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GVT: Hon Dr Michael Cullen: Speech to Productivity Workshop

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Jul 27, 2004, 8:30:31 PM7/27/04

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Speech to Productivity Workshop

28 July 2004 Speech Notes
Embargoed until: 9am Wednesday 28 July 2004 Speech to Open the =
Productivity Workshop James Cook Grand Chancellor Hotel, The Terrace, =
Wellington

One of the most salient features of the New Zealand economy in the last =
few quarters has been its capacity to confound the forecasters by =
outperforming the consensus forecasts for growth.

Looking forward, however, the question is whether we can sustain this =
rate of growth. Most forecasters say we cannot, and for good reason. =
They expect a slowdown over the coming year.=20

A number of factors point to this slowdown; the one that needs to =
concern us all is the evidence of a capacity constraint. Our options =
for addressing this in the short term are very limited. However, there =
is more that can be done in the medium to long term, and today's =
workshop is an opportunity to get a better focus on this. I =
congratulate the organisers for the initiative.

So what of productivity? Unfortunately, the concept of productivity has =
had a bad press in some sectors. It smacks of teams of consultants with =
clip-boards and stopwatches, observing the minutiae of business =
operations in order to identify tiny increments of costs to be saved or =
additional output to be produced. =20

In the 1980s and 1990s we did reasonably well at cutting costs and =
increasing output. However, I would argue that there are fewer and =
fewer gains to be made in that direction. We need to find ways of =
adding more value to what we do.=20

Achieving a more productive workforce means three things:

v Improving labour utilisation, so that more of us are working;

v Improving workforce skills, so that we work smarter; and

v Increasing the level of capital investment per worker, so that we get =
the best leverage from those skills.

We have already made significant progress on the first of these. Our =
workforce participation rate is the highest it has been for many years. =
Since we took office there are more people in the labour force, and more =
of them are employed, leaving fewer unemployed.

I am not claiming that government policies have been the major driver of =
this development; however, their impact has not been immaterial. We =
have been putting in place policies that encourage workforce =
participation (policies such as improved parental leave). And the major =
set of initiatives in Budget 2004 - the Working for Families package - =
includes a set of measures that will strengthen these incentives =
further, by increasing the returns for workforce participation, and =
ensuring that good quality childcare is both available and affordable.

However, there are limits to our ability to increase the size of the =
workforce by improving participation rates; just as there are limits to =
our abilities to increase it through immigration. =20

For that reason, we now need to focus our efforts on skills and on =
capital investment. =20

Compared to the OECD, New Zealand has low levels of labour productivity, =
capital per unit of labour, and what is known as multi-factor =
productivity. So we need to increase the overall level of skills in the =
workforce; and we need to increase the investment of capital in New =
Zealand businesses. The objectives go together. The availability of a =
skilled workforce means that businesses can invest in capital equipment =
knowing that it will be well utilised.

The recent growth of labour productivity, capital per unit of labour, =
and multi-factor productivity has been encouraging. Our labour =
productivity accelerated from a 0.5 per cent annual rate in the early =
1990s to a 1.7 per cent annual rate in the six years to 2002. However, =
we need to do better to make up for the lost time.

This is not just a matter of increasing the number of New Zealanders =
with elite high level skills; indeed the indications suggest the =
opposite: that our major shortages now and for the foreseeable future =
are in the mid level skills that provide the backbone to industries like =
manufacturing, tourism and agriculture.

The tertiary education sector is one of the key engines of workforce =
productivity, and hence of economic growth. We have a system that is in =
many respects world-class, with world-class researchers and world-class =
teachers. But we need to ask ourselves how well focussed these =
resources are.

The system we inherited was geared towards increasing the number of =
enrolments. That may have drawn a greater proportion of New Zealanders =
into tertiary education; but what is not clear is whether they acquired =
relevant skills as a result.

It may be time to apply more broadly to the tertiary sector some the =
features similar to those that make industry training successful, to =
find ways of getting industry much more closely involved in the tertiary =
education system. This should not be seen as a threat to academic =
freedom. This kind of engagement between tertiary institutions could be =
a standard part of their business, to assist them in identifying skill =
needs; ensuring that qualifications match the competencies businesses =
want; and helping them in the monitoring of quality. Engaged education =
is without a doubt better education.

