Economic resilience: the Productivity Commission’s final inquiry🍋
And an agenda for the new Ministry for Regulation
In October 2022 the Labour-led Government asked the Productivity Commission to undertake an inquiry into New Zealand’s economic resilience to persistent supply chain disruptions. It turned out to be the Commission’s final inquiry, with the organisation closing in late February and its funding redirected towards a new Ministry for Regulation.
The inquiry’s focus was on significant and disruptive economic shocks. The infrastructure that underpins supply chains (think ports, roads and cables but also trade agreements and regulation) was out of scope, as was identifying policy options for responding to short-term disruptions to essential goods (such as crude oil and refined petroleum products, plant and machinery). The Commission therefore turned its attention to considering medium-term policies and interventions that would enhance New Zealand’s resilience to economic shocks.
What it means to be resilient rather than robust to economic shocks
There is much to like about the Commission’s final Improving economic resilience inquiry report. For one, the Commission’s framing of “resilience”:
Resilience is the ability to adapt and transform in the face of shocks and disturbances. Rather than simply bouncing back to a previous state, resilient systems adapt their structures, functions, and behaviours – to not only survive, but also to learn, grow and improve. Over time, genuinely resilient systems evolve towards a “new normal”, better suited to changing circumstances and shocks. For this reason, the term “resilience” has increasingly become synonymous, in an economic policy context, with a range of positive attributes – many of which are similar to those needed to improve long-term productivity and economic growth.
Robust economies often survive smaller or short-run disruptions unchanged or return to normal with little stress. But returning to “normal” can also result in a cumulative build-up of imbalances. When these imbalances come face to face with a crisis, the impacts are often more severe than when firms and households embrace resilience and adapt to smaller changes.
What sort of shocks? How disruptive could it be?
A big part of the inquiry involved modelling the likely impact of different types of economic shocks:
A supply shock – e.g. a shortage of oil and resultant increase in price.
A technology shock – something that radically alters the demand for an export product – e.g. technology that enables the mass production of synthetic dairy products at lower prices.
A trade shock – e.g. the introduction of tariff barriers in our export markets.
An important distinction exists between trade and supply shocks, which could reverse quickly (although it could still take time to return to the original growth path); and technology shocks, which might force a permanent change in the demand for our exports.
A broad-based supply disruption, like an oil shock, had the largest modelled impact on production, reducing GDP by 7.5%, whereas the impact of the trade and technology shocks was in the order of 1.5%. The trade and technology shocks resulted in a 3% loss of consumer welfare, but the oil shock was triple that at 9%.
The shocks all entailed a significant level of disruption, affecting multiple industries and thousands of jobs. While the oil shock had a larger impact on output and consumer welfare, the technology shock affected the most jobs. This is because the technology shock entailed an enduring change in the global demand for our exports and a larger change in the output structure of the economy.
A painful history of economic shocks – what happened and how the Government responded
New Zealand has experienced all three types of shocks modelled for the Improving economic resilience inquiry, providing lessons on how best to respond (or how not to respond).
Wool had been a mainstay of NZ’s exports, making up a third of the country’s international sales values well into the 1960s, but synthetic fibres had become an increasingly competitive alternative. The crunch came on 14 December 1966 when the auction price for coarse wool fell by 40%. As Brian Easton observed, this “was basically a cut of 16% in our total export revenue … one dollar in six went down.”
This technology shock was followed by a supply shock and a trade shock. In the 1970s the cost of oil and petrol skyrocketed due to constraints imposed by the OPEC cartel, and access to our traditional markets was sharply limited through Britian’s entry to the European Common Market.
Unemployment and inflation – once effectively non-existent – began to climb, and economic growth slowed. As Productivity Commission staff noted in a blog post that accompanied the Technological change and future of work inquiry,
The government tried to shelter the country through various means, such as buying up all the excess wool, devaluing the currency, subsidising farming and trying to stop inflation by freezing wages and prices. These efforts were expensive and ultimately futile.1
Successive NZ governments of the 1970s and early 1980s introduced controls to shield us from external shocks designed to maintain the balance of payments, protect and develop domestic industry and ensure full employment. The Commission’s Technological change and future of work report concluded that these controls distorted technology and investment choices by protecting inefficient and high-cost industries, reducing the flexibility of the economy to adapt.
The protections were reversed from the mid-80s onward in a series of wide-ranging liberalising reforms. The Commission’s report acknowledged that these were a painful adjustment to the imbalances generated by earlier policies. Formerly protected firms and industries closed or reduced their workforce, unemployment was high, and many displaced workers faced significant financial hardship. It seems obvious that making incremental adaptations when external changes first made an impact would have lessened the severity of the pain the country ultimately endured.
What did the Improving Economic Resilience inquiry recommend?
