Archive for the ‘Solutions’ Category
The Copenhagen climate change talks were messy, chaotic and the results underwhelming, but from New Zealand’s perspective they coughed up a huge opportunity which if we fully exploit could be game changing for our economy.
Tomorrow and Thursday 80 international scientists and policy analysts (yeah, that bit is scary) meet in Wellington for the first gathering of the Global Research Alliance which aims to produce more food with fewer emissions.
New Zealand is becoming less green, and that’s a big danger to our clean and green brand. The alliance is an opportunity to become a whole lot greener.
Our cows, sheep and other farm animals are responsible for about half of our green house gas emissions. Worldwide agriculture represents about 15% of emissions, but at the same time along with forestry, the sector can also help off-set emissions.
Reducing our agricultural emissions and having the ability to increase stocking rates without sh!tting on the environment matters to New Zealand big time.
Our food exports (not entirely, but mostly sourced for farting, belching cows and sheep) are worth more than $20 billion.
Get it wrong, as many in the farming community appear intent on, and our dairy, beef and sheep products will be shut out of markets, not necessarily by governments putting up trade barriers, but by supermarkets only stocking products that tick the right environmental and social boxes.
Recent publicity appears to downplay New Zealand’s role in setting the Alliance up, but our current Government can take much of the credit.
We need to continue this leadership when the research gets underway.
The alliance represents a once in a lifetime opportunity for New Zealand to be at the centre of world-leading research.
The Government has announced a $45 million investment (over 4 years) in the Alliance.
It has also investing $5 million a year in Palmerston North’s Agricultural Greenhouse Gas Research Centre.
The US has announced it will contribute US$90 million (NZ$127.5 million) over four years to the Alliance.
So while our contribution looks small, there’ll be big bucks to play with.
This week’s meeting hopes to sort out working groups, develop a process for a stocktake of existing research and discuss priorities.
Dunno if the Government sees the Alliance this way, but here’s hoping that behind the diplomatic talk of “international cooperation and collaboration” there’ll be a hard sell of New Zealand’s abilities.
BigCake fears the Government’s mining hopes are a cop out from more difficult problems facing the economy.
Yeah, more difficult than the question of ‘to mine, or not to mine?’
For sure any mother lode of gold found in a national park, and mined after passing all the environmental tests, will unleash new riches.
The oil rich nations show that gushers of ‘Texas tea’ can supercharge an economy.
But as Bryan Gould, former vice-chancellor of Waikato University, points out in today’s NZ Herald we’ve had gushers of milk at times of high milk prices, but the benefits of this have quickly disappeared.
Following the rise in world dairy prices “our response was to allow the exchange rate to rise (thereby wiping out any gain to domestic profitability, investment and growth) all because we see high dairy prices as an inflationary problem – requiring a tighter monetary policy – rather than as a stimulus to better economic performance,” Gould says.
“There are no prizes for guessing which course we would follow in the event that we discovered major new sources of mineral wealth. We do not need a crystal ball when we can read the book.
“Not only have our policymakers slavishly followed monetarist prescriptions over a long period, but we have some useful case studies of our own to guide us. Those instances exhibit the same errors in policy-making as those made by the British and the Dutch.”
Britain was going to become great again on the back of North Sea oil, but as oil revenues began to flow, policy-makers under the influence of monetarist theory, let the exchange rate rise with the result that manufacturing contracted as oil production rose.
Gould says the Dutch had a similar experience – to the point that the adverse effects for their economy were dubbed the “Dutch disease”.
“The Norwegian experience of North Sea oil was very different. They paid no attention to monetarist theory. They succeeded in ring-fencing the proceeds of the oil so that their exchange rate remained stable.”
Last year Norway was number 3 in the IMF’s wealth rankings; Britain 20th and The Netherlands 9th.
Even if New Zealand gets to tap into its mineral riches, there need to be big changes to the way we as a country do business if we are to reap their full reward.
One of BigCake’s fears is that our economic growth cook book has a lot of important ingredients missing.
Improving the tax system, reducing bureaucracy and cutting red tape, while important, won’t get us to where we want to be.
