New Zealand has many conditions in place to support increased per capita income and living standards. These include inclusive, high-integrity government, quality institutions, macroeconomic stability and microeconomic flexibility.
However, productivity is stagnating. We are struggling to address rising superannuation and health costs, let alone close the per capita income gap with better-performing economies. We are poorly positioned to deal with threats. These include breakdowns in international trade and biosecurity. The primary industries are vulnerable to disruptive offshore innovation. There are risks that our access to the Australian labour market will be eroded.
New Zealand’s relative decline is associated with its weak tradeable sector and its persistent high real exchange rate. Inwards migration has put pressure on infrastructure and housing affordability. New Zealand suffers from massive capital misallocations that inflate existing farm and housing prices. This leads to indebtedness (largely to overseas banks), and barriers to entry. It starves innovative businesses of investment capital.
New Zealand’s isolation limits trade connections and slows technology transfer. However, it has some advantages. We have low defence expenditure and high biosecurity. We are better placed than Western European countries to service Asia-Pacific markets. Shipping costs to export markets are often lower than land transport costs for continental countries. IT is making knowledge flows faster and cheaper. However, unlike Singapore and China we lack an economic strategy.
A strategy is needed because hands-off market liberalism from the mid-1980s has failed to arrest our relative decline. Our economy has no growth trajectory that can meet future health and social security expectations, let alone manage major shocks.
New Zealand’s economic strategy should aim to recapture our past position near the top of the world’s per capita income ratings. This is what underpinned our lead in living standards, social cohesion and human rights.
Internationally, productivity gains and returns on capital have been disproportionately concentrated in dominant frontier firms[1]. Productivity growth and returns on capital have been decoupled from wage growth, exacerbating inequality.
New Zealand’s economic strategy needs a supporting narrative based on investing in people, inclusive growth, sustainability, and concern for others. New Zealand colonists rejected the British class system and believed in fairness, equalitarianism and self-reliance. In Maori culture, Manaakitanga involves caring for others and whanaungatanga supports the importance of relationships. Kaitiakitanga values environmental stewardship, and Te pae tawhiti supports a long-term intergenerational view.
We must also hold to an even more important narrative. We are citizens of the world, especially the modernist, democratic world. While our capital and ownership must be more local, ideas and technologies are increasingly international, and we must meet our global obligations.
An economic strategy for New Zealand would involve:
Lifting domestic savings rates
Lifting domestic savings rates will deepen and diversify New Zealand’s capital markets, and over time see more financial sector profits retained in New Zealand. It will reduce the real exchange rate, and lift the capital to labour ratio. It will make exporters more competitive, improve labour productivity, and foster innovation, entrepreneurship and economic diversification.
Lifting domestic savings rates means addressing issues such as retirement provisions and tax policy. New Zealand superannuation is equitable, efficient and gives people good incentives to work beyond retirement age. However, pay as you go (PAYGO) schemes do not contribute to capital market development and productive sector growth. Save as you go (SAYGO) schemes such as the New Zealand Superannuation Fund (NZSF) and Kiwisaver develop capital markets and expand productive capacity.
New Zealand is unusual among OECD countries in lacking mandatory requirements for personal retirement savings. Compulsory saving can reduce other savings forms, and squeeze consumption. However, increased savings flowing into productive investment makes higher consumption possible in later time periods.
Compulsory savings for superannuation could be reintroduced[2]. However, this is politically challenging, and can increase complexity and transaction costs. It raises equity issues. Domestic savings can be increased through other interventions. These include lifting contributions to the NZSF, making Kiwisaver mandatory, and other initiatives akin to Whai Rawa and Individual Development accounts – see: https://en.wikipedia.org/wiki/Individual_Development_Account
Tax on interest should not discourage savings in, for example, retirement schemes. However, tax or other subsidies for private saving should not lead to government dissaving.
Shifting domestic savings and investment into the productive sector
Higher savings will lift growth and per capita incomes when invested in expanding productive capacity. Tax and business regulatory policy needs to support this.
We need to ensure that regulatory settings and incentives lead to a greater share of increased savings being invested in the tradeable sector and expanding productive capacity, rather than inflating fixed asset prices.
