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Smile, you’re in New Zealistan

Catch those upstart Aussies by 2025. That’s the aim of John Key and his young Turks. Dream on, John. Government inaction and the biggest recession in 70 years are conspiring to bring us level with the home of Borat by 2025. Vincent Heeringa reckons we need a better plan to avoid becoming New Zealistan.

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Illustration by Dean Proudfoot

Catch those upstart Aussies by 2025—that’s the aim of John Key and his young Turks. Dream on, John. Government inaction and the biggest recession in 70 years are conspiring to bring us level with Kazakhstan by 2025. Vincent Heeringa reckons we need a better plan to avoid becoming New Zealistan

There’s nothing more enjoyable than a good graph.

Beer, sex, a stirring Bledisloe test—these are good pastimes, to be sure. But a graph that tells you more in a glance than an entire book, well there’s a beautiful thing.

So take a look at the graph at right, which shows where nations stand in relation to their economies of 1909. It’s from a New York Times article lamenting the economic collapse of Argentina, from eighth richest in 1909 to about half that of Italy today.

Argentina is an outlier, a dunce, a textbook case of wealth squandered. It deserves an article.

What’s disturbing, though, is that New Zealand is giving it a run for its money. A century on, New Zealand has surrendered its favoured place in the top seven to several countries in Asia and every European country except Portugal. The Aussies are miles ahead and others such as Chile, Mexico and Venezuela are catching up.

In 1950, New Zealand was ranked sixth in the world in GDP. By 2007 we’d fallen to 32. Where to from here? Well, make sure you’re seated

It’s the downward trajectory that’s so concerning. In 1950, New Zealand was ranked sixth in the world in terms of gross domestic product per capita. By 2007 we’d fallen to 32. Where to from here? Well, make sure you’re seated. According to projections by the infrastructure investment firm Morrison and Co, if we keep our current performance we’ll be 47th in the world in 2025. That’s two spots behind Kazakhstan.

You can just see Borat now, standing in a paddock somewhere near Balclutha. My sheep, they very nice!

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In 1909 (horizontal axis), New Zealand’s GDP per capita was at the head of the pack with the US, Australia and UK. By 2001 (vertical axis), we’d been leap-frogged by 16 countries and sat level with Taiwan. At present rates, we’ll be pegged with Kazakhstan in 2025 • Source: Edward L Glaser

Be grateful , then, that we have economically literate leadership in the Beehive, right? The government, in seeking ways to turn around this country’s almost genetic ability to fritter away wealth, is planning for an economic overhaul. On the agenda:

  • the taskforce on how to catch Australia by 2025;
  • the review of the taxation system;
  • the taskforce on capital markets;
  • ongoing attacks on the RMA and ‘red tape’;
  • caps on bureaucracy;
  • a 2010 budget focused solely on stimulating economic growth.

Sounds promising, except that when John Key announced his vision for reform at parliament’s opening it was met with overwhelming disappointment. After nine years in opposition, National had a mandate for change. You’d think it would seize the opportunity it had finally won, but its agenda already looks modest and bereft of ideas. Even the cautious New Zealand Herald declared that with his hands firmly on the levers of power, Key chose to use just his pinky.

To be fair, the task of ‘transforming the economy’ was derailed last year by the worst recession in 70 years. But that just means we’ve gone from a poor performer to a slightly poorer performer. The original task remains: we need to shift from a low-tech, commodity-producing, unproductive and slow-growing country to a South Pacific tiger. Or else Kazakhstan, here we come.

How well are Key and English preparing us for the shift?

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Despite our high quality of science and management, the industrial outcomes are poor. Why? What holds up our commercialisation? • Source: World Economic Forum Global Competitiveness Report 2009-10

There is good news: Key understands the problem. “In recent times New Zealand incomes have fallen further and further behind the countries we like to compare ourselves with,” he told parliament. His speech was littered with references to our desperate need to reverse the slide with R&D, education, innovation and entrepreneurship.

He’s also astute, having built awesome political capital with the Maori Party and Act to make bold changes.

And people were hungry to hear his plan. Reading through the submissions to the 2025 taskforce there’s a broad consensus among scientists, economists, unionists, educationalists, loony lefties and the raving right: New Zealand is getting poorer and its downward direction results from a cruel mixture of chronically low productivity, overbearing regulation, poor commercial innovation, reduced exports, bad investment decisions and relatively high government spending.

How unfortunate, then, that the government’s response is neither bold nor politically astute.

Take the 2025 taskforce headed by Don Brash. The Don may be economically qualified, but he’s also politically alienating with the diplomatic smarts of Mister Magoo. The taskforce members were extracted from the dry-to-parched side of the political spectrum; and the results were a familiar New Right dose of salts involving privatisation, loosening up employment laws, lowering the minimum wage and deregulating the RMA. Like a ghost of old boyfriends past, the spectre of Roger Douglas hung all-too present for John Key and he dismissed the recommendation as “too radical”. A cynic would say that the taskforce was set up to fail.