I’ve blogged before on Philip McCann’s view that fiddling around with these issues, as we’ve done in the past without much success, won’t make much difference to our economic growth prospects.
I’d also filed away a Business Herald interview (Prescription for NZ: Action not talk) with former All Black captain and former CEO of Fairfax Media David Kirk who’s similarly sceptical.
Kirk only nods in the direction of tax cuts, smaller government, privatisation and the other usual economic reform suspects and heads off on an angled run into much more interesting territory, though ultimately I’m not sure it brings us much closer to the goal line.
Kirk is smart and a winner, and he cares about his home country (yeah, I know he’s now an Australian), so when he says we’ve got a problem we should take notice.
He says we’re dreaming if we think we are going to catch Australia without getting radical.
“And those radical things can’t be structural policy things because there’s just not enough leverage in that.”
The “structural policy things” are what Brash banged on about in his 2025 report – cutting government spending, reducing taxes, privatisation and less regulation.
The Herald interview was before the Brash report was made public, so it’s probable that he wasn’t having a bash at Brash.
Anyway he supports these moves, he just feels they are inadequate.
His missing bits include:
• Leadership – “…to cut through this kind of morass of ‘it’s all too hard’ and apathy and disbelief that wealth creation is a good thing to do, it just takes leadership. It takes people out there talking about it, banging away.” Kirk is talking about more than just the politicians here. Those doing the leading need to be “people who are demonstrably balanced human beings that are not flashy people who just want to make money and rip off other people”.
It’s easy to get cynical about the latter comment. BigCake’s initial reaction was ‘that halves the field’, but really it’s crap. With one or two exceptions our leaders are (and have been) good people with good intentions.
• Ambition “We need to be more ambitious for ourselves and for future generations.”
• Love businesses – “…people have to understand the value of private enterprise. No one else makes money – only companies create money – and as a nation we only make money by selling things to other countries.”
• Celebration of entrepreneurs – “…it does take building of a lot of small businesses; and putting in place good opportunities for capital formation, and a lot of them will fail, and it takes an environment where people say, ‘Oh well, it doesn’t matter, they had a go’.”
• Skilful business-building capability “Being an entrepreneur gets your business to a certain stage and friends chip in this and that, but you’ve got to build businesses to take on the world.”
• Immigration – Kirk says Australia has benefited enormously from European and Asian migrants. “New Zealand has had less of that. I’m not trying to make any judgment on this, but I think New Zealand has had Asian immigration, and from the Pacific Islands, and I think the ethnic make-up of New Zealand is an issue. Whether there needs to be new ways found to create pathways, to educate, and to create an environment where particularly Polynesian people in New Zealand have got a stake in the entrepreneurial future of the country is an interesting question, and is a question that should be open and people should debate it openly.”
Nothing wrong with this list, but BigCake reckons it still falls short. It’s not really all that radical nor anything we haven’t tried before (Knowledge Wave, Trade and Enterprise, Buy New Zealand, Export Year etc anybody?).
All the same some on the list are hard – changing ones like our lack of ambition and distrust of overt wealth creation really cut against the Kiwi cultural grain.
As I wrote in the post What the hell’s good growth? growth needs to be Kiwi – We must find our own solutions that fit who we are and what we do best.
But that’s not to say we can’t grow up a little on some of our attitudes.
The latest Idealog magazine has a great interview with Sam Morgan.
Here are some snippets:
Idealog: Do you think Kiwis have the confidence to invest elsewhere [other than in property], in New Zealand businesses or even in the stock market?
Morgan: “Fundamentally, no.
“…the allocation of capital into property is excessive and needs to be controlled.
“I think central government has a role in protecting people from their own stupid selves.”
But as he says a lot of people have been scared off shares because of things like the 1987 sharemarket crash.
• BigCake: This is a big problem because we need more investment in our companies, and not just through the sharemarket, but also in Venture Capital, Angels and Private Equity. He wonders how much Kiwis were driven into property investment because businesses were seen as too risky. The sharemarket crash crippled investor confidence and this was compounded by some subsequent listed company behaviour and failures and more recently finance companies falling over. The New Zealand sharemarket is now a shadow of its former self.
Idealog: Your thoughts on tax reform [BigCake paraphrasing the question here]?
