Why haven't economic reforms increased productivity growth in New Zealand?1

Abstract

Productivity, measured by output per hour, grew by less than one percent per annum in post reform New Zealand. During the same period productivity grew at a rate two times faster in relatively protected Australia and one and half time faster in the “free market” economy of the US. This spectacular failure of economic reforms in boosting productivity growth to the international standard calls for an explanation. Unfortunately, nobody has yet offered a theoretical model of economic growth to respond to that call. This paper is an attempt to start that process within the academic discipline established by Solow, Lucas and Prescott, the only three growth economists who are Nobel Laureates. It offers an endogenous growth model with endogenous rent seeking, which adversely affects the economy's total factor productivity (TFP). The model determines TFP as a function of economic policy and not as unexplainable residuals, unlike most previous studies. In particular, it provides explicit formulas for measuring TFP and rent‐seeking activity in an economy. The paper argues that well intended economic reforms could nonetheless lead to an endogenous skill shortage that may ironically turn innovators into rent‐seekers and in turn, retard productivity growth. Future research may apply this model or a modified version of it to determine if the above argument sheds some light in explaining the productivity puzzle of the post reform era in New Zealand.