Aaron’s blog

Import-led growth

It’s well known that New Zealand businesses have relatively low productivity on average. Roger Procter has dug into the stats a bit deeper and found that some New Zealand firms have very high productivity but there is a very long tail of unproductive firms that are able to survive.

He notes that the ratio of the productivity of the firm at the 90th percentile (i.e. near the top) to the 10th percentile (bottom) of the productivity distribution in New Zealand industries is around nine.

In other words, a firm that is nine times less productive than the best in the same industry can survive in New Zealand. In Denmark, for example, the ratio is reported to be around 1.6 to 3.5. Danish firms that can’t achieve at least a quarter of the productivity of the best firms get killed off quickly.

Roger argues, and I agree, that lack of competition is a major reason for this. Competition forces firms to increase productivity and kills off those that don’t.

He also points to New Zealand’s low level of international trade, as trade is a good substitute for local competition, especially in a small economy. Again I agree, but while exports are often the focus of policies around trade, I reckon there should be plenty of emphasis on imports.

Imagine you are a NZ firm in the bottom half of the productivity distribution. You are surviving and comfortable, not facing much competition. If you started exporting (to Denmark, say), you’d likely face competition from considerably more productive firms based over there. Unless you were really motivated to improve your performance, you probably wouldn’t bother with exporting and just keep serving the domestic market where there’s little competition.

This might also explain why New Zealand doesn’t trade very much. We’re stuck in a low-competition, low-productivity, low-trade equilibrium. New Zealand domestic markets are too small to support enough intense competition to get us out of this state. Exporting is hard work and not enough firms are motivated (or forced) to drag the economy up the productivity mountain.

On the other hand, if low cost imports from productive foreign firms start coming in, maybe NZ firms will be forced to improve their game, or get killed off.

I realise this is a harsh “stick” type strategy, rather than an export “carrot”. Exports create jobs and imports can destroy them, at least temporarily. Maybe I’m getting soft in my old age but there might need to be assistance for some workers during the transition. But given the dire productivity stats, maybe a strong shock to the system is required.