Education is of course a long-term exercise. We need also to be able to =
respond to immediate labour market shortages in key industries. The =
issues are never simple, but invariably involve some mix of training, =
immigration and thinking around remuneration and working conditions.

Finally, we need to improve the level and quality of capital investment =
in the New Zealand economy. =20

We have been working at some of our key regulatory issues, notably some =
important elements of the tax system for business, and the issues around =
foreign investment.

On taxation, two key areas where the government is making good progress =
are depreciation and the taxation of investment. =20

Finally, I think it's worth remembering that the Growth and Innovation =
Advisory Board recently undertook some research into New Zealanders' =
attitudes towards economic growth. The research showed that Kiwis rate =
quality of life and the natural environment above employment prospects, =
business opportunities and increasing personal wealth.=20

There is strong 'headline' support for economic growth. Employers and =
employees also agree on the need for new ideas and ongoing learning. =
However, New Zealanders do not necessarily buy into traditional growth =
messages. There is a fear about the negative consequences of growth and =
ambivalence about big business. Even the term 'labour productivity' =
sounds to many people like something that is done to workers without =
their knowledge or consent. Or worse, it is regarded as code for cost =
cutting.

So we still need to win hearts and minds by aligning our growth goals =
more closely with core Kiwi values. This means changing our language =
and management styles. For government and its policy advisors, it means =
connecting economic growth with social and community goals, such as =
better health services and a better environment. And for the business =
community it means connecting business growth with a sense of =
opportunity for employees to give their best efforts to something =
worthwhile and purposeful, and to be adequately rewarded both =
financially and in terms of career satisfaction and opportunities for =
family and leisure.

I am pleased to see the Treasury, Reserve Bank and the Ministry of =
Economic Development sponsoring this important dialogue. I challenge =
you to engage in discussions with the end point in mind, and to focus on =
practical policy measures that support it.

Thank you.

The Michael Cullen mailing list operated by OneSquared Limited.

To unsubscribe, enter the following address in your browser address bar =
and press the Enter key.

http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubscribe=3Dyes

You can also subscribe to this service or change and maintain your =
existing subscription list by going to:

