New Zealand productivity issues no accident

New Zealand’s productivity problem has long been recognised. For decades, reports from the Treasury, the Productivity Commission, the OECD and others have told a consistent story: our economy grows by adding more people and more hours, not by producing more value per hour worked.

But the International Monetary Fund’s April report, released online this week, New Zealand’s Productivity Challenge, offers a sharper and more unsettling perspective. It suggests we are not just underperforming but actively backing the wrong kinds of firms.

The report’s overarching finding is familiar. New Zealand’s GDP per hour worked has steadily slipped behind that of comparable countries. Once on par with Scandinavian economies in the 1970s, we now produce around 40 per cent less output per hour than Denmark, Finland, or Sweden. While those countries have lifted productivity through sustained investment in innovation-led sectors, New Zealand has relied more heavily on labour force expansion and inward migration.

What makes this report stand out is its focus on where our growth is coming from. The IMF zeroes in on “gazelles,” a term used to describe the young, high-growth firms that are typically engines of innovation and productivity. In most advanced economies, these firms tend to emerge in sectors like information and communications technology (ICT), software, and professional services. In New Zealand, the pattern is quite different.
 

Only 13 percent of new firms established in New Zealand between 2008 and 2018 met the threshold to be considered gazelles, a lower share than in Australia, Finland, and Sweden.

More importantly, over 40 percent of these fast-growing firms were in finance and real estate. Fewer than 10 percent were in ICT or professional and technical services. This is a problem because while finance and real estate play important roles in any economy, they are not typically the source of the productivity gains and knowledge spillovers that drive long-run growth.

The IMF’s analysis suggests that our financial system helps explain this skew. In their first three years, startups in New Zealand have better access to finance than in many other countries. They face effective interest rates around one percentage point lower than older firms, and they tend to be more leveraged, with debt-to-asset ratios about 15 percentage points higher. In their early years, capital is relatively accessible.

As these firms mature, however, the picture changes. After a decade, their borrowing costs rise above those of larger, older firms. And for firms with high levels of intangible assets like software, data, or intellectual property, the costs are even higher. Gazelles with a high intangible asset intensity pay, on average, 0.75 percentage points more in interest than their older counterparts. This pattern is not observed in peer countries, suggesting that our financial system is poorly equipped to support firms whose value lies in knowledge, not bricks and mortar.

In practical terms, this means that property-backed businesses find it easier to access growth finance, while firms developing new technologies, platforms, or global services are penalised. We are not simply underinvesting in innovation; we are structurally directing capital toward low-productivity sectors. It is not that New Zealand lacks entrepreneurial energy. It is that we reward kinds of entrepreneurship that are less likely to lift national productivity.

These sectoral patterns are reinforced by deeper inefficiencies. The IMF reports that New Zealand’s capital productivity, the efficiency with which capital is used to generate output, has declined by more than 10 percent since 2000. What makes this particularly troubling is that it has happened despite low overall investment.

Growth in capital stock per hour worked has been slow, and by 2019, New Zealand’s capital stock per hour worked was just half the level of Australia and Finland, and 60 percent below Denmark. This means New Zealand firms are operating with significantly fewer tools, machines, and technologies than their overseas counterparts, and using the capital they have less effectively.

Weak infrastructure, especially digital infrastructure, adds another layer of constraint. Nearly half (47.3 percent) of New Zealand firms report experiencing internet disruptions. This is one of the highest rates among advanced economies, and it impedes the diffusion of productivity-enhancing technologies, especially for small and medium-sized firms outside major urban centres.

The IMF outlines a set of reforms to address these challenges. Some of these are already underway. The Financial Markets Authority has taken steps to encourage deeper capital markets. R&D tax settings are under review, and the Government has begun work to streamline planning and investment processes for digital infrastructure. These are welcome developments, but the report suggests they need to be expanded and better targeted.

What remains underdeveloped is a strategic reorientation of policy to shift the balance of support from sectors that grow by leveraging existing assets to those that generate new knowledge and compete internationally. This will require more than adjusting policy levers. It will mean rethinking the logic currently governing capital allocation, risk assessment, and innovation policy, including government investment in basic research.

New Zealand’s economy is not underperforming by accident. It reflects decisions about where capital flows, which firms are enabled to scale, and how risk is distributed. If we continue to reward property-backed expansion and underwrite financial returns in low-productivity sectors, we should not be surprised by the outcomes. The real message in the IMF’s report is not just that we need more growth, but that we need to stop rewarding the wrong kind of growth.