The challenge of the archipelago economy

If the dollar, the petrol price and the Olympic washout haven’t yet got you down, go listen to a home-grown captain of industry. Mapped out between you and your economic hopes will be mighty crevasses of unconfidence and gloom.

Perhaps positive thinking is these days reserved to foreign magnates who can invest their energy and money anywhere in the international board game. Certainly, by most accounts, the Herald’s owner, Tony O’Reilly – who distinguished himself in my eyes way back in 1959 by, film-star-like, wearing cut-down boots as a British Lions wing – was upbeat in speeches here last week.

Contrast that with the almost unrelievedly lugubrious message last Wednesday from Kerry McDonald, longtime boss of an earthbound smokestack, Comalco, and Business Roundtable notable, at the annual shindig of the Institute of Economic Research (NZIER), of which he was director 20 years ago and is now deputy chair.

An economist by training, Mr McDonald showed a battery of graphs depicting New Zealand doing worse than a bevy of comparable countries since as far back as 1960 and spectacularly poorly since about 1990. He blamed this mostly on politicians and a lack of vision and leadership and saw little light ahead. But when asked for a policy prescription, he proffered peanuts.

You begin to understand Helen Clark’s frustration with these people. Sure, she angered them with the tax rise, the ACC renationalisation and the new labour laws and, sure, it is unrelentingly gruelling in the grind of the competitive modern economy without politicians erecting obstacles. But, some of the NZIER’s bureaucratic, economics and business guests muttered after Mr McDonald’s speech, is the business elite going to stay in this funk forever?

For a focus on opportunities instead of problems it is best these days to talk to business’s subalterns. As the Business Herald has shown week after week, there are hundreds, maybe thousands, of sparky entrepreneurs plugged into the high-earning part of the international economy and doing a smart trade.

Mr McDonald acknowledged their existence but said they are “islands”.

He is right. Though he did not put it like this, we now have an “archipelago” economy.

The old economy of big, ubiquitous industries spread wealth around through easy-to-get-the-hang-of jobs. But the terms of trade have run against them for decades. That once-halcyon economy is like a continent sinking below the sea. Those anchored to it are getting gradually sodden.

The successful new businesses are islands jutting above this sunken continental shelf. They sell into the world economy on high terms of trade. Their owners and staff are on world incomes, especially in the high-tech sectors.

These businesses don’t employ many each and the jobs mostly require high education, so their wealth-creating capacity is not spread far. Though they may start by supplying the local economy, they are not integrated with it, as the old industries are. They could do what they do anywhere.

They do buy services from the surrounding economy, of course, but that doesn’t lift wage rates generally because they pay local – that is, low – rates for those services.

Then, when they reach a certain size they are often sold to some big foreign outfit and the jobs and capital go offshore.

How to get more of them, keep them and employ their creativity to raise the sunken continent – to turn the archipelago economy into first-world prosperity for the many – is the challenge Ms Clark and Pete Hodgson have set themselves.

That is why the next phase of the government’s programme – at least, as senior ministers have outlined it to me – is geared around the “knowledge society” aka the “knowledge economy”. As I indicated last week, this programme implies a switch of emphasis from the economy as servant of social policy to social policy as servant of economic policy.

Such a switch, if carried through, will mark an important change in the conduct of social democrats in office in this country. Down-in-the-mouth business captains might take a steer from the archipelago economy’s positivity and hunt out opportunities in this switch. The cabinet’s hui with 70 selected business “leaders” on October 24 might be a place to start.