Paddling round the archipelago

E-vision interactive breakfast, 27 November 2001

When I leave here this morning I will drive to Rotorua, where I am to sum up at a regional development conference hosted by Jim Anderton. This ought to be the sort of thing to bring tears of ideological joy to the eyes of Mr Anderton’s phalanx of critics in the Alliance. It sounds like good old-fashioned 1960s subsidies, which Labour used to obsess about before it changed tack in the 1980s and deregulated the economy and al-ienated Mr Anderton.

But the Alliance purists would feel deceived by and angry at his version of regional development. The world has moved on, interring the better past the Alliance old guard want for us. Now governments don’t set up or, one way or another, invest heavily in new businesses to create activity and jobs in the “regions”. Mr Anderton’s role is to facilitate, not initiate, to get alongside self-starters or alongside local governments getting alongside self-starters. Except for Kiwibank, which has the endorsement of such raving socialists as Jim Bolger, Ross Armstrong and Elmar Toime, the government is not any more to be the starter, the investor, the owner, the director.

The Alliance old guard live in the age of the factory, the age of uniformity, mass pro-duction, the organised society, the age when the manufacture of goods was the measure of a modern economy — steel mills, car plants, television assembly lines. It was the age of the factory state, too: uniform services for a grateful populace provided by a benevo-lent government with its people’s best interests at heart. That was the age of social democracy, with a hint, maybe the promise, of socialism round the corner.

It was the age when agriculture relentlessly lost ground to manufactures. The terms of trade headed down a one-way street that left grasslands countries like New Zealand run-ning faster and faster to stand still until we ran out of puff. It took 529 lambs to buy a tractor in 1962, 1445 in 1982.

But now it is manufactures’ turn to lose out to knowledge business. Peter Drucker, in his marvellously succinct feature for the Economist magazine three weeks ago put it this way: “The relative purchasing power of manufactured goods has fallen by three-quarters in the past 40 years. In 2000 it took five times as many units of manufactured goods to buy the main knowledge products as it had done 40 years earlier.” Manufacturing remains important, as agriculture does, but it is not the key to riches. Singapore thought it was acquiring a stake in the new economy (whatever that is) when its planners snared a chip-making plant to go with other IT hardware manufacture. But chips and even computers are commodity manufactures: Singapore’s economy has contracted painfully this year after IT investment in the United States dried up at the end of the 1990s boom.

The world has in fact been turned upside down. New Zealand and Australia, with no IT hardware manufacture of any significance and still heavily dependent on primary exports (minerals and agriculture in Australia’s case, agriculture, forestry and fisheries in New Zealand’s), look well placed to ride out the international downturn with not too much damage. In fact, New Zealand got through the Asian downturn in 1997-98 with less of a dent in growth than the OECD average, despite two droughts that each took between 1% and 2% off growth.

But that misses the point. A country should certainly play to its strengths and one of this country’s is growing or hunting high-quality food. But just doing that and no more is disastrous. As David Landes pointed out in The Wealth and Poverty of Nations, Argentina was once a wealthy country, raising beef. But it stuck to traditional ways and ownership. It did not apply new knowledge. Now it is a basket case.

The reason this country did so well for so long on the sheep’s and cow’s backs is that our farmers were techno-freaks. They thought about what they did. They thought up ways to do it better. They took the ideas of scientists and applied them with gusto. They mechanised wherever they could. Productivity soared. Farmers not only had to run faster to keep us all prosperous; they could run faster, they wanted to and they did. Until the 1970s their incomes kept up, too, because productivity increases matched the fall in their goods’ purchasing power.

Drucker tells the same story about American manufacturing workers. Their goods buy less but it takes far fewer of them to make the goods, so over the past 40 years “most of their real income has been preserved”. The secret of this astonishing transformation has been the application of new knowledge — just as in farming here. The problem is that this shakes out workers. Only those who can keep up with change ride this wave. Those who don’t or can’t get the skills languish. The days of good wages for the unskilled and low-skilled have pretty much gone, just as the days of the farm labourer had largely disappeared by the 1970s.

But the critical influence of primary products on our economy has not gone. New Zealand’s economic growth tracks world prices for our commodity exports. If those prices are high we grow fast; if they are low we grow slowly or contract. For all the diversification of the past 30 years — and it has been remarkable — that is still the case. (It is also the case for Australia.)

Now note a second uncomfortable fact. By comparison with Australia in the 1990s our commodity prices were better. But we grew on average more slowly than Australia. Now our average incomes are a third lower than Australia’s. It doesn’t feel good.

Why the difference? Among the main reasons was that we had an overvalued currency. We kept pretending to ourselves we were richer than the fundamentals justified — and foreigners aided and abetted us in our delusion, because we were the darling of the eco-nomic ideologues in the way we had deregulated our economy and then became a vogue choice for rich Asians looking for boltholes in the mid-1990s.

