Brian Gaynor and false oriental wisdom on Christchurch earthquake – an opportunity lurking in the crisis

An old myth is that the Chinese word for crisis is a combination of the characters danger and opportunity.

It’s a great idea, but it’s a “curious specimen of alleged oriental wisdom“.

However, it does give you a clue about how to handle crises.

In today’s NZ Herald, columnist Brian Gaynor sees opportunity in the Christchurch earthquake.

He says although the quake has had a devastating impact on local residents “it will divert resources into an area of the economy that is much more likely to take us out of the recent recession.

“The economic argument, which is becoming increasingly popular in the United States, goes a bit like this.

“The consumer, who accounts for around 70 per cent of economic growth, is shopped-out because of too much debt and the depressed state of the housing market. In other words economic recovery is not going to be consumer-led, there have to be other economic drivers.

“Construction and infrastructure-led recoveries are obvious alternatives to a consumer-led recovery.”

BigCake has posted before on why our spending power has taken a hit. It’s not just that we’re now more sensible with money and debt, but we’ve run out of ways to ensure we can continue to buy what we want rather than what we need.

These mechanisms are:
• Two-income families
• Working longer
• Debt.

The Global Financial Crisis killed the last one.

And now to the danger bit in a crisis.

Gaynor says influential US business people, looking for ways to fill the economic hole left by newly thrifty consumers, want US federal and state governments to sell infrastructure assets and use the proceeds to build new infrastructure projects or repay debt .

“A similar approach needs to be looked at in New Zealand because the debt-loaded consumer is in no position to drive the economy out of recession through increased spending.

“An obvious alternative is for the Crown to sell minority shareholdings in its commercial companies and use these proceeds to invest in the country’s rundown infrastructure assets.

“The new Auckland Super City could do the same by selling a stake in Ports of Auckland and a number of other assets and use the proceeds to invest in badly needed infrastructure assets, particularly roads and public transport.

“Unfortunately, the domestic political environment is not sympathetic to that approach so it looks as if we have to rely on a natural disaster to create a construction/infrastructure led recovery.”

There’s a growing heap of stuff that needs to be sold.

Gaynor says “it is patently clear that we are not going to have a consumption-led recovery …

“…the preferred option is to have a government policy-led construction/infrastructure boost instead of just waiting for the next natural disaster.”

BigCake would add this boost should be funded by asset sales as Gaynor suggests, not debt (of which we have already got more than enough).

NZ infrastructure been going downhill for a while

It looks as though the quality of NZ’s infrastructure has gone seriously downhill over the last six or seven years, probably for much longer, but there’s an indication the trend is being halted.

My last  post set out my theory explaining why we’ve ended up with second-world infrastructure. Basically our health and education expectations gobbled up the budgets.

It gets a bit tricky making infrastructure comparisons over the years because I’ve been forced to use secondary sources. The Global Competitiveness reports use two measures of infrastructure: one, just plain infrastructure under the heading of ‘basic requirements’ and the other ‘overall quality of infrastructure’.

Sometimes it’s not clear which of the two the secondary sources are referring to.

Anyway, I have two sources (Treasury and MED) for the fact that back in 2004-05, we came in 22nd in world in ‘overall quality of infrastructure’.

In the latest 2010-11 report, we rank 48th.

Treasury gave a breakdown on the 2004-05 measures:
• Ports – 13th in the world (22nd in 2010-11)
• Aviation – 13th (17)
• Telecoms infrastructure – 16th (26)
• Electricity supply – 30th (53)
• Rail infrastructure – 31st (37).

So, yeah an ugly performance.

But a note of caution here. The above numbers are derived from the World Economic Forum’s Executive Opinion Survey. There were 43 NZ respondents to the survey in 2010-11.

The respondents were asked to assess general infrastructure (e.g. transport, telephones, and energy) with 1 = extremely underdeveloped; 7 = extensive and efficient by international standards.

So I’d pick the ‘overall quality of infrastructure’ measure can be a bit subjective and prone to being influenced by what is going on at the time of the interview.

And looking at the (more objective?) ‘basic requirements’ measure for infrastructure over the last three years we get:
• 2008-09 – 42nd in world
• 2009-10 – 35th
• 2010-11 – 37th

So perhaps some progress.

For sure, building and maintaining infrastructure in NZ is harder/more expensive than say the flat, geographically compact and well-populated The Netherlands.