Morgan: ”The amount of tax people pay in different areas is not fair. The people that pay the most tax are working people.
“I was lucky enough to sell my company [TradeMe for $750 million all up] in a country with no capital gains tax on the sale of my company.
“[Now] I basically pay no tax. And that’s not right, but what am I supposed to do?”
Idealog: Have you been following the feed lot [industrial farming] argument down in the Mackenzie Country?
Morgan: “New Zealand is widely recognised as having a pastoral system, not a lot feed system. Muddying that message by having lot-fed cows is not good for our brand with dairy exports being a third of our net exports, or whatever it is.”
• BigCake is very wary of telling farmers how to farm, but he’ll do it (again) anyway. You need to get real! Your future is in high value, not high volume. South American countries and others will kill you in the volume game. Leverage the clean and green advantage and don’t put that advantage at risk by dirty dairying. And that includes in China.
Idealog: The New Zealand internet is getting better, but we will have data caps.
Morgan: “We need to solve the international bandwidth problem. We need a cable which is not based on price maximisation. I’m almost inclined to do it myself.
“It’s maybe $600 million and I think you can make that happen.”
• BigCake thinks this answer is a laugh given this week’s Pacific Cable announcement in which Morgan, along with Stephen Tindall and Rod Drury announced they’re looking at a $900 million investment in a new internet fibre cable linking New Zealand Australia and the US.
He must of known of this when he spoke to Idealog. The cost grew by a third in the interim.
One of BigCake’s big ideas for New Zealand’s future is that our farmers need to get out of the volume game.
We’ve been pretty good at it in the past particularly in dairying, but we’re soon going to get slaughtered by the likes of Uruguay and Chile.
Our future is in value – less is more by making the most of our clean green image which the South American companies haven’t a hope of emulating, probably ever.
The danger is that we’ll sh!t all over this advantage and we’ll be forced to play the South Americans in the volume game.
This value v volume argument perhaps also applies to tourism.
BigCake knows Tourism NZ has been chasing the world’s wealthy tourists, but Julian Roberston, American billionaire (437th on the Forbes billionaires list), NewZealand enthusiast and part-time resident, says New Zealand has a “backpacker mentality”.
That is a focus on volume rather than value.
Roberston tells The Dominion Post in an interview published today that in many ways the Kiwi tourism industry is “not very well run.
“…what I’m trying to tell [PM] John Key and these people is that my wife could spend more in an hour than a backpacker would spend in three months.
“I think New Zealand was put on this earth as the greatest tourist destination there is.”
BTW – Robertson also supports the national cycleway proposal which of course BigCake is a big backer of.
In today’s Dominion Post (Strategies and plans aplenty but are there any new ideas?), political writer Colin James talks about the need for investment in “soft infrastructure” – I think he means people.
He says “soft infrastructure might contribute more to faster economic growth than six-lane highways to carry more of the same and water to grow more of the same”.
James believes the Key Government understands that getting things like tax and government spending right is not enough.
And “neither actually is investment in physical infrastructure,” he says.
The Government’s infrastructure plan includes school buildings, “but teachers don’t teach buildings and children don’t learn buildings.
“Teachers teach and children learn knowledge, skills and how to think.
“The real school infrastructure is what is inside the heads of the future workforce: how smart it is, how smartly it works and how it can make life better and richer.”
As James points out, a problem with this ‘infrastructure’ is that it is mobile and has a habit of heading off to Australia.
I think we’ve been stuck with a definition of growth that’s too narrow, one that focuses mostly on greater wealth and producing and consuming more.
Opponents of economic growth, or those who are sceptical about what growth can do for them personally, tend to centre their attention on this definition.
But it leaves out a huge part of the growth story (maybe even the best bit).
Harvard University economist Benjamin M. Friedman, in his book The Moral Consequences of Economic Growth, says “Growth is valuable not only for our material improvement, but also for how it affects our social attitudes and our political institutions in other words, our society’s moral character”.
[This book has been recommended to me, but haven’t gotten around to reading it yet so relying on a Business Week review here].
BigCake’s not sure about the ‘moral character’ bit, but Friedman is bang on about the importance of economic growth to overall human progress.