Tax policy, financial market and business regulatory settings need to support “retain and invest” rather than shareholder maximisation business models – see: https://winsleys.wordpress.com/2017/01/15/what-caused-the-mess-we-are-in-and-how-do-we-get-out-of-it/
Savings rates and business tax policy need to encourage businesses to apply more capital to labour. Capital needs to be in productive capabilities, and be patient. What is scarce in New Zealand is not money, but equity in productive, tradeable sector businesses with long-term, innovation-focused strategies.
Gearing social expenditure to support economic development
Social policy has three main pillars. These are:
- Services that government can deliver more efficiently and equitably than the private sector (much health, education and superannuation provision, and ACC)
- Targeted interventions to address at risk populations, such as vulnerable children
- Social transfers to keep people out of poverty, and to act as fiscal stabilisers during recessions (unemployment benefits, support for low income families)
Social policy dominates government spending. Even incremental efficiency improvements have massive economic benefits. Social investment to provide security and well-being can be geared to economic development in a mutually reinforcing way.
The best social welfare is a high-performing economy that generates rewarding jobs, with social welfare as a backstop. Comprehensive social security systems in Scandinavian countries encourage rather than stifle risk-taking. Entrepreneurs know that if they fail they can recover rather than be left destitute.
However, some social welfare expenditure that subsidises consumption and keeps people out of absolute poverty can entrench them in relative poverty, and the passivity this gives rise to. Some social welfare transfers subsidise businesses that should be paying a living wage.
Social expenditure should build people’s human capital capabilities, and build assets for them, allowing them to escape from poverty.
Singapore avoided a welfare-dependent underclass from emerging. It did so through investing in individual and family education, financial assets, and home ownership rather than subsidising consumption. New Zealand should develop similar approaches.
Individual Development Accounts (IDAs) could be established to invest in education, net worth and productive asset creation. These could involve start-up government contributions beginning from birth or early childhood. They would be open to contributions from different sources, with withdrawals restricted to capability development purposes. For example, some part of child poverty-related financial transfers could be invested in IDAs. Grandparent, wider whanau, iwi and church contributions could be made with confidence they will be invested in children’s interests and not be diverted to “other purposes”.
IDA accounts could be drawn on at particular lifecycle stages, such as early childhood, tertiary education, and for financial and business asset creation. Aggregate savings from these accounts would boost economy-wide growth, while building individual wealth-creating capabilities.
New Zealand should continue a “social investment” approach to optimise expenditure targeting, taking account of all direct and indirect benefits and costs. This can complement capability development.
Social investment allows targeting investment to key lifecycle stages, and to address specific risks or opportunities. It could for example target investment more heavily at the earliest childhood development stages, building capability from then on, and delivering both wealth creation and avoided social cost dividends. This can lift the productivity of New Zealand’s social expenditure, giving better outcomes for people at lower cost to all parties.
New Zealand can lead the world in social investment.
Tax reform
New Zealand has a well-designed, broad-based and low transaction cost tax system. GST is comprehensive, and minimises exemption-based transaction costs. Simplicity in tax policy and in regulatory design makes it difficult for the powerful to game.
Tax policy should encourage savings and investment in productive capacity. Capital gains taxation would help shift investment into productivity and wealth creation.
Tax policy needs to keep up with how technological change erodes tax bases and creates monopoly rents. For example, some global IT companies and private equity investors have exercised monopolistic powers through their scale and network barriers to entry, more so than intellectual property rights. This has exacerbated inequality. This might be addressed through tax and competition policy interventions.
Tax reform can focus on changing behaviour more so than raising revenue. We should increase taxes on “bads” (for example, pollution, tobacco and sugar drinks) and reduce taxes on “goods”, such as interest from savings.
End corporate welfare and incumbent coercive power
Businesses should exist to serve their customers, and to allow their staff, owners and communities to flourish. CEO rewards should be based on productivity, not bargaining power. Business regulation must not protect incumbents or discourage new business entries and competition. It should favour value creation rather than value extraction.
Immigration policy and labour market regulation should avoid a “race to the bottom”. Migration should not be used to subsidise businesses through, for example, putting downward pressure on wages, or lifting demand for housing at times of housing shortages.