Now, as the world shudders, we are doing OK. Why? Because we have become poorer. Our currency has dropped by more than a quarter since 1997. And most commentators think that drop is structural and therefore enduring — that even if it rises a bit during the next few years, it will still be well below the levels of the mid-1990s madness.

Being the object of pity in Australia is not much fun. Nor is it much fun quailing at the price of a coffee or a beer when we go abroad. Thirty years ago it was a breeze. Now we know our peasant status.

How do we get out of this?

Well, the bright and determined among us can do it by going to live somewhere richer. They can have a higher standard of living in Sydney or Singapore or San Diego or New York or London. And their prospects are likely to get better: able-bodied people of “working age”, whatever that means, are going to be in great demand in Europe over the next decades as the proportions of old people in the populations rise and working-age populations hollow out. There is a danger the whole of this country becomes like the East Coast is now after the movers and shakers have been sucked out by richer employ-ers in other countries, as East Coasters once were by Auckland.

Stir in some more demographics. Maori and Pacific islanders are going to be a rising proportion of the population for the next 20 or 30 years. Modern-day Maori kids have lower aspirations than the rest of the population, so get less well-educated and when they grow up are less fit for work. It doesn’t take rocket science to work out what that means for the country’s economic prospects if it isn’t fixed. That will be a recipe for more of the bright and determined to go elsewhere.

All this is well known. So is our history of relatively slower growth than our cousins in the rich Atlantic countries and our neighbours in east Asia. Less well-known is that in the 1990s we just about kept up with the rich countries in per capita growth: that is a positive legacy of the flexibility Rogernomics forced on the economy. The issue, now that the currency collapse has brought home to us our bottom place in the rich-country league, is how to go beyond just keeping up and instead do better — to climb back up the league table.

In crude terms, if we can get our average growth rate up from the present 2.5%-3% to 4% a year it will take us until sometime between 2020 and 2030 to get into the top half of the rich countries’ club. And to get that extra growth we will have to double productivity growth — that is, double the rate at which on average we all in this country can increase our output for the same work.

That is a massively difficult task. I haven’t met anybody who thinks, deep down, we can do that. Unless we change radically. And haven’t we had enough of change?

Well, the hard news is that we will change. Unless we do better we will — even more than now — not have the health services we want or need or the education we want or need for our kids or the wherewithal for consumer goods or holidays abroad. Our universities are perilously close to losing international credibility because we can’t pay lecturers enough and the same goes for cutting-edge researchers. It will be even worse if the bright and determined decide it is not worth the candle here and we lose too many of the very people who can spearhead the difference.

And that is why we now have this obsession with “knowledge”. We can do so much by cutting business costs and more can be done by managers and the government (though this government won’t). But to create opportunities we need “knowledge”.

So we are supposed to become the “knowledge society”, catch the “knowledge wave” to the “knowledge economy” and thereby fashion the “knowledge nation”. How? The formula is wonderfully simple: better and different education, coupled with an entrepreneurial spirit.

We allegedly have the entrepreneurial spirit, the GEM study published earlier this month told us. And by international standards our education system isn’t too bad. So what’s the problem?

Our entrepreneurs are actually mostly better described as self-employed — limited-ambition, limited-range, small, traditional things for local markets. The education system is in the grip of people who believe life is a zero-sum game and all winners are matched by losers so we mustn’t have winners. It is only a step from there to a zero-sum belief that profits are someone else’s loss. A century ago our mindset was “getting ahead is good”. Do we have that mindset now?

Some of us do.

There is an astonishing number of small companies operating internationally in high-tech and medium-high-tech fields — in software, in graphics, in biotechnology. There is a surprising number of manufacturers who are very good at tweaking technology to find niches in the world market. There are plenty of farmers who have recognised that they are not farming for capital gain as their forebears did but for real-time returns on capital which means they have to do what Drucker tells us the top manufacturers do — think very creatively about what they can use and how they can adapt it to lift productivity. So we do have lots of energetic, energising, enterprising people. They are the knowledge economy. They draw down international incomes.

But do they connect with the rest of us who are sinking gently, watching the world go by? Do they generate opportunities in quantity or just in small amounts? Are they going to generate that doubling of productivity we need as a minimum if we are to climb back up the rich countries’ league?

I think of those smart business, those knowledge economy enterprises, as islands. The rest of us are on what you might call a surrounding continental shelf, getting wet feet as it slowly sinks (relative to the rest of the world). We have an archipelago economy.

My guess is that is not hugely different from what is going on in other economies but I can only speak for this one. The island dwellers don’t really connect much with those on the continental shelf, except to buy in coffee and other services on a limited scale. They don’t even connect much with each other. But they are plugged into the world and they do very well.

