We can't blame our size or lack of minerals for the growing income gap between New Zealand and Australia, according to the New Zealand Institute of Economic Research.
An NZIER study released this morning found the main reason for the disparity is differences in the quality of management, process innovation and the quality of labour and capital.
“When we adjust for differences in the structure of our economy, we find that the income gap with Australia is not so much because it does different things, but because, in the things we do too, Australia does it better,” said Jean-Pierre de Raad, NZIER chief executive.
“Only 30 percent of the productivity gap is due to the structure of the economy. Mining is not the secret to Australia’s success.”
He said the main problem was not a lack of capital locally but the underperformance of industries.
“New Zealand clearly outperforms Australia in agriculture, energy and water supply, and mining. But the services sector performs poorly. This is a problem given the sheer size of that sector.”
The report concluded it was imperative to tackle the root causes of productivity differences, focusing on lifting the quality of labour, capital, management, and the regulatory environment.
It said that improving skills and organisational quality could have a profound effect on New Zealand’s growth potential because they improve the overall economic environment and increase the capacity to innovate.
“The OECD has pointed out that our reputation for the quality of regulation has eroded," de Raad said.
"We also still have more than one million people in the workforce who have only basic or no qualifications. Many lack basic literacy, numeracy, and language skills. To be able to compete, our industries need skilled labour that can adopt and operate new technologies and processes.”
According to the report, part of the productivity gap may be due to the fact that lower-skilled labour in Australia has found a home in mining while in New Zealand it tends to end up in the services sector.
However, it said, "at the end of the day, growth depends less on what happens on average in the economy and more on what happens at the margins".