Monday, 27 August 2018

A different view of productivity

New Zealand's biggest economic problem is our low productivity by international standards. Here, for example, is a chart from an excellent paper by the Productivity Commission's Paul Conway, 'Can the Kiwi Fly? Achieving Productivity Lift-off in New Zealand'.

In the better-off parts of the OECD people can produce 100 widgets an hour (and in the US, more like 105). Australians can produce 90. We can only produce 65.

As Paul says on page 41 of his paper , "This is unusual within the OECD, given that lagging economies have, in principle, greater scope for improving productivity more quickly than leading economies. New Zealand's lack of productivity catch-up is even more perplexing given that its economic policies are often regarded as fit for purpose".

The more I've been thinking about this, the more I'm convinced that we should recast the problem in a slightly different way. What if we put it like this?

In the better-off parts of the OECD people take an hour to produce 100 widgets (and in the US, more like 57 minutes). Australians take 67 minutes. We take 83 minutes.

Exactly the same data, but when put in terms of how slow or fast we are, it suggests some different lines of inquiry about what's going on and what some remedies might look like.

As a thought starter, think about infrastructure planners. Say they've got a budget of a billion a year, and they've got five equal sized $1 billion projects in mind.

One choice is to start the five projects at once, spending $200 million a year on each one, and therefore (because of the budget constraint) necessarily doing them slowly over five years, using 1,000 people with shovels on each one. Five low-productivity projects.

The other choice is do project 1 quickly, using only 200 men and lots of productive (but expensive) heavy equipment, and spend the whole annual $1 billion budget on it. Then do Project 2 in year 2, again in a concentrated burst, and so on. Five high-productivity projects.

In New Zealand's culture, though, which choice do you think will be made?

Quite. And never mind that doing it the high-productivity, short-time way will actually deliver 10 years of benefits from the projects by the end of year 5, whereas going the slow-delivery route will have generated no benefits at all till the completion of all five slow-moving projects.

Not that it's wholly to be laid at the door of the commissioning planners. I'd suggest that spinning out five years of 1,000 men with shovels suits the bidders just fine, too. They keep the band together, and they take out the risk (if they do the $1 billion quick job) of being left high and dry with a lot of idle heavy equipment if they don't pick up a job in year 2. In an economy where lumpy projects don't necessarily appear like clockwork, that's a rational fear, and I'm not the first to observe that one productivity-enhancing policy might be a pre-announced big-project timetable.

Or another example. In public procurement of commercial construction, we are, apparently, extremely tough on cost over-runs. You go over budget, you wear it - too bad, as Fletcher Building has painfully experienced. But does completion time get anything like a decent look-in compared with the focus on cost? If a public buyer had to choose between the bidder who says, "It'll cost a bit more but I'll have it done by Christmas, no dramas" and the bidder who says, "Cheap as, but it'll be next Lammas Eve twelvemonth, probably", I wonder which way they'd go?

Not that I wonder a lot, as I suspect I know the answer.

And it's not just big construction projects or public buyers that are dragging the chain. I've worked in a variety of in-house and external consultancy environments: some have been on the ball, with quick turnaround times, some have been, shall we say, rather more relaxed. No doubt you've experienced the same in your career.

Thinking of low productivity as slow pace also puts a different spin on how prospective solutions might work. Many people (including the Productivity Commission, and me) think greater competition is part of the answer. Too many dozy producers are enjoying the quiet, low-activity life because there aren't enough people snapping at their heels to make them do any better. Typically, we think of competition as forcing out inefficient levels of costs, or pushing prices down to 'normal profit' levels. Maybe we should think about how it could also be harnessed to improve response and delivery times? 

Viewing our productivity problem as a low-speed issue isn't a panacea. There's still a lot of mileage to be got from the more usual low-production view. But at a minimum it's a useful complementary viewpoint. I'm quietly convinced that digging into the incentives to do things slower or faster could provide some extra answers to our productivity conundrum. 

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