The rest of us wait — as once the New Guinean cargo cults did after the second world war — for the great white bird to come out of the sky and bring us riches. It has happened twice before: refrigeration in the 1880s created multitudinous good jobs in freezing works and spinoff industries; aerial topdressing in the late 1940s greatly expanded sheep and beef production.

There was an element of that cargo cult mentality in the Knowledge Wave conference (though not among the organisers). Knowledge is the plane that will bring us all riches.

But the island dwellers in the archipelago economy do not generate riches for the conti-nental shelf dwellers. The continental shelf dwellers haven’t all got the brains or the creativity or the inner drive to get an island lifestyle. We mostly pretend to ourselves we can have Scandinavian lifestyles on Portuguese wages — and grumble that the rich among us are getting too rich and the less-well-off aren’t making it — the zero-sum game again. Or that foreigners have turned us into a branch economy, partly because we won’t save — why should we? Or that the successful people treacherously sell out to foreigners just at the point where they might get big and employ lots of us — the nursery economy.

This is a product of revolution.

Any economic revolution of the sort we are now going through makes some very wealthy and many poorer or at least insecure. That happened in the industrial revolution and again in the mass-production revolution. The good news is that everybody got richer eventually — though when you are living through it, it doesn’t seem that way and in any case why should history repeat itself on the upside.

We are still in the early stages of our revolution, the information revolution. The really big phase, those who understand these things say to me, is the biotechnology phase. That is now getting under way and will dwarf the silicon phase. So expect a lot more inequality and a lot more disruption. Wishing it away will only make it worse.

The alternative is to get as many people involved in the information revolution as possible. And the key to that, it seems to me, is new knowledge.

Knowledge, as I understand it, is a process, not a substance. It is the continuous acquisition and application of new information, not the once-for-all acquisition and storage of a “block” of facts. Just about anyone in ICT (information and communications technology) knows that. So do those in creative design.

So the “knowledge society”, the “knowledge wave”, the “knowledge economy” are about new knowledge.

I think new knowledge comes in three sorts.

The first is cutting-edge science and new technology and the development of saleable products and services from those discoveries. I would also put in this category highly inventive design.

The Prime Minister has grasped the economic value of this sort of new knowledge. Her strong statements on genetic modification about not being able to afford — economically — to “turn our backs on science” made that point. And she is a champion of design and the arts that underlie good design.

This first sort is the glamour end of new knowledge. It excites and scares people — out of their wits in the case of genetic modification, which we are about to wrap so tightly in cotton wool we risk missing the economic opportunities it promises. High research is what most people think of as the “knowledge wave”. And most people cannot see a place for themselves on that surfboard.

The second branch of new knowledge is to be found among those who do the work of the new businesses founded on new science or who apply ideas creatively or imagina-tively to what we might call traditional work. These are the technologists and techni-cians, creative designers and thinking managers who learn new skills or techniques to make the new ideas work or to do the work of the new ideas.

This second branch of new knowledge is not the discovery of a new technique but its application. Among the elements of this branch is connecting up with successful expa-triates and in some sense or other plugging them into this economy even if they stay put overseas.

Most people can’t see themselves on that surfboard either. But there is still a wave for them to catch and it is vital for the rest of us that they do.

My concept of this third branch is the acquisition of old knowledge, by those who have no knowledge or low levels of it — and usually, as a result, no or low earned incomes. It might be a step up from basic work to technical work. It might be a step up from flip-ping hamburgers to nouvelle cuisine in a smart restaurant. It might be a step up from il-literacy and the benefit to basic work for an income, a step on to the first rung of the ladder � and, once on the ladder, experience tells us, people mostly want to go on climbing.

This is a role no government has yet taken seriously. It would require massive changes in early childhood assistance, massive changes in schools and a massive second-chance polytechnic programme — far bigger than have yet been contemplated or prioritised for in the budget. The government fiddles at the edges and congratulates itself. And it can be excused: there is no stomach among the populace for this and I doubt the populace can be persuaded.

What unifies these three branches of new knowledge?

They all require us to think and to change. The status quo is reverse gear. Once you could be freezing worker or a mechanic or a middle manager for the whole of your life without having ever to put your brain in gear. Now a factory operative might well be doing at least part of the work through, or with reference to, a computer. Ask the Watties workers in Hastings who have had to go back to school. Mindless repetition is less and less an option unless you want Nike wages.

So if there is a unifying strand for educational institutions it is to teach children and adults (a) that they need to think and (b) how to think — and that they will need to go on thinking. The alternative is wet feet, then knees, then who-knows-what-else on the continental shelf.

