Rod Oram: Let’s build a first class economy

Rod Oram argues in his weekly column that there's never been a better time to build a high productivity and high wage economy, but there's also a risk the current good times will allow complacency to lock in New Zealand's bad habits.

We have a choice. We can rise to the immense challenge of making this a high value, high wage economy over the next decade. The global and local conditions for doing so are the most favourable ever.

Or we can keep muddling through in the lower ranks of developed countries. We would get away with it for a while longer. But current economic, social, environmental and political tensions would increase. They've become destructive, as they already have in the US, UK and some other countries.

The case for taking the bold leap is powerful and persuasive across all sectors of our economy. Quite simply we need and want to do much more than our current practices allow.

Take construction. We need far more new homes and infrastructure than the sector can currently build, according to the previous government's annual forecast last year. The number of new dwellings consented will peak nationwide at 34,500 next year, only slightly above the previous high of 31,423 in 2005.

The shortfall would be even more extreme in Auckland with a peak of about 13,000 next year against the previous record of 12,182 in 2004. Yet the region is short some 50,000 homes.

While the new Government is planning to push for some modest innovation in home construction on some of its projects, the sector would deliver even more if it embarked on a comprehensive reform of its technologies, skills and systems.

In doing so, it would be joining the global drive to lift the sector's low productivity. Reports by the World Economic Forum and McKinsey articulate how to achieve such a reinvention of construction worldwide.

Take the shift from our old economy to a new, low-emissions economy. This "will be profound and widespread, transforming land use, the energy system, production methods and technology, regulatory frameworks and institutions, and business and political culture", the Productivity Commission says.

Its final report, due in June, will outline pathways by which companies and sectors could significantly improve their productivity and their environmental performances.

Take agriculture and tourism, our two largest generators of foreign income. Both have enjoyed exceptional growth in recent years. But environmental and economic constraints mean they can't keep growing the volume of their activity. They have to learn how to greatly increase the value of it instead. I made the case for agriculture's reinvention, and its progress towards it, in my December 1 column.

Take manufacturing and services. Globally, both these broad and vast sectors are experiencing revolutionary change in technologies and business models, and at an accelerating rate. Governments are swept up in this too as enablers through new laws, policies, and strategies and as providers of funding and services.

Even our smallest enterprises are finding ways to capitalise on these extraordinary opportunities. They are increasing their capability and wealth here, and their engagement with the global economy.

Any person or organisation keen to learn more about some of these possibilities might be interested in three gatherings over the next few months:

  • Digital Nations 2030 summit in Auckland February 19-20 will explore the ways digital technologies are reinventing education, the workforce, society, and the productive, finance and government sectors.
  • AI-DAY, March 28 in Auckland, will bring together New Zealand and international experts on artificial intelligence and its applications in business and across society.
  • Techweek, May 19-27 in various venues around the country, will showcase NZ technology. It is billed as "a festival of innovation that's good for the world."

Among New Zealand businesses, there is clearly a growing appetite for progress. In the pre-election Mood of the Boardroom survey by the New Zealand Herald, 63 percent of companies said they expect their business to change more in the next five years than they have in the past five years.

Each company will have its own story. Some will have had a good run in recent years, which is making them more confident and ambitious; some are eager to exploit market and technology opportunities; and some will feel they're being pushed to change by competitors or other factors in the fast-changing economy.

The new Government has a similar range of responses. In opposition, it ran a Future of Work Commission to study how powerful technologies such as artificial intelligence will change the nature of jobs and the skills required for them. So far it has translated only a few of its conclusions into policy proposals.

Meanwhile, it has stated its goal of lifting the minimum wage to $20 an hour by 2021. The first lift from $15.75 to $16.50 happens April 1, reinforcing its position as the highest minimum wage in the OECD as a percentage of average wages.

Conventional analysis largely supports the proposition that an increase in minimum wage causes a loss in jobs. The greater the increase, the bigger the loss.

But there are a growing number of case studies showing how individual companies have markedly improved their performance by training, equipping and paying their employees better. One of the most famous is of Costco's out-performance against the Sam's Club subsidiary of Walmart. A Harvard Business Review article entitled The High Cost of Low Wages tells the story.

Yet, despite all these great opportunities, recent economic data might encourage us to make the complacent choice of incremental change in our existing practices.

The latest labour market data out this week showed there was plenty of scope left to keep flogging our low wage, low productivity model. For example, some 343,000 people, 12 percent of the workforce, say they are under-utilised. They are part-timers, for example, who want to work more.

Similarly, the Reserve Bank's latest forecasts show only moderate growth in wages and inflation out to March 2021. If such a benign environment eventuates, some employers and employees might lose some of their enthusiasm for change.

Late last year, Statistics NZ revised up the level of GDP by 2.7 percent. Its biggest increases were to private consumption and investment. It made none to labour market data. That implied our productivity performance was not as abysmal as we previously thought.

But the revisions didn't change the fact that our real GDP growth per capita, the key measure of our wealth and productivity, was barely above one percent a year over the past decade. This is less than half our best rate since our economic reforms in the 1980s. It leaves us languishing low in the OECD.

We can turn that around. Let's not squander this golden opportunity.

Disclosure: I'm involved in the three conferences I've cited.

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