And some of these ratings are not a million miles away from the level of our overall wealth – 28th in the competitiveness report.

But we’re going nowhere without improving them.

Has NZ’s infrastructure paid the price for the mismatch between our health and education expectations and our ability to pay?

Something BigCake has long wondered about is why our infrastructure is so shitty compared with other modern economies.

The obvious answer is that we haven’t invested in it, but why’s that?

In most other areas that underpin economic growth we, most of the time, at least do okay.

My theory (just formulated this morning – apologies if someone else has bet me to it) is that investment in infrastructure over the last couple of decades has been cut back (or at least not matched what was needed) so we can continue to enjoy first world standards in health and education.

A price for this has been our slide into second-world standard road, rail and telecommunications. And reduced economic growth which would help to bridge the gap between what we want and what we can afford.

Given our relatively poor economic growth compared to the countries we like to think ourselves the equal of, something had to take a hit. So maybe fair enough for infrastructure.

But it’s helped mask the truth that NZ has been living beyond its means.

As the Ministerial Review Group on health said about our health spend: “We like to consume health services like other OECD countries, but we are less able to afford to.

“The difficulty is that our per capita income is much weaker than [our] per capita health spend.”

According to the BigCake theory, our infrastructure has paid the price this mismatch between what we can afford in health and what we expect. Same for education.

But with infrastructure these particular chickens have come home to roost.

Global Competitiveness Index rankings highlight the disparities resulting from these investment (or underinvestment) policies.

In the latest index we come in 23rd (down from 20th last year) out of 139 countries in overall competitiveness with infrastructure being the standout brake on our overall economic performance.

We do well in things like:
• Institutions (such as banks etc) – 3rd in world
• Health and primary education – 5th
• Market efficiency – 7th
• Higher education and training – 13th

But in quality of overall infrastructure we come 48th thanks to:
• Electricity supply – 56th best/worst in the world
• Mobile phone subscriptions – 48th
• Roads – 45th
• Rail – 45th

Kiwi businesses rate ‘inadequate supply of infrastructure’ as the single biggest problem they face.

There are other shockers as well, but often these are in things we don’t have much control over:
• Local supplier quantity – 77th
• Domestic market size – 59th

But some we do:
• National savings rate – 90th (the worst indicator of all)
• State of cluster development – 56th
• Company spending on R&D – 38th

What a cow – district council seeks to buy rest of dairy company

What’s left of one-time sharemarket darling Tasman Agriculture is about to disappear from public ownership, fully gobbled up by New Plymouth District Council.

Yeah, you read right, the New Plymouth bloody District Council.

Local government asset creep is an aspect of state asset creep I didn’t cover in earlier posts on this phenomenon because there was more than enough examples in the state sector. Check out NZ Post, Quotable Value, Orcon…

(Declaration of interest here: I’m a small Tasman Farms – the company’s current name – shareholder. It trades on the Unlisted exchange. I bought into Tasman Ag very early on and have stayed for the ride).

I hung in because it was one of (the only?) way the few ways for me to get investment exposure to the agriculture sector, in this case dairying. If agriculture was going to be NZ’s economic saviour, then I wanted a bit of it.

Anyway, the NPDC now holds about 75% of Tasman Farm shares and last week gave notice it wanted the rest.

I ain’t arguing that Tasman Farms has been badly run under NPDC ownership, but I’d point out that the current share offer price is exactly the same as what Tasman Farms shares were trading at (albeit thinly) three years ago.

The Capital Market Development Taskforce noted that New Zealanders don’t have as many opportunities to invest in large and mature, local companies (like Tasman Farms) as investors in many other countries.

It saw agriculture as a key gap.

The other thing is that in the long run I wouldn’t bet on district councils, or the state, running businesses better than the private sector.

The more of the economy that ends up out of the reach of private investors, the worse it’ll be for the economy.

BTW – there’s an Alan Hubbard connection here. Alan Hubbard co-owned the bulk of Dairy Holdings which at one time held 42% of Tasman Farms.

The Mr Blobby effect in housing. Treasury backs tax-favoured argument

There’s been a long standing sh!t fight over housing and saving.

But at the bottom of the saving debate BigCake reckons is our relative impecuniousness. Kiwis don’t save enough because we haven’t been able to afford to (or at least we haven’t been willing to stop spending on things we want rather than need).

