Towards Building A New Consensus About New Zealand’s Productivity

Towards Building A New Consensus About New Zealand…
01 Jan 2003

There is a wide consensus that New Zealand’s productivity has been poor despite the comprehensive market-oriented reforms of the 1980’s. This consensus is based on estimates of New Zealand’s productivity growth measured either in terms of GDP per capita or total factor productivity (TFP). TFP is typically computed using growth accounting (i.e., calibrating a Solow model with fixed capital share). We argue that identification of the nature of the trend and the method of estimation are important elements of any study of productivity growth. Although difficult, it is quite important to determine whether the trend is linear deterministic or stochastic. It is equally important to measure the trend and TFP growth when there is a structural change (the reform in 1984 and the following adjustment periods) because factor shares, which are coefficients in the production function, are unstable. New Zealand data are short and undoubtedly badly measured and estimates of the standard errors of factor shares are quite large. Thus, even when we account for structural change, TFP estimate, which depends on the estimate of factor shares, is an unreliable measure of New Zealand’s productivity. There is evidence, both time series and panel data that productivity has improved in the 1990’s and by more than we thought. There is also significant evidence of increasing returns to scales (spillovers), which when ignored understates the estimate of the share of capital. Also, there is evidence of improving convergence of productivity between New Zealand and Australia during the 1990’s. The conclusion has policy implications. We need to re-think and scrutinise the current consensus regarding current estimates before we engage in planning programmes to lift productivity.

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