Anthony Byett: Productivity key to growth needed to boost economy

New Zealand is at a crossroads. We need growth, and to get it we need greater productivity. At the heart of that productivity is investment, especially into information and communications technology.

The concept of productivity - getting more for the same or less - is simple, and the incentives are enticing: higher wages and profits as a reward for the resulting added value.

The choice, therefore, should also be simple: are we going to be part of the modern world or are we going to be an island economy?

But New Zealand is having difficulty achieving greater productivity, and unfortunately the answer to the problem is not so easy - but the solution does require embracing technology.

The country has experienced strong economic growth over the past 14 years. The average growth of 3.4 per cent a year was high and above the average of the 30-member OECD. But the growth has slowed of late and, more importantly, the environment that enabled such a fast rate of increase no longer exists.

We find ourselves in this situation for several reasons.

Previous growth was largely built on people - both existing workers and new entrants to the labour force - working more hours. As a result, the record of output growth per hour worked is below the OECD average and not showing concrete evidence of improving - yet.

Labour was relatively abundant and cheap in the 1990s, especially when short-term thinking was applied to business plans. Capital investment was also relatively low and workers did not get the extra resources that their contemporaries abroad received.

Managers could perhaps be excused for short-term thinking in the past because of the severe disruption during the economic reforms of the 1980s and the early 1990s, but the rationalisation does not hold up today.

The slow growth period is largely cyclical, with an economic rebound over 2007 and 2008 looking likely. Many businesses will therefore be looking to scale up again, but this time there will be no large pool of spare people or physical resources.

National growth will require a lot more output per hour of input - and that will only come in a sustainable way with more capital equipment and knowledge.

Further complicating the issue is a drift toward proportionally more output coming from the service sector. For statisticians, this creates difficulties measuring output and hence productivity.

More generally, it creates the challenge of providing greater added value for each customer, even where the service provided might be of a menial nature.

Think of trying to get more income from each tourist with fewer people catering for their every need.

The other interrelated issues behind the problem are our predominance of small - micro in international terms - businesses and the preponderance of duplicated service providers, from large banks to small taxi firms. This mix does create a wonderful selection for the consumer, often at low prices, but it is producing only mixed results, at best, for efficiency and incomes.

The economy in the next 10 years is likely to include more large companies or, at least, small companies working more closely together so that economies of scale can be exploited.

It will involve greater use of capital equipment in general to reduce the need for personal input. There will also be a greater focus on what the customer really wants, with a higher price to match the greater value.

This is a world of organisation, information and communication - obviously, ICT plays a vital role in such an environment.

This is not fanciful thinking. The pressures - rising labour costs, intense international competition, New Zealanders' desire to succeed - are already here to make it happen.

On the other side, the technology and finance are readily available.

The other ingredient required - hopefully not missing - is the willingness of businesses to embrace this new world.

This is as much a change of mindset as of buying some ICT.

It's about setting strategies to succeed in five years' time that may go beyond simple return-on-investment models in the short term.

It's about having the people now who are able to fully use the technology and information in the future, and reorganising to get the best from them.

International research suggests the eventual returns from ICT investment are often as much due to the reorganisation that goes with the purchase as to the technology itself. The two go hand in hand.

We face a shortage of labour. We all face a shortage of time. Let's be smart about it.

* Anthony Byett is the chief economist at ASB Bank.