Friday, 13 September 2013

Competition in small markets

Another for the "New Zealand's Fixed Costs Matter" file: Aaron Schiff posts on the relative lack of competition in New Zealand. Where inefficient firms are driven from the market in other places, New Zealand has a long tail of pretty unproductive outfits.
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.
Aaron agrees with Procter's assessment that New Zealand's low level of international trade hurts things, then makes a rather interesting argument for import-led growth.
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.
There's not a lot that we can do to make New Zealand even more open to imports: tariffs are very low, GST rules around imports currently make sense, and we see no need for the New Zealand government to enforce at the border any exclusive dealing arrangements that foreign manufacturers have seen fit to make with New Zealand retailers. But getting rid of our ability to run parallel importing, or doing dumb things imposing GST on low-value imports, or forcing a policy preference for New Zealand Made products, would do harm.


  1. In driving people and resource towards productive activity, do we lean against what we are also told is important for NZ - diversifying away from our reliance on a few sectors? Would one expect a new area in which NZ has a comparative advantage to emerge from such a process, or would it rather drive a greater focus on the comparative advantages which are already apparently overly-relied upon?

  2. I don't think that policy should lean towards one industry or another. I tend to expect that we do well via public investments in research complementary to better pastoral systems for nitrogen fixing and methane reduction, and through institutional structures supportive of IT development (sane IP legislation, perhaps more emphasis on privacy rather than GCSB/TICS), and through mechanisms supportive of increased immigration and skills enhancement (like my idea of "If you get a good NZ qualification, it comes with permanent residence"). But I don't know what's the best area for people to invest in. And I don't think Stephen Joyce does either. It's because I don't know that I like neutral institutional structures on the whole so that whatever may be best can emerge.

  3. I also hate the idea of the Government trying to decide how to allocate resources. But is there not also a risk, if resources are left to find their own way without Government intervention, of the "Manchester United problem" - technically the rules are the same for all English soccer clubs, but success breeds success and attracts/can pay for the best, the result being a very small number of clubs always winning everything and others left increasingly forlorn of hope to ever catch up. That's great for the winners and their fans, but less so for the paying public which may like to see more of a competition; and it doesn't seem to be doing much for the England team either. Translated back into the NZ economic context: a risk of ending up ever more reliant on and exposed to a very small number of sectors. Perhaps this is always likely to be the result of international trade, ie increased specialisation by national economies, and perhaps that isn't a bad thing? Or are there countervailing mechanisms likely to encourage diversification within rather than between national economies?

  4. There is another point about comparing Denmark that needs to be considered. Denmark has a general VAT rate of 25%, and income taxes on middle incomes in the 50%+ area. In addition, much higher welfare benefits as a percentage of average income than NZ. All in all, this puts a pretty high treshold of productivity on workers and firms. At least this is an additional explanation to the difference in "death by low productivity", other than the "being far away from markets"-thing.