Essentially growth is good for a whole bunch of social reasons as well material ones. Little things like: democracy, tolerance, fairness and social awareness for starters.
Friedman says “…when living standards stagnate or decline, most societies make little if any progress toward any of these goals, and in all too many instances they plainly retrogress.”
Argentina anyone?
More material wealth flowing from increased economic growth won’t necessarily make all individuals happier, but will make a country a happier place to live.
The Business Week reviewer paraphrases Friedman’s argument this way: “As long as people see their own income rising, they worry less about doing better than others. And that in turn creates a more favorable environment for political and social advances.”
The 1700s, Friedman says is an example of a period when greater wealth through increased trade and commerce resulted in legal and institutional progress.
BigCake notes that in New Zealand it was the same in the 1890s and 1900s when New Zealand became perhaps the wealthiest nation on earth.
The first Labour Government in New Zealand that came to power in 1935 could be seen as an exception to this rule (Friedman calls the US’s ‘New Deal’ in the 1930s an exception) but by 1935 the world was already coming out the Depression. The ‘New Deal began in 1933.
In the absence of growth, you get movements like the Nazis in Germany and the KKK in the American South.
Friedman worries that “rising intolerance and incivility and the eroding generosity and openness…have been, in significant part, a consequence of the stagnation of American middle class living standards during much of the last quarter of the twentieth century.”
A Government 2025 economic target that has largely snuck under the radar is the “aspiration” to lift exports from 30% of GDP to 40% by 2025.
It’s another big ask, but it’s the guts of how we’ll achieve that other target – income parity with Australia by 2025.
The Government says the overall thrust of its economic policies is to shift the economy more towards exports and productive investment, and away from consumption and borrowing.
Bits and pieces are happening in key policy areas affecting exports such as in science and innovation, trade agreements, infrastructure and regulations but nothing you’d think that would be enough to get us up to 40%.
According to Ministry of Economic Development (MED) calculations, our exports would need to be 2.7 times higher in 2025 than they are now to hit the target. That’s a cool $100 billion or so more in exports.
Judging by the PM’s Statement to Parliament, the Government is pinning its hopes on mining.
Key says there’s “extraordinary economic potential in the mineral estate residing in Crown-owned land”.
It even has an “action plan” (you seen any others of these?) to unlock New Zealand’s petroleum potential which the Government reckons could generate many billions more in export revenues by 2025.
“Mining in New Zealand uses just 40 square kilometres of land, less than 0.015 percent of our total land area,” Key says. “ The export value of that land however is $175,000 per hectare, which makes mining an extremely valuable use of land.”
BigCake supports the idea of finding out what’s under our conservation land, a proportion of which is not high conservation value, but is deeply uncomfortable with the Government’s greedy eyes.
Any conservation land that has valuable mineral deposits needs to be subjected to a balancing act between economic and conservation values.
Key appears to be indicating the scales will be tipped in favour of the former.
Also mining is in a way a cop out. Find a massive oil field in the Great Southern Basin and then you don’t have to do any of the hard stuff.
And hitting that 40% will be hard.
Professor Paul Callaghan has talked about needing 300 or so more companies of Icebreaker’s size to get there.
Back in 2006 a New Zealand Institute report (The Flight of the Kiwi), while proposing a “conservative” target of exports equalling 35 percent of GDP by 2020, said that’d need three new Fonterra-scale companies or 500 former IT darling Rakon-sized ones.
But the export target is not entirely pie in the sky. As the Institute points out, in 2000 when there was that rarest of unions – strong commodity prices and a low New Zealand dollar – our export to GDP ratio (briefly) hit 35 percent.
However, most of the last 20-odd years the ratio has been stuck around the current 30 percent – that’s compared to a small OECD country average of more than 50 percent.
As well as the Kiwi growth sceptic, there’s a group I call the growth fatalists – those who believe that if we go down the economic gurgler, “well, you know there’s not much we could have done about it.
“We’ve got no mineral wealth, we’re thousands of ks away from our markets, the government can’t fight its way out of a wet paper bag, blah, blah…”
But all is not lost for the economic basket cases of the world (and future ones).You don’t have to be poor losers.
