Productivity
growth is a complicated process.
Differences in
the accumulation of the factors of production (capital and labor) in different developed
countries cannot explain the differences in output per person growth rates. We
have no evidence to the contrary. The same is true for intangible capital such
as human capital or other forms of capital.[1]
So if
economists are unsure about the explanation how would politicians make policy about
“closing the productivity gap”?
Generally
speaking, nations are rich and prosperous –countries endowed with natural
resources notwithstanding – if people produce more goods per hour-worked.
Producing the
goods is only half the problem though. People have to sell the goods. New
Zealand is not a big domestic market so we have to export our products to other
markets.
To compete with
other countries in the global market we not only have to sell more goods,
we have to sell new variety and quality goods.
We don't know
how to measure improvement in quality very well. With respect to variety,
however (a very few exceptions notwithstanding) we have not really produced a
lot. We produce and export unskilled-intensive commodity-dominated goods. Milk
remains milk, timber is timber and lamb is lamb, and neither is Samsung or an
IPhone…or seedless melon etc. you get the point.[2]
In addition to the
quality and variety of new goods, growth also requires cost reduction. All
modern growth models, which can generate growth require increasing returns to
scale in the factors of production and technological progress.
Production
of new, quality and variety goods at lower
cost is simply what Total Factor Productivity (TFP) is all about. It is
the key to explaining income per person and we do not really know a lot about
TFP, do we? The neoclassical growth model says nothing (The Solow residuals).
The strongest available
evidence is for investments in R&D as the driver of endogenous growth. TFP
growth requires a big monopolistic R&D sector. We don’t have such sector.
The New Zealand economy is made of small firms.
One would think
that in the absence of an R&D market the government could play a role. In
my research with the late Robin Johnson and Steve Stillman we studied
R&D stock in New Zealand over a period of 40 years and found no evidence of
positive spillover from public R&D investments.[3]
Successive governments over four decades produced no effect. Why should we
believe that the government could do anything differently?
Sixty years
ago, the late Nobel Laureate Simone Kuznets argued that, under the assumption
of increasing returns to scale, per capita output growth is tied to population
growth in the long run.[4]
He cited different effects arising from natural population growth, immigration,
and decreasing death rates. His idea, although mathematically valid and easy to
prove, was controversial then, but it is less so today because we have
endogenous growth models with scale, and increasing return to scale production
function, which have good empirical validity.
Kuznets calls one
of the connections between population growth and productivity growth: useable
knowledge. To produce these new goods (e.g., the IPhone), a country needs
to exploit and use the knowledge created in the advanced world.
This knowledge,
“the effective advanced-world research efforts,” measures the time and efforts scientists,
inventors, innovators in these countries etc. put into producing it.
The larger the
population (in advanced and developed countries) that higher is the probability
that more people will be working in the production of knowledge.
So TFP growth in
New Zealand or any other developed country is a function of the growth rate of
effective world research efforts, which essentially explains output per capita
growth.
In the
long-run, output per capita growth in any developed country is a function of
the population growth in the advanced world. Generally speaking, immigration is
just one way to increase population, the labor force and the probability of
more R&D.
That said, the
advanced countries today have declining working age populations, stagnant or
declining fertility rates, declining youth population, and more aging
population. These trends seem to be associated with long-run declining
productivity growth, which we observe in the data currently.
Along the transitional
path between now and the long run, productivity growth in the developed
countries is slowing because TFP growth is slowing, and TFP growth is a
function of a slowing growth of effective world research efforts. These
declining efforts imply that scientists, innovators, researchers etc. allocate
less time to the production of knowledge for the same reasons workers decide to
work less hours. The supply of labor depends on taxes, the consumption-output
ratio, the share of capital in production, the relative value of leisure, and
demographic among many other variables.
Here is the
trend in the growth of research efforts.[5]
The conclusion
of this story is that New Zealand productivity growth is bound to be relatively
low if NZ does not exploit/use the effective world research efforts or/and if
the knowledge diffuses at a slower rate, or/and if the productivity growth in
the developed countries is declining.
But why should
we exploit more usable knowledge or have the frontier technology and best
practices diffuse faster? We don’t produce and export new varieties of high
quality skill-intensive goods at low cost, do we?
[1]
Prescott, E. C., Needed: A theory of Total factor Productivity, International
economic Review, Vol. 39, Issue 3, (August 1998), 525-551.
[2] Before joining the EU, the U.K. bought all New Zealand’s farm products
so competition was not an issue. And I say seedless melon because I saw quality
Australian seedless melon selling for about 80 New Zealand dollars a melon in
the Middle East.
[3] Johnson,
R., W. A. Razzak, and S. Stillman, Has New Zealand
benefited from its investments in research and development, Applied Economics,
2007, 39, 2425-2440.
[4]
Simon Kuznets, Population Change and Aggregate Output in Demographic and
Economic Change in Developed Countries, Universities – National Bureau,
Columbia University, 0-87014-302-6, 1960, 324-351.
[5]
Research effort is the sum of the product of (weighted) stock of human capital
and the number of researcher.
