An international perspective on the New Zealand productivity paradox

New Zealand lags behind advanced OECD countries in productivity and per capita income levels, in spite of what can be characterised as growth-friendly structural policy settings. Using an augmented-Solow growth framework, this paper explores the "productivity paradox", and identifies the main determinants of New Zealand's economic under-performance. We find a sizeable contribution from New Zealand's gap in knowledge-based capital (also referred to as intangible assets) and from its disadvantage in economic geography captured by an indicator of access to markets and suppliers. For instance, New Zealand's low R&D intensity vis-à-vis advanced OECD countries can explain up to one-third of the productivity gap. The room for catch-up also extends to other types of intangible assets such as information and communication technology (ICT) and managerial practices. Furthermore, unfavourable access to large markets and suppliers of intermediate goods limits New Zealand's trade intensity, especially its integration with global value chains where intensive transfer of advanced technologies often occurs. Overall, the empirical estimates provided in the paper suggest that remote access to markets and suppliers and low investment in innovation (as measured by R&D intensity) could together account for between 17 to 22 percentage points of the 27 percent productivity gap vis-à-vis the average of 20 OECD countries.