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<html><head></head><body>Speech to =
Productivity Workshop 28 July 2004 Speech Notes Embargoed =
until: 9am Wednesday 28 July 2004 Speech to Open the Productivity =
Workshop James Cook Grand Chancellor Hotel, The Terrace, =
Wellington One of the most salient features of the New =
Zealand economy in the last few quarters has been its capacity to =
confound the forecasters by outperforming the consensus forecasts for =
growth. Looking forward, however, the question is whether we can =
sustain this rate of growth. Most forecasters say we cannot, and for =
good reason. They expect a slowdown over the coming year. A =
number of factors point to this slowdown; the one that needs to concern =
us all is the evidence of a capacity constraint. Our options for =
addressing this in the short term are very limited. However, there is =
more that can be done in the medium to long term, and today's workshop =
is an opportunity to get a better focus on this. I congratulate the =
organisers for the initiative. So what of productivity? =
Unfortunately, the concept of productivity has had a bad press in some =
sectors. It smacks of teams of consultants with clip-boards and =
stopwatches, observing the minutiae of business operations in order to =
identify tiny increments of costs to be saved or additional output to be =
produced. In the 1980s and 1990s we did reasonably well at =
cutting costs and increasing output. However, I would argue that there =
are fewer and fewer gains to be made in that direction. We need to find =
ways of adding more value to what we do. Achieving a more =
productive workforce means three things: v Improving labour =
utilisation, so that more of us are working; v Improving =
workforce skills, so that we work smarter; and v Increasing the =
level of capital investment per worker, so that we get the best leverage =
from those skills. We have already made significant progress on =
the first of these. Our workforce participation rate is the highest it =
has been for many years. Since we took office there are more people in =
the labour force, and more of them are employed, leaving fewer =
unemployed. I am not claiming that government policies have been =
the major driver of this development; however, their impact has not been =
immaterial. We have been putting in place policies that encourage =
workforce participation (policies such as improved parental leave). And =
the major set of initiatives in Budget 2004 - the Working for Families =
package - includes a set of measures that will strengthen these =
incentives further, by increasing the returns for workforce =
participation, and ensuring that good quality childcare is both =
available and affordable. However, there are limits to our =
ability to increase the size of the workforce by improving participation =
rates; just as there are limits to our abilities to increase it through =
immigration. For that reason, we now need to focus our efforts =
on skills and on capital investment. Compared to the OECD, New =
Zealand has low levels of labour productivity, capital per unit of =
labour, and what is known as multi-factor productivity. So we need to =
increase the overall level of skills in the workforce; and we need to =
increase the investment of capital in New Zealand businesses. The =
objectives go together. The availability of a skilled workforce means =
that businesses can invest in capital equipment knowing that it will be =
well utilised. The recent growth of labour productivity, capital =
per unit of labour, and multi-factor productivity has been encouraging. =
Our labour productivity accelerated from a 0.5 per cent annual rate in =
the early 1990s to a 1.7 per cent annual rate in the six years to 2002. =
However, we need to do better to make up for the lost time. This =
is not just a matter of increasing the number of New Zealanders with =
elite high level skills; indeed the indications suggest the opposite: =
that our major shortages now and for the foreseeable future are in the =
mid level skills that provide the backbone to industries like =
manufacturing, tourism and agriculture. The tertiary education =
sector is one of the key engines of workforce productivity, and hence of =
economic growth. We have a system that is in many respects world-class, =
with world-class researchers and world-class teachers. But we need to =
ask ourselves how well focussed these resources are. The system =
we inherited was geared towards increasing the number of enrolments. =
That may have drawn a greater proportion of New Zealanders into tertiary =
education; but what is not clear is whether they acquired relevant =
skills as a result. It may be time to apply more broadly to the =
tertiary sector some the features similar to those that make industry =
training successful, to find ways of getting industry much more closely =
involved in the tertiary education system. This should not be seen as a =
threat to academic freedom. This kind of engagement between tertiary =
institutions could be a standard part of their business, to assist them =
in identifying skill needs; ensuring that qualifications match the =
competencies businesses want; and helping them in the monitoring of =
quality. Engaged education is without a doubt better =
education. Education is of course a long-term exercise. We need =
also to be able to respond to immediate labour market shortages in key =
industries. The issues are never simple, but invariably involve some =
mix of training, immigration and thinking around remuneration and =
working conditions. Finally, we need to improve the level and =
quality of capital investment in the New Zealand economy. We =
have been working at some of our key regulatory issues, notably some =
important elements of the tax system for business, and the issues around =
foreign investment. On taxation, two key areas where the =
government is making good progress are depreciation and the taxation of =
investment. Finally, I think it's worth remembering that the =
Growth and Innovation Advisory Board recently undertook some research =
into New Zealanders' attitudes towards economic growth. The research =
showed that Kiwis rate quality of life and the natural environment above =
employment prospects, business opportunities and increasing personal =
wealth. There is strong 'headline' support for economic growth. =
Employers and employees also agree on the need for new ideas and ongoing =
learning. However, New Zealanders do not necessarily buy into =
traditional growth messages. There is a fear about the negative =
consequences of growth and ambivalence about big business. Even the =
term 'labour productivity' sounds to many people like something that is =
done to workers without their knowledge or consent. Or worse, it is =
regarded as code for cost cutting. So we still need to win hearts =
and minds by aligning our growth goals more closely with core Kiwi =
values. This means changing our language and management styles. For =
government and its policy advisors, it means connecting economic growth =
with social and community goals, such as better health services and a =
better environment. And for the business community it means connecting =
business growth with a sense of opportunity for employees to give their =
best efforts to something worthwhile and purposeful, and to be =
adequately rewarded both financially and in terms of career satisfaction =
and opportunities for family and leisure. I am pleased to see the =
Treasury, Reserve Bank and the Ministry of Economic Development =
sponsoring this important dialogue. I challenge you to engage in =
discussions with the end point in mind, and to focus on practical policy =
measures that support it. Thank you. The Michael =
Cullen mailing list operated by OneSquared Limited. Click <a =
href=3D'http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubscrib=
e=3Dyes'>here</a> to unsubscribe. If the unsubscribe link is not =
active, enter the following address in your browser address bar and =
press the Enter =
key. http://www.beehive.govt.nz/Lists/index.aspx?UID=3D2160&unsubs=
cribe=3Dyes You can also subscribe to this service or change and =
maintain your existing subscription list by going to: <a href =
=3D =
'http://www.beehive.govt.nz/lists/default.cfm'>http://www.beehive.govt.nz=
/lists/default.cfm</a> </body></head>
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