The Improving economic resilience inquiry concluded that the NZ economy is one of the most exposed of advanced economies due to its geographical isolation, concentrated market structures, vulnerability to natural hazards, climate-related shocks, and ageing infrastructure, combined with chronic levels of underinvestment. These challenges weaken NZ’s economic resilience, and its economic performance more generally.
The Commission Chair in his foreword to the final report highlights that “a critical insight from the modelling … is the importance of the mobility of productive resources (land, labour, and physical capital like machinery and equipment)”. This framing could have served as the foundation for a comprehensive work programme to identify and remove barriers to NZ’s resilience and growth potential.
Unfortunately, the Commission did not take up this opportunity. Instead, its recommendations focused on “improving and sharing information well, developing strong networks, and providing the private sector with a voice in any strategic framework aimed at economic resilience in an increasingly volatile and uncertain future”.
Specific recommendations included:
Monitoring potential supply chain disruptions, assessing trade vulnerabilities and the criticality of imports and exports for the performance of New Zealand’s industries and communities, and identifying services and goods that are both concentrated and critical under disruption scenarios.
Motivating firms and industries to proactively invest in their resilience by diversifying or innovating and co-funding resilience-enhancing investments.
Public co-funding of industry-government networks and Government creating a Long-term Advisory Group on Economic Resilience and Innovation, and a Chief Executives Group, which would also provide business with a voice.
An unfinished agenda
A comprehensive work programme to identify and remove barriers to NZ’s resilience and growth potential would include a rigorous assessment of the efficiency with which NZ’s input markets – its labour, skills, land and capital markets – adjust to changing circumstances, and the barriers that might prevent a reallocation of resources to more productive uses. Earlier work by the Productivity Commission and other organisations suggests considerable room for improvement.
One area where NZ’s policies do support prompt adjustment is the labour market. The Commission’s Technological change and future of work inquiry identified NZ’s flexible labour market as an asset:
New Zealand workers are active participants in the labour market, changing jobs from time to time to find better matches … New Zealand’s wider policy settings support worker mobility, by ensuring that access to social assistance (eg, healthcare, retirement savings, unemployment benefits) are not linked to jobs or particular work arrangements (eg, full-time employment, as opposed to contracting).
But in plenty of other areas NZ’s policy settings limit adjustment and efficient reallocation. One part of a successful labour market transition is the ability of workers to acquire new skills and move into higher-demand fields. The Productivity Commission’s inquiry into New Models of Tertiary Education found a sector that was “not well-placed to respond to uncertain future trends and the demands of more diverse learners”. A key source of this weakness was:
the high degree of central control that stifles the ability of providers to innovate … over time government has responded to fiscal pressure, political risks, and quality concerns by layering increasingly prescriptive funding rules and regulatory requirements on providers.
The Productivity Commission’s inquiries into Using Land for Housing and Better Urban Planning spelled out the many barriers to making different or more intensive use of land. Restrictive planning rules and unresponsive infrastructure provision have driven up the price of housing, making it harder for workers to move for better job matches in our larger cities.
Rigid and onerous land use rules and consenting processes don’t just affect our ability to build houses, they also make it harder for NZ to meet its decarbonisation goals. Research carried out for the New Zealand Infrastructure Commission found that without reforms to dramatically shorten consent processing times, NZ will not be able to consent the infrastructure needed to support our climate change aspirations.
All these issues remain live, and undoubtedly many other areas exist where rules and policy unhelpfully limit the ability of firms and workers to adapt to changing circumstances.
An agenda for the new Ministry for Regulation?
Now that the Productivity Commission has shut up shop, who is best placed to pick up this agenda? One candidate is the new Ministry for Regulation, whose functions will include reviewing existing regulations and red tape and presenting Omnibus Bills to Parliament that would remove surplus rules and regulations. NZ has a longstanding and well-known problem with productivity and, if the Commission’s final inquiry report is anything to go by, a growing vulnerability to shocks. A dedicated programme to lift regulatory constraints on the ability of input markets to promptly adjust to change could go a long away to promoting a more prosperous and secure future.
By Nik Green & Judy Kavanagh
Nik Green worked for the NZPC from 2013 to 2021. He was involved in inquiries into regulatory institutions and practices, urban planning, state sector productivity, low emissions economy, technological change and the future of work, and New Zealand’s immigration settings.
Judy Kavanagh worked for the NZPC from 2011 to 2022. She was the Director of the New models of tertiary education and the Technological change and future of work inquiries. She also worked on inquiries into housing affordability, regulatory institutions and practices, and state sector productivity.
Commission staff created a blog – FutureworkNZ – to test ideas and promote debate. Sadly, the blog was expunged from the Commission’s website in 2022. However, it can be retrieved using the nifty Wayback Machine.
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