriate for long-lived assets. Public-private partnerships may provide access to international expertise, and user-pays mechanisms such as water metering and congestion charging can improve resource allocation.

The objective shouldn’t be simply to spend more, but to obtain greater productivity and economic value from each infrastructure dollar.

Foreign direct investment

FDI can raise productivity by providing access to new technologies, management expertise, international markets and capital. It can also increase employment, strengthen international connections and broaden the tax base. Yet New Zealand attracts relatively low levels of FDI compared with other OECD economies.

New Zealand has significant advantages for investors, including strong institutions, political stability and a skilled workforce. However, our small domestic market and distance from major markets make it especially important to maintain an attractive investment environment. The Overseas Investment Act has historically created a relatively restrictive and slow screening regime.

A more welcoming and targeted approach to FDI would improve productivity, particularly in technology-intensive industries and downstream processing. The consent process should be streamlined while retaining protections for genuinely sensitive assets. Environmental and cultural protections should apply to foreign and domestic investors alike rather than being pursued through broad restrictions on foreign ownership.

Establishing Invest New Zealand in 2025 was a positive step towards attracting international investment. Its effectiveness will depend on whether it has sufficient resources and mechanisms to compete internationally for high-value projects.

Greater FDI can also reinforce competition policy: new foreign firms can increase contestability, introduce new technologies and management practices, and place pressure on established domestic firms to improve productivity.

Social welfare system

Well-designed social welfare policies can support labour-market participation while providing insurance against economic shocks. New Zealand’s system, however, is unnecessarily complex, with numerous benefits, tax credits, subsidies and eligibility rules. This complexity can make it difficult for people to understand their entitlements and obligations.

The welfare system should be simpler, more transparent and more strongly focused on employment and economic participation. Hundreds of narrowly defined active labour market programmes could be consolidated into a smaller number of well-funded programmes that can be properly evaluated.

The Covid-19 pandemic also demonstrated the limitations of New Zealand’s lack of an unemployment insurance scheme. Sudden job losses left many middle-income workers without adequate income protection. A well-designed unemployment insurance system could provide temporary earnings-related support following involuntary job loss while maintaining incentives to return to work.

Welfare reform is therefore not simply a matter of redistribution. A simpler system can reduce administrative costs, improve incentives and support movement into employment. The objective should be a coherent framework that provides adequate protection while helping people participate in the labour market.

All four together

New Zealand’s relatively poor productivity performance can’t be addressed through a single policy initiative. It requires a coherent programme of reforms that improve incentives facing firms and individuals and raise the efficiency with which capital and labour are used.

Reforms across the four policy areas would reinforce one another. Better infrastructure would make New Zealand more attractive to international investors, while increased FDI could strengthen domestic competition and introduce new technologies. Stronger competition would encourage firms to make better use of infrastructure and capital, while an effective welfare system could help workers adjust to economic change.

The central challenge is not simply to increase government intervention or spending, but to refresh New Zealand’s policy settings so that markets, infrastructure and institutions support greater productivity and innovation. Achieving better value from existing resources is essential to restoring productivity growth and improving living standards.

Tim Maloney is an Emeritus Professor of Economics at the Auckland University of Technology. This opinion piece is based on his chapter in the Helen Clark Foundation's latest book, Facing Up to Our Future: Challenges and Choices for New Zealand.