Think tank gives NZ performance a D for dismal

New Zealand ranks between Greece and Slovakia for labour productivity.

The New Zealand Institute's report card on the country's economic, social and environmental performance awards D (for dismal) grades for most of the economic measures.

Productivity is at Greek or Slovak levels and New Zealand languishes near the relegation end of the OECD league table on innovation.

It ranks three-quarters of the way down the OECD rankings in output per capita.

Since the early 1990s it has been stuck about 10 per cent below the OECD average by that measure, while Australia is 20 per cent above it and trending higher.

Low labour productivity, or output per hour worked, is the main reason for the low ranking, the institute says. New Zealand ranks between Greece and Slovakia for labour productivity.

It is improving, but in recent years more slowly than in other developed countries.

"And there is still no convincing strategic plan in place to improve performance," the institute's director, Rick Boven, said.

But it acknowledges a range of measures the Government says are intended to lift per capita output: tax changes in the coming Budget, increased spending on infrastructure, driving the public sector harder, regulatory reform, encouraging innovation and setting up a Productivity Commission.

Statistics New Zealand's most recent annual productivity data included the revelation that New Zealand had slightly outperformed Australia over the past 30 years in productivity growth strictly speaking, that is, how effectively firms use the resources of labour and capital at their disposal.

Australia's faster economic growth has reflected stronger growth in inputs of labour - much of it arriving from New Zealand - and of capital.

"New Zealand has about 20 per cent less capital employed per worker," Boven said.

Persistent and usually wide current account deficits reflect the extent to which the country depends on imported capital to fund investment. Household savings rates are well below the OECD average.

Unlike many other countries New Zealand does not have tax incentives for saving, nor does it compel it.

By contrast Australia has a 9 per cent compulsory saving regime, creating a pool of investment for productive investment, the institute says.

The Government's response to the recession has also reduced savings potential, by reducing employers' KiwiSaver contributions and suspending payments into the New Zealand Superannuation Fund.

Tax changes to shift incentives so productive investment is encouraged instead of investment in housing would be a positive step, it says.

But in the end it agrees with the World Economic Forum that for advanced economies innovation and business sophistication are the most important drivers of income.

On this score, too, New Zealand is below par.

It does best on measures reflecting research capability, such as patents, university-industry collaboration and the quality of research institutes.

But performance is poor on factors in the control of businesses, such as private-sector spending on R&D and the sophistication of production processes, the institute says.

"We are better at doing research and inventing things than at converting those inventions into international business success," Boven said.

Doing better would require, among other things, getting market input earlier in the process so effort is not wasted and ensuring commercialisation is at scale and world-class.