Savings of course being what remains of your pay packet after consumption.

On one side of the housing war zone, there’s a group that says ‘no worries’ about Kiwis piling their money into housing, after all they’re saving for the future and they’ll eventually be able to cash up.

On the other are those who say our love affair with housing crowds out investment in more productive exercises.

Treasury’s Saving in New Zealand – issues and options discussion paper probably gives ammunition to both sides.

Housing is the Mr Blobby of NZ investment. About 95% of our net wealth is tied up in our homes, investment properties, baches etc much more than in other countries Treasury looked at. The next highest are Australia and France with around 65%.

In the US it’s less than half.

But housing as a percentage of disposable income, at 5 times disposable income, is pretty average – about the same as Australia’s, less than for the UK, France and Italy but more than the US and Canada.

One thing not mentioned is that our houses are often crap (at least compared to the above countries) so we’re paying more for less.

Anyway, Treasury’s interpretation of the above is that we’re not over investing in housing because our stock of housing wealth is not unusually high. “Rather it is more a reflection of the low rate of household saving more generally.”

Which means we spend more than other countries? Don’t think so.

It’s just that after paying for our housing and consuming, we have less left over to save.

Later in the discussion document Treasury does ask whether NZ households’ relatively low stock of financial assets is a reflection of an ‘over investment’ in housing or a reflection of the low rate of household saving more generally?

Could even be a bit of both.

Treasury agrees with arguments that investment in housing has had preferential tax treatment compared with investment in debt or equities, leading to our preference for holding wealth in the form of housing rather than financial assets. “Even so, these tax distortions do not explain New Zealand’s low rate of national saving, other than to the extent that the wealth (or collateral) effect from rising house prices encouraged more consumption at the expense of saving.”

High debt, Treasury says is the counterpart to very low levels of private saving. “New Zealand’s household debt levels doubled in the last 15 years as a fraction of disposable income. They are now around 160 percent of disposable income.”

Debt is one of the coping mechanisms we use to make sure we can keep up with our spending expectations. I’ve posted before on the tricks consumers in Western countries have used to overcome the fact that their incomes were not keeping up with all the goods and services they were producing.

NZ Institute describes our economic hole – a guide to why NZ needs to walk the talk to escape

BigCake’s four big themes have been:
1. Economically we are in a hole
2. We need to recognise we are in a hole
3. We can extricate ourselves if we get our act together
4. NZ is still a pretty sh!t hot place, so while climbing out of the hole, we need to protect what’s great about living here.

Regarding numbers 1 and 3, the NZ Institute thinktank has been a major influence.

Following up on yesterday’s post.  Below I’ve cherry picked facts from the institute’s latest paper, A goal is not a strategy, to show that NZ is in a hole. Many challenge the way we like to think of ourselves:

Innovation and education
• New Zealand has the highest proportion in the OECD (equal with Ireland) of highly skilled people living in other OECD countries.
• None of the 10 MBA programmes offered around the country focuses on developing the skills needed for international business success.
• In New Zealand innovation is often confused with inventiveness. As a result there is a tendency to think that if R&D output is increased then innovation will increase. Unfortunately for New Zealand, which is quite good at inventiveness, innovation also depends on successful commercialisation of the new way of doing things, and New Zealanders are not so good at this.
• New Zealand’s innovation and business sophistication score is low relative to the scores for many other advanced economies indicating there is great potential to improve innovation, and that doing so would lift economic performance substantially.

Agriculture
• In 1990 New Zealand had around five hectares of agriculture and forestry land per person; today it has less than three hectares per person. Population growth will reduce that further.
• Productivity per hour worked in agriculture is not very different between New Zealand (NZ$40) and Denmark (NZ$50). But in New Zealand the productivity of agriculture is around 83% of the average for the whole economy (NZ$48) whereas Denmark’s agricultural productivity is only around 47% of Denmark’s overall average productivity (NZ$106). Despite outperforming New Zealand in agriculture, agriculture is not the powerhouse of the Danish economy.
• Denmark and New Zealand have almost identical food and agriculture, beverages and tobacco exports per capita. However, New Zealand uses a greater share of its total workforce (6.8%) than Denmark (2.6%) to achieve the same result.

