Production boost seen as the only way to go

David Skilling

Business can no longer count on increased employment participation for growth and more effort has to be put into boosting productivity, a leading think tank says.

The New Zealand Institute notes in a report, No Country is an Island, that the country's recent strong economic performance - annual average growth of 3.2 per cent since 1990 - is largely due to growth in the labour force.

However, as unemployment is at historic lows, growth in labour participation will be limited. The country must look elsewhere.

Productivity is the most obvious target as the country's annual labour productivity of 1 per cent over the past 15 years is in the bottom quartile of OECD members.

Institute chief executive David Skilling said: "For New Zealand to sustain its growth rates will require a substantial and sustained lift in labour productivity. And to converge to the income levels of the top half of the OECD will require an even larger increase in labour productivity growth."

The report - which follows its proposals at the start of the year to solve Kiwis' poor savings record - says the country's small size and its distance from other markets act as a drag on productivity growth. International expansion could reverse the problem but the country lags the world in this measure as well.

Its level of outward direct investment is lower than most developed countries, while its current account deficit, at 8 per cent of gross domestic product, is the worst in the developed world.

"New Zealand will not be able to achieve substantially increased rates of productivity growth without significantly increased levels of exporting and international investment by firms," Skilling said.

The institute says boosting productivity is a significant challenge, but other small developed countries have achieved this during the past decade or so.

The institute's next report, out on December 7, will describe New Zealand's performance in terms of the level of exporting and international investment.

Subsequent reports will describe some of the actions that business, government and others need to take to improve New Zealand's international outcomes.

Look outwards

* The growth rate is slowing because ready supplies of labour have almost disappeared.

* Annual productivity growth - averaging 1 per cent a year over the last 15 years - is in the bottom quartile of the OECD.

* The problem can be rectified if businesses can find more outlets for their products and services.

* This means looking abroad.