Rethinking how to get richer

Colin James for The Australian, 20 June 2011

How does a tiny economy ride the turbulent 2010s? By playing to strengths and thinking its way to new strengths. New Zealand has yet to do that rethinking.
The 2010s global economy is more interdependent and interconnected than five years ago. Pathways, technology and platforms are changing rapidly and unpredictably. Rising (but potentially unstable) Asia and its destabilising scramble for resources are reshaping the global order. People are moving to cities in huge numbers and cities increasingly drive global economic growth.

There are big opportunities and big challenges.

A free trade agreement (FTA) with China gives New Zealand firms and officials extraordinary behind-border access. Opotiki’s mayor (population: 9020) was grandly welcomed on a sister-city visit to Yantai (population 6.5 million) last year. Ministers see counterparts in Beijing; they can’t expect that in Washington.

But a long-time New Zealand investment adviser in Beijing says the FTA is an “unconsummated marriage”. New Zealand has not capitalised on the “deep political goodwill” or drawn on “abundant, hungry Chinese capital”.

An example is New Zealand’s abundant water. China, where an official mantra says China has 20% of the world’s population but 8% of the arable land and 2% of the water, wants to buy into New Zealand’s water (for food). But many New Zealand politicians and swathes of voters are suspicious or hostile: they fear becoming “tenants in our own land”.

New Zealand’s specialty is fresh/safe/natural food. Global demand and prices are high and the outlook looks good. The cashflow boosts national income and gives breathing space to adjust the economy. But it also illustrates the economy’s still essentially extractive nature (tourism, too, sells on landscape) and wages for milking cows and tourists are low by OECD standards. Higher-wage extraction activities such as oil and minerals are either a decade away or far less prolific or accessible than Australia’s.

New Zealand does spawn a lot of high-technology niche companies. Their exports are 2.5% of GDP and rising. But they (and other firms, except dairy giant Fonterra) are small by foreign standards — even Weta Digital, the world’s leading movie imaging firm (witness Avatar) and Fisher and Paykel Healthcare. To get to scale most need partnerships and/or foreign capital which often leads to absorption and expatriation.

General manufacturers are selling well in booming, high-currency Australia. But that reflects a one-third gap in wages. Around 30,000 on average emigrate to Australia each year chasing the higher wages.

That in turn illustrates a deeper challenge: that the big money (outside of resources) is in substantial cities and particularly in “spikes” (to quote spatial economist Phil McCann, adviser to the European Union), where the “creative class” congregates. New Zealand has no candidate cities (Australia neither, probably). People who can join the global elite go where the elite is — offshore. Population churn is around 80,000 (1.8 per cent) a year.

Yet New Zealand has comparative advantages many countries would kill for: abundant water and energy, relatively light direct climate-change effects, distance from mayhem (no boat people reach New Zealand), abundant space, a fresh/safe/natural brand, strong institutions, good education and a tolerant, adaptive and inventive populace.

Many Chinese, Indians, Koreans, Americans and Germans already find these attributes desirable. In 2030 the population might be 10 million, not the projected 5 million. Population policy is one starting point for the rethink.

This underlines two points: that internationalism — of information, finance, production and populations — is mainstream; and that international (including trade) policy starts at home.

Domestic policy settings are no longer leading-edge as they were after the 1984-92 reforms which jettisoned economic nationalism for zero subsidies, near-zero tariffs, light regulation (including of wages), low-ish taxes, an independent central bank and fiscal transparency. Those arguing for more of that sort of reform bump against over-40s’ grumpy memories of long unemployment queues, business closures and “fire-sale” disposal of state assets in 1984-92. Hence the suspicion of China.

Add a defensive mentality. New Zealand is a rich developing country — it grew rich on natural resources but still is not a true mature economy.

New Zealanders cling to the “rich”. An Icelandic-rivalling borrowing binge to stay rich so overweighted the economy to the domestic sector that rebalancing will take a decade.

“Developing” gets less attention. A century ago the buzzword was “progress”. Today’s is “aspiration”. Aspiration is a state; progress is action.

More cows and tourists and hopes for an oil/minerals bonanza dominate the government’s “aspiration”.

One “progress” alternative is a democratic variant of Singapore’s corporatism: a “New Zealand Inc” coordination of government agencies and firms to pursue some concentrated priorities and bulk up presence abroad. There is a new attempt to do that. It has yet to be translated into action.

A second “progress” alternative is innovation. Higher real wages come from higher productivity, which comes from innovation. Governments’ most useful contribution to innovation is in science and technology.

New Zealand’s private sector firms do about as much research and development as their OECD counterparts’ levels but the national private-sector average is far lower because low-research sectors predominate.

The lesson: lift the proportion of high-research sectors through government support for science and technology. For two decades governments have spent less than the OECD government average and a fraction of the levels in small, high-achieving Denmark and Singapore.

A third “progress” alternative is to think laterally about the comparative natural advantages. Current policy “balances” the physical environment and ecosystems against material economic growth on a zero-sum calculus. Some officials argue for treating them as economic infrastructure. Investing in and maintaining infrastructure supports economic growth.

Similarly, education can be seen as “soft” economic infrastructure — building the workforce’s human capital. That can be broadened to argue that a well-functioning society is also economic infrastructure: children who get a good nutritional, cognitive and emotional start become productive workers and don’t descend into costly teenage delinquency, mental ill-health, drug and alcohol addiction and crime. Actuarial assessment of future liabilities could help identify the highest-return interventions to help “at-risk” children.

This is a long way from conventional economic thinking. But these are not conventional economic times. Adaptive and inventive policy and action if a tiny economy is to ride the turbulent global tides and get richer.

That’s for New Zealand. Australia’s two-speed-economy tensions suggest it may need to think imaginatively, too.