Stop the world - we want to catch up

NZ needs a higher uptake of information and communication technologies, including broadband. Click on 'more pictures' below for a graphic comparing OECD national productivity.

With its decision on unbundling last month, the Government signalled its intention to transform the economy.

New Zealand is disadvantaged by its size and isolation from the rest of the world. Its businesses must be more efficient in how they do things, which means taking full advantage of technology, said Communications Minister David Cunliffe.

But so far, the country has failed to do that. New Zealand has one of the lowest unemployment rates in the Organisation for Economic Co-operation and Development, yet New Zealanders work some of the longest hours for comparatively low pay. Crucially, ICT (information and communications technology) investment has also been low.

Economists point out that this is a labour crisis in the making and is likely to be a key reason for the country's pronounced brain drain - where many of the best and brightest are heading off to other countries in search of higher pay and better working conditions.

The solution, they say, is to work smarter, not harder.

Companies need to change their attitudes toward investing in ICT and take a long-term view for how technology can improve not only their business, but the lives of New Zealanders.

Today, we begin a month-long series on how businesses can improve their productivity through ICT investment.

Over the next month we will be looking at the various technologies, from the internet to video conferencing to open-source software, and hearing from dozens of experts who believe in a better environment for business.

Today

The macroeconomic issue - where New Zealand stands among its peers, and what is the best way forward.

Lifting New Zealand's rate of productivity growth remains "the big nut to crack" in souping up the economy, according to Finance Minister Michael Cullen.

With its recent broadband unbundling decision and its digital strategy, the Government clearly regards investment in the uptake of information and communications technology (ICT) as the potent nutcracker.

Shortly after his unbundling decision saw the light of day, Communications Minister David Cunliffe estimated New Zealand's annual gross domestic product could increase by as much as $13 billion to $14 billion if the digital strategy targets were met.

What that translates into in terms of productivity gains is hard to specify, since such things are notoriously difficult to measure. The relationship between productivity and any particular area of investment, including ICT, is even more problematic.

A recent report by ICT market research company IDC New Zealand found that isolating and identifying specific relationships between economic indicators and technology diffusion, let alone quantifying an aggregate economic impact, had proven difficult.

That aside, it also found general agreement "that the diffusion of enabling ICT technologies has a positive impact on the broader economy by improving the productivity of workers".

The report did raise questions about the longevity of such gains.

But the risk that ICT investment may not result in lasting productivity gains may be outweighed by that of losing ground internationally due to a failure to spend.

According to IDC, a failure to maintain technological parity with trade partners and rivals could affect international competitiveness.

"In the case of broadband, players failing to meet certain technological standards could even be excluded from significant markets."

That's a point not lost on Cunliffe, who believes New Zealand's comparatively woeful uptake of broadband has led to the country suffering a "cumulative disadvantage" in productivity terms by not being able to compete with our peers in the Organisation for Economic Co-operation and Development.

This year the World Economic Forum released its 2005-2006 Global Information Technology Report. It ranked countries on their general macroeconomic, regulatory and infrastructure environment for ICT, the readiness of their individuals, businesses and Governments to use and benefit from the technology and their actual usage of it.

New Zealand placed mid-table at 21st, unchanged from its position in the same survey last year despite about $4.5 billion in expenditure on ICT and the Government's best efforts in the interim.

Of the 20 countries ranked ahead of New Zealand, including Australia, most were also more productive, according to most recent data.

A 2004 paper by economists Dean Parham and Paul Roberts of Australia's Productivity Commission suggested New Zealand's productivity growth was lagging behind Australia's in part probably because of an absence in New Zealand of a strong acceleration in uptake of ICT, as had occurred in Australia from the mid 1990s.

Two years later New Zealand shows little signs of catching up.

According to figures from IDC, New Zealand's ICT spend per capita was US$792 in 2005 against Australia's US$1025 and US$1394 for the United States, which also topped the World Economic Forum's report.

Between 2001 and 2004, the US average annual growth in productivity was 4 per cent, more than three times what it was in the 1980s.

Bank of Japan research estimated that half of that acceleration was due to investment in information technology during the 1990s. The same research found that robust economic growth during the late 1990s in a number of other countries including Australia was led by ICT.

Treasury economist Geoff Lewis said comparing New Zealand with the United States was of limited use. The US productivity had largely benefited from ICT in a two-stage process, with an initial phase generated by increasing efficiencies in the production of ICT products themselves. With no ICT production industry of any scale, NZ is unlikely to see those benefits.

The secondary phase in the United States, which took longer, was where the technology was applied effectively to other sectors of the economy, particularly distribution and retailing.

Much of the secondary US productivity gains from ICT can be put down to what Lewis called the "Wal-Mart effect" where large businesses can make rapid substantial productivity gains by applying ICT in a big way to stock control and ordering systems.

Australia, with its larger economy and more big companies, was better placed than New Zealand to enjoy those types of benefits.

Council of Trade Unions economist Peter Conway also believed New Zealand was unlikely to get significant overall productivity gains through ICT investment at the big end of town.

Conway was concerned that the Government's ICT Taskforce "entirely missed the point" a few years ago with its target of growing 100 companies at $100 million

"They looked at it as a vertical sector - I always thought it was supposed to be about ICT diffusion as an economic enabler across the economy. In a sense, the Government having to come back and revisit broadband is indicative of that."

Peter Macaulay, head of the Government's Digital Strategy Secretariat, recognises New Zealand is unlikely to experience big, fast productivity gains as a result of ICT investment.

"We have small pockets of innovation but we don't have the quantum, that big effect of all those major businesses doing that stuff."

IDC emphasised the importance of broadband in its latest report and Macaulay sees that as the key to unlocking productivity gains for New Zealand. "You've got to link broadband with whatever you're doing now," he said.

"It's the technology that's going to drive huge change in terms of collaborative behaviour and changes in working practices, and in New Zealand it's going to drive productivity in the small and medium-sized enterprise sector."

Macaulay believed improving the productivity of SMEs was "a huge issue" for New Zealand.

"They used to say England was a nation of shopkeepers; well, New Zealand is a nation of small businesses."

While most of them now had computers, "they're not making good use of ICT and that's a hole".

"What we really need to do is to get our SMEs recognising that they can start trading in every way their whole supply relationships. All their other technical relationships can be done using collaborative, supply chain management and customer relationship management tools."

Furthermore, Macaulay doesn't believe that throwing great wads of cash at ICT is the way forward, but innovation is.

"I suspect we need to lift the percentage of our investment that's going into research and development. In fact what we see is all R&D leads to ICT spending."

Next week

*Leveraging the internet - with improved broadband on the way, how businesses can transform themselves into leaner and meaner operations.