Entrepreneurship
• Two-thirds of New Zealand entrepreneurs are home based and tend to be ‘solo’ operators with few employees. Many of these people are satisfying their desire for independence, to be their own boss. These small independent businesses are likely to have quite low productivity. The relative abundance of these small businesses is therefore likely to be contributing to low overall relative productivity.
• New Zealand has too few highly skilled entrepreneurs targeting international business success. The shortage means the product of New Zealand’s inventiveness – large research output, inventions, and new business opportunities – is not being converted into international business success.

Exporting
• New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.
• New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.
• Commodities are well known for their cycles, and reliance on them would mean New Zealand would continue to be exposed to volatility and price shocks.

General
• New Zealand and Denmark have similar small populations yet the institute calculates that Denmark’s GDP per worker (NZ$170,386) is more than twice New Zealand’s GDP per worker (NZ$83,842).
• New Zealand’s manufacturing labour productivity is the same as that of agriculture, at NZ$40 per hour worked. In comparison, Denmark’s manufacturing labour productivity is almost 90% higher than New Zealand’s, at NZ$75 per hour worked.
• Despite strong doses of economic liberalisation, New Zealand’s GDP per capita remains lower than the OECD average and much lower than Australia’s. New Zealand’s private economy labour productivity is 57% of Australia’s.
• New Zealand scores relatively poorly on measures of infrastructure development, placing 35th in the world with the quality of roads, railways, and electricity ranking worse than the OECD average.

It’s a pretty big hole, but it’s one that we can get out of if enough of us accept we are in a hole. We also need to accept that something more needs to be done to get us out our hole than we are seeing at the moment.

In A goal is not a strategy, which everyone interested in the above issues should read, the Institute again sets out the case for change and the bare bones of an economic growth strategy. It says New Zealand needs to:
• Focus on the internationalisation of high value,differentiated export sectors
• Prioritise labour productivity improvement efforts on these sectors, and
• Reallocate resources from low to high productivity sectors.

[Photo credit - horslips5 via Flickr]

Latest NZ Institute paper out – “A goal is not a strategy”. NZ’s tiddlywinks approach to economic growth

The NZ Institute’s latest discussion paper – “A goal is not a strategy – focusing efforts to improve NZ’s prosperity” – touches on one of BigCake’s observations about how this country attacks its economic growth issues.

We’re playing “bloody tiddlywinks” while countries, even of a similar size, play big boys’ games.

Tens of millions of dollar there, millions here ain’t going to make much difference.

As the NZ Institute says if a goal is important, then resources should be poured in to match.  “Competing small countries are committing hundreds of millions of  dollars to efforts they regard as strategically important.”

The Herald’s Brian Fallow has commented on the sizeable discrepancy between what NZ will fork out for its national broadband network (calculated to be $5-8 billion) and Australia’s A$43 billion.

“Canberra’s estimate is the equivalent of $2400 per Australian, eight times the per capita outlay of public money our Government is talking about.”

Fallow was making the point that “this does not, as they used to say, compute.” Someone is going to lose – the taxpayer and/or the consumer.

BigCake’s point is the difference in ambition – geographical and population differences aside.

A couple of years ago I wrote about how the then Labour Government was, under the heading of economic transformation, going to spend $3.6 billion over four years on infrastructure skills and R&D.

At the same time Ireland’s National Development Plan projected expenditure of NZ$105 billion on infrastructure alone over six years.

Whether either happened is not really the point – it’s just the gap in ambition (and the money backing it) that hits you between the eyes.

You see the small thinking in the current Government’s tens of millions approach to agriculture R&D.

As usual the NZ Institute’s work is packed with good grunty stuff on what’s wrong with our economy and what we can do to fix it.

“A goal is not a strategy” is focused on boosting the non-commodity side of the economy – “exports of differentiated goods and services, and helping firms overcome the barriers to internationalisation.

“New Zealand’s exports have grown much more slowly than the OECD average partly because global trade in commodities (where New Zealand exports are concentrated) has grown more slowly than trade in differentiated goods and services.

“New Zealand’s most important sectors for exports are tourism, agriculture, and manufacturing. All three sectors have average or lower than average productivity so simply growing these activities without also substantially lifting productivity would not lift GDP per capita materially.

“Other small countries are becoming prosperous by exporting differentiated goods and services and New Zealand must find a way to join them or find another strategy for success.”

A post on the performance of our ICT sector has been banging around my head for a while. The above looks like good context for a post.