Foundations for growth

New Zealand has a productivity problem. We produce less per hour worked than other advanced economies, and our productivity growth has been slower for over decades. This has real consequences. Slow productivity growth means slower wage growth, lower government tax revenue, harder trade-offs on climate change, and higher outward migration flows.

Infrastructure investment is often promoted as a solution. Historic projects like the Clyde Dam and modern infrastructure programmes have been justified on the promise of higher economic growth. But the relationship isn't straightforward. New Zealand already spends a higher share of GDP on public infrastructure than most OECD countries, yet our productivity challenge persists. This research provides a framework for understanding how infrastructure affects economic productivity, based on both theory and evidence.

Key findings

• Productivity is a measure of how much economic output – goods and service – we get from our economic inputs, like hours worked. Productivity growth, being able to produce more for less, leads to higher incomes, greater government revenues, and lets New Zealand invest more in our social and environmental priorities.
• This paper looks at how infrastructure can increase productivity. It sets out a macroeconomic and microeconomic framework for thinking about this relationship, reviews the empirical literature and analyses the efficiency of New Zealand’s roading network.
• Productivity growth is mainly driven by new ideas, technologies and innovations. Infrastructure primarily plays an indirect enabling role in supporting the creation and spread of new ideas and technologies, reallocating resources to more efficient firms and industries, and supporting agglomeration by helping our cities grow.
• Infrastructure is costly and more isn't always better. Infrastructure creates capacity – but this capacity is only valuable when there is sufficient demand. Infrastructure investment is likely to unlock economic growth where there are bottlenecks, which historically are driven by significant technological change and rapid demographic shifts. In the absence of these factors, infrastructure investment should focus on value-for-money projects built in line with, rather than ahead of, demand growth.
• International evidence on the relationship between infrastructure investment and productivity is mixed. A meta-study of over 200 papers found that developed countries see lower returns overall and for transport investment, but see higher returns for digital and energy investments. After depreciation and finance costs, international evidence suggests that many investments could provide a negative return, which highlights the importance of selecting high-quality projects.
• The paper also analyses how ‘efficient’ our roading network is compared other developed countries. That is, how good are we at turning roading inputs, like investment spending and the length of our road network, into roading outputs, like vehicle kilometres travelled, road quality and lower travel times.
• Our analysis finds that while our road inputs are middle of the pack relative to other countries, and our spending on roading is relatively high, the outputs we receive are lower than average. This suggests the efficiency of our road network could be improved and that could realise greater economic benefit if we used existing infrastructure more efficiently.