Migration should grow our intellectual, creative and entrepreneurial capabilities, our links to the world, and shift our productivity possibility frontiers outwards. It should bring diversity in forms that meld with our democratic and modernist values. We should ensure we are a good global citizen through refugee intakes.
Weakening of trade union bargaining power in the 1990s reduced incentives for businesses to invest in training and in labour-augmenting and labour-displacing technology. It is likely to have harmed both worker interests and long-run business productivity.
Labour market regulation should balance business flexibility with a more stable work environment that encourages longer-term investments such as apprenticeship and other training, and which helps workers plan their lives. Done well, this can underpin cooperative and “positive sum game” approaches to labour relations. Employees then see the need for businesses to grow through dynamic responses to markets, underpinned by stable and cumulative approaches to workforce development and human capital creation.
Businesses do not have a monopoly on incumbent coercive power and impeding opportunities for others. Restrictive trade union practices can impede innovation and productivity. Workplace bullying by peers as well as bosses causes misery and stifles new perspectives. “Nimbyism” impedes new housing developments.
Innovation-driven industrial development
Government should champion innovation-driven industrial development see: https://winsleys.wordpress.com/2017/02/15/how-innovation-can-fulfil-our-future/
Innovation and business development policy can include government equity investment and other “hands-on” policies. While honouring international agreements, New Zealand can actively use innovation-related procurement policy to foster industry development.
New Zealand needs to be linked to and participating in international basic research, and have the capacity to adopt, extend and apply leading-edge science and technology. Universities need the freedom to pursue undirected basic research. However, we need more challenge-based research and DARPA model approaches to create technological solutions and “new economic space”.
We should set technological challenge targets, and marshal public and private capabilities to achieve them. This will create technology to grow New Zealand businesses. Illustrative examples might include electrical engineering innovation[3], for example to manage renewable generation intermittency, and for primary industry vehicles and machinery. Remote monitoring technology can enhance environmental and natural resources management and EEZ surveillance. Precision agriculture can optimise nutrient management. Automation of dangerous and debilitating work can lift productivity and enhance worker safety and job satisfaction.
Business-specific technology adoption and application must be market-driven. However, Government has a key role in strategic research going beyond business time horizons, and focused on opportunities for New Zealand. Its research investment needs to be enhanced, and focused on specific technological platforms that multiple companies can draw on.
Government should not provide corporate welfare through non-competitive business grants. It should take stakes in the technologies it helps fund, and leverage returns from this taxpayer investment.
Science-driven and “high tech” businesses can be powerful enablers. However, they generate few jobs directly. Innovation-based growth must be leveraged over broad product and service sector opportunities. Some of these will be core New Zealand industries, others will be tightly-focused microcosms of future mass markets.
New Zealand-specific strategies are needed. These could focus on:
Leveraging off the primary industries
The primary industries are a growth platform. New Zealand has primary industry scale, and many business models to build from. Leading-edge technology from other industries can be applied in primary sector applications. Landcorp can play a role in trialling new technologies at scale, and diffusing what is learnt more widely.
The primary industries are also a base from which to grow manufacturing, engineering, biotechnology (including pharmaceuticals), IT, energy and other industries.
Some growth can come from businesses that cluster around the primary sector. Examples include agricultural equipment and machinery, grading, product testing and processing plant, IT, and plant and animal genetics products and services. Other businesses can begin in the primary industries, and from this platform diversify into different markets. This can come from a “migration of market structure” business journey.
Using sustainable development as an economic development strategy
New Zealand’s low per capita population to natural resources ratio is a key to our living standards. Most of our land is mountainous or has poor soil, and we should minimise urban encroachment on our best agricultural land. We already harness most of our low cost hydroelectricity potential, and are up against water use, biodiversity and sustainable fisheries limitations.
However, natural resources are not entirely inelastic. They can be expanded (for example through forestry plantings), more widely harnessed (wind and geothermal power) and used more efficiently (nutrient management).
