Posts Tagged ‘Brian Fallow; Productivity’

Does regulation crowd out investment?

Brian Fallow is on a bit of a downer on the economy in his latest Herald column.

A grumpy reponse to the column’s dismal prognosis on investment from (BigCake assumes) a small manufacturer highlights an issue with regulation BigCake hadn’t considered  – does regulation crowd out capital investment?

Reading between the lines of the comment, it looks as though this manufacturer has no time, money or energy for capital investment because it’s all being used up dealing with the demands of regulations.

Fallow says: “The labour market and housing market are torpid, at best. The cost of living is rising and interest rates are rising too.

“Business confidence is slipping and business investment is weak. Credit growth is flat-lining. The net inflow of migrants has dwindled to a meagre and exiguous trickle.

“Even the bright spot – export commodity prices – is getting dimmer.”

He’s also not impressed by our productivity progress which I think he blames mainly on the lack of capital.

But even if businesses could get it, BigCake not convinced they’ll use it to expand. They’re just not in the mood as the comment makes clear.

“Investment in manufacturing now days isn’t about capital. The focus is on putting time and effort into developing procedures and processes that minimise risk and add often unnecessary layers of cost to products which were previously developed and produced quite efficiently.

“Regulation is developed by large corporations in co-operation with Govt regulatory departments and it’s then forced onto smaller businesses who only have limited resources to invest in their business.”

Not sure big business is driving regulations – they hate it as much as the small guys – but usually they are in better shape to cope.

Anyway, our productivity story is still ugly.

Fallow  points out that between 2006 and 2009 labour productivity declined at an average annual rate of 0.3 per cent. “But that period is only part of a cycle and included a recession.

“In the complete peak-to-peak cycle before that, 2000 to 2006, annual labour productivity growth was 1.3 per cent, less than half its rate in the 1990s and lower than it was in Muldoon’s day. By 2006 New Zealand ranked 22nd among the 30 OECD countries in labour productivity and in GDP per capita.

“The problem, in short, is capital shallowness – too little capital invested per worker by firms in plant, equipment and software, and by the country in infrastructure.

“When it comes to multi-factor productivity – how much output is extracted from given inputs of capital and labour – New Zealand has in fact significantly outperformed Australia over the past 30 years.”

You depressed yet?