The Knowledge Wave conference was a start. But what has it spawned?

o A Knowledge Wave Trust of mainly private sector and university people, which monitors, facilitates and occasionally funds in a small way private initiatives. This trust is determined not to fall under the spell of the government.

o The trust is also leading a number of projects recommended at the conference. Among these are:

–a pilot, being developed by Andrew Grant of consulting firm McKinsey and Co, for a social venture capital fund intended eventually to be two or three $1 million private sector funds investing in 15-20 non-profit organisations, with returns measured by achievement of agreed goals;

–development by a working party headed by Andrew Grant and Chris Liddell, of Carter Holt Harvey, of a “balanced scorecard” of national targets for economic growth, establishment of a knowledge society, talent development, social cohesion and environmental health and then monitoring progress towards these goals;

–a “teaching oscars” project to honour high-quality, high-achieving teachers;

–a broadband project, in conjunction with the Law and Economics Consulting Group;

–a Knowledge Wave symposium and a Knowledge Wave week in August 2002 to review what has been done a year after the original conference.

o The KEA project — KEA stands for Kiwi Expats Association — has begun to get some focus. This was dreamt up last year and given some underpinning at the Knowledge Wave conference by Warehouse chief Stephen Tindall and David Teece of the University of California at Berkeley stumping up $100,000 to speed up devel-opment of a database of expat New Zealanders.

It has some government funding but is intended eventually to be self-funding. It has a director based in Wellington and is developing “nodes” of expats. The first is Silicon Valley, linked also to Stamford University and Berkeley, with London and New York likely to follow. Through these nodes companies here will be able to identify and network “high-end” expats they can hire home or link into to for their technical and marketing skills and contacts for sales, alliances or intelligence about new developments.

o A privately-sponsored “Minute of Innovation” series, developed by Lowe Lintas’s Mike O’Sullivan, is to run five days a week for 40 weeks on the “Meal in a Minute” slot just before the 6pm news on TV1. O’Sullivan’s aim is to “give us a sense of identity and confidence in ourselves”. They are modelled on similar series in the Treaty of Waitangi sesquicentennial and at the millennium. They have five themes: “clever science” (of the sort that is developed into profitable products); “bright futures” about learning at all levels; entrepreneurial “knowledge champions”; “enterprising ideas” by which businesses have used research and development to add value; and the ICT industry.

o Television New Zealand is also developing an educational series for its breakfast programme.

o Ernst and Young is developing an entrepreneur of the year award, in keeping with a Knowledge Wave conference’s demand that we celebrate entrepreneurs instead of snip-ing at them.

o Peter Townshend, Canterbury Employers Chamber of Commerce director, called a meeting of 40 chief executives to work out “how to develop the good stuff into ac-tions” and apportion responsibility for getting some initiatives moving. Out of that came a plan to ensure every school has an informal linkage with a business (separate from existing arrangements, such as supplying computers) and a forum for manufacturers, to which 100 turned up, to work out how to create an environment to promote manufacturing and raise individual manufacturers’ capabilities (compliance costs, in-ternational marketing and skills shortages were among focuses).

Notice something about all that?

It’s all private sector. Not a skerrick of government.

The government is in the loop. Pete Hodgson sits on the Knowledge Wave Trust. He says the conference accelerated policy development. And he is Minister of Science: the great majority of science and research done in this lost little country is paid for by the government and even done in institutions owned by the government. Without the gov-ernment we would be waiting for the cargo plane.

But, apart from that, the government’s role is strategic. The Department of Prime Minister and Cabinet is pulling together a strategy which will be the centrepiece of the Prime Minister’s annual statement to Parliament in February. This draws on o an innovation strategy developed by the Prime Minister’s Science and Innovation Advisory Council;

o a Treasury report on the challenges and opportunities of our small size and distant location, among other things looking at adult literacy and what Mr Hodgson calls the “interconnectedness of scientists and industry” and focusing on specialisation as a vehicle for economic transformation — in her speech to APEC on 19 October Ms Clark prioritised biotechnology, information and communications technology, creative industries and environmental technologies;

o a report, by the LEK consultancy, on developing and attracting talent, which ties into the KEA project; this includes a “talent visa” to enable employers to fast-track extended work permits for high-talent foreigners;

o a still-secret Boston Consulting Group report on attracting and facilitating foreign direct investment — though ministers are wary of simply aping Ireland’s strategy and want foreign investors locked into the economy here.

These four reports will be meshed with strategies being developed in other portfolio ar-eas and partly by Industry New Zealand, most notably on e-commerce, incubators and early venture capital and in tertiary education.

Which leads me back to where I came in, with Jim Anderton’s regional conference over the next couple of days. What is an old-fashioned notion like regional development doing amidst a drive for a knowledge economy?

The answer lies in how it is conceived. Big government money and programmes will just cost the taxpayer a lot for little return. But smart and fast facilitative assistance to small self-starters can pay dividends.

Self-starters can be anywhere. What it takes is nerve. We had nerve 100 years ago. Do we have enough now? Or will we 20 years from now be paddling round the archipelago, wondering where all the good fishing went? I don’t know but I’ll have fun watching from the beach.