A cynic would say that the 2025 taskforce was set up to fail. John Key dismissed its recommendation as “too radical”

Its failure is a tragedy because we’ve squandered a rare moment to build consensus about the path to 2025. Without the support for a step change from a cross-section of New Zealanders (not just economists, business people and a few journalists), the government will wimp out. Already Bill English has intimated as much, saying the growth required for us to reach Aussie by 2025 is unachievable. So has Reserve Bank governor Alan Bollard.

In his submission to the taskforce, economist Gary Hawke suggested that the group look to the trans-Tasman free trade agreement Closer Economic Relations as a model of political management. Forged over the course the 1970s and 1980s, CER was a slow and steady programme of freeing up the borders between Australia and New Zealand. The process spanned changes of government, the collapse of ANZUS and even the under-arm incident. It endures because the benefits are so well understood by all sides.

Even before you look at the content of the taskforce’s recommendations, you’ve got to give it a D-minus for building this kind of consensus.

How about the other initiatives? The capital markets taskforce, chaired by investment banker Rob Cameron, gave the government a tough but doable assignment: clean up the markets, flatten tax incentives, free up state-owned enterprises and encourage investment in the sharemarket (ultimately the productive sector). All good ideas and long overdue. There was only one reference in Key’s speech to the taskforce about improving the Security Act—opportunity lost.

The tax taskforce recommended a bold attack on the small number of property investors who benefit from their tax-free gains—thereby screwing up investment, housing and savings for everyone else. But Key signalled only a modest change around depreciation. Again, opportunity lost.

As for the government’s modest deregulation programme—streamlining the RMA, attacking red tape, reducing government staffing—this sort of tinkering with the economic mix may deliver a small portion of growth. It may also lead to the kind of poor regulations that gave us the multibillion-dollar leaky home disaster (another problem the Aussies don’t have to deal with).

Deregulation is not in itself sufficient to deliver transformational change. It’s a lazy, default centre-right approach, that will only be matched by an equal and opposite re-regulation once the left is returned to power.

Similarly with the idiotic idea of mining on the conversation estate. More resource-hungry, polluting and commodity-based business will not cut it. What’s needed is a break from the past—a consensus-based programme that sets an ambitious goal and the steps to get there.

Here’s a suggestion how it could be done.

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The government is doing its part; now business needs to find a reason to invest in R&D • Source: OECD, 2005+

For most of New Zealand’s history, our success lay in producing more sheep, wool and milk to an ever-growing Commonwealth. But as the world pays less for our produce we have to redouble our efforts. Victoria University scientist Paul Callaghan points out that the $30 billion gap between us and Australia would require more than five Fonterras, or a quadrupling of our tourist numbers. We would literally run out of land before we even got there.

Another type of industry is required, where the value far exceeds the volume. That industry is right under our noses.

The high-tech sector is the only economic engine capable of generating the kind of value required to accelerate our growth. In the opening chapter of his 2008 book, Beyond the Farm and Theme Park, Callaghan lists companies that generate more than US$1 million per employee, a measure of productivity if there ever was one. The top revenue generators are technology companies: Microsoft, Apple, Genentech and Nokia.

We already have such companies, but in small doses: Weta, Gallagher, Fisher & Paykel Healthcare, Tait Electronics, Navman and many that have graced the pages of Idealog. “They are sustainable, environmentally and socially benign, and there is no limit to the number of such companies which we might enjoy,” Callaghan writes.

The OECD reports that there is strong evidence that healthy innovation systems cause GDP growth. It’s one of the reasons resource poor backwaters like Korea, Taiwan and Finland have enjoyed such fast growth.

In addition to economic gains, the high-value sector creates excitement to rally hearts and minds. Kiwis bristle with pride when they say that Richard Pearse was the first to fly a powered aircraft and Ernest Rutherford cracked the first atom. And rightly so—our history in science and technology is filled with heroes and we have a global reputation for world-class research. We publish more scientific papers per head than many OECD countries, including the USA.

It’s commonplace for scientists at this point to lament the low level of spending on R&D: 1.2 percent of GDP compared to Israel (4.4), Finland (3.3) and the US (2.2). Clearly we should be spending more if we want to be like them. But is spending more on R&D a consequence or an outcome of a successful economy? Professor Callaghan broke ranks with his peers recently and joined a growing chorus of economists and business leaders who argue that merely raising R&D spend will not spawn an economic miracle. For one thing, we are already spending more. Since 1995 we have doubled the number of researchers per thousand employees and rank fourth in the OECD on that measure.

What’s missing is not so much the science, but what comes next, the commercialisation. Contrast the number of papers we published with the number of patents: 0.03 US patents per 1000 people compared to 0.15 for Finland and 0.26 for the USA. Or compare the amount of R&D done by Kiwi businesses, where the only justification for investment in science is financial return: only 0.5 percent of our GDP is spent by business on R&D, less than a quarter of the OECD average.

“Increasing [science] spending alone is not the answer,” says Rick Boven, the new head of the New Zealand Institute. “The spending must deliver research that has strong commercial potential and there must be an effective innovation ecosystem to convert the outputs into commercial benefits.”

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Despite agriculture’s stunning performance, all other sectors pull New Zealand’s innovation index down to almost zero • Source: IBM/University of Auckland Innovation index

New Zealand is missing a magic sauce, a catalyst that turns our world-class research into world-class intellectual property.