That’s pretty much the message of False economy – A surprising economic history of the world, a book I’m reading at the moment and have blogged on before (see “Don’t cry for me Argentina”).
The book’s author, Financial Times trade editor Alan Beattie, attacks the idea that a country’s economic future is “predestined and that we are helplessly borne by huge, uncontrollable, impersonal forces.”
BigCake suspects this school of thought is stronger in New Zealand than many other countries thanks to the fact that as a piece of economic jetsam at the bottom of the world, we often feel shoved around. Well more so than larger countries.
Beattie’s list of fatalistic myths includes:
• The US and Western Europe were always going to be rich
• Other regions such as Africa were always going to stay poor
• Market forces and globalisation are unstoppable.
His book points out that countries have choices and those choices have “substantially determined whether they succeeded or failed.
“You don’t get rich by accident.”
Same for becoming poor.
“There are plenty of reasons why countries have made mistakes. Often their decisions are driven by a particular interest group, or a coalition of groups, whose short-term gains stand at odds with the nation’s longer term benefits.
“But such interests can be overcome.
“Countries that succeed are those that are flexible enough to learn from experience and which do not come to be captured by groups whose interests are sharply at odds with those of the country as a whole,” Beattie says.
Argentina is country that has failed on both counts. Ireland is probably a country that has succeeded along with the Asian tiger countries (Hong Kong, Singapore, South Korea and Taiwan).
How does New Zealand stack up to Beattie’s test? (BigCake’s ratings):
• Flexible enough to learn from experience – poor. Flexibility only extends to the extremities of the political, social and commercial corpuses
• Not captured by interest groups – hah! Where to start: monopolists and semi monopolists, antediluvian farmers, oldies, banks and anyone else opposed to change only because it threatens some “right” they have been given at the expense of the rest of the country.
Catching Australia’s levels of income by 2025 is a toughie, but it can be done.
As the New Zealand Institute points out in a statement out today, Ireland has managed to get the levels of growth required.
But some like Reserve Bank Governor Alan Bollard have flagged it away as too hard.
The New Zealand Institute believes we are not going to get there on our present course – “the opportunities being floated are not bold enough.”
Ireland, the Institute points out “succeeded by the bold step of cutting corporate tax rates to 12.5% overall and 10% in some instances to attract foreign investment in technology based businesses”.
I think they also got a bit of European Union money, but basically when the country realised it was in the shit, it got its act together.
The former ‘beggar of Europe’s’ economic miracle was based on a number of interconnected measures, including consensus building and radical (or at least not business as usual) policies.
Anyone seen these around here.
Ireland’s Social Partnership was kicked off by a public finance crisis and I’m not sure that most New Zealanders see their country currently facing a crisis.
As well as cutting corporate taxes and public spending, Ireland invested heavily in ensuring the country became and remained internationally competitive.
So through a combination of planning, good timing and geographical good luck Ireland, in little more than a decade, went on to become one of Europe’s richest countries.
Though the country has become a bit unstuck by the Global Finnancial Crisis, it is still cracking the whip. In its latest National Development Plan, Ireland plans to spend Euro184 billion (NZ$360 billion) between 2007 and 2013 on economic and social infrastructure.
Yeah, they also have a plan.
BTW – Ireland’s population is 4.5 million.
The New Zealand Institute’s solution for New Zealand is to focus on our savings and productivity gaps with Australia.
“Our initial estimates indicate that a substantial portion, around 40%, of the GDP per capita gap [between New Zealand and Australia] can be explained by two factors: differences in the capital intensity of the productive economy, and differences in innovation and business sophistication.”
New Zealand also lags Australia because:
• Australia has vigorous policies to promote savings
• Innovation has been systematically encouraged in Australia for around 30 years; here for only about 10 years.
“Surely the most promising way to close the gap is to go after opportunities like these,” the Institute says.
“Alan Bollard will be proved correct if we do not take the right bold steps soon. If Government is serious about closing the gap it needs to identify the policy changes that will make a big difference and tell a compelling story so they will be supported and adopted. Incremental change may be easier to sell and implement, but it will not be enough.”
Amen.
One of BigCake’s fears is that our economic growth cook book has a lot of important ingredients missing.