Imagine a thought experiment in which someone invented “an imaginary country” designed to survive and prosper through climate change and sustainability challenges. This country would have a long coast to land area ratio, and be located in the “roaring forties” to maximise wind power. It would have good farming and forestry resources for sustainable food, fibre and energy production. It would be mountainous to harvest rain, and to create hydro-electricity potential. Its volcanism would sustain soil fertility over geological time, and underpin geothermal power. It would be located in a large ocean away from the poles, to reduce climate change extremes.
New Zealand is well positioned to move to sustainable resource use and break dependence on fossil fuels and other non-renewables. In doing so it would reduce import costs, create competitive technology-based businesses, and address climate change and other environmental challenges.
We must set high ambitions and fulfil them. Our renewable electricity resources can underpin mass electric vehicle adoption. Farm and forestry businesses can contribute to distributed generation.
Healthy, sustainable housing is a foundation for families and communities. It can also generate electricity and enhance grid security. Government-led housing, construction and infrastructure development can drive technological innovation, and translate this into business growth. We can be the world leader in multi-storey, highly engineered wood-based buildings, and move our commodity timber into high-end applications.
Growing and retaining knowledge-intensive manufacturing and services (KIMS) businesses
New Zealand has birthed many knowledge-intensive manufacturing and services (KIMS) businesses. They are often private or unlisted public companies. They typically focus on industry rather than consumer good markets. They compete in technically challenging, small to medium scale niche markets. They have economies of scope more so than scale. Their competitive strategies include customisation, flexible production runs and customer responsiveness.
New Zealand fails to grow and retain the benefits of KIMS businesses. Some of them move offshore, for example Glaxo and many IT companies. Others are bought out by offshore competitors and turned into “branch offices” or import distribution arms. Examples include Interlock and Navman, and more recently Sistema, Compac Sorting Equipment and PowerbyProxi.
Sales of businesses to offshore investors can make sense. Some such businesses are footloose, with little to anchor them in New Zealand. Proceeds from offshore sales can be reinvested in other New Zealand technology-based businesses, supporting “serial entrepreneurship”.
However, New Zealand loses when it fails to grow many KIMS businesses into globally significant players and anchor them in New Zealand. To do so needs capital investment of a scale and long-termism that local private investors struggle with.
There is nothing autocratic or self-defeating in governments retaining high-productivity businesses within their borders. The Lower Saxony State owns 12.7% of Volkswagen, giving it 20% of the voting rights in the world’s seventh biggest company. The French government intervened to prevent foreign buyout of Danone. Nestles’ headquarters, and about one third of its shareholding are anchored in Switzerland. The United States masquerades as a free market economy while protecting its own strategic businesses.
A publicly-supported “growth and anchoring” fund could be established to take cornerstone shareholdings in KIMS businesses. The intent would be to help these businesses achieve international scale and long-term growth horizons. In return, these businesses would have to anchor core activities in New Zealand, even though much of their marketing, servicing and manufacturing might be offshore. These core activities might include R&D, design, business strategy and financial management.
Such a fund could be administered via the NZSF, or some other stable, long-term investment vehicle. KIMS businesses with this government stake might also attract stable investment from other New Zealand superannuation funds, iwi and other long-term investors.
Returns from NZSF and ACC investment compare favourably with private investors. They have the scale and patience that New Zealand private funds lack. New Zealand should use long-term state investment to substitute for the private investment it lacks.
Concluding comment
New Zealand cannot prosper in the long-term through dependence on market-based resource allocation, with government’s role limited to setting the rules. The government must be a prominent actor on the economic development stage, without at the same time stifling or crowding out the other players.
Addressing capital misallocations and low domestic savings rates are the biggest challenges government needs to address. Without this, “industry policy” will lack traction and wider economic impact.
The government must align savings, tax and business regulatory policy and social investment to support inclusive economic growth. It must also focus on time horizons longer than those of individuals and businesses, and on opportunities for future generations.
[1] This might partly explain why low interest rates and high business cash surpluses have not translated into higher demand, business investment response to service it, and higher employment and wage levels.
[2] This was introduced by the 1972-75 Labour Government.
[3] New Zealand has strengths in wireless power, power conversion and superconductivity science. A New Zealand engineer, Ian Wright co-founded Tesla. However, we have not fully leveraged these capabilities and retained benefits in New Zealand.
Peter Winsley 