Other organisations are spotting the same gap. The Global Innovation Index, a comprehensive, biannual study produced by the Insead Business School, contrasts ‘inputs’, such as the quality of our institutions, ease of doing business, access to capital and talent and so on, with ‘outputs’, including knowledge, competitiveness and wealth. It finds that New Zealand has a weird profile. On inputs, we rank 19th. On outputs we slip to 37th. Curiously, the only other OECD country to share the same dynamic is Denmark, albeit at a much higher rank. The report singles out Denmark for special mention—it’s an outlier, like Argentina above. “While Denmark comes at top position on inputs it ranks relatively low at 21st position along the output pillars … [This] raises questions about why, despite creating a highly conducive environment for innovation, Denmark is not able to capitalise on innovation.”

The same can be asked here: what stops New Zealand capitalising on innovation? Answering that gives us a strong clue to 2025 because it unlocks incredible potential to create value rather than volume.

The answers will also suggest what the government needs to do around education, migration, capital markets, employment law, taxation and the Resource Management Act. They will shape the way government agencies relate to the private sector. And they’ll embolden the government to cut spending in some areas: the biotech sector, for example, is overrepresented in government funding to the detriment of other science. And increase it in others: Australia plans to pump A$43 billion into a national fibre-optic network; the New Zealand government, citing the fact we’ve fallen behind global competitors, plans to spend a relatively paltry $1.5 billion.

In the 90s, people were fond of quoting America’s Cup skipper Sir Peter Blake: “Will it make the boat go faster?” The high-tech, high-margin, knowledge-economy is our boat out of here and the finish line is 2025. Now how do we make this thing go faster?

I’m not seeing the answer in John Key’s plan. Are you?

Beached as

In case you need reminding, here’s a snapshot of why John Key describes our economy as “third division”.

Relative to most other countries, we have slid in wealth since 1950, possibly even since 1909.

At the heart of our problems is poor productivity. According to Treasury, an hour worked in New Zealand is about 30 percent less productive than an hour worked in Australia.

Our export sector, and domestic companies that compete with imports, have shrunk around five percent over the past five years. Over the past 25 years, exports have flatlined.

Since 2004, the rest of the economy, the bit that lives off the tradable sector, grew 18 percent propelled by private debt and government spending.

We live beyond our means (to be precise $1.09 for every $1 of income) and now owe the world $177 billion, equal to 98 percent of our gross domestic product. For a while we were adding to our net foreign indebtedness at a rate of about $44 million a day.

Our economy has been half-eaten by the public sector. Central and local government now make up 45 percent of the economy. Since 2002, core Crown spending has increased by nearly $25 billion.

To date government debt hasn’t been a large part of the picture, but Treasury forecasts indicate public debt will hit $63 billion in 2013.

We are lousy savers—our household savings rates are negative—so we rely on the rest of the world for the investment capital we need.

And when we do invest, we do so in housing, delivering poor returns for the economy as a whole. And promising companies that need money can’t get it.

New Zealand Venture Investment Fund chief executive Francesca Banga, looking over the ProvencoCadmus wreck, said the receivership stood as “yet another failure of New Zealand's capital markets to adequately support highly promising technology-based companies. One thing is for sure: it did not fail because of a lack of capability.”

Back to the backbone

A new report into the state of Kiwi innovation reveals two surprising facts, and reminds us of a dismally old one

Hands up who thought agriculture would be our most innovative sector, beating film, manufacturing and tourism by a long shot? And hands up who thought all the high-falutin’ talk of ‘economic transformation’ under Helen Clark had almost zero effect on the key innovation indicators since 1998?

A new study into the last 11 years of innovation, produced by IBM and the University of Auckland, reveals some surprising truths about the state of our economy and a dismally well-known one: if not for agriculture, fisheries and forestry, we would be a significantly poorer country.

The Innovation Index, based a similar study run by IBM and the Melbourne Institute, tracks a suite of measures including productivity, R&D, IP intensity and organisational innovation. The overall conclusion: “After rising by 13 percent between 1998 and 2000, the Innovation Index remained virtually flat through to 2007. In 2008 the index fell by six percent.”

Dougal Watt, the chief technologist at IBM New Zealand, is dismayed by the disparity between agriculture and the rest of the economy. “Agriculture, with the likes of Zespri and the aquaculture industry, is clearly leading the way in terms of R&D investment and in clever marketing—controlling the value chain from grower to customer. But a standout negative against all this is the tourism industry which continues to be fragmented, cost-conscious and dominated by lifestylers.”

With tourism such a large export earner, New Zealand must find ways to improve the return on investment, he says.

The study is one building block in IBM’s ‘smarter planet’ strategy to work with government and businesses to make better use of data to solve key problems such as city gridlock, spiralling health costs and business productivity.

Watt worries that the dramatic drop in innovation from 2008 marks a wobble in the famous Kiwi mettle. “A recession is a good time to invest in innovation, not to withdraw from it. One of the great Kiwi attitudes is that we believe we can do anything—it’s part of our heritage.”

If there was ever a time to reach for our innovative streak, it’s now.